Michael Giberson
Price gouging is “Evil Corporate Plot #1,235,086.” Story includes photographic evidence of the consequences of corporate wheeling and dealing. A gripping tale.
(HT to Mungowitz at KPC.)
Archive for February, 2011
If truth is what your freshmen students let you get away with, then…
February 22, 2011Michael Giberson
What do we owe the status quo?
Uwe Reinhardt, Economix, asks “How convincing is the case for free trade?” In his column, Reinhardt takes note of a few discussions of free trade without taking a stand himself. But he ends with a provocative quote from Alan Blinder: “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.”
Mark Thoma responds, “If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.”
Thoma’s response triggers Tim Worstall: “this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.” He continues, “This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you. Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?”
Blinder’s message is one that William J. Polley has learned from “16 years of defending free trade to Midwestern college students.” In ”Should losers from free trade be compensated?” Polley says you can’t just teach free trade leads to potential Pareto improvements. It isn’t good enough for “classes of principles students who have seen jobs in their hometowns disappear because of free trade.” You have to add that there are winners and losers, and standard economics can’t recommend the policy unless the winners compensate the losers. What economists know about free trade is that winners will gain more than the losers will lose (problems of implementing the necessary transfers aside). Polley says he doesn’t advocate free trade unless compensation is there.
Polley notes Worstall’s critique of compensation arguments, but isn’t persuaded. Ultimately, said Polley, “it boils down to the notion of a social contract. People make decisions, many of which are irrevocable or nearly so, on the basis of the best information and their expectations of the future. Sometimes the biggest influences on our expectations are the existing law and the political environment. If I then make a decision in good faith based on existing law, only to have the law change to my disadvantage, I will feel wronged.”
Polley’s “social contract” is, essentially, the same principle as involved in the broadest notion of regulatory takings. If a new law or regulation deprives a person of some portion of their property, advocates of regulatory takings will demand compensation. You want to prevent millionaires from building their vacation homes too close to the beach? You’ll have to tax the public to pay the millionaires for taking beachfront property, since they acquired the property in good faith based on existing laws. Want to impose a carbon tax to control global warming? All those owners of coal deposits are going to need a side payment. Want to implement new workplace safety rules? Like free trade, the policy will have winners and losers; like free trade, Polley’s social contract would have the workers pay the factory owners for the owner’s losses.
And the principle is still broader: when Wal-Mart comes to town, it should pay off the less efficient competition for taking their customers. Boeing moves its headquarters from Seattle to Chicago? They’d have to pay Seattle for the good faith decisions the citizens left behind made on the basis of the best information and their expectations for the future. This “social contract” is a quite conservative tool, a very big defender of the status quo.
Of course ideas like this “social contract” are usually not as ambitious as all of this, usually because they are not as consistent. Instead, in most such “social contract” arguments, the advocates want to pick and choose which winners should pay and which losers should be compensated. The “social contract” argument is, in effect, the tool by which a “value free” economist can get his values back into the mix.
Anyway, I prefer to argue in favor of free trade because I think the right to choose who I wish to deal with belongs to me and your right to choose who you deal with belongs to you. I think, ultimately, government policies respecting these rights will promote economic growth and development, but that is mostly just a happy coincidence.
ADDED: Two related views from Kids Prefer Cheese: first Angus, then Mungowitz.
MORE: This post is quoted at Free Exchange: “Putting the Free in Free Trade.”
How has my happiness varied over time?
February 21, 2011Michael Giberson
Since December 30 I’ve been responding to twice-a-day prompts to report how I feel and what I am doing. Loosely speaking I am taking part in the Mappiness research project, but Mappiness is primarily focused on mapping “subjective well being” over time and place within the U.K. No guarantee that my data is doing anything other than sitting in storage somewhere. But the system provides some feedback to me, see below, which I find mildly interesting.
Project creator George MacKerron explained the project and described some early research results at the recent TEDx Brighton event.
(The TEDx Brighton page has the video as well along with additional information about MacKerron and the project.)
