SCEPA Blog

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The Political Economy of Unemployment Insurance

Ismael CidThis week's Worldly Philosopher, Ismael Cid-Martinez, discusses the politics and economics of unemployment insurance.

The debate surrounding unemployment insurance (UI) returns to Capitol Hill. This is not entirely surprising. Amid the good news, today's report confirmed that a large shadow continues to loom over our labor market. Examining monthly changes in each category of unemployment by duration, we observe that long-term unemployment remains stubbornly high when compared to previous recoveries (see graph).

Read more: The Political Economy of Unemployment Insurance

Thinking Beyond the Minimum Wage Fight

On June 23, 2014, SCEPA Director Teresa Ghilarducci appeared on MSNBC's UP with Steve Kornacki along with Neera Tanden from the Center for American Progress and Paul Sonn with the National Employment Law Project to discuss the bigger economic picture that necessitates raising the minimum wage. The panel discussed the facts that productivity gains have far eclipsed wage gains, that the federal minimum wage has been stagnant since 2009, and that the average hourly pay has declined over the past 12 months. The panel overwhelming agreed the best way to address these structural economic issues is through increased collective bargaining. A recent working paper by Teresa Ghilarducci and Joelle Saad-Lessler find two factors that significantly impact the likelihood of obtaining employer-offered benefits - time spent unemployed and union status. Therefore, attempts to raise wages must address the decline in workers' bargaining power and change the norms relating to benefits and wage provision. The City of Seattle has taken the largest step in addressing the wage gap by elevating their minimum wage to $15 an hour, while Massachusetts offers the highest state level minimum wage at $11 an hour. Teresa Ghilarducci ended the MSNBC panel with a summary of the advantages of unionization for both workers and employers.

Policy Debates In A Post-Piketty World

Raphaele ChappeThis week's Worldly Philosopher, Raphaele Chappe, writes on the policy implications of Thomas Piketty's analysis on inequality.

We are in a post-Piketty world. Since my last blog entry, Thomas Piketty has received nothing short of a rock star treatment upon his U.S. visit. What are the policy debates that we face if Piketty is right?

As the ratio of capital to income (which Piketty terms "beta") increases, Piketty argues there is no natural mechanism that would lead r (the rate of return on capital) to adjust downwards so as to perfectly compensate the impact on the distribution, placing emphasis on policies that might reduce r.

Taxation is one way to reduce r and Piketty's proposal is a progressive world-wide tax on wealth although many agree that this may prove politically unfeasible, especially in the absence of international legal cooperation. Other tax possibilities for fighting inequality include increasing tax rates on capital gains and dividends (which have been getting favorable treatment in the tax code as compared with labor income1), or simply combating tax evasion for the wealthy (see The Price of Offshore Revisited).2 In my own research, I plan to run simulations to test the effectiveness of such tax proposals, and their impact on the wealth distribution.

We could also consider labor-focused policies designed to increase the share of national income going to labor, such as raising the minimum wage, or giving workers direct participation in management and profit through employee ownership or other means. (For the use of national income and product accounts (NIPA) as a framework for studying how inequality will be affected by fiscal and other initiatives such as raising the minimum wage, see SCEPA working paper 2013-1).

In order to advocate for the best policy solutions, we may wish to understand the drivers for high profit rates in recent decades. Piketty's proposed wealth tax solution is compatible with the conventional marginal productivity framework, with r equal to the marginal productivity of capital (itself a technical determination, given the existing technology and the shape of the production function, i.e. the elasticity of substitution between capital and labor). Yet the wealth distribution may be shaped by factors other than the technology. In his recent blog entry, Gregor mentions socioeconomic variables such as the globalization of production, the bargaining power of labor, financialization, and changes in production technology as being responsible for the shift to higher profit shares. To be fair, Piketty acknowledges that r might also be socially and politically determined and that factors of production may not necessarily get paid their marginal product, but he does not elaborate further.

This has led some commentators to highlight that some sectors of the economy (such as the financial sector the pharmaceutical industry) could suffer from large economic rents. Dean Baker suggests that policies designed at eliminating such rents (e.g. with a financial transaction tax or a breakdown of patent monopolies) could lower r while at the same time raise g.

Our policy debates cannot ignore existing structures of economic and political power.
If wealth controls government, existing political economic institutions will not necessarily cooperate. In his latest book "The Price of Inequality," Stiglitz raises the issue of political power exercised by lobbies and moneyed interests over legislative and regulatory processes. In his view, politics has shaped the market in ways that advantage the wealthiest at the expense of the middle-class. But politics can change.

