Wednesday, October 17, 2018

Canada Legalizes Marijuana: What's Up in Colorado and Oregon?

Canada became the second country to legalize recreational use of marijuana today. The first was Uruguay, back in 2013.

However, the Uruguayans have proceeded quite slowly in legalization, with a heavy dose of regulation.  Apparently 14 pharmacies in the country, most have run the regulation gauntlet to be allowed to sell marijuana. Uruguay has only two legal producers of marijuana. Buyers must register with the government. Moreover, there are international financial complications. Specifically, parts of Uruguay's economy, including its pharmacies, make heavy use of US dollars. As a result, Uruguay's pharmacies have accounts with US banks. However, under US law, banks cannot provide an account to any party involves with controlled substances. Thus, the Uruguayan pharmacies that are licensed for sales of marijuana can only sell for cash.

It appears that Canada's legalization will move ahead more briskly. Among US states, 31 have enacted laws allowing the sale of marijuana for medical purposes since California did so back in 1996.  But it was in 2012 that Colorado became the first state to legalize recreational use of marijuana. Alison Felix and Sam Chapman describe "The Economic Effects of the Marijuana Industry in Colorado" in Main Street Views from the Federal Reserve Bank of Kansas City (April 16, 2018). For the non-Coloradans among us, they provide a useful overview of what has happened.

Colorado allowed local jurisdictions to keep some control over marijuana sales. Felix and Chapman write: "Although marijuana is legal in all of Colorado, each local jurisdiction can decide whether to allow medical or recreational marijuana retail stores. As of June 2017, 65 percent of Colorado jurisdictions (out of 320) had banned both medical and recreational stores, 4.7 percent had allowed only medical stores, 3.4 percent had allowed recreational stores only and 26.6 percent had allowed both recreational and medical marijuana stores."

Here's the pattern of monthly sales of medical and recreational marijuana:
Image
The overall rise in recreational marijuana sales is substantial. It's interesting that sales of medical marijuana have remained flat. There are always concerns with medical marijuana that is it just a back-door to recreational use. But if that was true in Colorado, one might expect medical marijuana sales to decline when recreational use became legal, and that decline hasn't happened. (Of course, it's also possible that when recreational use of marijuana became legal, it also made medical use more culturally acceptable to more people, so any shift from medical-to-recreational use is being offset by greater acceptance of medical use.)

Sellers and producers of marijuana are licensed in Colorado, and the number of licenses has been rising substantially. Felix and Chapman write:
"In January 2014, there were 156 business licenses issued for recreational retail stores and 493 business licenses for medical marijuana stores. By February 2018, recreational retail store licenses had more than tripled to 518 stores, while medical licenses had grown slightly to 503 stores. In addition to retail stores, the state of Colorado also provides business licenses for cultivation facilities, infused product facilities, testing facilities, operators and transporters. In February 2018, there were 1,473 licenses for cultivation facilities including both medical and recreational, 535 licenses for infused product manufacturing facilities, 23 licenses for testing facilities, 12 operator licenses and 18 transporter licenses. These licenses are issued by the Marijuana Enforcement Division and signify the number of licenses issued but do not necessarily imply that all of these licenses are being actively used."
Colorado has several sales taxes on marijuana, adding up to an overall sales tax rate of about 30%. Most of this goes to the state government, with a sliver going to local jurisdictions. For perspective, marijuana sales taxes have been equal to about 2% of total general fund revenue for the state of Colorado since 2016. However, the tax revenue from marijuana does not go to the general fund, but instead is earmarked for popular causes like school construction and renovation, as well as paying for expenses of running the marijuana licensing system, doing research on marijuana health issues, and so on.

