Archive for March, 2011

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Economic illiteracy alert of the day: Ag. Secretary Tom Vilsack

March 10, 2011

Lynne Kiesling

I know that pointing out the economic illiteracy of politicians is akin to shooting fish in a barrel, but I have an irrationally optimistic hope that shining a light on such illiteracy will help reduce it. Today’s economic illiterate is U.S. Secretary of Agriculture Tom Vilsack, who in an interview with Ezra Klein revealed that he does not understand the economic consequences of farm subsidies:

EK: You keep saying that rural Americans are good and decent people, that they work hard and participate in their communities. But no one is questioning that. The issue is that people who live in cities are also good people. People who live in exurbs work hard and mow their lawns. So what does the character of rural America have to do with subsidies for rural America?

TV: It is an argument. There is a value system that’s important to support. If there’s not economic opportunity, we can’t utilize the resources of rural America. I think it’s a complicated discussion and it does start with the fact that these are good, hardworking people who feel underappreciated. When you spend 6 or 7 percent of your paycheck for groceries and people in other countries spend 20 percent, that’s partly because of these farmers.

EK: My understanding of why I pay 6 or 7 percent of my paycheck for food and people in other countries pay more is that I’m richer than people in other countries, my paycheck is bigger. Further, my understanding is that a lot of these subsidies don’t make my food cheaper so much as they increase the amount of it that comes from America. If we didn’t have a tariff on Brazilian sugar cane, for instance, my food would be less expensive. If we didn’t subsidize our corn, we’d import it from somewhere else.

TV: Corn and ethanol subsidies are one small piece of this. I admit and acknowledge that over a period of time, those subsidies need to be phased out. But it doesn’t make sense for us to have a continued reliance on a supply of oil where whenever there is unrest in another part of the world, gasoline prices jump up. We need a renewable fuel industry that’s more than corn-based, of course, and there are a whole series of great opportunities here. But as soon as we reduced subsidizes for biodiesel, we lost 12,000 jobs there. So if you create a cliff, you’re going to create significant disruption and end, for a while, our ability to move beyond oil. And keep in mind that the Department of Agriculture has moved, for years, to reduce our spending. We cut $4 billion in crop insurance and put that to deficit reduction. So we are making proposals to get these things in line. But a lot of our money goes to conservation, and goes to some of those 600,000 farmers who are barely making it.

I think that last sentence tells us what we need to know about U.S. farm policy and its lead practitioner: it’s backward-looking and reactionary, not really about being forward-looking and increasing productivity. It’s about creating a top-down impression of increased productivity through pushing the government-elite-approved renewable energy options for income diversification, regardless of whether or not ethanol, wind power or solar power actually create real economic value.

I’d ask Secretary Vilsack what the opportunity cost is of this spending to preserve (as an extinct insect in amber) rural communities, but I’m confident that he would fail to understand the question.

We cannot afford this kind of economic illiteracy in our political elites.

HT: Reason.

Posted in Economics, Politics | Tagged , | 6 Comments »

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Progress toward a Alaska Natural Gas Pipeline thwarted by shale gas

March 9, 2011

Michael Giberson

In February, the Federal Energy Regulatory Commission made its eleventh report to the U.S. Congress on the status of efforts to build a natural gas pipeline in Alaska. The twice-annual reports are required by the Energy Policy Act of 2005. Three efforts to bring gas from the North Slope of Alaska to market seem to be underway: TransCanada Alaska Company LLC, Denali – Alaska Gas Pipeline LLC – both of which intend to deliver gas across Canada to U.S. and Canadian markets  - and efforts by Alaskan state agencies for a pipeline to bring the gas to the southern coast for conversion to LNG.

TransCanada route map. Links to additional company information on route.

TransCanada route map. Image links to additional company information on route.

Reading between the lines it looks like all three gas pipeline efforts remain alive, more or less, but no one is anywhere close to actually building such a thing. With the current relationship between natural gas prices and oil prices in the United States, natural gas on the North Slope may be currently more valuable where it is, reinjected into reservoirs or otherwise used to aid crude oil production, than it would be in the lower 48 states.

If sufficient people in the industry believed shale gas skeptics and were pessimistic about the long term viability of the resource, someone would be beginning construction on a pipeline from Alaska. I conclude that the skeptics have not yet been persuasive.

Also at ferc.gov: links to all eleven reports to Congress.

