Off to the annual conference of the International Society for New Institutional Economics. Back Sunday. Mike’s gonna hafta pick up my slack!
Off to the annual conference of the International Society for New Institutional Economics. Back Sunday. Mike’s gonna hafta pick up my slack!
Chicago has a well-earned reputation for cultivating busybody politicians. One of the busybodiest current aldermen is Ed Burke (14th ward), who has proposed a mandatory helmet law for motorcycles.
Now, while I think wearing a helmet while driving a motorized small vehicle in traffic with other, larger vehicles is the epitome of common sense, I cannot support the paternalistic drive behind mandatory helmet laws (or seat belt laws, for that matter). Nor am I persuaded by the “we pay through hospital costs” argument. Why impose another distortionary regulation to counter the ill effects of our convoluted means of paying for health care? To my eye, not wearing a helmet should leave you on the hook for you medical costs from an accident, and you shouldn’t be able to foist that cost off on others because of a no-fault insurance law.
But it gets worse … our mayor, Richard Daley (who himself possess notable busybody tendencies) would like to extend the helmet law recommendation to bikes and rollerblades!
Where does this belief that they know what’s best for others come from? Why do we indulge it?
Haven’t made plans for German Unity Day (October 3) yet? I recommend a viewing of “Good Bye, Lenin!” – funny, humane look at the reunification of Germany from the perspectives of an East Berlin family. Erica Abeel, Film Journal International, said, “The film’s take on filial love is fresh and affecting. Its political savvy yields sharp insights.” (Via film review site Rotten Tomatoes.)
From the Sony Pictures Classics website:
October, 1989 was a bad time to fall into a coma if you lived in East Germany – and this is precisely what happens to Alex’s proudly socialist mother. Alex has a big problem on his hands when she suddenly awakens eight months later. Her heart is so weak that any shock might kill her. And what could be more shocking than the fall of the Berlin Wall and the triumph of capitalism in her beloved East Germany? To save his mother, Alex transforms the family apartment into an island of the past, a kind of socialist-era museum where his mother is lovingly duped into believing that nothing has changed.
The movie is available in capitalistic plentitude, for a price, not only from your neighborhood video rental store, but from many other competitive sources as well.
Jeff Jarvis is writing a series called Issues 2004, and his post on energy policy from Monday tackles a lot of important questions and offers some recommendations. In addition, the comments on his post include a lot of good insights and thoughts.
Here are my thoughts. Jeff starts with his memories of the 73-74 oil crisis in the US, of which I largely remember sitting in line at gas stations with my mother, waiting to fuel up her 1971 Camaro and reading Laura Ingalls Wilder books (I was eight at the time). Perhaps it was a bit of a coincidence, but I do recall my father buying a Toyota in 1974 … and taking apart and rebuilding its catalytic converter several years later.
Jeff is correct that we have not reduced our dependence on foreign oil in the intervening 30 years. What is remarkable, though, is how much more economic activity we are able to create and enjoy with that level of oil dependence. In other words, we create more GDP per barrel of oil than we did 30 years ago. Still, we do consume a lot of oil, even if at the margin it takes less oil to produce an additional dollar’s worth of goods and services than it did then.
Of course, part of what’s going on here is that the technological dynamism of the past 30 years cuts two ways: newer technologies have become more energy efficient and deliver more value per unit of energy consumption, but what that means is that at the margin, the energy cost of new technologies is actually lower (all other things equal, including energy prices). That makes it cheaper to use these efficient technologies more, so in aggregate we may consume more energy because we pursue a larger volume of economic activity than we used to. That’s the nugget at the core of the GDP increase of the past 30 years. What’s unseen (to continue the Frederic Bastiat theme from earlier today) is one of the counterfactuals: how much economic activity would we have had without the technological change toward more energy-efficient technologies? Because what we see is an increase in energy use in absolute terms, we can indulge the predisposition to hysteria about energy use. Perhaps it’s overstated; but I do think, as one of Jeff’s commenters said, that it’s hysteria about wanting to sustain economic activity with energy prices as low as they currently are.
Jeff next tackles gasoline, suggesting a tax on inefficient cars that is paid as a wealth-transfer subsidy to owners of efficient cars. Such a streamlined policy would be more transparent than the Baroque web of federal/state/local gasoline taxes that we currently pay to subsidize the construction and maintenance of, for federal taxes, the interstate highway system. Some of Jeff’s commenters confront this Baroque tax system head-on, and rightly so. Dave Schuler paraphrases what he says in his own post on the topic:
So what should the federal government do about energy independence in general and dependence on oil in particular? In my opinion, the federal government should get the hell out of the way. This is a problem that the market is absolutely able to address. Government should stop providing false incentives and let the market operate. Don’t provide incentives for solar cells that take more energy to produce than they’ll produce in their productive lives. Don’t subsidize the production of ethanol that’s more costly in energy terms than the gasoline it displaces.
