And so begins the trade war Trump promised us.

Mar 18 JDN 2458196

President Trump (a phrase I will never quite feel comfortable saying) has used an obscure loophole in US trade law to impose huge tariffs on steel and aluminum. The loophole is based on the idea that certain goods are vital for national security, and therefore imposing tariffs on them is in some sense the proper role of the Commander in Chief. It’s a pretty flimsy justification in general (if it’s really so important, why can’t Congress do it?), and particularly so in this case: Most of our steel and aluminum comes from Canada, and we are still totally dependent on imports for bauxite to make aluminum. Trump did finally cave in on allowing NAFTA members to be exempt, so Canada won’t be paying the tariff. The only country that could plausibly be considered an enemy that will be meaningfully affected by the tariffs is (ironically) Russia.

The European Union has threatened to respond with their own comparable tariffs—meaning that a trade war has officially begun. The last time the US started a major trade war was in 1930—which you may recognize as the start of the Great Depression. There’s a meme going around saying that 1928 was the last time the Republican Party controlled the whole US government; that isn’t actually true. Republicans have controlled all three branches as recently as 2006. Of course, the late 2000s weren’t a great time for the US economy either, so make of that what you will.

Does this mean we’re headed toward another Great Depression? I don’t think so. Our monetary policy is vastly better now than it was then. But are we headed toward another recession? That seems quite likely. By standard measures, the stock market is overvalued. The unemployment rate is now at 4%. We are basically at the ceiling right now; the only place to go is down.

Of course, maybe we will stay here awhile. We don’t have to go down, necessarily. If Obama were still President and Yellen were still Fed Chair, I might believe that. But the level of corruption, incompetence, and ideological rigidity in Trump’s economic policy is something I’ve not seen in the United States within my lifetime.

Peter Navarro, Trump’s Director of the White House Trade Council, has described his own role in an incredibly chilling way:

“This is the president’s vision. My function, really, as an economist is to try to provide the underlying analytics that confirm his intuition. And his intuition is always right in these matters. […] The owner, the coach, and the quarterback are all the president. The rest of us are all interchangeable parts.”

Well, there you have it. It’s just as the saying goes: There are liberal professional economists, conservative professional economists, and professional conservative economists. Peter Navarro has officially and proudly declared himself a professional conservative economist. He seems proud to admit that his only function is to rationalize what Trump already believes.

We really shouldn’t be surprised that Trump brought us into a trade war. Frankly, it was one of his campaign promises. When he was announcing the tariffs, he declared, “Trade wars are good, and easy to win.” In fact, trade war is much like real war, in that the only winning move is not to play.

What really worries me about all this isn’t how it will affect the US. Maybe it’ll trigger another recession, sure; but we’ve had lots of those, and we make it through eventually. (Recession might even be good for our carbon emissions, as we’re well above the Wedge.) The US economy is very strong, and can withstand a lot of mistakes. Even on a bad day we’re still the richest country in the world.

What worries me is how it will affect other countries. It’ll start with countries that export steel and aluminum, like India, China and Brazil. But as tariffs and counter-tariffs proliferate, more and more exports will be brought into the trade war. Trade is one of the most powerful tools we have for fighting global poverty, and we are now pulling the plug.

Of course, hurting China was part of Trump’s goal, so I doubt he’ll feel much remorse if the trade war results in millions of people in China thrown back into poverty. People who voted for him on the grounds that he would keep the dirty foreigners down may well be celebrating such an outcome.

There will be pain. But most of it will be felt elsewhere from here. “But those were Foreign children and it didn’t really matter.”

Forget the Doughnut. Meet the Wedge.

Mar 11 JDN 2458189

I just finished reading Kate Raworth’s book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist; Raworth also has a whole website dedicated to the concept of the Doughnut as a way of rethinking economics.

The book is very easy to read, and manages to be open to a wide audience with only basic economics knowledge without feeling patronizing or condescending. Most of the core ideas are fundamentally sound, though Raworth has a way of making it sound like she is being revolutionary even when most mainstream economists already agree with the core ideas.

