Archive for January, 2011

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When helping hurts: randomized experiment shows free legal aide delays unemployment benefits

January 9, 2011

Michael Giberson

Learning from randomized controlled experiments: apparently free legal representation provided by the Harvard Legal Aide Bureau tended to delay (by about two weeks on average) receipt of unemployment benefits among a group of claimants appealing an initial disallowance of their unemployment claims.  Representation had no effect on the likelihood of a claimant succeeding on their appeal.

We should be careful about leaping to broader conclusions about free legal aid from a single study, but (1) note that a well-conducted randomized controlled experiment is a powerful tool for improving understanding of the world, and (2) additional studies of legal aid are called for in order to discover what helps, what fails to help, and especially when trying to help ends up hurting.

Ian Ayres has additional commentary at the Freakonomics blog.

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Rob Bradley Jr. wishes his organization was smaller and his work was less valuable

January 7, 2011

Michael Giberson

The world has plenty of empire builders, but Rob Bradley Jr. – founder and CEO of the Institute for Energy Research – apparently isn’t one of them. He wishes IER were smaller and his work was less relevant.  At his blog, MasterResource, Bradley has posted an interview of him done by Stephen Hicks, a shorter version of which appeared August 2010 in KAIZEN magazine.

Here is the part from which my title comes:

Bradley: … And I founded an organization that has grown from basically a “think bucket” (as one journalist put it) to a bona fide Washington, D.C.-based think-and-do tank. The Institute for Energy Research (IER), a 501(c)3 educational nonprofit, used to be just me working out of my house, but now also has a 501(c)4 advocacy affiliate, the American Energy Alliance. I am still CEO, but the main operation is now in Washington under the direction of our president Tom Pyle.

Kaizen: That is something to be proud of.

Bradley: In one sense, yes. But remember that spiraling energy intervention, almost all of which I’m against, is behind IER’s growth. Our funding comes from the productive sector to try to neutralize the forces of coercive energy transformation. So in a nonpoliticized, ideal world, IER would be smaller and I less relevant. But the general economy would be stronger, so we would all be happier, right?

 

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Would granting futures exchanges copyright protection for prices deter some market manipulation?

January 6, 2011

Michael Giberson

In New York Mercantile Exchange Inc. v. IntercontinentalExchange Inc., the U.S. Court of Appeals, Second Circuit denied NYMEX copyright protection for its settlement prices. The decision turned on application of the merger doctrine in copyright law, which governs cases in which the expression of an idea is so completely linked to the idea itself that granting copyright protection to an author’s work would in effect grant copyright protection to the idea expressed. Since ideas are not copyrightable, when a particular expression of an idea is so closely bound to the idea itself then the expression also cannot be copyrighted.

Jeremy Murray analyzes the court’s decision in a Buffalo Law Review piece, “The Death of Copyright Protection in Individual Price Valuations, a Flawed Merger Doctrine, and Financial Market Manipulation.” There is a lot of information here, some of which I only skimmed through, but Murray offers some interesting points on the link between copyright protection for exchange settlement prices and market manipulation exercises such as that of Amaranth Advisors.

In particular, he advises that ICE’s capability to directly link its product prices to NYMEX settlement prices created conditions in which the natural gas market manipulations by a Amaranth trader could flourish (if only for a short time). Among other things, Amaranth sought to profit by holding large short positions in natural gas on ICE, then drive the NYMEX price down by dumping a small long position in the last few minutes of trading. Murray argues that if ICE was required to identify its own settlement prices, rather than copying NYMEX settlement prices, then Amaranth-style manipulations would fail: dumping contracts on one market would not automatically and exactly manipulate the price of the other.

Murray also offers some interesting speculation as to whether NYMEX would have been more successful had it pursued a claim based on “time sensitive information” rather than copyright.

(While I liked much of Murray’s analysis, to motivate his discussion of market manipulation he relies way to heavily on quotes from politician. Let’s just say I’m not willing to take the claims of Sens. Maria Cantwell and Richard Durbin as authorities on energy market operations, nor am I convinced that sharply increasing energy prices in 2007 and 2008 were due to rampant market manipulation. Thankfully, the discussion is mostly irrelevant to his broader analysis.)

NOTES: New York Mercantile Exchange Inc. v. IntercontinentalExchange Inc., 497 F.3d 109, 112 (2d Cir. 2007), cert. denied, 128 S. Ct. 1669 (2008).