Posted in Energy markets, Regulation | Tagged , , | 4 Comments »

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From rebound to backfire: Tierney column examines limits to use of energy efficiency policy to pursue energy conservation

March 8, 2011

Michael Giberson

John Tierney’s column, “When Energy Efficiency Sullies the Environment,” in the New York Times examines the rebound effect and some of the broader consequences of trying to promote conservation through policies inducing energy efficiency.

Some of the biggest rebound effects occur when new economic activity results from energy-efficient technologies that reduce the cost of making products like steel or generating electricity. In some cases, the overall result can be what’s called “backfire”: more energy use than would have occurred without the improved efficiency.

Another term for backfire is the Jevons Paradox, named after a 19th-century British economist who observed that while the steam engine extracted energy more efficiently from coal, it also stimulated so much economic growth that coal consumption increased. That paradox was mostly ignored by modern environmentalists, who have argued that rebound effects are much smaller today.

But economists keep finding contrary evidence. When Britain’s UK Energy Research Center reviewed more than 500 studies on the subject, it rejected the assumption that rebound effects were small enough to be disregarded. The author of the 2007 report, Steve Sorrell, noted that these effects could, in some circumstances, “potentially increase energy consumption in the long term.”

A similar conclusion comes from a survey of the literature published last month by the Breakthrough Institute, an American research group that studies ways to slow global warming. Its authors, Jesse Jenkins, Ted Nordhaus and Michael Shellenberger, warn that “rebound effects are real and significant,” and could sometimes erode all the expected reductions in emissions. (Links in source.)

Tierney also mentions the research on the potential rebound effect associated with solid-state lighting, mentioned here last year.

His final paragraph is on target: with or without public policy pushing us along, we will continue to use energy more efficiently – just don’t expect it to lead to less energy consumption overall.

Posted in Economics, Energy markets, Environmental policy, Politics | Tagged , , | 1 Comment »

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Fracking wastewater not causing radioactivity issues in Pennsylvia rivers

March 7, 2011

Michael Giberson

The recent New York Times series on natural gas fracking suggested that poorly treated produced water was being discharged into streams and rivers in Pennsylvania, and that disposal of produced water was a larger environmental issue than groundwater contamination from poorly completed wells. A key concern raised in both industry and regulator documents discussed in the article was the potential radiation hazard, since the produced water will usually pick up radioactive components under ground and bring them to the surface.  (In an earlier post I lauded one article in the series for “advancing the public’s understanding of the issue.)

An Associated Press story today reports that the Pennsylvania Department of Environmental Protection has been monitoring water quality at several locations downriver from wastewater treatment plants handling the post-fracking produced water. The Pennsylvania DEP said all water samples from November and December  showed levels of radioactivity “at or below the normal naturally occurring background levels of radioactivity.”

(Reader ‘Fat Man’, commenting on the earlier post, used the data accompanying the news story and a couple of simple calculations to conclude that radioactivity should not be a concern.)

ADDED: Oil and gas industry group Energy in Depth offers responses to the recent New York Times articles on fracking, see “Third times the charm” and “On Wastewater and The New York Times.”

Posted in Energy markets, Environmental policy, Regulation | Tagged | 2 Comments »

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A triple-dividend from Pigovian gasoline taxation?

March 7, 2011

Michael Giberson

Evan Turgeon, a lawyer working for the Cato Institute, has an article on gasoline taxation in the Journal of Land, Resources & Environmental Law: “Triple-Dividends: Toward Pigovian Gasoline Taxation.”

The “triple dividends” asserted are benefits to the U.S. domestic economy, the national security outlook, and the environment. In general the idea is that if we increase the gasoline tax while eliminating a host of other programs that address related issues in piece-meal fashion, overall we’d be much better off.

I’d agree that in principle Turgeon is right. In practice, it would depend on how high the gasoline tax is raised and how many of the piece-meal programs are actually eliminated. Among the programs Turgeon thinks could be eliminated are CAFE standards and renewable fuel mandates, subsidies and tariffs. Turgeon also argues that we could reduce U.S. overseas military involvement if we reduced oil imports.

But I’m not quite convinced that a higher gasoline tax will actually reduce oil imports, which Turgeon said would keep more money in the domestic economy and produce an economy boost. Higher gasoline taxes will reduce the demand for gasoline, so tending to reduce the quantity of crude oil to supply U.S. consumers and so reducing world crude oil prices a bit. But whether that reduction comes at the expense of domestic or foreign producers depends on which producers tend to have higher costs. If, as is reasonable to believe, U.S. domestic producers tend to be higher cost than many foreign producers, then as crude oil prices tend to fall the percentage of oil we import could rise. We could become more “addicted” to foreign sources of supply, with indeterminant effects on U.S. military activity.

