Economists Know: Ask What Changed
By Charles L. Hooper and David R. Henderson
When you try to understand change, whether in economics or in the rest of life, one good rule is to ask what other factor or factors changed. To explain a change in one variable, we have to point to another variable that changed, not to one that stayed the same.1
Asking what changed can lead us to reject some explanations and embrace others. Consider three examples: the recent California fires; cable television’s sudden decision to drop C-SPAN in the early 1990s; and the dramatic increase in heroin-related deaths.
In 2017 and 2018, Californians experienced devastating forest fires. The 2018 Camp Fire alone—officially the most destructive in the state’s history—burned 240 square miles, destroyed 18,804 buildings, and killed 86 people in and around Paradise, California.
What caused these fires to be so extreme? Let’s look for what changed.
One change many people point to is in the climate. Alice Hill and William Kakenmaster, in an article on the 2017 fires, write, “Many factors contribute to wildfires, but two in particular greatly contribute to increasing risk: climate change and growing development in the wildland-urban interface (WUI).”2 Hill and Kakenmaster aren’t alone: search online for “California wildfires” and “climate change” and you get about 600,000 hits.
President Trump blamed forest management. “There is no reason for these massive, deadly and costly forest fires in California except that forest management is so poor.”3 The Little Hoover Commission, an independent state oversight agency created in 1962, seems to agree with Trump. “During its review, the Commission found that California’s forests suffer from neglect and mismanagement, resulting in overcrowding that leaves them susceptible to disease, insects and wildfire.”4
But have forest management and global warming gotten that much worse recently?
California’s extreme fires are a recent phenomenon: eleven of the state’s 20 worst fires occurred in the last ten years.5 That’s unusual for a state that is almost 170 years old. How much has global warming (aka climate change) contributed to higher temperatures over the last ten years? The numbers bounce around, but 0.1 degrees C is a good estimate, based on an increase of roughly 1° C per 100 years.
Can a 0.1° C/0.2° F change really have that much effect? Let’s put that increment into perspective. It’s a mere 0.9 percent of the average daily swing in temperatures for Paradise, CA and a tiny 0.24 percent of the yearly range for 2018.6 And if temperatures are so important, why did the Camp Fire start on the morning of November 8, when the temperature was approximately 50 degrees F below its peak for the year?
Poor forest management is likely a factor, but forests in California have been badly managed for decades. Also, some of the fires burned through areas that went up in flames about a decade ago, and some of the “forest fires” weren’t in forests at all but, rather, on scrub land.7 What else could be behind these fires?
The aforementioned Hill and Kakenmaster do point to one factor that has changed: the wildland-urban interface. Unfortunately, their data cover changes only up to the year 2000, but the period of bad fires started a decade after that. So has anything else changed dramatically lately?8
Actually, yes. What has changed is precipitation. California’s three-year precipitation in 2011-2014 was the second lowest since state records were first collected in 1895,9 and normal precipitation levels haven’t yet returned. Trees are still suffering from the shortfall. The biggest change over the last decade isn’t temperatures or forest management—it’s a drought of historic proportions.
You might argue, and some have argued, that the drought itself is due to global warming. But the National Oceanic and Atmospheric Administration (NOAA) has stated, “The current drought is not part of a long-term change in California precipitation, which exhibits no appreciable trend since 1895.”10 In other words, the lack of precipitation is short-term and, therefore, is separate from the issue of long-term global warming. Richard Seager, a climate model specialist at Columbia University’s Lamont-Doherty Earth Observatory reports, “We are saying climate change would have not been a main driver of the precipitation anomalies, which was the fundamental cause of the drought. California lost essentially one full year of precipitation.”11
But doesn’t more heat lead to drought? There are three problems with that view. First, as noted above, there is so little additional heat, on the order of 0.1 degree C. Second, the correlation between warmth and drought is tenuous. A 2016 study points out that world drought was most severe in the 12th and 15th centuries. Interestingly, the 12th century was warm and the 15th century was cold.12 That study’s lead author, Fredrik Ljungqvist of Stockholm University, said that’s because “much of the change [in drought conditions] is not only driven by temperature, but some internal, more random variability.”13 In support of this finding, Justin Sheffield concluded in a Nature paper that “there has been little change in drought over the past 60 years.”14 Third, as Seager and his coauthors point out, if the theories that underpin the climate models are correct, California should get more precipitation during winter, not less. Remember that many of the warmest places on Earth are also the wettest and many of the coldest are the driest. So much for warmer equals drier.