We discussed the NYMEX case here earlier, see “What is a Price? The Courts Think They Know; The Courts are Wrong“. Also related is “Prices are information goods, and information wants to be expensive, because it’s so valuable” and “CFTC Holds Hearings on Oversight of Energy Trading.”

Several posts here discuss the Amaranth manipulation charges.

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The TSA’s wholesale violation of our civil rights, including economic liberty

January 6, 2011

Lynne Kiesling

I have been a too-silent opponent of the Patriot Act’s authorization of invasive surveillance in the name of national security. One of the consequences of that authorization has been the growth of the Department of Homeland Security and, under it, the formation and growth of the TSA. Those of us who travel frequently have known the TSA as “Thousands Standing Around” for years, and have derided the TSA policies on shoes (the “shoe carnival”) and liquids that are the security equivalent of locking the barn after the horse is stolen.

The TSA’s push to increase the intrusiveness of their physical search of passengers for specific items has pushed beyond laughable inconvenience and inefficiency into literally physically invasive search that does not qualify as a reasonable search under the administrative search carve-out of the Fourth Amendment. The Fourth Amendment, as written, protects individuals from unreasonable government search and seizure of their person and property, and the TSA operates under the administrative search carve-out from it — basically, if you put your bags on the conveyor you are presumed to have consented to the search of your person and possessions. The TSA are trying to claim that the new backscatter x-ray full-body scanners, millimeter wave full body scanners, and aggressive, frisking-style pat-downs are a sufficiently reasonable search that they should be considered legal under administrative search.

The TSA’s position is wrong, and instead is an aggressive, authoritarian push that violates not just the dignity of individuals, but also our innate (i.e. NOT government-granted) civil and human rights. Their policies and procedures operate on the presumption that every single person that presents himself or herself at the airport to engage in a commercial transportation transaction is a potential terrorist. That presumption flies in the face of every concept of freedom and individual rights that is at the foundation of a free, dynamic, vibrant society.

They do so in the name of making us safer in the face of terrorist threats, but this is a false equivalence, and one where economic logic is important. Their invasive practices require lots of resources. Did you know that each of these scanners costs $175,000? How many FBI intelligence agents and explosive-sniffing K-9 teams could we train and employ with the millions of dollars that Congress has already authorized for the purchase of these scanners? The opportunity cost of these scanners is enormous. Enormous. And it puts us at more risk than we would face if we instead focused those resources on more effective tools, such as behaviorally-targeted intelligence gathering and explosive-detecting dogs.

But here’s where the political economy comes in. The companies who manufacture these technologies are active lobbyists, and have spread their lobbying dollars liberally among the heads of security-related committees and sub-committees in the 111th Congress, and those members of Congress have delivered millions of dollars in scanner contracts to these companies. If that’s the decision-making dynamic in Congress, what hope do the relatively cheap intelligence and dog options have in the face of well-funded x-ray and MMW scanner lobbyists?

These trampling of individual civil liberties have economic implications. Remember that airlines operate on razor-thin margins, and Herb Kelleher of Southwest famously observed that the last 5 or 6 passengers on a plane make a difference between profit and loss on that flight. It doesn’t take a large reduction in demand for air transportation (an inward shift in the demand curve) for the airlines to see that profit margin evaporate. For example, I used to be both Platinum on American and Premier on United, which meant I flew at least 75,000 miles annually. For 2011, because of the TSA, I am taking 1 flight at the end of January because I made a commitment before these policies were implemented, but after that, I will not fly. I have zero flights planned, and only two tentative trips to which I’ve committed for vacation in July and December. With razor-thin margins, it doesn’t take many frequent flyers who want to maintain their dignity and respect staying off of planes to turn profits to losses, at the hands (literally!) of the TSA.

If you have made some of these arguments yourself, you have probably heard the response that flying is not a right. That is wrong. The Supreme Court has ruled in several cases that flight falls under the individual rights we have to free movement under the Constitution, and this right was reinforced formally in language in the Airline Deregulation Act of 1978. We do have the right to fly, and to fly without unreasonable search that strips us of our dignity.

