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More examples of economics as the exuberant science. W. Michael Cox and Richard Alm argue that productivity growth enables us to afford more leisure, less pollution, and other elements of a "balanced life."

In the long run, we cannot afford any component of a balanced life -- be it consumption, leisure, easier workdays, safety and security, variety and convenience, or environmental cleanup -- that we don’t earn by becoming more productive. When counting our blessings, we should first thank the economic system. Not federal agencies, not advocacy groups, not unions.

Virginia Postrel cites the work of Professor Sala-i-Martin, and reports,

Over the last three decades, and especially since the 1980's, the world's two largest countries, China and India, have raced ahead economically. So have other Asian countries with relatively large populations.

The result is that 2.5 billion people have seen their standards of living rise toward those of the billion people in the already developed countries — decreasing global poverty and increasing global equality. From the point of view of individuals, economic liberalization has been a huge success.

Discussion Question. If economic liberalization is a simple solution, why is China a success and Argentina a failure?

Lynn Kiesling discusses the peak-load pricing concepts advocated by economists for electricity pricing.

Experimental economists Vernon Smith, Bart Wilson, and Steve Rassenti have shown in repeated experiments that demand responsiveness makes electricity consumers better off, reduce price spikes and price volatility, and reduce the need to build more plants to serve peak demands. Customer demand response also disciplines the ability of wholesale suppliers to raise prices in peak hours, because customers have the alternative of shifting their use to other hours or cutting their use of electricity.

Discussion Question. How might this concept be applied to the Internet or cell phones?

Brad DeLong makes a simple present value calculation that shows that the Toyota Prius hybrid car makes economic sense.

Seven years of free maintenance--that's got to have a present value today of $2500. Increased efficiency implying a savings of $600 a year in gasoline costs at current prices--that's got to have a present value of $5000 today, plus whatever allowance for the risk of gasoline price changes we wish to include ($6500 in total?). Thus in buying a--fully-loaded--Prius, Richie paid $25000 and got back $9000 worth of maintenance, repair, and gasoline cost savings, for an NPV cost of only $16000.

Discussion Question. Do you think consumers will take into account these savings, or will they focus entirely on the sticker price?

In this article, I point out that economists are becoming optimistic about economic growth, because of Moore's Law.

in fifteen years, computers have become a much bigger deal in the economy as a whole. As this chart shows, information technology investment relative to GDP grew from less than 2 percent in 1987 to 6 percent today. Also, keep in mind that in 1987 the state-of-the-art microprocessor was the Intel 386. In fifteen years of progress from 1985 to 2000, the standard microprocessor went from the 386 with 275,000 transistors to the Pentium 4 with 42,000,000 transistors.

Discussion Question. If one sector of the economy is growing at an annual rate of 30 to 80 percent, how large does that sector have to be as a share of the economy in order to raise the overall growth rate by 1 percent?

Douglas I. Kalish argues that better genetic information can improve health care, but the outcome for health insurance may be darker.

On the positive side, knowing the genetic profile of a patient should allow doctors to select the most clinically effective and the most cost effective course of treatment...

On the negative side, genetic information about an individual will enable insurers to identify those who are likely to develop a disease... In the absence of legislation or social pressure to solidify community and average premium rating, the availability of personal genetic information will increase the spread of health insurance premiums that are much closer to an individual's real cost.

Discussion Question. Could a fair insurance market emerge for the risk of discovering that one has genes that imply a need for medical care?

What was the net effect of the Internet Bubble on the U.S. capital stock and future growth? The "glass is half full" view is represented by Paul Philip.

Technology bubbles happen when a radical technology emerges that has the potential to transform the economy, society and politics. The bubble itself is driven by exactly the same manias. The difference is, at the end of the bubble there is much left behind (technology, knowledge, social practices, infrastructure) that has economic value. Technology bubbles increase the wealth creating capacity of the economy.

The "half empty" view is represented by D. Quinn Mills. He says that without the bubble,

There would have been a better economy and you wouldn't have had the economic recession we're in now with the risk of a substantial decline behind it. So you would have simply have had better economic growth. [The Internet bubble] did not contribute to the success of the American economy during [the 1990s]. In fact, if anything, it constrained it. And when it bust, it risked it entirely

Discussion Question. Could we have had the positive results discussed by Philip without the negative results described by Mills?

Steve Roach says that revised GDP statistics show that the economy is weaker than we thought.

In my some 30 years of experience as an aficionado of the US business cycle, I can remember only one other instance when a statistical revision to the US numbers carried such weight...