There are some social costs to be balanced against the financial and employment gains to producers, the pleasure of users, and funds for the government.
"One source, a March 2016 report by the Colorado Department of Public Safety, provides some early statistics related to the effects of marijuana legalization on public safety and public health. Reported marijuana usage has increased significantly in the state, with the percentage of 18 to 25 year olds reporting usage over the past month increasing from 21 percent in 2006 to 31 percent in 2014. Similarly, reported usage among adults over 25 has risen from 5 percent in 2006 to 12 percent in 2014. Hospitalizations related to marijuana also rose sharply from 803 per 100,000 hospitalization on average between 2001 and 2009 to 2,413 per 100,000 between 2014 and mid-2015. In addition, calls to poison control mentioning marijuana have increased between 2006 and 2015. ... Traffic fatalities with THC-only or THC-in-combination positive drivers rose from 55 in 2013 to 79 in 2014."
It typically takes a few years to compile health statistics, so it will be interesting to see how statistics on usage, health, and safety of marijuana evolve in the next few years. Of course, a full analysis would also have to take into account if higher marijuana use turns out to be substitute for use of alcohol and tobacco, or is in addition to them.

Oregon legalized recreational use of marijuana in 2016, and Josh Lehner at the Oregon Office of Economic Analysis posted some comments about the evolution of the market earlier this year in " Marijuana: Falling Prices and Retailer Saturation?" (February 8, 2018).  Lehner pointed out that in Oregon, Colorado, and Washington, prices for legalized recreational marijuana have been falling 10-20% per year in the last few years.

As Lehner argues, this price decline is probably to be expected as methods for production, distribution, and sales of marijuana become well-established, and as more efficient operations expand to take a larger share of markets.  On one side, some of the early entrants to legalized marijuana markets are going to be squeezed out by economic forces. But if part of the goal of legalizing recreational marijuana is to drive out black market sales, then lower prices for consumers will contribute to that goal.

Lehner also offers evidence that marijuana usage rates are rising in states which have legalized the recreational use of marijuana.


Finally, Lehner discusses some speculation that over time, the marijuana market may evolve in a way similar to the beer market.
"As economist Beau Whitney notes, it’s easy to envision a long-run outcome for marijuana that is similar to the beer industry. One segment of the market is mass-produced and lower priced products. This will be the end result of the commodification of marijuana. Margins will be low, but due to scale, businesses remain viable. These are more likely to be outdoor grow operations as well, due to costs. Even in a world of legalized marijuana nationwide, it is plausible that Oregon, along with California, would remain a national leader in this market due to agricultural and growing conditions in the Emerald Triangle. The second segment of the marijuana market would be similar to craft beer today. This segment would include smaller grow operations of specialty strains, higher value-added products like oils, creams and edibles. Such products will require and command higher prices."

Friday, October 12, 2018

Why is Labor Force Participation Falling for Prime-Age Males?

For economists, "prime-age" refers to the ages between 25-54, which is post-school and pre-retirement for most workers. Didem Tüzemen asks "Why Are Prime-Age Men Vanishing from the Labor Force?" in the Economic Review of the Federal Reserve Bank of Kansas City (First Quarter 2018, pp. 5-28). She begins: "The labor force participation rate for prime-age men (age 25 to 54) in the United States has declined dramatically since the 1960s, but the decline has accelerated more recently. From 1996 to 2016, the share of prime-age men either working or actively looking for work decreased from 91.8 percent to 88.6 percent. In 1996, 4.6 million prime-age men did not participate in the labor force. By 2016, this number had risen to 7.1 million."

As Tüzemen shows, this rise in nonparticipation rates of prime-age males is broad-based. If you break down prime-age male labor force participation by education levels (less than high school, only high school, some college, college or more), the nonparticipation level is higher for those with less education, but it's up in every education category.  If break down the prime-age group into decades (25-34, 35-44, 45-54), then nonpartication is higher in the 45-54 age group, but it's been rising in every age category, too. 

Perhaps more of a clue comes from the employment survey data tiself.  As Tüzemen reports:
Those who report their status as "not in the labor force” also respond to another question, which asks, “what best describes your situation at this time? For example, are you disabled, ill, in school, taking care of house or family, in retirement, or something else?”
The answers to this survey question suggest that between 1996 and 2016, the share of nonparticipating men who give "disability" as an answer has declined, while the share who refer to family responsibilities, taking care of family, and in retirement have all increased.