For example, she makes it sound like it is some sort of dogma among neoclassical economists that GDP growth must continue at the same pace forever. As I discussed in an earlier post, the idea that growth will slow down is not radical in economics—it is basically taken for granted in the standard neoclassical growth models.

Even the core concept of the Doughnut isn’t all that radical. It’s based on the recognition that economic development is necessary to end poverty, but resources are not unlimited. Then combine that with two key assumptions: GDP growth requires growth in energy consumption, and growth in energy consumption requires increased carbon emissions. Then, the goal should be to stay within a certain range: We want to be high enough to not have poverty, but low enough to not exceed our carbon budget.

Why a doughnut? That’s… actually a really good question. The concept Raworth presents is a fundamentally one-dimensional object; there’s no reason for it to be doughnut-shaped. She could just as well have drawn it on a single continuum, with poverty at one end, unsustainability at the other end, and a sweet spot in the middle. The doughnut shape adds some visual appeal, but no real information.

But the fundamental assumptions that GDP requires energy and energy requires carbon emissions are simply false—especially the second one. Always keep one thing in mind whenever you’re reading something by environmentalists telling you we need to reduce economic output to save the Earth: Nuclear power does not produce carbon emissions.

This is how the environmentalist movement has shot itself—and the world—in the foot for the last 50 years. They continually refuse to admit that nuclear power is the best hope we have for achieving both economic development and ecological sustainability. They have let their political biases cloud their judgment on what is actually best for humanity’s future.

I will give Raworth some credit for not buying into the pipe dream that we can somehow transition rapidly to an entirely solar and wind-based power grid—renewables only produce 6% of world energy (the most they ever have), while nuclear produces 10%. And nuclear power certainly has its downsides, particularly in its high cost of construction. It may in fact be the case that we need to reduce economic output somewhat, particularly in the very richest countries, and if so, we need to find a way to do that without causing social and political collapse.

The Dougnut is a one-dimensional object glorified by a two-dimensional diagram.

So let me present you with an actual two-dimensional object, which I call the Wedge.

On this graph, the orange dots plot actual GDP per capita (at purchasing power parity) on the X axis against actual CO2 emissions per capita on the Y-axis. The green horizonal line is a CO2 emission target of 3 tonnes per person per year based on reports from the International Panel on Climate Change.


As you can see, most countries are above the green line. That’s bad. We need the whole world below that green line. The countries that are below the line are largely poor countries, with a handful of middle-income countries mixed in.

But it’s the blue diagonal line that really makes this graph significant, what makes it the Wedge. That line uses Switzerland’s level of efficiency to estimate a frontier of what’s possible. Switzerland’s ratio of GDP to CO2 is the best in the world, among countries where the data actually looks reliable. A handful of other countries do better in the data, but for some (Macau) it’s obviously due to poor counting of indirect emissions and for others (Rwanda, Chad, Burundi) we just don’t have good data at all. I think Switzerland’s efficiency level of $12,000 per ton of CO2 is about as good as can be reasonably expected for most countries over the long run.

Our goal should be to move as far right on the graph as we can (toward higher levels of economic development), but always staying inside this Wedge: Above the green line, our CO2 emissions are too high. Below the blue line may not be technologically feasible (though of course it’s worth a try). We want to aim for the point of the wedge, where GDP is as high as possible but emissions are still below safe targets.

Zooming in on the graph gives a better view of the Wedge.


The point of the Wedge is about $38,000 per person per year. This is not as rich as the US, but it’s definitely within the range of highly-developed countries. This is about the same standard of living as Italy, Spain, or South Korea. In fact, all three of these countries exceed their targets; the closest I was able to find to a country actually hitting the point of the wedge was Latvia, at $27,300 and 3.5 tonnes per person per year. Uruguay also does quite well at $22,400 and 2.2 tonnes per person per year.

Some countries are within the Wedge; a few, like Uruguay, quite close to the point, and many, like Colombia and Bangladesh, that are below and to the left. For these countries, a “stay the course” policy is the way to go: If they keep up what they are doing, they can continue to experience economic growth without exceeding their emission targets.


