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Economic Currents

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The Role of Impatience in Sustainable Growth

Sustaining economic growth requires appropriate husbandry of our natural capital resources (e.g. fish, trees, freshwater, and coral).  But how much conservation is optimal? According to proponents of "strong sustainability," natural capital should never be depleted. This is inconsistent with maximizing economic welfare however. In less developed economies, for example, depleting natural capital may be the best way for an economy to accumulate the produced capital (e.g. buildings, transportation infrastructure, and machinery) that is needed to increase the productivity of labor.

Depending on current resource stocks, optimal economic growth may require either drawing down or building up natural capital to its optimal steady state level. For non-renewable resources such as oil, this often means substituting more abundant resources (e.g. clean coal) and eventually transitioning to renewable resources such as solar energy.

In addition to balancing the uses of natural and produced capital, sustainable growth requires intergenerational equity. Simply put, this is the principle of non-discrimination against future generations. By adding the non-discrimination requirement to the problem of welfare maximization in an economy whose production is dependent upon both produced and natural capital, we get conditions for optimal and sustainable growth. As it turns out, the conditions are familiar to economists, albeit from different parts of economics. From growth theory, we have the Ramsey (1928) requirement that produced capital should be accumulated in each period until its marginal product falls to a multiple of the growth rate of consumption. In the long run, as consumption approaches its golden rule level, the target marginal product goes to zero. The same condition applies to natural capital. And from resource economics we have the extended Hotelling (1931) condition that the resource should be depleted (or accumulated) in each period until net marginal benefit of that resource -- typically the resource price minus its extraction or harvesting cost -- is equal to the marginal opportunity cost of harvest that is imposed on future generations.

This formulation contains a paradox however. If individuals are impatient, i.e. they prefer consumption now to equal consumption later, how can society impose the condition of intergenerational neutrality, i.e. require that consumption in different periods be weighted equally? This would seem to violate the condition of consumer sovereignty, i.e. the requirement that social welfare and justice should be based on individual preferences (as well as social weightings thereof). We resolve this paradox with a model of overlapping generations. This allows us to consider a representation of social justice that eschews intergenerational discrimination, while simultaneously allowing individuals to be impatient regarding their own welfare. The surprising result is that while individual impatience matters for the lifetime consumption plan of the individual, it does not matter for aggregate consumption. Optimal and sustainable growth in the aggregate is therefore still governed by the Ramsey and extended Hotelling conditions.

What does optimal and sustainable growth imply for the evaluation of environmental projects? In particular, the present values of global programs to mitigate global warming depend crucially on the project discount rate. Does intergenerational justice require that the project discount rate be zero? It does not. From principles first established by Irving Fisher around the turn of the 19th century, the project discount rate depends on the productivity of capital as well as the social rate of impatience. Even if individuals were not impatient, the inherent productivity of capital would still result in a positive interest rate. Nonetheless, intergenerational equity may indeed imply that the appropriate discount rate is small, especially if global warming and the rate of technological improvement limit growth in the very long run. Indeed Sir Nicolas Stern has suggested a rate of only 1.4% for discounting the benefits of climate mitigation.

What are the implications of intergenerational equity for the deficit and the national debt? From the Ramsey condition, deficits and debt are consistent with sustainable growth but only so long as they finance investments with positive present values. Since future generations don't vote in current elections, debt may be a politically-expedient device to transfer resources from the future to the present, even when doing so reduces the welfare of future generations more than it increases the welfare of current voters. Economists can stand against this and other perversions of democracy by rendering the intergenerational consequences of social profligacy more transparent.

-- Lee Endress, James Roumasset, and Christopher Wada

References

Endress, L., Pongkijvorasin, S., Roumasset, J., Wada, C.A., 2013. “Intergenerational Equity with Individual Impatience in a Model of Optimal and Sustainable Growth.” Resource and Energy Economics (forthcoming).

Endress, L., Zhou, T., Roumasset, J., 2005. “Sustainable growth with environmental spillovers.” Journal of Economic Behavior and Organization 58(4), 527-547.

Hotelling, H., 1931. “The economics of exhaustible resources.” The Journal of Political Economy 39, 137-175.

Ramsey, F.P., 1928. “A mathematical theory of saving.” Economic Journal 38(152), 543-559.