Recently I hit 101 responses and so took some screenshots of the feedback for this post:
So contrary to my self-image as a quiet loner more comfortable in a stack of books, my self-reported subjective well-being data suggests I’m happier out in crowds at sporting events (#1, but note just one report) and talking/chatting/socialising (#2). On the other end of the spectrum, I’m least happy doing “Admin/finances/organising” (#22), “Shopping/Errands” (#23), “Sports/running/exercise” (#24), and “Something else” (#25, something not on their list, and perhaps fortunately I can’t remember what I was up to at the time). As in most of the U.K. data the MacKennon talks about, I report being happier on weekends.
Not that I think you should be that interested in my data, but it gives you a glimpse of the kind of information that Mappiness is collecting. The interesting part is in the broader Mappiness project.
The geography of ethanol’s support in Congress
February 19, 2011Michael Giberson
The House of Representatives budget battle has produced a few shots at the ethanol industry, including “Sullivan of Oklahoma Amendment No. 94,” a proposal to prevent the EPA from taking steps to encourage the sale of gasoline with higher ethanol content for use in newer cars. The amendment succeeded, 285-136 (12 not voting), and the resulting map of yeas and nays is so predictable, unsurprising, and boring that even as I am posting it I wonder why I bother.
Anyway, here is the map of the vote (blue is a vote opposing ethanol, red a vote favoring ethanol), followed by a USDA map showing corn production and ethanol plants:
Vote on amendment to stop EPA from implementing E15 waiver. Blue is anti-ethanol, red is pro-ethanol. (Click image for more details on vote)
U.S. Ethanol Capacity as of April 2007 (Link to USDA article on ethanol industry growth.)
If you are among those few people who still believe U.S. ethanol policy is driven by something other than the demands of the U.S. ethanol industry, then you might be surprised. For the rest of us: no surprises here.
Is the deregulated market in the ERCOT region sufficiently competitive?
February 18, 2011Michael Giberson
Two groups of municipal utilities in Texas, long critical of electric power deregulation in Texas and ERCOT in particular, have joined forces to issue a report, “The story of ERCOT: The grid operator, power market & prices under Texas electric deregulation.” The municipals describe the report as examining “governance issues related to ERCOT as an organization as well as deregulation issues related to ERCOT as a region.” In general, they assert that ERCOT has been costly, has suffered some significant episodes of mismanagement, the market hasn’t been as competitive as needed, and that power prices have been too high in the ERCOT region as a result.
Overall “The story of ERCOT” looks like a pretty good effort. ERCOT is a complicated entity, but worth understanding. The report contributes to a better understanding of ERCOT. But in the one section I chose to examine carefully, I was less satisfied.
Among the questions they ask is the one I pulled for the title, “Is the deregulated market in the ERCOT region sufficiently competitive?”, addressed specifically on pages 70-71. Here the report authors have a handful of complaints:
- “Questionable trading practices … very similar to those that helped undermine the California market … known as ‘hockey stick’ bidding.”
- The largest generator, TXU (now Luminant), was frequently a pivotal supplier in the market – able to set market price regardless of the actions of competitors.
- TXU was charged with market power abuse by the PUC in 2005. (A recommended fine of $210 was later reduced to $15 million.)
- Another company acknowledged in engaging in practices very much like hockey-stick bidding in 2007, “which has been found to violate market rules elsewhere in the nation.”
Hockey stick bidding, in which a generator offers the last few megawatts of power at a price substantially above the marginal cost of supplying that power, is a problem. If the power market were always competitive, consumers could be agnostic about individual generator’s offers; occasionally conditions will give generators temporary-but-substantial amounts of market power. These brief moments of market power are not always predictable, but hockey stick bidding means that generators don’t have to guess when they have market power, they just use a bidding strategy in which most of their power is offered at competitive levels and the last tiny bit at monopoly prices. The market in effect reveals that the generator has market power by dispatching all of the unit’s power, and having revealed the market power the market then does the generator the favor of automatically exercising it on the generator’s behalf.