The world has gotten slightly warmer, and forest management has gotten progressively worse, but what changed more over the last decade in California? Precipitation.
Corporate Greed and C-SPAN
A standard claim that economists confront when the price of a good increases (the good is often oil) is that the price rose because corporations (especially oil companies) are greedy.
There are two problems with that explanation. First, if greed is the cause, how do we explain oil price decreases? Second, and in line with our point that we should always ask what has changed, did the corporations suddenly become greedy or, if prices fell, less greedy? Weren’t they always ‘greedy’—aka profit-maximizing?
In his book The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone, economist Thomas Winslow Hazlett gives a beautiful example of a commentator using greed to explain something that happened, thereby missing a much more likely cause that is staring him right in the face.
In 1992, Congress passed the Cable Television Consumer Protection and Competition Act and overrode President George H.W. Bush’s veto. The new law had a “must carry” provision. It required cable systems with more than 12 channels to set aside up to one third of their capacity for retransmitting broadcasts in their local markets. Retailers bought up small UHF stations and converted them to home shopping channels, thus getting free access to cable, something that, before the 1992 law, they would have paid for. One of the stations displaced was C-SPAN. Hazlett points out that C-SPAN was at a disadvantage because, having no advertising revenues, it had no revenues to split with the cable networks that carried it. According to Hazlett, “more than seven million viewers lost access to C-SPAN programs following Cable Act-mandated implementation of must-carry in 1993.”
Hazlett quotes historian Dean Alger’s explanation for why cable companies dropped C-SPAN:
- Although [Brian] Lamb [then CEO of C-SPAN] misguidedly tried to assign a large part of the blame for these actions to the 1992 Act, most observers saw cable corporate greed and irresponsibility as the principal factor, given that there are forty or more channels on which to place C-SPAN.
Hazlett responds by pointing out that cable operators didn’t need an excuse to eliminate C-SPAN and, moreover, that cable operators were the ones who funded C-SPAN. Then he writes:
- Second, the idea that “cable corporation greed” was responsible for the loss of carriage raises the question of how that volume of greed came to be adjusted upward at precisely the instant the 1992 Cable Act’s must-carry mandate kicked in. Just before that pivotal policy moment, cable “greed” had placed C-SPAN on TV sets in more than fifty million households.
What changed? Not greed, which was always there. What changed was the law and the incentives that that law created.
Increased Deaths from Heroin
One of the more startling public-health-related developments was the 660 percent increase in the number of overdose deaths involving heroin between 2002 and 2017. Curiously, most of the increase happened after 2010.15
What caused this increase and why after 2010? If we were to think the way that many non-economists do, we might reason that the cause was the greed of heroin dealers or that somehow “heroin flooded the illicit market.” The second explanation is not an explanation at all. The first explanation doesn’t make sense on its own terms: greed is usually used to explain price increases, and if the price of heroin had increased substantially, then, absent other factors, one would expect less heroin usage and fewer deaths from heroin overdoses.
A third explanation comes from the Centers for Disease Control: “The increased availability of heroin, combined with its relatively low price (compared with diverted prescription opioids) and high purity appear to be major drivers of the upward trend in heroin use and overdose.”16 But this doesn’t explain much either. Why was heroin more available, and isn’t the CDC saying that the price and purity were relatively constant?