Of course, these decisions about not being in the labor market are not made in a vacuum, but are presumably also affected by the reality of labor market opportunities. That's just a long way of saying that the rise in nonparticipation can involve both decisions about labor supply and realities of labor demand. Tüzemen makes a case that evolving labor demand is probably more important for rising male nonparticipation than choices about labor supply. In particular, she focuses on the "polarization" of the labor market--the overall pattern in which low-skill workers do OK, because they are providing personal services that are (at least so far) hard to replace with automation or software, and high-skilled workers do OK, because they are well-positioned to make gains from the use of automation and software, but those in the ranks of the middle-skilled can find themselves at risk. 

You can read the article to sort through the details of this argument, but here are a couple of points that caught my eye. One is that while nonparticipation of prime-age males has risen in every education group, the biggest rise is not in the lowest-skill or highest-skill groups, but rather in the middle.

The other point is that many of those currently out of the labor force are not looking to return. When the Great Recession hit from 2007-2009, the share of nonparticipating prime-age men who said they still wanted a job rose sharply. But now, the share of that group that says they want a job has declined back to levels from the early 2000s. This pattern suggests to me that some of the labor market nonparticipants who wanted a job have now returned to the labor market, while others have given up on employment.

Thursday, October 11, 2018

Primary Care: Expanding the Role of Nurse Practitioners

For most of us, most of the everyday health care we get is from a primary care doctor. But there's a limited number of primary care doctors, not enough to match the number of patients, especially in rural areas. An option slowly being used more broadly across the US health care system is let nurse practitioners (NPs) do primary care. Peter Buerhaus makes the case for accelerating this movement in "Nurse Practitioners: A Solution to America's Primary Care Crisis," written for the American Enterprise Institute (September 2018).