Other economists have written about other more directly economic aspects of this important issue, thinking in terms of benefit-cost analysis. In November Art Carden wrote in Forbes that full frontal nudity doesn’t make us safer, and I strongly encourage you to read his analysis. In December Steve Horwitz made the substitution effect argument: if people substitute out of flying and into driving to avoid invasive TSA searches, those people are at much higher risk of accident and death:

To the degree that the new TSA procedures raise the psychic cost of flying, either by increasing the wait time at security and/or by making people very uncomfortable with see-through scanning or being fondled by a TSA agent, it will induce them to look for alternative methods of travel. For most people, that will be driving rather than flying. And the reality is that you are far more likely mile for mile to be killed in an automobile accident than in an airplane. The most dangerous part of air travel is driving to the airport. And if you consider not all of the risks of flying but only the risk of what the TSA procedures are supposed to prevent, namely the extraordinarily small chance of being killed in a terrorist attack on an airplane, it is even more likely that you will die in your car than on the plane.

Today the Electronic Privacy Information Center is hosting an event, The Stripping of Freedom: A Careful Scan of TSA Security Procedures, with several excellent panels. If you care about such rights, and I obviously think you should, I encourage you to check out EPIC’s activity in this area (including their lawsuit against the TSA to gain an injunction against the use of scanners for primary screening), contact your airlines and hotels, and contact your members of Congress. Otherwise our Fourth Amendment rights, which are essential to a dynamic, thriving society, will continue to erode, and will erode at an increasing rate.

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An example of ways poorly constructed markets can fail

January 4, 2011

Michael Giberson

From the Mim’s Bits column in the MIT Technology Review: “How Mechanical Turk is Broken
Why the world’s most famous outsourcing hub for tiny tasks is littered with spam and shoddy workmanship
.”

Mechanical Turk (MTurk) is Amazon’s site for linking companies seeking small web-based tasks requiring at least a bit of human intelligence to anonymous piece-rate web workers. Panos Ipeirotis, a computer scientist at NYU’s Stern School of Business, both uses MTurk to do research and does research on the MTurk marketplace.  He’s concluded that MTurk’s market design suffers from a “market for lemons” problem: lack of a reputation system for sellers (i.e. workers) means buyers (i.e. employers) can’t tell if they are getting high quality or low quality effort. If prices in the market reflect the average effort, it will be too low to retain high quality sellers. As high quality sellers leave, the average quality will fall and the price with it.

The Mim’s Bits column concludes, “Without transparency and accountability — the core ingredients of what economists call signaling — the site will continue to function primarily as an object lesson in the ways that poorly constructed markets fail.”

There is more to MTurk than this, including ways buyers can try to detect effort quality in order to improve seller effort. For more insight check out A Computer Scientist in a Business School where Ipeirotis blogs his MTurk research. Ipeirotis has related papers on his university website.

RELATED: Harvard researchers John Horton, David Rand, and Richard Zeckhauser write about using MTurk to conduct online social science research. Horton has related papers on his university website. Here is Horton’s list of economics-relevant stories from The Onion.

Many more academic papers on MTurk, via the Social Science Research Network.

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My Grid-Interop talk: Regulation’s role in stifling innovation

January 4, 2011

Lynne Kiesling

In early December I had the pleasure of delivering some lunch remarks at the Grid-Interop conference in Chicago. Grid-Interop is a great place for those interested in innovation in the electricity industry to share ideas about technology, business models, the interoperability that enables such creativity, and the role of economic regulation in how those relationships unfold. Below are my remarks; comments welcome!

We are brought together here by a shared interest in exploring, and expanding, interoperability and innovation in the electricity industry. Many of you come from a technology and/or engineering background. In contrast, I am an economist who studies regulation and its effects on innovation and new technology adoption. Today I’d like to use that perspective, along with some of the lessons I learned during the 5 enjoyable years during which I had the honor of serving on the GridWise Architecture Council, to explore the basic economic foundations of the regulatory environment in which technology and interoperability policy and investment decisions are being made. By “basic” I will abstract from the administrative, rate case, RFP weeds that we encounter regularly, and will instead focus on the economic concepts and incentives inherent in regulation.

In my remarks I’ll certainly say things you won’t like, or that you may not have considered, but my goal is to provide some provocative food for thought for your about the effects of economic regulation on your devices, interfaces, and business models. There’s also a certain degree of comfort in the known status quo, with large-scale utility procurement. But the economic institutions (by which I mean rules) and incentives that have created that status quo over a century will continue to limit innovation and growth unless they evolve.

