The Wall Street Journal reports on recent efforts to make sure that taxpayers are getting their money’s worth from state universities. Acknowledging that his comments “could be taken as special pleading,” a blogger who is also a Texas state employee providing university students with advanced instruction in financial economics offers his insights about the “perils of high powered incentive systems in multi-task environments, something first analyzed rigorously by Holmstrom and Milgrom in JLEO in 1991.”
Our financial economist sums up the idea as: “In many ways, this multi-tasking problem is captured by Einstein’s aphorism that not everything that counts can be measured, and that not everything that can be measured counts.”
The challenge for administrators is that, in addition to all of the other wonderful things that universities are, they are also economic enterprises with revenue streams and cost streams and somehow these base considerations must impinge on operations. The challenge for administrators is that it is hard to impinge on operations in a coherent way.
Jonathan Fahey observes that there seems to be little trouble finding Montana property owners willing to have wind turbines built on their property, but property owners usually fight against construction of power lines. Puzzling, right?, since wind turbines are large, moving and obtrusive, while transmission lines are not-as-big and immobile and generally somewhat less imposing.
If a developer wants to put a wind turbine on a patch of private land, he offers to pay a per-acre fee and a percentage of the revenues produced by the turbine. Landowners jump at the chance; siting wind is not a problem in Montana or elsewhere across the West. Ranchers and farmers are eager to harvest wind along with wheat and cattle.
But when a developer wants to build a transmission line, he seeks approval from state regulators. In Montana, this is covered by what’s called the Major Facilities Siting Act. If the project is approved, states can condemn land if need be. The landowner is paid a one-time fee for the land under the wires, but the fee can be small—80 to 90 percent of the land’s fair market value. After all, being able to threaten condemnation does a lot for one’s position at the negotiating table.
Predictably, it’s not nearly enough to compensate owners for what the wires do to the value of their land, so they fight against it instead of for it. It’s a case of “not in my backyard”—at least at that price.
If landowners were paid some fee, even if it were relatively small, for the electricity coursing through those wires, the land could increase in value instead. Paying landowners more for transmission would, of course, just add more to the cost of an already expensive proposition. Yet willing landowners might reduce financing and legal costs if, instead of fighting projects, they advocated for them.
Transmission companies seem to prefer the status quo – modest one-time fees, eminent domain as a backstop to negotiations, and fighting NIMBY land-owners from time to time – to a royalty-style arrangement.
Anyone know of transmission companies that have tried periodic payments rather than upfront lump sum?
At Master Resource, Daren Bakst and Carlo Stagnaro take apart a report by the North Carolina Waste Awareness & Reduction Network (NC WARN) that concluded that solar power was now cheaper than nuclear power. The short version of the story is that NC WARN’s analysis treated federal and state subsidies as reducing the cost of solar power, while not similarly crediting nuclear power with cost reductions due to subsidies.
The report’s “trend” of falling solar power costs may be mostly a trend of increased taxpayer subsidy, with a bit of technological advance thrown in as well.
The original NC WARN report was prominently and favorably discussed in a New York Times “special report” article published in July 2010, “Nuclear loses cost advantage,” but the article now features an editorial note explaining that the article did not present a full and balanced view of the issue. So far no NYT article reports the analysis of Bakst and Stagnaro.
As an aside, last week the New York Times ran a (real, actually reported) article on the slowed momentum for building new reactors – in general it looks like a combination of reduced power demand due to the recession and uncertainty surrounding federal loan guarantees is causing some utilities to hold back. Some utilities are holding back, but not all:
Two nuclear projects that have gone forward, in Georgia and South Carolina, are in states where the utilities building them also distribute the electricity and operate under traditional regulatory rules that virtually guarantee them a financial return: Whatever the companies spend to generate power, the customers will pay for, unless regulators decide the expenses were not “prudent.” That regulatory compact is so strong that the South Carolina project, on the site of the existing V. C. Summer reactor, has begun work without a loan guarantee.
Last week scholars from the American Enterprise Institute, the Brookings Institutions, and the Breakthrough Institute joined together to release “Post-Partisan Power,” (more here) a paper advocating substantial increases in federal spending on energy research and development in pursuit of goals including American economic growth, national security, and health and safety.
They lost me at “partisan.” Well, almost. But it seems like a fundamental mistake to define one’s vision for reforming the energy economy primarily by relation to party politics. Maybe I’m out of touch with real world politics in which key players pull the right levers and actually get things done in these trying times for Americans, or something like that.
And if anything, “post-partisan” seems worse than partisan. It is an attempt to sound high minded, in a “let’s rise above the fray” sort of way, but it signals a policy too weak to survive ordinary open political competition so they attempt to bypass the ugly business of politicking. THEM: “Let’s put aside our petty partisan bickering and just do it our way.” ME: “But why not put aside our petty partisan bickering and just do it my way?” THEM: “There you go again with your petty partisan bickering. Put that aside and let’s just do it our way.” ME: “???”
Maybe I’m too wound up in the title. It’s just a title after all. Let’s go to the paper.
