WWID: Recognizing high dimensionality

In Chapter 6 of What Works in Development, Ricardo Hausmann makes, in commentator Ross Levine’s words, an “imaginative, provocative, and substantive” argument that much work on economic growth willfully ignores the complexity inherent in the classical development formula (“peace, easy taxes, and justice” in Adam Smith’s words, or trade openness, sound finances, and property rights, to paraphrase Larry Summers). Providing the right public inputs, particularly regulation, to enable a nation to develop new productive capabilities is a very “high dimensional” problem, which Hausmann compellingly illustrates with the myriad policy elements required to enable an efficient real estate market.

The necessary information to determine optimal policies is highly dispersed, Hausmann continues, and in such a context central planning is bound to fail. Unlike a product market, the market for public inputs lacks mechanisms to aggregate information (prices), incentivize action (profits), and allocate resources (capital markets). Hausmann then hypothesizes that in the United States, the open political architecture allows lobbyists may play a market-making role in the provision of public inputs. (Not without some rent-seeking, of course, but this is a necessary tension “in the absence of an omniscient and benevolent social planner.”)

How, then, to incorporate broad input into the provision of public inputs in developing countries? He doesn’t have all of the answers, and neither do commentators Nava Ashraf (who suggests looking to social enterprise for systems) and Levine (who uses the example of racism to argue that institutions themselves evolve in response to underlying incentives, and their change cannot be mandated independently of those incentives). But I find the question alone quite profound.

Very interesting stuff… I will have to let it marinate for a while, and hope to have further reflections at some point.

Legislative update

Tyler Cowen thinks that:

If there's one lesson from the health care debacle, it is that Waxman-Markey was and is a dead end.

... and...

I believe the health care debacle should cause all of us to rethink our positions on preferred paths, sequences, and strategies. No matter what your opinion of the health care bill, it's not a pretty picture.

I hope he is wrong, but he is a very smart guy.

Also, via Morgan Downey, T. Boone Pickens is bullish on CNG legislation passing in Congress "by Memorial Day." I guess that would be good for the Pickens Plan, especially given that the wind farm leg hasn't been looking too healthy of late.

Debt as important as climate

That's the case Tom Friedman makes in the NYT. For human existence on the planet, perhaps not, but for the United States of America, absolutely. The seeming inability of American legislative and executive branches to behave in a fiscally responsible manner is a big source of frustration to me personally (for example, in the healthcare debate that I opted out of).

How can U.S. best promote nuclear?

Senator James Inhofe (R-OK) has an Ideas piece in Politico today plugging nuclear power; he runs through the standard arguments in favor (I generally agree) and then identifies two catalysts for the nuclear revolution: the NRC issuing "the first new license for a reactor before the end of 2011," and Obama's unambiguous support.

Inhofe was a long-time climate change skeptic who recently made a surprising U-turn; I find nothing objectionable in what he proposes here. Reducing regulatory uncertainty is certainly a necessary condition for such massive investments. And Obama hasn't exactly been leading the environmental charge lately.

What I'd add is that Inhofe's suggestions are necessary, but not sufficient. Jay Yarow points out that nuclear plants are expensive (not to mention the dicey project economics and poor financial state of nuclear manufacturers). And new technologies (whether reprocessing waste or new reactor designs) hold much promise on both the economics and waste issues. I believe it's only with a combined push on all five of these fronts - political leadership, regulation, economics, reactor technology, and waste disposal - that the U.S. can bring the nuclear revolution from rhetoric to reality.

Update: Especially the economics.

Republicans happiest with climate bill

Lots of people are upset with the climate bill - environmentalists, small businesses, big businesses, Paul Krugman. I'm a bit more pragmatic and think that, if this one passed 219-212 in the House, its unlikely that there was a viable version with less goodies that would have made it, so we should be thankful for having cleared one hurdle. Happier still, though, are the Republicans, who see the climate bill as the new coming of the infamous BTU tax of 1993, which barely passed the Democratic House (by an eerily similar 219-213 margin) then propelled the Republicans to decisive victory in the 1994 midterm Congressional elections. One can only hope that the electorate has stronger political will on climate change this time around...

Bingaman's energy bill: high praise, cloudy prospects

Geoff Styles breaks down in detail the many reasons he prefers Jeff Bingaman's existing energy bill to the non-cap-and-trade provisions of Waxman-Markey. In summary:

My strong preference would be for the Senate to graft a clean version of cap & trade onto Senator Bingaman's energy bill, jettisoning the distortions that Waxman-Markey acquired in the process of lining up enough House votes to ensure passage. Some of those distortions neatly cleaved the natural business coalition against the bill by lavishing so many free emissions allowances on the utility sector, but in the process severely undermined the bill's potential for achieving prompt and significant emissions reductions.

Unfortunately, this grafting seems the least likely path to a Senate cap-and-trade bill, as Styles explains. And with Harry Reid determined to yoke cap-and-trade and the energy bill together, I'm worried that Bingaman's hard-won bipartisan consensus-building will be for naught.