The fundamental economic reason I make that argument is that traditional economic regulation is based on cost recovery, not on expected value creation, and therefore does a poor job of “standing in for the market” as it is (incorrectly) supposed to do in theory. Read the rest of this entry ?

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Macroeconomic implications of residential electricity consumption

January 3, 2011

Lynne Kiesling

At Grist, Sean Casten muses on the macroeconomic implications of trends in electricity consumption. His musings focus on the established correlation between electricity consumption and economic activity, an association that he fleshed out in an earlier post. In these two posts he looks at trends in residential, commercial, and industrial electricity consumption over the course of 4 different recessions, to see if this one differs from earlier ones. In particular, he’s wondering why this past summer’s residential consumption, measured in millions of megawatt hours, were at an all-time high:

I’m at a loss to explain the residential data. Pre-recession, we had too many homes, easy credit, rapid construction, booming demand for plasma TVs and other consumer electronics … I get why all that leads to rising residential electric sales. But the data is showing that as of this summer, we were at all time highs for residential electric sales. Maybe there’s a seasonal impact, but all these data-points are on a trailing-12-month basis, so that can’t be a huge effect. I’m at a loss to square that with housing vacancy rates, unemployment and slower consumption. Any ideas?

My thoughts start with looking differently at the data. Frankly, I don’t find single-variable time series data particularly informative — there are too many variables that go into determining aggregate residential electricity consumption. Such variables include weather, household income, number of electricity-consuming devices, efficiency of said devices, and the price of electricity. For that reason, I chose instead to look at residential electricity consumption per dollar of GDP. Short of doing an econometric analysis that controls for all of these other variables, looking at MWH consumed per dollar of GDP gives us some (albeit rough) indication of whether or not that electricity consumption is directly associated with increased value of economic activity. If that ratio is higher, then it’s less likely that the electricity consumption is associated with increased value of economic activity.

For electricity consumption I used the same EIA data as Sean, although I did not take a 12-month trailing average. For GDP data I used the BEA’s quarterly real GDP in chained 2005 dollars. One caveat: the GDP data are seasonally adjusted, while the electricity data are not, and you can see the seasonality of residential electricity demand in the graphs I’m going to present (higher demand in QI and QIII, due to heating and cooling respectively). Note also that GDP data are not available monthly, so I aggregated the monthly electricity consumption data up to quarterly data.

Lots of graphs below the cut … Read the rest of this entry ?

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Hello [tap tap tap] … is this thing on?

January 3, 2011

Lynne Kiesling

Hi, how are you? Long time no chat. I hope you are all well.

I’ve been lurking, but not feeling like I’ve wanted to talk about what I’ve been up to. I do have some research I’ve been working on that I want to discuss, finally. But what’s really captured my mental bandwidth recently has not been directly related to economics, so I shifted to reading Mike’s awesome analyses of energy economics.

Anyway, Happy New Year, and best wishes for 2011.

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Energy news and outlook: Meet the new year, same as the old year

January 3, 2011

Michael Giberson

A handful of energy news stories and commentary on the energy outlook:

  • John Tierney’s energy resource optimism and James Hamilton’s response at Econbrowser. I like the response of the first commenter, Ricardo, to Hamilton: “It is not that crude oil will be with us forever but that energy sources will always give us more and better sources of energy.” (Reading “energy sources will always give us” in a Julian Simon-esque manner, which is to say human creativity will likely continue to accommodate energy demands over the long run.)
  • Paul Krugman sees a finite world. Krugman says, “the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices.” Krugman remains an economist; he projects adjustment rather than a “Mad Max-syle collapse” of civilization: “It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.”
  • Fereidoon Sioshansi sums up the changing U.S. natural gas supply story at the EU Energy Policy BlogGame Changer: Plentiful Domestic Natural Gas Supplies.
  • The Top 5 overlooked energy stories from last year, according to The Hill reporter Andrew Restuccia. Expect that rare earths will be more in the news in the coming year. Off-shore wind and power lines also mentioned.
  • North Dakota oil production is surging. Among U.S. states North Dakota is already the fourth largest producer, but it may jump to second (behind Texas) within a few years. The story indicates that among the reasons for increased production are “refinements in drilling technology.”

US EIA: North Dakota Field Production of Crude Oil (Thousand Barrels)

Meet the new year, same as the old year. Same Cornucopian vs. age of scarcity debates and all they all agree upon is that they don’t want us to be fooled again.

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