To set the stage, here's what primary care involves: 
"Primary care clinicians typically treat a variety of conditions, including high blood pressure, diabetes, asthma, depression and anxiety, angina, back pain, arthritis, thyroid dysfunction, and chronic obstructive pulmonary disease. They provide basic maternal and child health care services, including family planning and vaccinations. Primary care lowers health care costs, decreases emergency department visits and hospitalizations, and lowers mortality."
Here's evidence on the shortage of primary care physicians:
"The Association of American Medical Colleges (AAMC) estimates that by 2030 we will have up to 49,300 fewer primary care physicians than we will need ... Despite decades of effort, the graduate medical education system has not produced enough primary care physicians to meet the American population’s needs. When geographic distribution of primary care medical doctors (PCMDs) is taken into account, the problem begins to feel like a crisis. In 2018 the federal government reported 7,181 Health Professional Shortage Areas in the US and approximately 84 million people with inadequate access to primary care, with 66 percent of primary care access problems in rural areas."
Nurse practitioners (NPs) are already a recognized health care specialty, with additional training and autonomy beyond a registered nurse. Here's and overview:
"In the words of the American Association of Nurse Practitioners (AANP): `All NPs must complete a master’s or doctoral degree program, and have advanced clinical training beyond their initial professional registered nurse preparation.' Didactic and clinical courses prepare NPs with specialized knowledge and clinical competency to practice in primary care, acute care, and long-term health care settings. NPs assess patients, order and interpret diagnostic tests, make diagnoses, and initiate and manage treatment plans. They also prescribe medications, including controlled substances, in all 50 states and DC, and 50 percent of all NPs have hospital-admitting privileges. The AANP reports that the nation’s 248,000 NPs (87 percent of whom are prepared in primary care) provide one billion patient visits yearly.
"NPs are prepared in the major primary care specialties—family health (60.6 percent), care of adults and geriatrics (21.3 percent), pediatrics (4.6 percent), and women’s health (3.4 percent)—and provide most of the same services that physicians provide, making them a natural solution to the physician shortage. NPs can also specialize outside primary care, and one in four physician specialty practices in the US employs NPs, including psychiatry, obstetrics and gynecology, cardiology, orthopedic surgery, neurology, dermatology, and gastroenterology practices. Further, NPs are paid less than physicians for providing the same services. Medicare reimburses NPs at 85 percent the rate of physicians, and private payers pay NPs less than physicians. On average, NPs earn $105,000 annually.
"NPs’ role in primary care dates to the mid-1960s, when a team of physicians and nurses at the University of Colorado developed the concept for a new advanced-practice nurse who would help respond to a shortage of primary care at the time. Since then, numerous studies have assessed the quality of care that NPs provide ... and several policy-influencing organizations (such as the National Academy of Medicine, National Governors Association, and the Hamilton Project at the Brookings Institution) have recommended expanding the use of NPs, particularly in primary care. Even the Federal Trade Commission recognizes the role of NPs in alleviating shortages and expanding access to health care services. Most recently, the US Department of Veterans Affairs amended its regulations to permit its nearly 5,800 advanced-practice registered nurses to practice to the full extent of their education, training, and certification regardless of state-level restrictions, with some exceptions pertaining to prescribing and administering controlled substances."
So what's the problem? A number of states have rules limiting the services that NPs are allowed to provide. And a number of doctors support those rules, in part out of a fear that allowing NPs to do more would reduce their income or even threaten their jobs: 
"A 2012 national survey of PCMDs found that 41 percent reported working in collaborative practice with primary care nurse practitioners (PCNPs) and 77 percent agreed that NPs should practice to the full extent of their education and training. Additionally, 72.5 percent said having more NPs would improve timeliness of care, and 52 percent reported it would improve access to health services. However, about one-third of PCMDs said they believe the expanded use of PCNPs would impair the quality and effectiveness of primary care. The survey also found that 57 percent of PCMDs worried that increasing the supply of PCNPs would decrease their income, and 75 percent said they feared NPs would replace them." 
It's a nice thing that the health care industry provides jobs for so many workers, including doctors. But the fundamental purpose of the industry is not to provide high-paying jobs: it is to provide quality care to patients in a cost-effective manner. As Buerhaus writes:
"Drop the restrictions on PCNP scope-of-practice! These are regressive policies aimed at ensuring that doctors are not usurped by NPs, which is not a particularly worthwhile public policy concern, especially if it comes at the expense of public health. The evidence presented here suggests that scope-of-practice restrictions do not help keep patients safe. They actually decrease quality of care overall and leave many vulnerable Americans without access to primary care. It is high time these restrictions are seen for what they are: a capitulation to the interests of physicians’ associations."
Buerhaus also quotes a 2015 comment from the great health care economist Uwe Reinhardt, who died late last year. Reinhardt said:
"The doctors are fighting a losing battle. The nurses are like insurgents. They are occasionally beaten back, but they’ll win in the long run. They have economics and common sense on their side." 
In this arena, it would be nice if economics and common sense could win out a little faster.

Wednesday, October 10, 2018

How Best to Reintegrate Ex-Prisoners?

"Two-thirds of those released from prison in the United States will be re-arrested within three years, creating an incarceration cycle that is detrimental to individuals, families, and communities." So writes Jennifer L. Doleac in "Strategies to productively reincorporate the formerly-incarcerated into communities: A review of the literature" (posted on SSRN, July 21, 2018), Doleac's approach is straightforward: look at the studies. In particular, look at fairly recent studies done since 2010 that use a "randomized controlled trial" approach--that is, an approach where a group of participants are randomly assigned either to receive a particular program or not to receive it. When this approach is carried out effectively, comparing the "treatment group" and the "control group" provides a reasonable basis for drawing inferences about what works and what doesn't.

Here's a list of the interventions on which Doleac finds some fairly recent studies using randomized controlled trial approaches. Some of the studies focus on recidivism, while others look at outcomes like employment or gaining additional education. 