But the most important thing about the graph is not actually the Wedge itself: It’s all the countries outside the Wedge, and where they are outside the Wedge.

There are some countries, like Sweden, France, and Switzerland, that are close to the blue line but still outside the Wedge because they are too far to the right. These are countries for whom “degrowth” policies might actually make sense: They are being as efficient in their use of resources as may be technologically feasible, but are simply producing too much output. They need to find a way to scale back their economies without causing social and political collapse. My suggestion, for what it’s worth, is progressive taxation. In addition to carbon taxes (which are a no-brainer), make income taxes so high that they start actually reducing GDP, and do so without fear, since that’s part of the point; then redistribute all the income as evenly as possible so that lower total income comes with much lower inequality and the eradication of poverty. Most of the country will then be no worse off than they were, so social and political unrest seems unlikely. Call it “socialism” if you like, but I’m not suggesting collectivization of industry or the uprising of the proletariat; I just want everyone to adopt the income tax rates the US had in the 1950s.

But most countries are not even close to the blue line; they are well above it. In all these countries, the goal should not be to reduce economic output, but to increase the carbon efficiency of that output. Increased efficiency has no downside (other than the transition cost to implement it): It makes you better off ecologically without making you worse off economically. Bahrain has about the same GDP per capita as Sweden but produces over five times the per-capita carbon emissions. Simply by copying Sweden they could reduce their emissions by almost 19 tonnes per person per year, which is more than the per-capita output of the US (and we’re hardly models of efficiency)—at absolutely no cost in GDP.

Then there are countries like Mongolia, which produces only $12,500 in GDP but 14.5 tonnes of CO2 per person per year. Mongolia is far above and to the left of the point of the Wedge, meaning that they could both increase their GDP and decrease their emissions by adopting the model of more efficient countries. Telling these countries that “degrowth” is the answer is beyond perverse—cut Mongolia’s GDP by 2/3 and you would throw them into poverty without even bringing carbon emissions down to target.

We don’t need to overthrow capitalism or even give up on GDP growth in general. We need to focus on carbon, carbon, carbon: All economic policy from this point forward should be made with CO2 reduction in mind. If that means reducing GDP, we may have to accept that; but often it won’t. Switching to nuclear power and public transit would dramatically reduce emissions but need have no harmful effect on economic output—in fact, the large investment required could pull a country out of recession.

Don’t worry about the Doughnut. Aim for the point of the Wedge.

Is grade inflation a real problem?

Mar 4 JDN 2458182

You can’t spend much time teaching at the university level and not hear someone complain about “grade inflation”. Almost every professor seems to believe in it, and yet they must all be participating in it, if it’s really such a widespread problem.

This could be explained as a collective action problem, a Tragedy of the Commons: If the incentives are always to have the students with the highest grades—perhaps because of administrative pressure, or in order to get better reviews from students—then even if all professors would prefer a harsher grading scheme, no individual professor can afford to deviate from the prevailing norms.

But in fact I think there is a much simpler explanation: Grade inflation doesn’t exist.

In economic growth theory, economists make a sharp distinction between inflation—increase in prices without change in underlying fundamentals—and growth—increase in the real value of output. I contend that there is no such thing as grade inflation—what we are in fact observing is grade growth.
Am I saying that students are actually smarter now than they were 30 years ago?

Yes. That’s exactly what I’m saying.

But don’t take it from me. Take it from the decades of research on the Flynn Effect: IQ scores have been rising worldwide at a rate of about 0.3 IQ points per year for as long as we’ve been keeping good records. Students today are about 10 IQ points smarter than students 30 years ago—a 2018 IQ score of 95 is equivalent to a 1988 score of 105, which is equivalent to a 1958 score of 115. There is reason to think this trend won’t continue indefinitely, since the effect is mainly concentrated at the bottom end of the distribution; but it has continued for quite some time already.