There are arguments for and against allowing generators full flexibility in their offers, including allowing hockey stick bids, but on net consumers are right to oppose the practice. (I’m not at all sure what they mean by “very similar to those that helped undermine the California market”; California’s market fell mostly due to a host of other kinds of bad market design choices which exposed the market to manipulation and kept the consumer-side of the market mostly unable to protect itself.)
Luminant remains a large player in the market, with a market share that should continue warranting special attention from the PUC and ERCOT’s independent market monitor. The report doesn’t mention that Luminant has entered into a “Voluntary Mitigation Plan” (VMP) in 2008 as part of the settlement producing the $15 million fine. The point of the VMP was to deprive Luminant of the ability to exercise any market power. If the municipals have continuing concerns with Luminant then it would be useful to know what is wrong with the VMP.
I tried tracking down the reference to “another company … engaging in practices very much like hockey-stick bidding in 2007.” A footnote points to page 11 in Jay Zarnikau and Parviz Adib, “Will the Texas market succeed, where so many others have now failed?” (Available from Frontier Economics), but I didn’t find an explanation there. Generally speaking, the Zarnikau and Adib paper takes a more optimistic tone than the municipals’ report does.
Overall, in this brief section of the paper, I would have liked a little more analysis and not just a list of complaints. It is one thing to see apparent problems, but much more useful to diagnose the sources of the problem and suggest improvements.
Bye-bye WTI? Local conditions may sink global oil price benchmark
February 17, 2011Michael Giberson
Via email a reader asks about the divergence between two international oil price benchmarks – Brent and West Texas Intermediate (WTI).
At EnergyBurrito, Matt Smith explains the once-reliable, now rocky relationship between Brent and WTI in “WTI and Brent Crude Oil Through Steve Carell and Ricky Gervais.” Gervais played district manager David Brent in the British comedy, The Office; Carrel played district manager Michael Stott in the American version of The Office.
In a style better written, more humorous and more informative than what I convey here, Smith explains that the problem with WTI is infrastructure at and around Cushing, Oklahoma, the pricing point for WTI crude oil contracts traded at the NYMEX. It has become easier to move oil from producing regions to Cushing than to move it from Cushing to refineries and consumers. Pipeline capacity out has been added, and more is on the way, but not so much that the Brent-WTI price spread will amend itself anytime soon.
So the question becomes, with WTI prices becoming so strongly affected by local-to-Cushing factors, will WTI cease to be useful as a global crude oil price index? Smith suggests (but doesn’t predict) that Louisiana Light Sweet may become the replacement benchmark.
RELATED: Valero CEO complains that WTI is “land locked.”
Changing U.S. and Canadian oil production patters may be contributing to the Cushing problems. Domestic U. S. production is up in the last two years after 23 consecutive years of decline. Jonathan Fahey reports on the application of horizontal drilling and fracturing to oil production from shale, “New drilling method opens vast oil fields in US.”
Demsetz discusses Coase’s mistake on Pigou and social costs
February 17, 2011Michael Giberson
Last summer, Harold Demsetz spoke at the Property and Environment Research Center on Ronald Coase’s big mistake in “The Problem of Social Cost.” PERC has just posted the video.
Harold Demsetz lecturing on Coase's mistake in "The Problem of Social Cost."
The article he is presenting is, “Fallacies in the Economic Doctrine of Externalities,” but I bet in the written article he doesn’t say, “what the hell is a court doing in this model?” (at least not in those words).
Demsetz notes that his title is a nod toward Frank Knight’s 1924 response to Pigou, “Some Fallacies in the Interpretation of Social Cost.”
Fair trade for coffee may be good, but…
February 16, 2011Michael Giberson
Fair trade for coffee is good, but many readily available alternatives may be better. “Better” as in, better for the producer and better for consumers. I was browsing the website of a local specialty coffee roaster, and noticed the “Ethics” labels on the products: “Premium price” and “Farm Gate”, but not “Fair Trade.” Curious, I thought.