I'll let you read Doleac's literature review for details of individual studies. But I'll just notice here that this kind of list does not seek to respect what one expects or hopes might be true. 

For example, the "bad bets" at the bottom all have their advocates. But based on the evidence, Doleac writes concerning these programs: 
"Many programs focus on increasing employment for people with criminal records, with the hope that access to a steady job will prevent reoffending. This topic has been studied more than others, and the research results are mixed. Transitional jobs programs provide temporary, subsidized jobs and soft-skills training to those trying to transition into the private sector workforce. multiple rigorous studies show that transitional jobs programs are ineffective at increasing post-program employment, and have little to no effect on recidivism. ...

"Ban the Box policies seek to increase access to employment by prohibiting employers from asking about criminal records until late in the hiring process. Research shows that Ban the Box policies are ineffective at increasing employment for people with criminal records,and have the unintended consequence of reducing employment for young black men withoutcriminal records (because employers assume that applicants from this group are more likely to have a record when they cannot ask directly). The net effect is a reduction in employment for young, low-skilled black men--the opposite of what proponents of this policy hoped to achieve. ... 
"Given the array of challenges faced by people who cycle through the criminal justice system, a popular approach is to try to address many needs at once. Two evaluations of highly-respected reentry programs providing wrap-around services found little to no effect on subsequent recidivism. More recently, two large-scale evaluations of federal programs funding wrap-around services in communities across the country both found increases in recidivism for the treatment groups. ... Together, these studies suggest that these multi-faceted, labor-intensive (and thus expensive) interventions may be trying to do too much and therefore do not do anything well. Since this is a popular approach in cities and counties across the country, leaders should be skeptical about the effectiveness of their current programs."
Conversely, here are some comments on what seems most promising, based on the actual studies. From Doleac:
"Court-issued rehabilitation certi ficates can be presented to employers as a signal of recipients' rehabilitation. One study found that court-issued certi ficates increased access to employment for individuals with felony convictions. This could be because they provide valuable information to employers about work-readiness, or because employers perceive the court-issued certi ficates as protection against negligent hiring lawsuits. In either case, this strategy is promising and worth further study. The effect on recidivism is currently unknown. ...
"A large share of people who are arrested and incarcerated suffer from mental illness, and many more are hindered by emotional trauma and poor decision-making strategies. Therapy and counseling could have a meaningful impact on the successful reintegration of these individuals. Programs focused on mental health include cognitive behavioral therapy (CBT) and multisystemic therapy (MST). A growing body of evidence supports CBT as a cost-effective intervention, though the evidence on MST is more mixed and may be context-dependent. In both cases, it is unclear how much effectiveness will fall if programs are scaled up to serve more people: if they require highly-trained psychologists to conduct the sessions, the scalability will be limited. ...

"Diverting low-risk offenders to community supervision instead of incarceration appears to be highly effective. Electronic monitoring is used as an alternative to short incarceration spells in several countries, and in those contexts has reduced recidivism rates and increased economic well-being and educational attainment. Court deferrals--which allow low-risk, non-violent felony defendants to avoid a conviction if they successfully complete probation--reduce recidivism rates and increase employment. And an innovative diversion program for non-violent juvenile offenders that provides group mentoring and instruction in virtue theory was shown to reduce recidivism relative to standard diversion to community service. ...
"Many people coming out of jail or prison may benefit from government or community support, but many others might be better off if we left them alone. (This is especially likely if the programs they would be referred to are not effective.) A diverse set of high-quality studies consider the effects of reducing the intensity of community supervision. All found that reducing intensity of supervision (for example, requiring fewer meetings or check-ins with probation officers) has no impact on recidivism rates, and that it actually reduces recidivism for low-risk boys (age 15 or younger). That is, for less money, and less hassle to those who are court-supervised, we could achieve the same and even better public safety outcomes. This approach is worth exploring in a variety of contexts, and appears to be effective for high-risk as well as low-risk offenders. ... At this point, there is substantial evidence, from a variety of contexts, that increasing the intensity of community supervision has no public safety benefi ts and in some cases increases recidivism. It is also more expensive. It is unclear what the optimal amount of supervision is for various types of offenders, but it's clearly lower than current levels. ... 
"[A]nother policy that has great potential to reduce recidivism and incarceration
rates is expanding DNA databases. Two studies show that those charged or convicted of
felonies are dramatically less likely to reoffend when they are added to a government DNA database, due to the higher likelihood that they would get caught. Deterring recidivism in this way is extremely cost-effective, and reveals that many offenders do not need additional supports to stay out of trouble."
Doleac emphasizes that the evidence on many of these programs is not as strong as one might prefer, and there is certainly room for more research. But I would add that those looking to go beyond research and enact a wide-ranging alteration of policies should be considering the existing research, too.  