And, of course, the largest single subsidy that the federal government provides on the consumption of gasoline is called the Interstate Highway System. If the people in Massachusetts, or Wyoming, or Texas, or California want more highways, I believe that they absolutely have the right to build them. But they shouldn’t build them with money from Illinois or New York. And while we’re on the subject why is there an Interestate Highway in Hawaii?
I think that’s right; we do subsidize the use of technologies that are thought to have environmental benefits (such as solar and ethanol) that are less intense energy production technologies, which means that we use more resources to get the same number of BTUs of energy. The purported tradeoff is that we get less pollution in return for the increased use of resources to produce energy. That is a contentious topic — KP readers know that there’s a lot of research showing that ethanol production both is fossil-fuel energy intensive and produces emissions, while ethanol’s use contributes to ozone formation according to a new study that I linked to in this post. Solar panel production is prey to many of the same criticisms. Plus I think Dave’s right to point out that the Interstate Highway System is one of the biggest subsidies to energy use that we have, and that stopping that subsidy and pricing the use of the highway system would send accurate signals to drivers of the cost of their driving choices.
So if we ask the “compared to what?” question about gasoline taxes, I think in a frictionless world that the wealth transfer tax he proposes would create some of the incentives he intends. But reality is not frictionless, I don’t trust the government to implement the tax in a second-best efficient fashion, and I disagree with the top-down, control-and-manage mindset that claims to know what’s best for consumers (I’m not saying that Jeff is doing that, BTW, but many do). What if I’m a working immigrant with kids, and I scrape together enough cash to buy a secondhand but inefficient car so I can drive to work? If you tax my inefficient car and I can’t afford to buy it, you probably force me to either take a job accessible by public transportation or not work at all. That’s egregiously unfair. Energy costs are but one part of the complex lives we lead, and attempts to impose redistributive costs on us to change our behavior is going to reach up and bite us in unintended and unanticipated ways.
Jeff then asks about nuclear power. This September 2004 Wired magazine article looks at the academic research and the construction of nuclear power plants in China. China’s economic growth (which contributes to the currently high oil prices) is already straining their power supplies, so China plans to build 30 new nuclear power plants in the next 16 years, all using pebble-bed technology. Pebble-bed nuclear has been around since the 1930s. Instead of fuel rods, the uranium/carbon blend is encased in baseball-sized graphite/ceramic balls, and the reactor core is cooled with helium gas. No radioactive water, no spent fuel rods to make dirty bombs. And the scale of the plant is about one-third of the big ones that we are used to here. This is the nuclear technology of the future because it’s safer, cleaner and more secure. My hope is that this technology moves us away from our knee-jerk rejection of nuclear as an option, and that its different risk profile undermines the now-successful arguments for federal insurance subsidies (Price-Anderson).
Jeff goes on to discuss R&D and reducing world oil dependence, but I’ll stop here. Bottom line: we can do this, we are already doing this, and engaging government to satisfy our impatience is more likely to produce a worse outcome in the long run by forcing us to impose particular solutions instead of a variety of entrepreneurs all trying to find the energy approaches of the future. Tim Worstall’s comment on Jeff’s post touches precisely on that:
Please, no more new plans, no more money, no more tax breaks, research grants and definately [sic] no more bloody government interference. Just let the engineers and scientists get on with what they are doing, working to solve these problems under the rules and incentives already in place.
And let us use the information contained in price signals to evaluate our personal, subjective valuation of energy use to us, each in our own individual circumstances. The more we focus on transparency and reducing transaction costs in energy markets, the better those signals will be at capturing more of the true costs and benefits of our energy use.
Urban planning, sprawl, “smart growth”, and land use are issues that touch on the core issues that I find captivating. Thus I am always pleased to find thorough, logical discussions and analyses. Jane Galt’s post from Monday on smart growth is a good general discussion of the topic. I also found the comments generally edifying and informative.
One thing that the post and comments did not discuss, though, that I think is an important part of the smart growth story is road pricing as an alternative to either congested freeways or increased public transportation. I’m not the expert on this subject, but Bob Poole is, as seen in the content of Reason’s Surface Transportation Resource Center.
Transparent pricing of scarce resources, including highway capacity, creates efficiency, value and opportunity.