I’d argue with a number of other points in the paper, too, though some of my objections are likely just to the way a lawyer is writing about market activity. One further substantive issue concerns OPEC, as Turgeon credits OPEC with much too much influence on the oil market. Many careful examinations of OPEC and oil markets find that Saudi Arabia may have sufficient market power to influence prices and sometimes exercises it, but OPEC as a group does not have systematic effects on prices. Turgeon’s mistake here is pretty common, but a little digging here could have helped avoid it.

I also object to the idea that federal gasoline taxes are an appropriate tool for dealing with congestion issues. I can drive for hours across Texas without encountering any congestion but for the drive-in window at the Dairy Queen. Raising the federal gasoline tax on my cross-Texas travels will provide no congestion-reducing benefits. Toll roads, HOT lanes, and hi-tech congestion pricing for roads are much better approaches.

Even with my criticisms, I’d be in favor of trading a higher gasoline tax for the elimination of CAFE standards and renewable fuels policies. A definite win-win there for taxpayers/consumers/citizens.

Citation: Evan N. Turgeon,  ”Triple-Dividends: Toward Pigovian Gasoline Taxation,” Journal of Land, Resources & Environmental Law, Vol 30, No 1 (2010).

Abstract: The American public’s demand for inexpensive gasoline and indifference to the risks posed by climate change have shaped the nation’s traditional and alternative energy policies. Public opinion encourages lawmakers to implement inconsistent and economically inefficient policies, which not only fail to satisfy the nation’s energy needs but produce a host of secondary economic, national security, and environmental problems.

This article advocates replacing the United States’ current panoply of ineffective government subsidies and mandates with an efficient, market-driven solution: higher federal gasoline taxes. Whereas previous environmental tax proposals assume constant tax revenue, this article considers the potential to reduce costly foreign policy expenditures in light of decreased domestic petroleum demand. This broader view suggests that Pigovian gasoline taxes would yield triple-dividends, simultaneously benefiting the United States’ economy, national security outlook, and environment. Recognizing the incentives responsible for current energy policies provides insight into how higher federal gasoline taxes might successfully be promoted and enacted.

Posted in Economics, Energy markets | 7 Comments »

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Bainbridge’s broad brush criticisms on empirical legal studies slams all interdisciplinary legal work

March 4, 2011

Michael Giberson

Criticisms of the growing field of empirical legal studies by UCLA law professor  Stephen Bainbridge were issued in such broad brush strokes that he ended up blasting just about every law academic engaged in any sort of interdisciplinary work, especially so if the academic seeks to examine data of some sort. The main claims showed up recently in a National Law Journal article, which quoted Bainbridge:

“A lot of the people I see who are empiricists, often with doctorates in the social sciences, aren’t very good lawyers,” he said. “I’ve read numerous papers that just got the law wrong. The problem is that we’re hiring people with Ph.D.s in other fields, but their law credentials are middling at best. Someone who is a brilliant economist wants to be in a economics department, so we get second-rate lawyers who are second-rate in their academic field.”

Perhaps phrasing the criticism in that way touched a nerve with Josh Wright, a law professor at George Mason University who holds both a PhD in economics and a law degree from UCLA. Wright responds at Truth on the Market, noting among other things that Bainbridge is asserting many facts about the state of the world without actually pointing to any evidence (much less adequately testing the evidence once it is identified).

Posted in Education, Law, Science | 4 Comments »

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Texas water rampage

March 4, 2011

Michael Giberson

Clarity in the law is usually deemed a virtue. Groundwater planning processes implemented in Texas a few years ago have led to a few legal fights and the legislature has taken up groundwater law to help clear up some of the confusion. The conflict has arisen when groundwater management districts issue landowners permits in quantities less that the landowner desired, and perhaps in quantities less than the landowner has rights to claim.

Maybe we’ll get some clarity someday, but for now we just have a fight. From the Texas Tribune, “Texas Debates Who Owns Its Water“:

It sounds simple: Who owns the groundwater in Texas? But this issue, like others in the hot-button area of aquifer planning, is embroiled in an ongoing policy battle.