READ THE WORKING PAPER

 

Note: This research extends earlier work by Endress et al. (2005) and is forthcoming in the peer-reviewed journal, Resource and Energy Economics (Endress et al., 2013). For more applications of economic principles to natural resource and environmental management problems, visit UHERO’s Project Environment (link to: http://www.uhero.hawaii.edu/45/project-environment).


UHERO 101.9: Who's hiring? Who knows!

Posted October 10, 2013 | Categories: Blog

Beginning in July 2013, the Hawaii Department of Labor and Industrial Relations (DLIR) discontinued the regular monthly publication of industry payroll job counts for Kauai County, Maui County, and Hawaii County citing budgetary constraints. These statistics provided the most comprehensive and timely assessment of labor market conditions and served as an indicator of broader economic activity in each county. There are no alternative sources for this timely measure of our county economies. The loss of this data will negatively affect a number of stakeholders across the state.

The regular publication of industry payroll job counts is a valuable service to individuals and private business as well as policy makers. Imagine how hard it will be to evaluate the impact of the next shock such as a natural disaster, loss of an airline, or terrorist event. Of course, the jobs data are also crucial to understanding the evolution of the county economies during positive times. By identifying which industries are hiring and which are not, job seekers can concentrate their search in the fastest growing industries and students can make better choices on courses of study and training. Firms can use these figures to determine which industries are growing and which are shrinking, allowing them to assess business conditions among their suppliers, competitors, and customers. For policy makers these statistics are valuable for assessing economic conditions in real-time and evaluating the effects of new programs. With the termination of the industry payroll job counts, it will become increasingly difficult for private and public sector decision makers to make informed, data-driven decisions.

The discontinuation of these statistics comes at an especially unfortunate time as many federal statistical agencies are also ending publication of data as the result of the federal sequestration. The US Bureau of Economic Analysis (BEA) has recently announced that it is being forced to scale back its county level personal income statistics program. It remains to be seen what other data publications will be discontinued by federal agencies. These cuts together with the loss of industry payroll job counts will leave the public with precious little information that can be used to measure economic conditions on the Neighbor Islands.

At UHERO we believe that collecting and publishing this data is a valuable public service. If you agree we encourage you to contact your representatives at the State Legislature. Let them know about the value of these statistics and the serious data problem facing Kauai, Maui, and Hawaii counties. With your help we hope that funding will be reallocated so that DLIR can resume their work to collect and publish industry payroll job counts for all the counties in the state.

---Carl Bonham and James Jones


Now and Later: The Impact of the Government Shutdown

Posted October 9, 2013 | Categories: Blog

There are about 34,000 civilian federal jobs in Hawaii, a fraction of which were deemed essential and have therefore not been furloughed. Many of the 18,000 Department of Defense employees were ordered back on the job after the first week of the shutdown, and they are expected to be paid on time. Moreover, the House unanimously passed legislation to guarantee retroactive pay for all furloughed federal employees when the shutdown ends. But the effect of the shutdown goes beyond some delayed paychecks. Among others, it cuts into the income of many government contractors, hampers the investigation of the molasses spill in Honolulu Harbor, and leaves all seven national parks in the state closed, souring the mood of many visitors and ceasing the revenue stream to hundreds of tourism- dependent businesses.

In fact, consumer confidence has taken a nosedive since the first day of the shutdown, and if this decline persists, it may have a greater effect than lost/delayed income. In times of uncertainty people tend to cut back on discretionary spending such as leisure travel. Even if many would-be visitors end up eventually booking their trip to Hawaii, it may take a while before they do so. People also tend to put on hold the purchase of big ticket items and homes during uncertain times. The impact of the shutdown gets magnified as the reluctance to spend filters through the economy. Obviously, the longer the impasse lasts the greater its effects. Unfortunately, given the appetite of this Congress to create artificial crises, we may have to wait for calmer times at least until the next elections.

---Peter Fuleky

 


The UHERO Dashboard Project Jobs Explorer : Occupations in Hawaii

Posted October 8, 2013 | Categories: Blog

The Hawaii Jobs Explorer, the first interactive tool to be released as a part of the ongoing UHERO Dashboard Project, is now available for public use. The Hawaii Jobs Explorer is a thorough examination of occupations and salaries in the state of Hawaii, presented in a visual, easy-to-navigate context. The data-rich design allows users to explore multiple facets of the occupations data, including median salaries, number of jobs, and percentage of statewide employment as well as allowing them to compare both individual occupations and broad occupation categories.