UPDATE: There is a related post, full of good links, at the Heritage Foundation’s policy weblog.
Platt’s POWER reports that Arizona Public Service Company (APS) has reached an agreement with “merchant generators and others” that would allow the company – the largest regulated public utility in Arizona – to purchase five power plants from an unregulated corporate affiliate, Pinnacle West Energy Corp. (PWEC). Both APS and PWEC are subsidiaries of Pinnacle West Capital Corp. The purchase proposal is part of a rate case that APS has up at the Arizona Corporation Commission (ACC).
I’m not quite sure I would call it a trend, but there have been a number of these corporate reshufflings in the past year or two in which assets are being moved from unregulated merchant power companies into the sheltering embrace of an affiliated public utility. [See the extended entry for notes.] I guess it should be no surprise – volatility in the merchant power sector has raised capital costs for unregulated companies; the relative stability of a regulated rate-of-return looks attractive. I can see why the number crunchers at corporate HQ think this would be a good idea, but it is less obvious that ratepaying customers benefit from taking on these assets.
Typically, these moves are opposed by competing merchant power generators. If the regulated utility buys generating assets, that means fewer power purchases from competitive suppliers. But, as POWER reports:
Merchant generators signed off on the settlement because it bars APS from building new fossil fuel power plants before 2015, unless authorized by the ACC, and calls on the utility to issue a request for proposals for at least 1,000 MW by the end of next year. APS affiliates are blocked from taking part in the RFP. Separately, APS will issue an RFP next year for 100 MW in renewable resources.
Of course, regulated public utilities, like all companies, face a “make or buy” decision: Is it more economical for the company to generate the power itself, or buy the power it needs from other suppliers. It may just make sense for regulated power customers to have APS buy these generating plants.
But prices for a transaction between corporate affiliates always have to potential to be, as Lynne might say, a little hinky. I am not greatly reassured by the fact that the terms of the deal were worked out in negotiations with the company’s competitors. I am only very slightly reassured that ACC staff participated in the deal.
Some additional regulatory notes in the Extended Entry.
This transcript at Wonkette of Stewart’s appearance on the O’Reilly Factor reveals a lot about both men. And it’s a very entertaining read … according to O’Reilly, I’m a stoned slacker who is intoxicated while watching the Daily Show (or at least the probability of this being so is approximately 0.87). Anyone who knows me personally is laughing their tail off at this point, I’m sure! Actually, I’m most likely to be found knitting while watching the Daily Show (lately it’s been this lacy number, in laceweight variegated Italian kid mohair), and perhaps enjoying a little uisge beatha, preferably from Islay.
The interview does supply evidence consistent with my preconception that Bill O’Reilly is narrow-minded and mean-spirited, and that Jon Stewart is ha-freakin’-larious (as well as being downright cute and a William & Mary alum, yay!).
Thanks to 1.21 Gigawatts for the link.
Oil futures passed $50/barrel overnight, largely based on low US inventories and the anticipation of unrest in Nigeria, which could disrupt supply. The Wall Street Journal has a slug of articles today about oil prices, fuel efficiency, how natural gas prices are increasing the costs of exploiting Canada’s oil sands, etc. The best of the lot is this article on low US inventories and Nigerian unrest (subscription required), which notes
The decline in American inventories is roiling markets because the U.S., as the world’s largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan’s hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government’s Strategic Petroleum Reserve. The government is considering making more such loans. …
The inventory pinch comes at a time when the world’s oil producers, including members of the Organization of Petroleum Exporting Countries, have little or no effective capacity to produce more oil. Oil markets also have been fretting about instability in the Middle East, the world’s largest oil region, and the threat of a disruption to exports from OAO Yukos, which produces about 2% of the world’s oil and which is locked in a long-running tax dispute with the Russian government.
On Monday, spreading unrest in Nigeria, another major oil producer, also sent ripples through the markets. The leader of the rebel group fighting Nigerian government troops in the oil-rich Niger delta said the rebels will launch “all-out war on the Nigerian state” from Oct. 1 and advised all oil companies to shut production by then, according to Reuters. It isn’t known whether the rebels have the power to disrupt oil production. …
The refining system’s capacity for handling high-sulfur oil is already about fully engaged. Middle East exporters such as Saudi Arabia largely produce high-sulfur crude, and their oil is attracting relatively little buying interest, even though they are offering larger-than-usual discounts compared with low-sulfur crudes. Those discounts are now as much as $10 a barrel for Dubai benchmark crude versus the European Brent benchmark, for instance, up from an average of just under $2 a barrel in 2003.