First sentence: “American energy policy is at a standstill.”
Wait, what? CAFE standards are rising, the EPA just issued new ethanol policies and some ethanol policies are set for (beneficial) expiration at the end of the year, Cash for Clunkers has come and gone, offshore oil and gas development regulations are changing, several states are exploring cap-and-trade policies on greenhouse gas emissions, many states have renewable power mandates, we have extensive Production Tax Credits for renewable power, and recently allowed Investment Tax Credits and cash grants in lieu of tax credits for renewable power, we still have a U.S. military presence in Iraq, and we haven’t finished implementing all of the energy policy programs contained in the first stimulus package passed in 2009. Heck, I suspect we haven’t finished implementing all of the programs in the Energy Policy Act of 2005.
I suspect they are using the term “standstill” to mean “so far our favored approach isn’t going anywhere.”
Okay, I’m ranting not analyzing. But maybe now that I’ve got this rant out of my system, I’ll be able to return to “Post-Partisan Power” with a fresh eye and an open mind. Maybe I’ll be able to get past the first sentence before I dismiss the whole effort. Maybe, but it will have to wait for another day.
In the meantime, if you want more substantive criticism of the article, try Dan Cole’s post at Law, Economics, and Cycling. Alternatively, if you’d rather have some less substantive commentary on “Post-partisan power,” try David Leonhardt’s column in the New York Times.
Robin Hanson observes that prospects are not promising for health-case cost containment, in part due to a normal reluctance to give up on sacred values in exchange for money. I wonder if this same psychological factor is activated in emergency conditions which present opportunities to trade the sacred for cash, and if it is how it complicates recovery efforts.
Hanson quoted a few lines from Scientific American, “The Psychology of the Taboo Trade-Off“; here is the full paragraph:
What truly distinguishes sacred values from secular ones is how people behave when asked to compromise them. When people are asked to trade their sacred values for values considered to be secular—what psychologist Philip Tetlock refers to as a “taboo tradeoff”—they exhibit moral outrage, express anger and disgust, become increasingly inflexible in negotiations, and display an insensitivity to a strict cost-benefit analysis of the exchange. What’s more, when people receive monetary offers for relinquishing a sacred value, they display a particularly striking irrationality. Not only are people unwilling to compromise sacred values for money—contrary to classic economic theory’s assumption that financial incentives motivate behavior—but the inclusion of money in an offer produces a backfire effect such that people become even less likely to give up their sacred values compared to when an offer does not include money. People consider trading sacred values for money so morally reprehensible that they recoil at such proposals.
I further wonder if the outrage that is sometimes expressed with respect to price gouging is related. Not all price gouging episodes are so threatening as to demand a trade off of sacred values for money, but possibly the emotional responses are related.
In the price gouging case, paying a few extra dollars for a hotel room during a hurricane evacuation may not force a family to – say – have to toss out a boxful of old family photos, so there isn’t an explicit “money for your sacred values” demand being made. But facing price increases during an emergency may force a consumer to contemplate transactions that require thinking across normally separate ethical domains.
As Alan Fiske and Philip Tetlock explain in their article “Taboo Tradeoffs: Constitutive Prerequisites for Political and Social Life,” when someone seems to apply a inappropriate social model – say a merchant treating a consumer’s demand for emergency goods and services as an ordinary economic situation – the person is seen as suspect and morally dangerous. The merchant in this example reveals that he is not “one of us,” that is to say, not part of the community which is drawing together in response to the emergency.
More work would have to be done to explore whether these emotional reactions are closely related or not, but maybe it would explain the sometimes excessive moral outrage that some people express in response to allegations of price gouging. To the economist it may just look like a consumer had to pay a few extra bucks to fill up his automobile with gasoline, but to the consumer the transaction confronts him with the strong feeling that the merchant he has been doing business with for years just doesn’t care about his family’s needs during the emergency, and, in fact, that the merchant doesn’t share similar moral values, can’t be trusted when it really matters and really isn’t part of the local community.
The New York Times describes one of the hazards of doing new things: your new thing may not fit neatly into existing regulatory category. A case in point: Two new cars that can be recharged electrically are creating a puzzle for the Environmental Protection Agency, which must rate the “fuel economy” of passenger cars and light trucks sold by manufacturers covered by Corporate Average Fuel Economy standards.
How the Environmental Protection Agency rates the two cars, the Chevrolet Volt and Nissan Leaf, could have a big influence on consumers’ perceptions of vehicles that run on electricity. General Motors, which makes the Volt, and Nissan are anxiously awaiting the agency’s decision as they start production of the cars and complete marketing plans for rollouts in December.
Providing the customary city and highway miles-per-gallon information would make little sense for the Volt, which can drive 25 to 50 miles on battery power before its gas engine kicks on, and even less so for the Leaf, which is powered by only a rechargeable battery.
Another example of how hard it is to provide simple incentives in a complex world (a recent previous example here). My simple proposal: pull the plug on CAFE standards. Any half-way complete accounting of costs and benefits would find CAFE makes us worse off overall. To the extent CAFE standards were ever aimed at desired public policy goals, more economical policies must be available.