1From 2003 to 2012, qualified dividends have been taxed at the same rate as long-term capital gains (15 percent rate, and as low as 0 percent for individuals in low-income brackets). The American Taxpayer Relief Act of 2012 has recently increased this rate to 20 percent (for both capital gains and dividends) for taxpayers that exceed the thresholds for the highest income tax rate (39.6 percent), extending the 0 and 15 percent tax rates for taxpayers below the thresholds. This regime clearly favors wealthy individuals that derive income from financial investments rather than labor.

2According to a study written for the Tax Justice Network by a former chief economist at the consultancy firm McKinsey, a global super-rich elite has accumulated an astronomical amount of financial investments hidden in tax havens, at least $21 trillion and as much as $32 trillion of private offshore wealth (as of the end of 2010).

The Long-Run Consequences of Income Distribution

Rishabh KumarThis week's Worldly Philosopher, Rishabh Kumar, models the asymmetric distribution of income and examines its effect on the growth of the U.S. economy. 

In a previous post, I highlighted some demand side limitations stemming from the asymmetric distribution of income and consumption in the United States. This entry examines the effect of this asymmetry on the future of U.S. economic growth and the possibility of secular stagnation.

Read more: The Long-Run Consequences of Income Distribution

The Unemployment Report: Getting Used to Unemployment

by Rick McGahey, SCEPA Faculty Fellow

Rick McGaheyThis morning's May employment report continues the trend of slight improvement but subpar overall economic performance.  The unemployment rate stayed stuck at 6.3 percent while jobs increased by 217,000. So far in 2014, job creation has averaged 214,000 per month, and if that rate continues for the entire year, it will be the strongest year since 1999.

But it is still not a great number. True, if May’s job performance continues, then the Atlanta Fed predicts we will reach 5.5 percent unemployment in ten months. But any lowering in the unemployment rate is driven in part by weak labor force participation, which remains near its lowest level in over thirty years.

Heidi Shierholz at the Economic Policy Institute points out how weak our recovery remains, noting that we are six-and-one-half years away from the Great Recession’s start. If you take population growth since then into account, we still are short around 7 million jobs.

The ongoing weakness of the job market also can be seen in data on wages and hours worked. Over the last year, average hourly earnings have increased by 2.1 percent, virtually the same as the low two percent growth in overall inflation. And the average hours worked each week hasn’t increased at all in the past year. A tighter labor market should see increasing wages and hours, but we don’t have that, underscoring that many people still lack work, and employers aren’t hiring at a vigorous rate.

This month, we mark the five-year anniversary of the Great Recession’s technical end. Five years is a long time for an expansion; the eleven U.S. business cycle expansions in the post-World War II period have averaged 58.4 months, although more recent expansions have lasted longer. And other data point to macroeconomic weakness. Real GDP growth in the first quarter of 2014 actually fell by one percent, making the relatively consistent job gains this year harder to understand.

But policy makers feel no urgency for further economic stimulus. We are in danger of accepting slow job growth, wage stagnation, and inequality as a “new normal.” The U.S. should be borrowing more with today’s very low interest rates, creating jobs in infrastructure and public services, but instead we drift along with slow growth, low wages, and a lack of shared prosperity.

A Conference to Honor Economics Professor Ed Nell

Professor Ed NellOn May 3rd, the Economics Department of The New School for Social Research honored Professor Edward J. Nell's 39 years of teaching with a conference celebrating his many contributions to the field of economics. Prior to his retirement in 2013, Nell served as the Malcolm B. Smith Professor of Economics since 1969. He published more than twenty books and wrote hundreds of articles for leading journals on macroeconomic theory, monetary analysis and finance, economic methodology and philosophy, and transformational growth and development.

Below is a sample of the working papers contributed to the conference by former students inspired by Professor Nell.

Willi Semmler: "A New Chapter"
Anna Shoysta: "Edward Nell as the Worldly Philosopher: Shaping the Minds of the Future Economists"
David Laibman: "Democratic Planning and Incentives – Coming to Grips with (Yet Another) Impossibility Theorem"
Louis-Phillippe Rochon: "The Monetary Circuit and the State"
Sergio Parrinello: "A Search for Distinctive Features of Demand-led Growth Models"

Beyond Broke: Why Closing the Racial Wealth Gap is a Priority for National Economic Security

Darrick HamiltonSCEPA economist, Darrick Hamilton recently coauthored the report, "Beyond Broke: Why Closing the Racial Wealth Gap is Priority for National Economic Security" with the Center for Global Policy Solutions, the Carolina Population Center at UNC, the Research Network for Racial and Ethnic Inequality at Duke University, and Milano Graduate School of International Affairs at The New School.  The report evaluates wealth disparities across racial and ethnic categories by providing an in-depth analysis of housing and liquid wealth.