Monday, October 8, 2018

Boglehead Wisdom

The Bogleheads believe in Jack Bogle, who "founded Vanguard in 1974 and introduced the first index mutual fund in 1975." An index fund seeks only to mimic the average market return, and thus can do so at very low cost. In contrast, an "active" fund looks for ways to beat the market, through picking certain stocks or timing movements in the market, but also charges higher fees. 

Jason Zweig reports on a conference of Bogleheads in "Jack Bogle’s Bogleheads Keep Investing Simple. You Should Too," in the Wall Street Journal, October 5, 2018. The part of the article that especially caught my eye was "The Wit and Wisdom of Jack Bogle," a collection of comments from Bogle over the years. Here they are:
  • "In the field of investment management, nearly all of those experts whom we identify as stars prove to be comets. Rather than being eternal beacons of light, most managers live a transitory existence, illuminating the financial firmament for but a brief moment in time, only to flame out, their ashes drifting gently down to earth. Of course, some outstanding managers remain, but history tells us that they are the exception that proves the rule."
  • "I don’t like the word `never' when it comes to the stock market."
  • "In the fund business, you get what you don’t pay for."
  • "Over the long run, a percentage point increase in volatility is meaningless; a percentage point increase in return is priceless."
  • "It is investor emotions, often inexplicable for individual stocks and for the market alike, that drive the market in the short run, and sometimes for remarkably extended periods. But not forever."
  • "We must base our asset allocation not on the probabilities of choosing the right allocation, but on the consequences of choosing the wrong allocation."
  • "While rational expectations can tell us what will happen... they can never tell us when.:
  • “I built a career out of knowing what I don’t know.”
There is strong evidence that for the average investor, with no special inside knowledge, Indeed, the legendary active investor Warren Buffett has instructions in his will that the money he is leaving to his wife should be invested in a low-cost index fund. Buffett explained a few years ago:
Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). ... The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.
That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. ... The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness. ...
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. ... My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
I think this advice boils down to: "If you aren't Warren Buffett, or at least a pale imitation of Warren Buffett, you should think seriously about being a Boglehead."


Economics Nobel 2018: William Nordhaus and Paul Romer

Both William Nordhaus and Paul Romer are deserving of a Nobel Prize in Economics, but I was not expecting them to win it during the same year. The Nobel committee found a way to glue them together. Nordhaus won the prize "“for integrating climate change into long-run macroeconomic analysis," while Romer won the prize “for integrating technological innovations into long-run macroeconomic analysis.” Yes, the words "climate change" and "technological innovations" might seem to suggest that they worked on different topics. But with the help of "integrating ... into long-run macroeconomic analysis," Nordhaus and Romer are now indissolubly joined as winners of the 2018 Nobel prize.

Each year, the Nobel committee releases two essays describing the work of the winner: for the general reader, they offer "Popular Science Background: Integrating nature and knowledge into economics"; for those who speak some economics and don't mind an essay with some algebra in the explanations, there is "Scientific Background: Economic growth, technological change, and climate change." I'll draw on both essays here. But I'll take the easy way out and just discuss the two authors one at a time, rather than trying to glue their contributions  together. 

