Archive for January, 2013

Will Americans Pay More Taxes?

January 16, 2013

Thomas Friedman thinks so. From his op-ed column in the New York Times:

I still believe that America’s rich and the middle classes would pay more taxes and trim entitlements if they thought it was for a plan that was fair, would truly address our long-term fiscal imbalances and set America on a journey of renewal that would ensure our kids have a crack at the American dream. Then again, I may be wrong. Maybe my baby-boomer generation really does intend to eat it all and leave our kids a ticking debt bomb. If only we had a second-term president, unencumbered by ever having to run again, who was ready to test what really bold leadership might produce.

Americans allergy to taxes, I will never understand. But I do think that they need to come over it to get out of the place they are in. It would be fun to see a bold Obama, but the temporary solution to avoid the fiscal cliff did not hold much promise, I think.

Kahneman on the Precautionary Principle

January 10, 2013

In Daniel Kahneman’s Thinking, Fast and Slow, there is an interesting discussion of how moral intuitions behind the precautionary principle conflicts with efficient risk management:

The intense aversion to trading increased risk for some other advantage plays out on a grand scale in the laws and regulations governing risk. This trend is especially strong in Europe, where the precautionary principle, which prohibits any action that might cause harm, is a widely accepted doctrine. In the regulatory context, the precautionary principle imposes the entire burden of proving safety on anyone who undertakes actions that might harm people or the environment. Multiple international bodies have specified that the absence of scientific evidence of potential damage is not sufficient justification for taking risks. As the jurist Cass Sunstein points out, the precautionary principle is costly, and when interpreted strictly it can be paralyzing. He mentions an impressive list of innovations that would not have passed the test, including “airplanes, air conditioning, antibiotics, automobiles, chlorine, the measles vaccine, open-heart surgery, radio, refrigeration, smallpox vaccine, and X-rays.” The strong version of the precautionary principle is obviously untenable. But enchanced loss aversion is embedded in a strong and widely shared moral intuition; it originates in System 1 [the thinking fast system]. The dilemma between intensely loss-averse moral attitudes and efficient risk management does not have a simple and compelling solution[p. 351, italics in original].

I suspect similar morals lie behind the US Endangered Species Act, which actually prohibits any kind of risk management; any specie should be conserved at any cost. One of my favorite economists, Jason Shogren, have written extensively on the problematic aspects of the Endangered Species Act. In one of his memorable passages, he writes:

Essentially, the approach of the Act that prohibits any activity that harms a listed [endangered] species puts a very large or infinite value on avoiding extinction. This view places endangered species beyond the reach of economic tradeoffs, and the economist is relegated to helping find the least cost solution to achieve a biological-based standard [Brown and Shogren 1998, Economics of the Endangered Species Act, The Journal of Economics Perspectives, Vol. 12, No. 3, pp. 3-20, p. 10].