The report finds that:
• Between 2005 and 2011, the median net worth of households of color remained near 2009 levels, reflecting a drop of 58 percent for Latinos, 48 percent for Asians, 45 percent for African Americans but only 21 percent for whites.

• For most African Americans and Latinos, checking accounts are their only liquid asset.

• African Americans (38 percent) and Latinos (35 percent) are over twice as likely as whites (13 percent) to hold no financial assets at all and to have no or negative net worth.

This analysis provides new insight into the close interplay between race and place as it relates to America's persistent wealth gap. To address these issues, the report calls for Congress and the Administration to ensure that future mortgage settlements include the collection of racial/ethnic, gender, geographical and other demographic data to ensure that relief programs are transparent, fair, and target the hardest-hit communities. The report also calls for the Federal Housing Finance Agency to allow Freddie Mac and Fannie Mae to perform principal reduction and loan modifications for distressed homeowners.

This report is part of the Closing the Racial Wealth Gap Initiative, which seeks to build awareness and support for efforts to address racial and ethnic wealth inequalities based on structural factors.

Just Say Yes- Bernard Schwartz Autobiography and Vision for America

Bernard L. Schwartz - an investor, a retired industrialist, a progressive public policy advocate and a philanthropist - recently published his autobiography, 'JUST SAY YES: What I've Learned About Life, Luck, and the Pursuit of Opportunity.'

JUST SAY YES is a story about a boy raised in Depression-era Brooklyn who grew up to become a giant in the aerospace business, a confidante of U.S. presidents, and a renowned international deal maker. From this lifetime of experience, Schwartz finds himself increasingly concerned about the future of the United States and its citizens due to the ever-increasing gap between the country's have's and have-not's. "Far too much emphasis is put on money and profit, instead of treating clients and customers as human beings. Our political leaders must also come back to the table, and start working together to improve the lives of all citizens." Without this effort, Schwartz fears that our glory days will remain behind us. As an "optimist by nature," Schwartz believes that American politics and business can change for the better.

Bernard L. Schwartz on his new book, 'Just Say Yes' - An Interview with Charlie Rose at the New-York Historical Society from Bernard L. Schwartz Center on Vimeo.

Must the Rich Grow Richer? Long-Term Trends in the Capital Share in Income

Gregor This week's Worldly Philosopher, Gregor Semieniuk, writes on the theoretical assumptions underlying Thomas Piketty's forecast of a growing share of income going to the rich.

The future share of total income that accrues as return on capital need not keep rising. The New School's Lance Taylor argues that the capital share trajectory rather depends on the assumptions in your model of growth and distribution. Taylor critiques Thomas Piketty who asserts in his celebrated book that the share of national income going to rich capital owners should rise in the 21st century, and may only be reduced by cataclysmic events such as wars or revolutions (Piketty 2014, p. 233). This post summarizes Taylor's argument.

Read more: Must the Rich Grow Richer? Long-Term Trends in the Capital Share in Income

Financial Stress, Sovereign Debt and Economic Activity

The Journal of International Money and Finance, one of the top journals for international finance, published SCEPA economists, Christian R. Proaño, Christian Schoder and Willi Semmler's working paper, 'Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions.' This paper is an expansion on their policy note, 'The Role of Financial Stress in Debt and Recovery' which studied the change in the sovereign debt and its impact on economic growth. Their study discovered that national debt was insignificant in determining the level of economic growth a country experiences as long as the financial market was stable. National debt was only detrimental to countries if there were high levels of instability and risk in the financial market. These findings explain why austerity policies have failed to promote economic growth, because economic growth depends first on financial market stability, and is only an issue if financial markets are unstable.

The Unemployment Report: Reported Gains, But Confusing Data

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

April’s employment report is a strong one on its own terms. The unemployment rate dropped by almost half a percentage point, from 6.7 percent in March to 6.3 percent in April; this is the lowest rate since September 2008, when the economy was plunging into the Great Recession. And payroll employment leapt up by 288,000, the biggest gain since January 2012. So all is good, right?