 
ABOUT THE VISUALIZATION:

The Hawaii Jobs Explorer was designed and developed by UHERO’s data team using d3.js technology. The occupations are presented as a “Treemap”, a type of graphic that subdivides an area into smaller areas that illustrate relative proportions.

 

ABOUT THE DASHBOARD PROJECT:

The UHERO Dashboard Project, initially a series of static visualizations released during the summer of 2013, was launched on Facebook to encourage feedback from the community. The “Occupations by Median Annual Salary” was selected as the starting point for the inaugural interactive tool because of its popularity, wide-reaching relevance, and success in stimulating discussion on the Facebook discussion forum.
 
The goal of the UHERO Dashboard Project is to produce a collection of indicators and visualizations that not only summarize the status of Hawaii’s economy, but update the community on the features of the economy that are relevant to them.

 
ABOUT THE DATA:

Data for The Hawaii Jobs Explorer was drawn from the Occupational Employment Statistics (OES) program, which produces employment and wage estimates annually for over 800 occupations. These estimates are available for the nation as a whole, for individual states and for metropolitan and nonmetropolitan areas; national occupation estimates for specific industries are also available.
The State Occupational and Wage Estimates for Hawaii were calculated with data collected from employers of all industry sectors in metropolitan and nonmetropolitan areas in Hawaii.

 

View the Jobs Explorer


Investigating the Effects of Furloughing Public School Teachers on Juvenile Crime in Hawaii

Posted October 1, 2013 | Categories: Hawaii's Economy, Blog

What happens to crime when 180,000 DOE students and all of their teachers are given the day off? When a fiscal crisis led to 17 "Furlough Fridays" during the 2009/2010 school year, we found ourselves in a unique position to find out. While it is tempting to imagine streets being flooded with idle teenagers up to no good, a new UHERO working paper titled "In School and Out of Trouble? Investigating the Effects of Furloughing Public School Teachers on Juvenile Crime in Hawaii" suggests the contrary.

The authors, Randall Akee (an assistant professor at UCLA), Timothy Halliday (an associate professor at UH-Manoa) and Sally Kwak (an economist at the US Congress Joint Committee on Taxation), used juvenile arrest data from the Honolulu Police Department to investigate the effects of this unusual policy on juvenile crime. Using such a policy to test the effects of shortening the school year on crime is an example of what economists call a "natural experiment;" an observational study that allows researchers to ascertain causal relationships without using a randomized trial.

Contrary to what many would have predicted, their results indicate that the furloughs were associated with fewer juvenile assault arrests for assault and drug-related crimes. Over the course of the entire academic year, there were 20 fewer arrests for assault and 15 fewer arrests for drug offenses due to the furloughs. These reductions are larger than effects produced from national studies. It is hard to say exactly why this is but the authors speculate that, since 1 in 5 students in Hawaii are in private schools, the average socioeconomic status of families who do send their children to public schools may be lower than elsewhere which may enhance the ability of school to facilitate rather than prevent crime.

Spatial differences were also identified. Assaults went down more than drug-related crimes in Leeward and Central Oahu, while drug-related crimes were reduced more than assaults in Metro and Windward Oahu. The authors attribute the reduction in crime to two factors. The first is a lack of "concentration" allowing for less opportunity to engage in criminal activity, and the second is possibly increased monitoring by parents that may have happened since parents were told about the furloughs in advance and 13 of the 17 DOE furlough days coincided with furloughs for state employees. The "concentration" effect was more prominent in Leeward and Central Oahu resulting in fewer assaults, while the monitoring effect may have been more prominent in Metropolitan and Windward Oahu where more affluent parents may have been better able to plan ahead to spend the day with their children or to arrange for a paid alternative activity.

It would be flippant to say that school should be canceled as a means of crime prevention, but the overall reduction in crime should encourage decision-makers to think harder about how to minimize crime while school is in session.

---Tim Halliday

READ THE WORKING PAPER


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