What else could explain the increase in the demand for heroin? How about a reduction in the supply of its substitutes, such as prescription painkillers?
In a 2018 paper published online, economists William N. Evans and Ethan Lieber of the University of Notre Dame and Patrick Power of Boston University explain what changed. Here are their words:
- We attribute the recent quadrupling of heroin death rates to the August, 2010 reformulation of an oft-abused prescription opioid, OxyContin. The new abuse-deterrent formulation led many consumers to substitute to an inexpensive alternative, heroin. Using structural break techniques and variation in substitution risk, we find that opioid consumption stops rising in August, 2010, heroin deaths begin climbing the following month, and growth in heroin deaths was greater in areas with greater pre-reformulation access to heroin and opioids. The reformulation did not generate a reduction in combined heroin and opioid mortality—each prevented opioid death was replaced with a heroin death.17
The FDA, in an attempt to prevent the abuse of prescription painkillers, inadvertently drove drug abusers to that notorious street drug: heroin. In doing so, the FDA swapped prescription opioid deaths for heroin deaths.
It’s often difficult to know why certain things change, as there are usually multiple factors behind every change. But there is one reliable way to accept or dismiss some posited factors: see if the factor changed or was relatively constant. If it was relatively constant, it probably did not drive the change we are seeking to explain; it if did change, it’s a likely candidate. Asking what changed can dramatically reduce the factors to consider and can boost clarity in economic thinking.
 The authors devote a whole chapter to this idea in David R. Henderson and Charles L. Hooper, Making Great Decisions in Business and Life, Chicago Park, CA: Chicago Park Press, 2006.
 Alice Hill and William Kakenmaster, “‘A New Normal’: California’s Increasing Wildfire Risk And What To Do About It,” Hoover Institution, 24 May 2018.
 Adam Ashton, “Brown swings back at Trump: Climate change is propelling California’s fires, governor says,” The Sacramento Bee, 11 November 2018.
 “Fire on the Mountain: Rethinking Forest Management in the Sierra Nevada,” Report #242, February 2018, Little Hoover Commission.
 See U.S. Climate Data for Paradise, California.
 Tim Stelloh, “Mismanagement isn’t to blame for California wildfires, scientists say, bucking Trump,” NBC News, 12 November 2018.
 Some have argued that some of the worst recent fires were ignited by Pacific Gas & Electric’s equipment that may have been maintained incorrectly. But PG&E’s equipment has been starting fires for years. The difference recently is that the fires grew rapidly whereas before they were put out while still small.
 Seager et al, “Causes and Predictability of the 2011 to 2014 California Drought,” NOAA, December 2014.
 Seager et al, “Causes and Predictability.”
 Harry R. Weber, “California Drought More Natural Than Man-Made, Study Says,” Bloomberg, 8 December 2014.
 Ljungqvist, F.C., Krusic, P.J., Sundqvist, H.S., Zorita, E., Brattström, G. & Frank, D. 2016: Northern Hemisphere hydroclimatic variability over the past twelve centuries. Nature, 532: 94-98.
 Justin Sheffield, et al, “Little change in global drought over the past 60 years,” Nature, 491, pages 435-438 (15 November 2012).
 Rose A. Rudd et al, Increases in Drug and Opioid Overdose Deaths—United States, 2000-2014,” Centers for Disease Control and Prevention (CDC), 1 January 2016.
 William N. Evans, Ethan Lieber, and Patrick Power, “How the Reformulation of OxyContin Ignited the Heroin Epidemic,” February 14, 2018. PDF file.
*Charles L. Hooper is president of Objective Insights, a company that consults for pharmaceutical and biotech companies. He is also a board member for a Northern California fire department.
For more articles by Charles L. Hooper, see the Archive.
David R. Henderson is a research fellow with Stanford University’s Hoover Institution and an emeritus professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California. He blogs at EconLog and is the Featured Articles Editor for the Library of Economics and Liberty.
For more articles by David R. Henderson, see the Archive.