Archive for January, 2011

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What has the EU ever done for us? Carbon edition

January 21, 2011

Lynne Kiesling

With apologies to my colleague Mark Witte for plagiarizing him … we were discussing how the EU has had to suspend their carbon emission permit trading system (I wouldn’t dignify it by calling it a market) due to online security breaches and the theft of millions of Euros worth of permits. Mark asked if there was any aspect of economics that the EU didn’t screw up, which prompted us to come up with the following list:

  • Emissions permit markets, common currency, agriculture, unions, employment protection, immigration, consumer product regulation, competition policy

Seriously, what aspect of economics has the EU not screwed up?

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Troubles, from the point of view of the solar power industry

January 21, 2011

Michael Giberson

It’s not easy out there for the solar power industry:

Solar power generation unit on TTU campus

Distributed solar power generation unit on the Texas Tech University campus.

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Some economics of TSA policies

January 20, 2011

Lynne Kiesling

As I’ve mentioned before, I am passionately and actively opposed to the TSA’s fear-based violations of the rights and dignity of individuals. But my opposition extends beyond the moral and philosophical into the economic … and some recent commentaries indicate that I am not the only one!

First let’s think about the cost of the scanners being installed at airports, most of which are x-ray scanners that bombard you with ionizing radiation that penetrates your skin and may increase your risk of skin cancer, particularly if you are already in a high-risk category, in addition to displaying a naked image of your body. Economically speaking, the U.S. government has already spent $80 million on these machines, with another $90 million request in for this year. Politically speaking, most of the x-ray scanner purchases, and therefore a big chunk of that $170 million, are from Rapiscan, a company that benefits from the lucrative relationships of its security advisor, former Department of Homeland Security head Michael Chertoff. Indeed, scanner companies employ many lobbyists, and 80% of the lobbyists for this industry are former Congress members or staffers.

But according to the GAO, the equipment purchase costs, while high, pale in comparison with the ongoing staffing costs that will have to ensue to use the whole-body imaging scanners, as reported in this Business Week article:

Staffing costs could add $2.4 billion to the overall expense of full-body scanners being deployed in airports in response to the attempted Christmas Day bombing, a congressional auditor said at a hearing today.

The U.S. Transportation Security Administration should figure out if the expense is worth it, said Stephen Lord, a director at the Government Accountability Office.

Lord also said it’s unclear if the machines would have detected an explosive device allegedly hidden in the underpants of Umar Farouk Abdulmutallab, the suspect in the Dec. 25 bombing attempt on a commercial jet landing in Detroit.

“While GAO recognizes that TSA is attempting to address a vulnerability exposed by the December 2009 attempted attack, a cost-benefit analysis is important,” Lord said.

The added staffing cost is a consequence of the TSA more than doubling its planned acquisition of scanners to 1,800 from 878 after Abdulmutallab allegedly tried to blow up the Northwest Airlines flight, Lord told a panel of the House Homeland Security Committee.

Note that the TSA proposes, and Congress has so far rolled over and accepted, this expenditure and use of this technology for primary screening, despite the TSA’s known unwillingness and/or inability to perform any sort of meaningful benefit-cost analysis on these whole-body imaging x-ray machines. The TSA willfully refuses to provide a benefit estimate to evaluate against the $170 million of equipment costs plus the $2.4 billion in operating costs, plus the unseen and unestimated cost of the stripping of individuals of their rights and dignity.

Quantifying these benefits will be difficult, particularly when you take into account that most airline terrorism threats originate outside of the U.S. and that even this invasive technology can be fooled easily with some putty, or by concealing PETN (plastic explosive) in one’s mouth. Not only does the technology fail to accomplish what its supporters claim; to paraphrase Bruce Schneier, TSA’s strategic approach to passenger searches is too fear-based and too focused on things and not focused enough on behavior. I’d be very surprised if these expenditures, or even the whole TSA budget more generally, could pass even a window-dressing cost-benefit analysis.

According to an article from Dominic Tierney in the Atlantic, more individuals and policymakers are becoming more aware of this fact with respect to DHS in general, not just the TSA:

DHS is ripe for savings and efficiencies. The fruit isn’t just low hanging–it’s boxed and ready to ship. But Republicans have excluded Homeland Security from any cuts (along with defense, veterans affairs, Social Security, and Medicare).

Politics and ideology combine to curtail a rational debate about the Department of Homeland Security. Cutting DHS funding offers few votes. Quite the opposite: any politician who calls for reduced funding will face the wrath of special interests. And if a future terrorist attack could be linked–even tangentially–to earlier cuts, it might be career ending (this is an even bigger problem for Democrats who live in dread of being labeled “weak on terror”).