At a crowded hearing earlier this week, members of the state Senate’s Committee on Natural Resources heard testimony on a bill introduced by Sen. Troy Fraser, R-Horseshoe Bay and the committee’s chairman, that would declare that landowners have a “vested ownership interest” in the water beneath their land. A less-discussed second bill, filed by Sen. Robert Duncan, R-Lubbock, recognizes both landowner rights and the “compelling public interest” of effective groundwater management.

Generally, surface property owners have long enjoyed the right to drill for water and pump as much as they want under a “rule of capture” regime. It is a regime that has worked fine for a long time, but population growth and extensive irrigation has put increasing demands on groundwater in the more arid parts of the state. Add to that existing conflict plans of some to develop their water rights to capture water for resale in amounts far in excess of historical uses.

“Texas Water Rampage” was the name of a failed Lubbock-area water park. Let’s hope that the current water fight in Austin has a happier ending.

 

 

Posted in Economics, Environmental policy, Law | Tagged , | Comments Off

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Singing about pricing (Is it, too, like dancing about architecture?)

March 3, 2011

Michael Giberson

At Knowing and Making, Leigh Caldwell writes about “a charming pop song by the delightful young artist Jessie J” about “the important and neglected issue of pricing.” Initially he is pleased with the song, but ultimately “his faith in humanity is shaken. Shattered, in fact.”

A great deal of drama for a short post.

Posted in Miscellany, Music | Tagged | 2 Comments »

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New York Times article advances public view of environmental issues surrounding hydrofracking

March 3, 2011

Michael Giberson

At first it seemed like just another newspaper article on the potential environmental dangers of fracking to produce natural gas from shale, but on second look there is something new in the New York Times article, “Regulation Lax as Gas Wells’ Tainted Water Hits Rivers.” Most such stories, and much of the public’s attention, have been focused on the possibility that a badly drilled well could taint groundwater. The new article reveals that disposal of the produced water recovered during fracking operations is likely the more important environmental concern. While produced water is (generally supposed to be) treated before being returned to waterways, some of the facilities used for treatment may not be capable of providing the services needed.

The web version of the story includes extensive related materials, including interactive maps, spreadsheets filled with data, and perhaps most significantly 1,113 pages of documents with annotations provided by the Times (described as the most significant documents out of more than 30,000 pages the Times reviewed for the project). The documents were collected via open records requests, obtained directly from regulators in the Marcellus shale region, or leaked to the Times by state or federal officials.

No doubt that a badly-drilled or poorly finished well can create problems, but the enviro-hype and associated docudrama film have insisted that this is the biggest problem. Probably not. The industry can reasonably point out that thousands and thousands of hydrofracking wells have been completed and of those many thousands only a handful have been linked to any kind of groundwater issue. In fact, as one of the documents points out, fracking has been used for years in Pennsylvania without a lot of controversy to produce coal-bed methane. The bigger hazards may be in produced waters downstream from drilling operations.

Some of the documents relied upon are several years old, and some reports are preliminary rather than final. There is much more to be learned, including – possibly – that the wastewater disposal problems are not as serious as the story suggested (or, of course, it could be worse).  Clearly, this newspaper article isn’t the end of the story, but it does the service of advancing the public’s understanding of the issue.

UPDATE, March 7: Fracking wastewater not causing radioactivity issues in Pennsylvia rivers

Posted in Energy markets, Environmental policy, Regulation | Tagged , | 3 Comments »

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New working paper: Mirror neurons, Adam Smith, and sympathy

March 3, 2011

Lynne Kiesling

Mirror neurons have captivated my attention for the past year. Think about the last time you were out walking around and smiling, and you noticed that others who saw you started smiling themselves (this happens to me all the time, is that strange?). Even that simple unconscious mimicry is triggered by our brain’s mirror neuron network. So, too, is your reaction when you watch someone drink a beer; even if you do not drink it yourself but only observe someone who is taking a drink, the same neural network activates in both your brain and in the brain of the person you are observing. Those are mirror neurons in action.

The mirror neuron system is a highly distributed, complex neural network, located in several regions of the brain and differentially active depending on the nature of the action undertaken or observed. Although networked across different areas, mirror neurons are concentrated in the premotor cortex, an area in the brainʼs frontal lobe that uses sensory information to plan, choose, and implement motor action. Most of this systemʼs activity is not conscious, and occurs without our having a sense of developing the abilities to perform actions effortlessly. Neuroscientists studying mirror neurons think that the mirror neuron system is part of what enables us to understand the actions of others and what creates a sense of interconnectedness and shared meaning, even between people who are complete strangers.