There’s no denying the strength of these numbers, but several factors caution against a full-blown celebration just yet. First, the dramatic drop in the unemployment rate is due not only to job growth, but to continuing declines in the labor force. The measured labor force fell by 806,000 people between the March and April household surveys (the source of the unemployment rate), while that survey actually showed slightly lower total employment in April than in March.

So, based on the household survey alone, the drop in the unemployment rate was almost entirely due to the lower labor force. BLS Commissioner Erica Groshen says their analysis shows the lower seasonally adjusted rate mostly due to “fewer people entering the labor force than usual…” but that still underscores that April’s lower unemployment rate is more a function of fewer people looking for jobs than it is of vigorous job creation.

But what about that strong payroll employment number?

Read more: The Unemployment Report: Reported Gains, But Confusing Data

A Debate on Mainstream Economics: A Gadget is a Dangerous Thing

Anthony Bonenby Worldly Philosopher Anthony Bonen

Recently, Paul Krugman (here, here and here) has taken a keen interest in a heterodox economist’s critique of mainstream economics (and not for the first time). In reponse, Tom Palley has issued solid rejoinders to Krugman and Simon Wren-Lewis. However, I fear the brilliant and (rightfully) esteemed Nobel laureate has missed the key point of heterodox’s frustration with marginal productivity theory. So, I follow his call to “continue to debate how we do economics.”

A key issue in distribution debates is the fair remuneration of capital and labor. Marginal productivity theory says, very basically, that the real wage and the (real) rate of profit are equal to the marginal increase in production added by the last unit of labor and capital, respectively.

Many economists, Krugman points out, do not believe this to be a cardinal truth of capitalist economies. Rather, he says [my emphasis]: 

"there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income."

That word – gadget – really stunned me. It sounds benign, innocuous even. Yet marginal product models are no mere “gadget”. They are the entrée for modern macroeconomics.

Read more: A Debate on Mainstream Economics: A Gadget is a Dangerous Thing

Fast Food Failure: CEO-to-Worker Pay Disparity

Catherine RuetschlinDemos recently published a report by New School PhD Candidate in Economics, Catherine Ruetschlin, "Fast Food Failure: How CEO-to-Worker Pay Disparity Undermines the Industry and the Overall Economy."

The report studies CEO-to-worker compensation ratios across industries, finding Accommodation and Food Services to be the most unequal sector in the economy. This fact is driven by the extreme pay disparity of the fast food industry, which is also one of the fastest growing employers in the nation.

Demos' research supports the renewed call, started by Robert Reich's  Inequality for All and Thomas Piketty's Capital in the Twenty-First Century, among others, to question increasing inequality, it's link to economic instability and what is driving it.

Read more: Fast Food Failure: CEO-to-Worker Pay Disparity

Anwar Shaikh: Named an "Eminent Economist"

Anwar Shaikh'Eminent Economists in the World Today,' the sequel to 'Eminent Economists,' presents the ideas of influential economists of the last 50 years. SCEPA is proud to announce that Anwar Shaikh, economist and professor at The New School for Social Research, is included in this distinguished honor, which recognizes his work on the economic patterns of the developed world.

Shaikh has always held the belief that economics is a moral science and has dedicated his research to understanding inequality. His entry, "Order In and Through Disorder" is a brief autobiography that captures significant moments in his life that influenced his research. 

The Digital Revolution's Energy Costs

Gregor SemieniukThis week's Worldly Philosopher, Gregor Semieniuk, writes on the trade-off between increased computing power and climate change.

Many commentators believe that exponential increases in computing power will lead to tremendous improvements in human welfare - at almost no cost per additional unit, or "marginal" cost.

Erik Brynjolfsson and Andrew McAffee (BM hereafter) express this view in their new book, "The Second Machine Age," and give examples of new technologies that are only possible thanks to recent and ongoing advances in information technology: self-driving cars, real-time translation software, and smart robots that can be taught new movement routines by guiding their arms, rather than programming a new software.

While these innovations are truly breathtaking in their technological sophistication, the authors are wrong to assert that these products and services come at "almost zero marginal cost of reproduction" (BM p. 62). Information technology (IT) - and the "information economy" it fuels - is not energy-neutral. Rather, its energy needs are quite costly, coming from fossil fuels that emit greenhouse gases and continue to supply 80% of the world's energy.

Technologies' use of energy is also costly in its contribution to climate change, which is now widely agreed to have adverse consequences for human welfare (IPCC 2014 and Tony Bonen's blog; Duncan Foley (2013) examines IT's growth trajectory from a classical political economy perspective). Economists and policy makers need to re-examine the claim that life-improving digital technologies are cost-free after their initial development costs.