This by itself would probably be enough to explain the observed increase in grades, but there’s more: College students are also a self-selected sample, admitted precisely because they were believed to be the smartest individuals in the application pool. Rising grades at top institutions are easily explained by rising selectivity at top schools: Harvard now accepts 5.6% of applicants. In 1942, Harvard accepted 92% of applicants. The odds of getting in have fallen from 9:1 in favor to 19:1 against. Today, you need a 4.0 GPA, a 36 ACT in every category, glowing letters of recommendation, and hundreds of hours of extracurricular activities (or a family member who donated millions of dollars, of course) to get into Harvard. In the 1940s, you needed a high school diploma and a B average.

In fact, when educational researchers have tried to quantitatively study the phenomenon of “grade inflation”, they usually come back with the result that they simply can’t find it. The US department of education conducted a study in 1995 showing that average university grades had declined since 1965. Given that the Flynn effect raised IQ by almost 10 points during that time, maybe we should be panicking about grade deflation.

It really wouldn’t be hard to make that case: “Back in my day, you could get an A just by knowing basic algebra! Now they want these kids to take partial derivatives?” “We used to just memorize facts to ace the exam; but now teachers keep asking for reasoning and critical thinking?”

More recently, a study in 2013 found that grades rose at the high school level, but fell at the college level, and showed no evidence of losing any informativeness as a signaling mechanism. The only recent study I could find showing genuinely compelling evidence for grade inflation was a 2017 study of UK students estimating that grades are growing about twice as fast as the Flynn effect alone would predict. Most studies don’t even consider the possibility that students are smarter than they used to be—they just take it for granted that any increase in average grades constitutes grade inflation. Many of them don’t even control for the increase in selectivity—here’s one using the fact that Harvard’s average rose from 2.7 to 3.4 from 1960 to 2000 as evidence of “grade inflation” when Harvard’s acceptance rate fell from almost 30% to only 10% during that period.

Indeed, the real mystery is why so many professors believe in grade inflation, when the evidence for it is so astonishingly weak.

I think it’s availability heuristic. Who are professors? They are the cream of the crop. They aced their way through high school, college, and graduate school, then got hired and earned tenure—they were one of a handful of individuals who won a fierce competition with hundreds of competitors at each stage. There are over 320 million people in the US, and only 1.3 million college faculty. This means that college professors represent about the top 0.4% of high-scoring students.

Combine that with the fact that human beings assort positively (we like to spend time with people who are similar to us) and use availability heuristic (we judge how likely something is based on how many times we have seen it).

Thus, when a professor compares to her own experience of college, she is remembering her fellow top-scoring students at elite educational institutions. She is recalling the extreme intellectual demands she had to meet to get where she is today, and erroneously assuming that these are representative of most the population of her generation. She probably went to school at one of a handful of elite institutions, even if she now teaches at a mid-level community college: three quarters of college faculty come from the top one quarter of graduate schools.

And now she compares to the students she has to teach, most of whom would not be able to meet such demands—but of course most people in her generation couldn’t either. She frets for the future of humanity only because not everyone is a genius like her.

Throw in the Curse of Knowledge: The professor doesn’t remember how hard it was to learn what she has learned so far, and so the fact that it seems easy now makes her think it was easy all along. “How can they not know how to take partial derivatives!?” Well, let’s see… were you born knowing how to take partial derivatives?

Giving a student an A for work far inferior to what you’d have done in their place isn’t unfair. Indeed, it would clearly be unfair to do anything less. You have years if not decades of additional education ahead of them, and you are from self-selected elite sample of highly intelligent individuals. Expecting everyone to perform as well as you would is simply setting up most of the population for failure.

There are potential incentives for grade inflation that do concern me: In particular, a lot of international student visas and scholarship programs insist upon maintaining a B or even A- average to continue. Professors are understandably loathe to condemn a student to having to drop out or return to their home country just because they scored 81% instead of 84% on the final exam. If we really intend to make C the average score, then students shouldn’t lose funding or visas just for scoring a B-. Indeed, I have trouble defending any threshold above outright failing—which is to say, a minimum score of D-. If you pass your classes, that should be good enough to keep your funding.

Yet apparently even this isn’t creating too much upward bias, as students who are 10 IQ points smarter are still getting about the same scores as their forebears. We should be celebrating that our population is getting smarter, but instead we’re panicking over “easy grading”.

But kids these days, am I right?