How is this research relevant to economics? What interesting economics questions can be illuminated by incorporating an understanding of the mirror system? I’ve been thinking about these broad questions for the past year, and have been working on two projects addressing aspects of them. At a very broad, evolutionary level, reading the neuroscience and the philosophy of mind literature arising from the mirror neuron work indicates that the mirror system is a neural framework for the evolution of anonymous coordination and cooperation — that is, cooperation even among strangers. This question is of great interest to those (economic historians, experimental economists, cognitive psychologists) studying the origins and foundations of impersonal exchange. Impersonal exchange relies on trust being embodied in social institutions (in contrast, for example, to direct personal relationships and trust in personal exchange). Is it possible that the mirror system is a neural framework for the social institutions that enable impersonal exchange?

My answer is yes. More specifically, in The Theory of Moral Sentiments in 1759 Adam Smith put forward a related argument, that humans innately desire the sympathy of others, desire aspects of interpersonal harmony, and therefore also want to behave in ways that will deserve such sympathy in return. This innate desire for sympathy leads to decentralized coordination and ultimately to the (formal and informal) social institutions of civil society, including institutions that enable cooperation and impersonal exchange. I think Smith’s articulation of the sympathetic process in Moral Sentiments is one of the most profound contributions to our analyses of human action and social institutions. But what do mirror neurons have to do with the Smithian sympathetic process?

That is the question I tackle in my new working paper, Mirroring and the Sympathetic Process: Some Implications of Mirror Neuron Research for Sympathy and Institutions in Adam Smith:

In The Theory of Moral Sentiments, Adam Smith asserts that humans have an innate interest in the fortunes of other people and desire for sympathy with others. Recent neuroscience research on mirror neurons has now provided evidence consistent with Smith’s assertion, suggesting that humans have an innate capability to understand the mental states of others at a neural level. This capability provides an important foundation for the Smithian sympathetic process, which has three components: sympathy as a synthesis of empathy with reason-based judgment, an external spectatorial perspective on the actions of others (and one’s own actions), and an innate imaginative capacity that enables an observer to imagine herself in the situation of the agent. This sympathetic process, and the neural framework that the mirror system appears to provide for it, predisposes individuals toward coordination of the expression of their emotions and of their actions. In Smith’s model this decentralized coordination leads to the emergence of social order, bolstered and reinforced by the emergence and evolution of informal and formal institutions grounded in the sympathetic process. This paper presents an argument that a sense of interconnectedness and the shared meaning of actions are essential foundations for the Smithian sympathetic process and the resulting decentralized coordination and emergent social order. The mirror neuron system appears to provide a neural framework for those capabilities.

In the paper I provide a survey of the mirror neuron literature, focusing on the neuroscience evidence and on the implications of mirror neuron evidence for the human philosophy of mind/theory of mind. The really striking and meaningful connection between Smith’s argument and the mirror neuron evidence is the extent to which the mirror system seems to enable imagination, which is crucial for achieving fellow-feeling with another person and his/her situation. Both the mirror neuron literature and Smith emphasize the impassable cognitive gap between one person and another, and that for two people to have a shared understanding of actions that would enable cooperation and social coordination, imagination is essential since we can’t get fully into the consciousness of another person.

The economic relevance of the mirror neuron research goes beyond the “see, Smith was right back in 1759, even without the neuroscience!” A neural framework that predisposes us to have shared meaning of actions is going to reduce cognitive barriers to coordination and cooperation, and I think a natural extension of that simple observation is that it makes it (at least somewhat) easier to find focal-point social institutions.

I don’t expand on this point in the paper, but I do also think there is a dark side to this neural framework for coordination and focal points — not all focal points are going to be as social beneficial and value creating as those that enable decentralized coordination and exchange in civil society. Bandwagon effects, or even coordination on agreement to behave in ways that harm some people (such as discrimination) are entirely possible under this framework. So I wouldn’t characterize the mirror system as the neural root of all possible social happiness, but would rather suggest thinking about it as a neural framework that enables us to form shared meanings of actions, and therefore to coordinate in ways that are mutually beneficial. Other ideas and factors (such as merit, leadership, vision, persuasion) must also come into play to create socially beneficial decentralized coordination. Our neural foundations provide but one part of the story.

Posted in Economics | Tagged , , , | 2 Comments »

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