All that means that the world’s only big supplier of oil with additional pumping capacity, Saudi Arabia, has limited power to moderate oil-price increases.
Experts say it is likely the industry can get by with inventories below the 270-million-barrel level, in part because of efficiency gains by refiners. Lawrence Eagles, an analyst at the IEA, figures that the decline in U.S. inventories to below 270 million barrels is a temporary blip, as it proved to be in 2002, and that the industry “is comfortably prepared to meet winter demand.” Yet Mr. Eagles notes that world demand for oil is running at a much higher rate at a time of capacity constraints.
But this National Post article says that Saudi Arabia is going to increase its production by 16 percent, to 11 million barrels per day. Can they really deliver on that promise? According to this AP report in Forbes, Saudi Oil Minister Ali Naimi says that the increase will come in an oil field where they’ve just started up production. Such a statement suggests that some exploration and capacity expansion have taken place. We’ll see; I’m a bit of a skeptic on that topic. Plus, as the WSJ article quoted above notes, our refining capacity for high-sulfur crude is full, so the bottleneck is in the refining part of the supply chain. That bottleneck is likely to cause high prices for refined products to persist.
In my rather simplified understanding of the world, the reason for regulation of electric utilities is to protect consumers from monopoly power. So how does this reason explode into such an intertwining of government and business, that the economic fate of over 35 million people depends upon the decisions of a single man? How does the story of natural monopoly and cost-of-service ratemaking lead us to the present world of the California and its governor, Arnold Schwarzenegger?
Actually, I don’t think the economic fate of the 35 million Californians does depend upon the Governor’s energy policies, but that assumption seems to underlie this story in the (Los Angeles) Daily News.
SACRAMENTO — While focusing the public’s attention on his efforts to rebuild the California economy, Gov. Arnold Schwarzenegger has quietly started overhauling the state’s dysfunctional power system, with the goal of completing the task in time for a 2006 re-election bid.
Critics say another electricity crisis — like the one in 2001 that soured voters on former Gov. Gray Davis, led to his low job-approval ratings and made his recall possible — is imminent, and that Schwarzenegger is not doing enough to prevent it.
… Using his authority to appoint members to state regulatory boards like the Public Utilities Commission, Schwarzenegger can call most of the shots.
His intricate plan involves the complex tasks of writing new regulations, accelerating the implementation of previously-passed legislation and expanding the state’s power-industry infrastructure to meet two key goals — making sure that supply meets demand and that electricity can be delivered where it is needed at any time.
But the governor’s plan won’t solve the state’s problems, said Assembly Speaker Fabian Nuez, D-Los Angeles.
Nuez said Schwarzenegger would leave too many decisions to the PUC…
Arthur O’Donnell ran a commentary piece on EnergyPulse, the subtitle of which got the point right: Energy Policies Should Not Be Governor-centric.
Wow, I am really glad that Mike and Tyler both posted about that ridiculously stupid USA Today story! One doesn’t need to be an economist to recognize that the broken window fallacy is just that, fallacious. This type of argument is one of my biggest pet peeves, and I actually said to the Knowledge Spouse the other night, “gee, I wonder when we’ll start seeing news articles about how these hurricanes are creating all sorts of economic opportunity.” But the fact that they are creating opportunities for people to profit from cleaning up and rebuilding doesn’t mean that this economic activity creates any net new value.
Economists of the Austrian School and Civil Libertarians argue that the “broken window fallacy” is extremely common in popular thinking. For example, after September 11, 2001, some economists suggested that the rebuilding in New York would stimulate billions of dollars of economic activity, which would provide a net benefit to the United States economy, which was in recession at the time. But libertarians argue that this was an example of the broken window fallacy, since it ignored the billions of dollars in assets which were totally destroyed as a result of the attack. If the World Trade Center should be rebuilt exactly as it was before, the world would have a World Trade Center, whereas without the September 11, 2001 attack, the world would have not only the World Trade Center, but also all the good things that could have been done with the resources now spent at rebuilding it (not to talk about all the lives and assets lost with the WTC).
Austrian Economists, and Bastiat himself, applied the parable of the broken window in a more subtle way. If we consider the parable again, we notice that the little boy is seen as a public benefactor. Suppose it was discovered that the little boy was actually hired by the glazier, and paid a dollar for every window he broke. Suddenly the same act would be regarded as theft: the glazier was breaking windows in order to force people to hire his services. Yet the facts observed by the onlookers remain true: the glazier benefits from the business, and so does the baker, the cobbler, and so on. Bastiat suggested that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him.