Over the first three quarters of 2001...business capital spending is now estimated to have declined by $88.2 billion in inflation-adjusted, or real, terms. That amounts to fully 154% of the $57.2 billion decline in real GDP over the same three-quarter interval...When the equity bubble popped, the IT bubble was quick to follow. A sharp contraction of IT spending accounted for 69% of the decline in business capital spending over the first three quarter of 2001 -- fully 106% of the decline in overall GDP during that same period.

A couple of comments on this.

1. It validates Tobin's q (the ratio of stock market capitalization to the replacement cost of capital) as a determinant of investment.
2. Moore's Law could lead to a lot of volatility in the estimates of investment in information technology. To translate nominal spending into real spending, the statisticians have to estimate the rate of quality improvement. This is almost impossible to do precisely these days. Are computers improving at a rate of 30 percent? 80 percent? A reasonable case can be made for either figure, with dramatically different implications for real spending.

I agree with Roach that the downside risk in the macroeconomic situation is substantial. I think that there is room for more expansionary steps in both fiscal policy (I like the idea of revenue sharing with state and local governments) and monetary policy.

Discussion Question. If business investment is difficult to measure, should policymakers be relying more on other indicators of the business cycle, such as the unemployment rate?

Europe lagged the United States in productivity growth in the 1990's, by 18 percent per year, according to Alberto Alesina and Francesco Giavazzi. They have analyzed the causes for this gap, and they find that the biggest difference is that United States businesses are better managed and more entrepreneurial.

Rigid labor markets and a corporate governance culture that protects incumbent managers, make it hard to reap the benefits of new technologies...goods market regulations favor incumbent firms and discourage new entrants: while firm profits in Europe are high, investment is not, at least when compared to the US.

This exposes the second weakness: the ability to innovate. As in the case of capital, what Europe lacks is not scientific competence, but the ability to translate scientific achievements into business innovations.

As an aside, I would point out that European opposition to genetically-altered food ought to be viewed in this light--as a resistance by incumbents to innovation. Even Paul Krugman pointed out in one of his early New York Times columns that organically-grown food is much riskier than genetically modified food--political correctness has it completely backwards.

Brad DeLong is more optimistic about Europe.

Much of western Europe is in the same situation as the US in the early 1990s, simply waiting for the next turn of the business cycle and the continued diffusion of technology to achieve the necessary critical mass. The computer and communications revolution is already transforming the economies of Finland, Sweden, Ireland, Australia. My money is on western Europe's revolution being relatively close behind.

Discussion Question. Throughout the 1990's, the financial press reported the "cruel" layoffs that were taking place among large U.S. companies. Why might an economist argue that rapid economic growth requires contraction in some sectors?

Paul Georgia discusses the costs and benefits of the Kyoto Protocol to address global warming.

the worldwide cost of implementing the Kyoto Protocol would be about $350 billion per year beginning in 2010. Beginning in 2050, the cost rises to $900 billion per year. The cost of predicted global warming, if climate models are to be believed, would be about $900 billion in 2100. But even if fully implemented, Kyoto would only delay the predicted amount of warming by a mere six years.

So what does this mean? It means that the world will spend thousands of billions of dollars over the next 100 years to prevent global warming, at the end of which it would have to pay the costs of global warming anyway, if it materializes. Kyoto is like trading dollars for pennies and would have about as much affect on the climate.

He cites Bjorn Lomborg, who in turn cites economist William Nordhaus for these estimates. The main economic arguments against Kyoto are:

1. The climate models that ecologists use actually have a rather low response of temperature to carbon dioxide, so that it takes a large reduction in carbon dioxide to prevent global warming scenarios. This factor raises the ratio of costs to benefits.
2. GDP will be much higher 100 years from now, when we foresee global warming's effects appearing. Therefore, relative to GDP, the cost of dealing with global warming in the future is much lower than preventing it today.

Discussion Question. What do you think of the point of view that future generations will be wealthier than today's, and so they should pay a higher share of overall environmental costs?

Robert J. Samuelson argues that the bear market may be a good thing in that it will discourage people from retiring early. He also says,

As a society, America needs to have people pay for more of their own retirement -- as opposed to having someone else pay.

He is referring not only to Social Security but to employer-funded pension plans. Instead, he is suggesting that people will make better decisions if they are given responsibility for choosing their level of saving.

Discussion Question. Do you think that most people would save sufficiently for retirement if they were given that responsibility?