Tierney is challenging Republicans to be intellectually consistent in their quest to reduce government expenditure to tackle the $14 trillion government debt and the $1.3 trillion annual budget deficit, but regardless of partisan accusations, the evidence is mounting that the TSA (and DHS more generally) does not provide good value for money, does not give us a good return on the taxpayer and “airport security fee” payments to support their apparently dubious and ineffective activities.

Even the commenters on this post on the WSJ travel blog are quick to point out that the TSA is an ineffective and unresponsive bureaucracy, so when the post’s author muses on the lack of recent TSA complaint volume, there’s an avalanche of comments along the line of “why bother to file a comment with the TSA? They don’t respond. So I’m just going to stop flying until this Orwellian nightmare is finished.”

That point raises another unseen economic cost to the TSA’s intrusive procedures and unresponsive bureaucracy. What’s the economic cost of the foregone productive activity that doesn’t take place when people stop flying? Conference calls, web videos, and Skype are not perfect substitutes for face-to-face, interpersonal interaction, whether for work or leisure. Some estimate of that lost economic activity (just what you want when coming out of a recession!) would have to be added to the cost side of the cost-benefit analysis.

So when Matt Kibbe and Dick Armey ask what expenditures Congress should cut, as they did in yesterday’s Wall Street Journal, here’s my top recommendation: Defund the $90 million request for additional x-ray scanner purchases. Pass a bill that picks up where H.R. 2200 did in the last Congress, by limiting the use of the x-ray scanners already purchased to secondary screening. Refocus the existing TSA budget on actually being able to deliver on actual cargo screening rather than passenger search policies that operate on the presumption that every person wanting to fly is a potential terrorist. Or, as Art Carden argued so eloquently in November, abolish the TSA, return the responsibility for airline security to the, you know, airlines, and direct those resources to some higher-value use, like paying down the $14 trillion national debt. With that kind of tradeoff, how can we afford not to do that?

But the invasive TSA policies and the widespread anger and aggravation they have generated have led to one piece of positive economic activity, although I think it technically still counts as a Bastiat-style broken window:

Elguji Software, LLC. released their second app for the iOS platform: TSAzr – Share Your TSA Experience.

TSAzr (pronounced “TAY-zer”), allows the flying public to share their TSA screening experience with the world.

Passengers can provide information such as if they went through a body scanner, received a pat down (and what the pat down experience was like), even if their “junk” was touched.

Now with the Apple iPhone, iPad or iPod Touch and the new TSAzr app, everyone can rate their experience with the TSA, airport by airport. Even post their TSA experience on their Facebook wall.

See which airports are performing the most body scans, which airports are doing the most pat downs, and which airports people are rating the highest and lowest. View real time data and graphics for each airport.

With a $14 trillion federal government debt, a $1.3 trillion annual federal government budget deficit, and government policies that are leading people to reduce their economically productive activity, we cannot afford the expensive and failed bureaucracy that the TSA provides. Nor can we afford to spend money on the TSA budget to cater to special interests peddling ineffectual and morally reprehensible technologies.

We cannot afford to maintain the TSA charade any longer, either economically or morally.

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Compact fluorescent bulbs not living up to California program’s expectations

January 20, 2011

Michael Giberson

The Wall Street Journal reports that a program to cut energy consumption by subsidizing consumer purchases of  compact fluorescent light bulbs is not working out as planned.  I think we can summarize this as: regulator approves cost recovery for subsidy program to reduce energy consumption, program doesn’t work as well as expected, so regulator approves additional “incentive pay” rewards. Onward and upward!

Related stories from the San Francisco Bay Guardian (“PG&E may receive millions for unverified energy savings“) and NRDC’s Switchboard blog (“CPUC Awards Final Incentive for Success of 2006-08 Energy Efficiency Programs; Improving The Mechanism For Following Years Should Now Be Urgent Priority“). As the WSJ article points out and the NRDC report emphasizes, no one claims that the programs didn’t reduce energy consumption. The dispute is over how much of a reduction the programs were responsible for, and so what kinds of incentive rewards (or penalties) the utilities are due under the program design.  I hope someone is also arguing about the cost to ratepayers per unit of benefit received.

The program is an example of an approach to regulatory ratemaking termed “decoupling,” in which the profit a utility earns is separated in part from total sales. The intent is to enlist the utility in fostering energy conservation by letting it profit by helping consumers cut back.  California’s policy has been cited as a model for decoupling policy, but it may also suggest the potential problems. Regulated companies always have good reasons for putting energy into pleasing their regulators. Decoupling exacerbates the problem by creating programs for which most or all of the potential profits come from convincing regulators that the company did something useful, rather than simply doing something useful for consumers like supplying them with safe, clean, reliable and inexpensive electric power.