Read more: The Digital Revolution's Energy Costs

How Paul Ryan's Budget Fails

CNN logoSCEPA Faculty Fellow Rick McGahey's opinion piece on CNN.com today, "How Paul Ryan's Budget Fails," calls out the House-approved budget for using 'voodoo economics' to pose as 'balanced' while calling for tax cuts for millionaires.

In short, McGahey notes, the math fails, which leaves a budget meant more for political posturing than for the health of the nation's economy. 

"How can Ryan claim that his budget is balanced? By invoking what used to be called "voodoo economics" -- assuming budget cuts and unfair tax cuts will unleash economic growth and generate enough tax revenue.

Former Reagan administration economist Bruce Bartlett has criticized this approach as "just another way for Republicans to enact tax cuts and block tax increases. It is not about honest revenue-estimating; it's about using smoke and mirrors to institutionalize Republican ideology into the budget process."

Of course, Paul Ryan isn't stupid, so why the phony budget math and the return of voodoo economics? Because it serves his presidential ambitions."

The Social Cost of Carbon as a Lower Bound for Policy

This week's Worldly Philosopher, Anthony Bonen, writes on economists' contribution to efforts to mitigate against climate change.

tony bonen image 4On Sunday, the IPCC Working Group III, Mitigation of Climate Change, released its latest report, and the news isn’t good. The report says (to no one’s surprise) that governments around the world have failed to act against climate change. The result has been rapid increases in greenhouse gas (GHG) atmospheric concentrations and rising temperatures around the world (see figure). The silver lining (silver sliver?) is that climate change mitigation is eminently affordable if – a big if – governments start to invest now.

It is time for economists to step up and help politicians take this supremely reasonable and moral action to invest. This can be done by improving economic models of climate change and, even more importantly, clearly communicating the limitations of our models.

The Financial Times reports that the costs of “an ambitious fight against climate change will reduce annualised economic growth by somewhere between 0.04 and 0.14 percentage points” versus a scenario of zero mitigation efforts. This compares to a welfare loss of between 0.2% and 2.0% of global GDP if average global temperatures rise by a further 2°C (IPCC, WGII SPM, p. 19). A finance degree is not necessary to decide between these two investment choices.

Yet, these two headline costs, -0.14% (maximum loss if mitigation) versus -0.2% (mininimum loss if no effort), are generated from extremely different data, which leaves the latter open to charges of, at best, uncertainty and, at worst, fantasy. The cost of investing in renewable energy, carbon capture and green transportation are based on real, observable markets and technologies. But the cost of unmitigated climate change? This comes from integrated assessment models’ estimates of the social cost of carbon (SCC).

The SCC metric is the net present value cost of an additional ton of CO2 emissions (tCO2). That is, how much welfare society stands to lose from a marginal increase in carbon emissions, translated into current U.S. dollars. Undoubtedly, there is an enormous degree of uncertainty regarding the nonlinear and variegated impacts of temperature increases on the environment, economy and society.

Although we don’t like to admit it, monetizing the cost of climate change involves a lot of guesswork. We already know that unabated climate change will bring devastating consequences for many peoples and communities around the world. So, are economists adding anything by putting a price tag on these impacts? Put another way: is it worthwhile for economists to compute the social cost of carbon?

Read more: The Social Cost of Carbon as a Lower Bound for Policy

Is the 'Better Off Budget' an End to Austerity as We Know It?

Katherine MoosThis week's Worldly Philosopher, Katherine Moos, writes on austerity and the social safety net.

In the wake of the financial crisis, we have witnessed a number of policy measures that have increased the financial fragility of workers by cutting benefits and social safety net programs. In the United States, there have been repeated calls to cut Social Security – by raising the retirement age or by adjusting benefits to the Chained CPI – legalese for cuts in entitlements that would have disastrous effects, especially for the poor.

However, at the most unlikely time, there have also been calls to expand Social Security benefits. Last year, Senator Harkin (D-IA) introduced legislation that would link benefits to the consumer price index for elderly consumers, CPI-E, that factors in additional costs faced by retirees such as higher healthcare expenses. The bill garnered the support of Senators Brown (D-OH), Begich (D-AK), Schaltz (D-HI), and Warren (D-MA). Congress Member Sanchez introduced the House version of the bill in September, which has since obtained 55 co-sponsors. While neither version has moved in Congress, this legislation seems to have emboldened other members to push for progressive reforms.