Looking around the website, the “About” page had a clue:
There were some things we were certain about. … The coffee had to be ethically sourced. Fair Trade isn’t always so fair, and we strive to make sure that the farmers who grew our coffee were paid at least, but usually more, than the Fair Trade minimums.
The roaster’s blog revealed more: “News: Fairtrade is accused of doing less for coffee farmers than Starbucks.”
The post links to a Gaurdian (U.K) news story discussing a report by the London-based Institute of Economics Affairs. The key problems identified, highlighted in the roaster’s blog post, are: high overhead keeps some of the poorest coffee farmers from Fair Trade certification; Fair Trade is not about quality of products, just price and production conditions; Fair Trade certification works with organizations, like co-ops, but not individual farmers, and Fair Trade premiums paid to the organization may not reach farmers. The IEA report offers more details.
IEA is a free-market leaning think tank, and Fair Trade proponents frequently frame their efforts as morally superior to ordinary market outcomes. One might expect IEA to slam Fair Trade rhetoric. A Financial Times columnist finds that the report “is more nuanced than that.”
[Author Sushil Mohan] accepts that a Fairtrade buyer is, like any other consumer, simply making a choice. “Fairtrade rests as much on market forces as conventional trading does,” he writes. “Fairtrade works not because it subsidises goods no one wants, but because some free market consumers are willing to support it.”
Yet overall, Mohan concludes, Fair Trade seems to be more about catering to the attitudes of western consumers than about improving the lives of coffee producers. Perhaps it yields some good for some producers, but the benefits are surely tiny in comparison to the good that good ol’ free trade is doing for coffee producers. Given that reality, the report suggests there is no reason for school systems or others to succumb to Fair Trade lobbying.
Earlier fair trade coffee commentary at Knowledge Problem:
ERCOT rolling blackout news: Powerful market forces already at work
February 16, 2011Michael Giberson
A regulatory filing by Energy Futures Holdings Corp., the parent company of Luminant, a major power generator in the Texas market, provides a small peak behind the curtain of confidentiality that has limited the public’s view of what all went wrong on February 2. A small peak, but a significant story:
In an 8-K filing with the Securities and Exchange Commission, EFH reported that it lost about $30 million on February 2 because of weather-related outages at several of its power plants. The outages kept the company from delivering power it had contracted to sell, so the company was responsible for purchasing power at the real-time market price to cover for its shortfall. Real-time prices spiked to the market’s $3,000 cap during the emergency.
Add that supply-side news to last Friday’s announcement that under-prepared power retailer Abacus Resources Energy has been forced from the market. As one of the participants in yesterday’s Texas senate hearings said, there are already powerful economic incentives at work to help the market avoid a repeat of the Groundhog Day blackouts.
More news reports:
- Austin American-Statesman: Texas electricity system unprepared for cold, senators told
- Fort Worth Star-Telegram: Blackouts in Texas could have been prevented, officials say
- San Antonio Express: ERCOT defends its blackout actions
- Associated Press: Feds investigate Texas power outages
- Dow Jones Newswire: Luminant CEO: Texas Generating Plants Failed On Freezing Temps
- Dow Jones Newswire: FERC To Probe Power, Gas Outages In Texas, Other States
- Dow Jones Newswire: Texas: No Evidence Of Manipulation During Outages
And this commentary by Ken Herman in the Austin American-Statesman: “If they could give us warm, fuzzy feelings, we wouldn’t be here“:
On public display Tuesday in the Texas Senate chamber was a reminder of the main reason humans form governments. It is, scholars tell us, primarily for the pleasure of convening committee hearings at which we can watch well-heeled witnesses squirm….
ERCOT blackout hearings underway in Texas State Senate
February 15, 2011Michael Giberson
Via Houston Chronicle‘s Fuel Fix, notice of hearings on the ERCOT blackout being held Tuesday morning, February 15. Live now and should be archived later.
More information from FuelFix:
- Blackout investigations start up this week
- ERCOT blackout: Changes already made to emergency procedures
UPDATE: A link to ERCOT CEO’s presentation to its board on the blackout, from yesterday.