Back in the 1970s, the federal government had just recently taken on a primary role in setting and enforcing environmental laws, with a set of amendments in 1970 that greatly expanded the reach of the Clear Air Act and another set of amendments in 1972 that greatly expanded the reach of the Clean Water Act. As far back as the mid-1970s, William Nordhaus was estimating models of energy consumption that explored the lowest-cost ways of keeping  COconcentrations low in seven different "reservoirs" of carbon: "(i) the troposphere (<' 10 kilometers), (ii) the stratosphere, (iii) the upper layers of the ocean (0–60 meters), (iv) the deep ocean (> 60 meters), (v) the short-term biosphere, (vi) the long-term biosphere, and (vii) the marine biosphere."

By the early 1990s, Nordhaus was creating what are called "Integrated Assessment Models," which have become the primary analytical tool for looking at climate change. An IAM breaks up the task of analyzing climate change into three "modules", which the Nobel committee describes in this way: 
A carbon-circulation module This describes how global COemissions influence CO concentration in the atmosphere. It reflects basic chemistry and describes how COemissions circulate between three carbon reservoirs: the atmosphere; the ocean surface and the biosphere; and the deep oceans. The module’s output is a time path of atmospheric CO concentration. 
A climate module This describes how the atmospheric concentration of COand other greenhouse gases affects the balance of energy flows to and from Earth. It reflects basic physics and describes changes in the global energy budget over time. The module’s output is a time path for global temperature, the key measure of climate change. 
An economic-growth module This describes a global market economy that produces goods using capital and labour, along with energy, as inputs. One portion of this energy comes from fossil fuel, which generates COemissions. This module describes how different climate policies – such as taxes or carbon credits – affect the economy and its CO emissions. The module’s output is a time path of GDP, welfare and global CO emissions, as well as a time path of the damage caused by climate change. 
A number of different IAMs now exist. The usefulness of the framework is that one can plug in a range of assumptions--how much energy will an economy use, how will this affect CO2 in the atmosphere, how will it affect overall climate--and develop a sense of what factors or assumption matter most or least. These are quantitative models: that is, you can plug in a policy like a carbon tax, and then trace through its economic and environmental effects, and consider costs and benefits. Nordhaus offers a readable overview of how this work has developed here, with citations to the underlying academic references. 

When I was first being indoctrinated into economics in the late 1970s, the prevailing theories of economic growth were based on the work of Robert Solow (Nobel '87). A couple of implications of Solow's model are relevant here. One is that in Solow's approach, the researcher calculated increases in inputs of labor and capital for an economy, and then figured out whether those rising inputs of labor and capital could plausibly explain the overall rise in the overall amount of economic output. In these calculations for the US economy, economic output was rising faster than could be explained by the growth of labor and capital and so the additional residual amount was said to have resulted from a change in "productivity" or "technology" which needed to be understood in the broadest sense to include not just explicit scientific inventions, but all ways of rearranging inputs to get more output.

This approach was clearly useful, and also clearly limited. Another economists (Moses Abramowitz) liked to say that because it measured technology as the leftover residual from what could not be explained through increases in labor and capital, the discussion of productivity that resulted was "a measure of our ignorance." Others sometimes referred to economic growth in this theory as "manna from heaven," falling upon the economy without much explanation. Others said that technology in this model was a "black box"--meaning that the question of how new technology was created was assumed rather than argued.

Solow and other growth theorists working with this approach did derive some predictions about rates of economic growth. For example, they argued that growth depended on rates of investment, and that economies would experience diminishing returns as their capital stock increased. Thus, a low-income country with a low level of capital stock would have higher returns from investment than a high level of capital stock. 