Quotes from the WSJ story below (but the full thing is worth reading):

Read the rest of this entry ?

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More on Evergreen Solar’s move to China

January 20, 2011

Lynne Kiesling

As an addendum to Mike’s post Monday about Evergreen Solar and Ed Glaeser’s comments, note that WW at The Economist’s Democracy in America blog has also posted some remarks on the subject. In particular, he focuses on the use (or uselessness) of solar technology subsidies as social policy:

If subsidies for solar-panel manufactures is good policy, that’s because it forestalls future costs to the economy and the environment by hastening the day alternative-energy sources become cheaper than coal and oil. But these supports make sense neither as a way of creating jobs nor as a way of reducing income inequality. Indeed, because state subsidies to industry so rarely produce a stable source of jobs or growth, in the end they tend to amount to little more than transfers of taxpayer money to rich people.

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It’s Lysander Spooner’s birthday too!

January 19, 2011

Lynne Kiesling

Another important birthday today, Lysander Spooner! “… An American individualist anarchist, libertarian, political philosopher, Deist, abolitionist, supporter of the labor movement, legal theorist, and entrepreneur of the nineteenth century.” He famously founded a mail delivery company to compete with the monopoly U.S. Postal Service, and government legal challenges to his company drove it out of business. If you aren’t familiar with his writings, No Treason: The Constitution of No Authority (1870) is a good place to start.

HT to Steve Horwitz on Facebook.

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Paul Cézanne’s birthday

January 19, 2011

Lynne Kiesling

Today’s Google banner celebrates the 172nd birthday of Paul Cézanne, my favorite artist. I love how he unpacks the underlying layers of geometry in landscapes. When I first saw the painting above, Le lac d’Annecy, in the Courtauld Gallery in London when I was a college student, it literally took my breath away.

Last year when I read Jonah Lehrer’s Proust Was A Neuroscientist, I was riveted by his chapter “Paul Cézanne: The Process of Sight”, because he articulated so clearly (where I cannot!) why I respond so strongly to Cézanne’s art:

His paintings were about the subjectivity of sight, the illusion of surfaces. … But Cézanne believed that light was only the beginning of seeing. “The eye is not enough,” he declared. “One needs to think as well.” Cézanne’s epiphany was that our impressions require interpretation; to look is to create what you see.

We now know that Cézanne was right. Our vision begins with photons, but this is only the beginning. Whenever we open our eyes, the brain engages in an act of astonishing imagination, as it transforms the residues of light into a world of form and space that we can understand.” …

… Cézanne’s art exposes the process of seeing.

None of this, or its appeal to someone like me, should surprise any of you familiar with Hayek’s The Sensory Order. On a related note, see this post from Steve Horwitz on The Sensory Order and optical illusion.

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Is rationalizing regulation even possible through political processes?

January 19, 2011

Lynne Kiesling

Like other economists, I was intrigued by President Obama’s op-ed in Tuesday’s Wall Street Journal about streamlining federal regulation. Like Matthew Kahn, I see the influence of Austan Goolsbee here, as well as Cass Sunstein; like Tim Haab, I think this is a salutary call for more, and more consistent, application of cost-benefit analysis to existing and proposed regulation and legislation. I applaud the sentiments President Obama conveys when he says

But creating a 21st-century regulatory system is about more than which rules to add and which rules to subtract. As the executive order I am signing makes clear, we are seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs. This means writing rules with more input from experts, businesses and ordinary citizens. It means using disclosure as a tool to inform consumers of their choices, rather than restricting those choices. And it means making sure the government does more of its work online, just like companies are doing.

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

Call me a skeptic, though, when I then observe that intentions and rhetoric are not value-creating unless they lead to actual results. Previous executive administrations have promised such regulatory reviews, usually amounting to little more than window dressing, regardless of political party. This administration promised a line-by-line budget review two years ago and has yet to deliver on that promise. Regulatory lag is very likely to undermine a large share of the potential benefit from this executive order; take this example from President Obama’s op-ed:

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.

The EPA listed saccharin as a hazardous chemical in 1980. He’s offering this as an example of the EPA “wisely” eliminating a costly and counterproductive regulation … but note that saccharin was discovered in 1879, the FDA considered banning it in 1977 but did not do so due to Congressional legislation, and the EPA is finally eliminating its contradictory rule in 2011, 31 years after putting saccharin on the hazardous chemicals list! Unless federal executive and administrative staff actually set deadlines and act to meet them in a timely manner, and are held accountable to do so with consequences if they don’t, regulatory lag will consume all of the potential benefit from this proposed regulatory streamlining.