More recently, the Congressional Progressive Caucus (CPC) introduced its "Better Off Budget" for fiscal year 2015. It includes a number of fiscal policy measures that signal support for expanding Social Security. CPC Co-Chairs, Representatives Raúl M. Grijalva (D-AZ) and Keith Ellison (D-MN), issued a statement that the Better of Budget "reverses the damage [that the] austerity agenda has inflicted on hard-working families." The budget would create 8.8 million jobs, repeal the sequestration cuts, change the tax code to create tax relief for low and middle-income working families, and expand retirement and health benefits. The budget is also estimated to reduce the federal deficit by more than $4 trillion in 10 years.

Read more: Is the 'Better Off Budget' an End to Austerity as We Know It?

Income Inequality and Demand Side Limitations: The American Case

Rishabh KumarThis week's Worldly Philosopher, Rishabh Kumar, writes on the wealth inequality debate.

The wealth inequality debate has taken center stage since the publication of Tom Piketty's new book, "Capital in the Twenty-First Century." Piketty drives home the point that wealth owners are better off than income earners because the rate of return on capital is higher than the return on income. Since wealth holders increase as we move up the class distribution, this implies an increasing income gap between the poorest and richest households.

In recent (and upcoming) research, my co-authors and I are examining the income distribution for the United States between 1986-2009. Using data from the Congressional Budget Office (CBO) and Bureau of Labor Statistics (BLS), we observe the gap between the super rich (the top 1 perce) and the bottom groups is indeed increasing (Figure 1: Shares of Different Household Groups in Total Household Income. Source: Upcoming in Taylor, Rezai, Kumar and Barbosa, 2014). But unlike Piketty, we did not count capital gains, and we discovered that the super rich are also increasing their share of income. Therefore, the rapidly increasing inequality that favors a few does not solely depend on capital and wealth, as Piketty's analysis implies.

Table 1Thus, even without wealth gains, the top 1 percent was able to increase its share of "non-wealth" income (the black line in Figure 1) from just under 9 percent in 1986 to around 18 percent by 2009. This happened while the income shares of the other groups remained relatively stagnant, if not decreasing. Piketty ascribes inequality to the concentration of wealth in the hands of the few. Our findings complement the story – the richest class in the United States has also benefited from higher (real) labor compensation and transfers (interest, dividends etc). In a broad sense, the total growth in income in the United States over the last two decades is heavily skewed in favor of the super rich.

Read more: Income Inequality and Demand Side Limitations: The American Case

The Cost of Climate Change - More Than Disasters

This week's Worldly Philosopher, Anthony Bonen, writes on the economic and social costs of unmitgated climate change.

A heated debate was sparked last week after Robert Pielke, Jr. wrote an article for Nate Silver's fivethirtyeight.com arguing that the rising costs of natural disasters are driven not by climate change, but by the world's increasing wealth. Pielke's spurious assertions have already been picked apart by ThinkProgress and Salon. But what strikes me is the bizarre narrowness of his argument.

For example, in a misleading statement on the IPCC's recent findings Pielke says: "There have been more heat waves and intense precipitation, but these phenomena are not significant drivers of disaster costs." Well sure, heat waves and intense precipitation are only minor aspects of disaster costs. But the economic costs of unmitigated climate change are far more wide-ranging than disasters alone.

In a recently released SCEPA report, my co-authors and I examine how the three integrated assessment models (IAMs) used by the US government translate climatic change into economic impacts. The report focuses on the formal mechanisms by which the DICE, FUND and PAGE models convert temperature increases, sea level rises and more intense storms into a dollar figure. These mechanisms are known as damage functions.

Although the IAMs use very different damage functions, they all base the impact of climate change costs on comparative scenarios. This only makes sense. The cost of climate change is not just the destruction of structures and objects; it comes from lower food production, worse health outcomes, higher indoor cooling costs and lost land to higher sea levels. While big storms and earthquakes capture the media's attention, incremental changes will have by far the greatest cumulative impact on our wellbeing.

Even among economists the consensus is that these costs will be profound. In fact, our report and an earlier article by our colleagues show these leading economic models, if anything, greatly underestimate the costs of climate change.

So don't be bamboozled by pseudo-climate skeptics like Pielke. Economists and climate scientists don't just add up the value of capital lost in storms like insurance agents. We are looking ahead and mapping out alternative options we, as a society, can take. That is how one assesses economic costs.