But as Paul Romer noted when he began working on technology and economic growth the 1980s, this theory of productivity growth seemed inadequate. There were many examples of low-income countries that were growing quickly, but also many examples of low-income countries growing moderately, slowly, or even negatively. Something more than capital investment seemed important here. In addition,

From the Nobel "popular science" report:
"Romer’s biggest achievement was to open this black box and show how ideas for new goods and services – produced by new technologies – can be created in the market economy. He also demonstrated how such endogenous technological change can shape growth, and which policies are necessary for this process to work well. Romer’s contributions had a massive impact on the feld of economics. His theoretical explanation laid the foundation for research on endogenous growth and the debates generated by his country-wise growth comparisons have ignited new and vibrant empirical research. ...
"Romer believed that a market model for idea creation must allow for the fact that the production of new goods, which are based on ideas, usually has rapidly declining costs: the frst blueprint has a large fxed cost, but replication/reproduction has small marginal costs. Such a cost structure requires that frms charge a markup, i.e. setting the price above the marginal cost, so they recoup the initial fxed cost. Firms must therefore have some monopoly power, which is only possible for sufciently excludable ideas. Romer also showed that growth driven by the accumulation of ideas, unlike growth driven by the accumulation of physical capital, does not have to experience decreasing returns. In other words, ideas-driven growth can be sustained over time."
Romer's approach is often describe as an "endogenous growth" model. The earlier Solow-style approach demonstrated the critical importance of growth in technology and productivity, by showing that it was impossible to explain actual long-run macroeconomic patterns without taking them into account.  A Romer-style approach then seeks to explore the determinants of growth, with an emphasis on the economic power of producing and using ideas.
Oddly enough, Nordhaus and Romer published essays on the topics that won the Nobel prize in consecutive issues of the Journal of Economic Perspectives in Fall 1993 and Winter 1994 (full disclosure: where I have worked as Managing Editor of JEP since the start of the journal in 1987). For those who want a dose of the old stuff:

Saturday, October 6, 2018

Nobel #2: Taking the Medal Through Fargo Airport Security

The Nobel Prize in economics will be announced on Monday. Thus, it is perhaps an appropriate time to revisit this post from about four years ago.  
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Brian Schmidt was a co-winner of the 2011 Nobel Physics Prize for "for the discovery of the accelerating expansion of the Universe through observations of distant supernovae." This is the discovery that leads physicists to infer the existence of "dark energy," which although we have no direct way to measure or observe it is apparently causing the expansion of the universe to speed up. At the Scientific American blog, Clara Moskowitz reports the story recently told by Schmidt about ttaking his Nobel medal to show his grandmother in Fargo, North Dakota -- a city on the eastern edge of North Dakota, on the border with my home state of Minnesota. Fargo has a little more than 100,000 people, which makes it the largest population city in North Dakota. Here's how Schmidt tells the story:
“There are a couple of bizarre things that happen. One of the things you get when you win a Nobel Prize is, well, a Nobel Prize. It’s about that big, that thick [he mimes a disk roughly the size of an Olympic medal], weighs a half a pound, and it’s made of gold.
“When I won this, my grandma, who lives in Fargo, North Dakota, wanted to see it. I was coming around so I decided I’d bring my Nobel Prize. You would think that carrying around a Nobel Prize would be uneventful, and it was uneventful, until I tried to leave Fargo with it, and went through the X-ray machine. I could see they were puzzled. It was in my laptop bag. It’s made of gold, so it absorbs all the X-rays—it’s completely black. And they had never seen anything completely black.
“They’re like, ‘Sir, there’s something in your bag.’
I said, ‘Yes, I think it’s this box.’
They said, ‘What’s in the box?’
I said, ‘a large gold medal,’ as one does.
So they opened it up and they said, ‘What’s it made out of?’
I said, ‘gold.’
And they’re like, ‘Uhhhh. Who gave this to you?’
‘The King of Sweden.’
‘Why did he give this to you?’
‘Because I helped discover the expansion rate of the universe was accelerating.’
At which point, they were beginning to lose their sense of humor. I explained to them it was a Nobel Prize, and their main question was, ‘Why were you in Fargo?’”