Note also, while we’re on the subject of the EPA, that the EPA is involved in much of the contradictory cross-agency regulation that the Obama administration purports to want to streamline. As Matthew Kahn asked in his post linked above, “How will cross-agency disputes here be arbitrated? If one agency finds the rule helpful while another does not, how will the verdict be decided?” The incentives facing each of the hundreds of federal agencies is not necessarily to streamline their regulations, particularly when doing so might create benefits for others but would reduce their budget or their reach/power. How do the implementers of this order in the Obama administration propose to align those incentives with President Obama’s statement that “Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary.”?

Another complication that will limit the executive and administrative staff in achieving regulatory streamlining will be federalism. Some of the most costly and nonsensical cross-agency contradictory regulations are not just cross-agency; they are cross-jurisdiction, where a federal regulation and a state regulation interact to yield perverse incentives and bad outcomes. One example is the interaction of the EPA’s New Source Review regulations under the Clean Air Act with the cost-based economic regulation of electric utilities at the state level. New Source Review and regulatory approval of cost recovery for investments combine to create risk aversion and caution among state regulators, and thus to stifle technological innovation in electricity, particularly in generation. A streamlining of federal regulations would not address situations such as this one.

Finally, note that President Obama is clinging to the canard that “… we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.” He and his administration refuse to acknowledge the central role that regulation played in creating the incentives leading private actors to make the decisions they did in financial and real estate markets. I refer him and his staff to Russ Roberts for a clear and thorough analysis that will remedy their (possibly willful) ignorance.

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Evergreen Solar moves manufacturing to China

January 18, 2011

Michael Giberson

In my view most “green jobs” arguments are bunk. While such estimates may have their practical uses, for the most part they are convenient lies. Industry lies to politicians and bureaucrats to get subsidies, and politicians recycle the lies to get votes. My view is not particularly subtle.

Edward Glaeser provides a subtler view, illustrated in his assessment of the most recent “green jobs fiasco” argument. Evergreen Solar recently decided to move its manufacturing plants from Massachusetts to China. Evergreen had received several million dollars in green energy and local economic development subsidies as it grew from an idea to an employer of 800 or so workers, but in the end lower costs (and an offer of still more subsidies from the Chinese government) led it to move manufacturing oversees.  Does this mean subsidies for green jobs don’t work?

Glaeser observes:

The main difficulty with solar energy has always been cost, which is why the falling price of solar panels that seemingly pushed Evergreen to close Devens is actually good news.

As long as solar panels are getting cheaper, we shouldn’t worry about where they are being produced. We should continue financing research on solar technology as long as that research continues to produce cost-cutting breakthroughs, like “string ribbon” technology, but we shouldn’t pretend that cheaper solar energy will end up employing millions of our less-skilled citizens.

And even more to the point:

Massachusetts’s edge lies in ideas, not products. Those ideas are best produced in creative clusters, built around cities, where knowledge moves easily from inventor to entrepreneur. The only production that really needs to occur in greater Boston is the early-stage manufacturing that can be an important part of the research process. Mature companies, like Evergreen Solar, naturally move their factories to lower-cost areas.

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Jay Hancock is not happy with the PJM power market

January 18, 2011

Michael Giberson

From the Baltimore Sun, Jay Hancock explains he is unhappy with electric power restructuring in Maryland and with the PJM market. I think he hits some targets and misses others.

Assessing the particulars would require a lot of detailed work, probably better done by someone other than me. One big source of agreement concerns stranded costs policy; I agree with Hancock that ratepayers were, uh, “not well served” is the polite way to say it, by stranded cost policy. This conclusion is easier to see in retrospect than it was at the time, but large and small consumers were loudly opposed at the time. (Of course stranded cost policy is better seen as one more failing of regulatory policy than as something appropriately pinned onto deregulated markets.  Stranded cost policy was settled the same way as any cost allocation process in the previous nine decades of utility rate regulation: regulators and utility lawyers arguing over what should be done while consumers mostly were relegated to the sidelines. Yet restructuring was the reason stranded cost recovery were called for, so restructuring is implicated in this particular kick-in-the-pants delivered by regulators to consumers.)

ASIDE: It was nice of Hancock to call the American Public Power Association a “beacon of intelligence” and one of the “honest information brokers” around, after all he had been kick-off speaker for an APPA symposium held a few days ago. I tend to see APPA more like other industry trade associations: good on some issues, but primarily interested in defending their own interests. One thing that cuts in APPA’s favor is the diversity of market positions among its members. The balance among members helps to keep the organization’s positions in balance at least on some power market design issues (but for a little residual wishing that they could put select pieces of the restructuring genie back into the bottle from whence it came).

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