Recently I went looking for a source for the idea that special interest lobbying succeeds due to the logic of concentrated benefits and dispersed costs.
Frequently in economics and especially among public choice analysts the concept is attributed to Mancur Olson and sometimes specifically to The Logic of Collective Action. For example, in a post by J.C. Bradbury, A Lesson in Concentrated Benefits and Dispersed Costs, “ he states “Mancur Olson was right” in reference to a news story that compares the $4 million lobbying campaign a football team put together seeking taxpayer spending for a football stadium to a mere $20,000 that opponents of the spending were able to raise. At TechLiberation Jerry Brito writes, “The few who will benefit from the transfer have an easy time organizing to lobby for it, while a group as diverse and dispersed as taxpayers face what Mancur Olson called a collective action problem.” (Links in sources).
The main concern of Olson’s LCA is how special interest groups manage to organize in the first place. In a sense, this is the flip side of the “concentrated benefits and dispersed costs” problem; Olson in LCA is more about how groups manage to get prospective members to engage in private costs (i.e. pay dues) to pursue group benefits (i.e. lobbying for a policy change). If the prospective member will benefit from the policy change whether or not it joins the lobbying group, then economic logic says the prospective member should not join the group. (Olson’s answer is that most lobbying groups are maintained by the provision of private goods to members and the lobbying capability is, in a sense, a byproduct capacity of the group.)
In an essay “An ‘Austrian’ Perspective on Public Choice,” [ungated version] Pete Boettke and Peter Leeson observe that Ludwig Mises, F.A. Hayek, and Joseph Schumpeter each indicated they grasped the basic policy logic of concentrated benefits and dispersed costs. For example:
Like public choice theorists, Hayek understood the danger of interest groups in the context of the logic of concentrated benefits and dispersed costs. While these “innumerable interests . . . could show that particular measures would confer immediate and obvious benefits on some, the harm they caused [on others] was much more indirect and difficult to see” (Hayek [Road to Serfdom] 1945, 17-18).
The examples pre-date LCA by 20 years. Boettke and Leeson don’t assert that any of the three invented the idea, only that they exhibited familiarity with the concept. For a clearer source we will need to look elsewhere.
In political science, and particularly in the literature on the politics of trade, the idea is tracked to E. E. Schattschneider’s 1935 book on the Smoot-Hawley Tariff: Politics, Pressures and the Tariff: A Study of Free Private Enterprise in Pressure Politics, as Shown in the 1929-1930 Revision of the Tariff. (Republished in 1974 under the awful title: Politics and People: The Ordeal of Self-Government. Page numbers below to this edition.) Schattschneider wrote:
Contrary to facile assumptions, economic interests, insofar as their behavior is illustrated in the tariff revision of 1929-1930, are not universally active in promoting their interests in politics. … Apparently, equal stakes do not produce equal pressures. The protective tariff is well established because large areas of adverse interests are too inert and sluggish to find political expression while an overwhelming proportion of the active interests have been given a stake in maintaining the system. (pp. 162-163)
“Although . . . theoretically the interests supporting and opposed to [tariff] legislation . . . are approximately equal, the pressures upon Congress are extremely unbalanced. That is to say, the pressures supporting the tariff are made overwhelming by the fact that the opposition is negligible.” (p. 285-286)
As it turns out, Olson does cite Schattschneider in Logic of Collective Action, but to a later book on lobbying (The Semi-Sovereign People) rather than Politics, Pressures and the Tariff. Still, Olson does articulate the political logic of concentrated benefits and dispersed costs, if not quite in those words, and his book is probably the earliest work by which most present economists and political scientists have been introduced to the idea.
Perhaps Schattschneider’s 1935 book was not the first to describe this logic of mobilized political interests either, and in any case as the work of Boettke and Leeson suggests, the idea was likely independently arrived at by others as well. Still, if we’re awarding blue ribbons for first place, I’ll tentatively give the award to Schattschneider unless you convince me of an earlier source.
Appearing in the September 2010 issue of BioScience: “Untangling the Environmentalist’s Paradox: Why is Human Well-Being Increasing as Ecosystem Services Degrade?“
ABSTRACT: Environmentalists have argued that ecological degradation will lead to declines in the well-being of people dependent on ecosystem services. The Millennium Ecosystem Assessment paradoxically found that human well-being has increased despite large global declines in most ecosystem services. We assess four explanations of these divergent trends: (1) We have measured well-being incorrectly; (2) well-being is dependent on food services, which are increasing, and not on other services that are declining; (3) technology has decoupled well-being from nature; (4) time lags may lead to future declines in well-being. Our findings discount the first hypothesis, but elements of the remaining three appear plausible. Although ecologists have convincingly documented ecological decline, science does not adequately understand the implications of this decline for human well-being. Untangling how human well-being has increased as ecosystem conditions decline is critical to guiding future management of ecosystem services; we propose four research areas to help achieve this goal.