Archive for October, 2011

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Leisure reading while sick

October 20, 2011

Lynne Kiesling

I have the first really bad cold, complete with ear infection, that I’ve had in almost two years. Other than the throat and ear pain, the coughing, and the congestion, I can tell it’s bad because I’ve stayed home from work for two days, and rather than being my usual Energizer bunny self I have little energy for anything other than light reading …

… which means I am about 40 percent through Neal Stephenson’s new book Reamde, but don’t have the cognitive energy to use this time to dig in! Too bad, because so far I am enjoying it a lot, but in a different way from either Anathem or the Baroque Cycle trilogy. Those two works were intellectually and historically meatier, but Reamde shares with them Stephenson’s telltale characteristic weaving of multiple stories into a witty, wry, and intentionally slightly opaque narrative. It’s definitely primarily a technology thriller along the lines of Zodiac and Snow Crash, and so far I’m enjoying it as a well-told set of interwoven stories with compelling character development.

So this afternoon instead I will couple my Cepacol lozenges and hot tea with Wives and Daughters by Elizabeth Gaskell; isn’t Victorian fiction a more suitable companion in the sickroom anyway?

Posted in Books | 3 Comments »

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Energy industry continues to reshape itself to fit the new world of oil and gas resources

October 17, 2011

Michael Giberson

Two multi-billion dollar deals in the news this weekend provide additional evidence of how advances in drilling technology have unlocked vast new energy resources and are reshaping the energy industry. Norwegian oil company Statoil is paying about $4.4 billion for Brigham Exploration, getting “a stronger foothold in unconventional resources” according to the Wall Street Journal. The Brigham deal will gain Statoil a significant footprint in the Williston Basin, a so-called “tight oil” formation that includes the wildly productive Bakken Formation in North Dakota and Montana. Statoil had previously invested in the Eagle Ford Shale in Texas, another unconventional oil and gas resource that has been a source of new reserves.

WSJ graphic shows the pipeline footprints of Kinder Morgan and El Paso Corp.

WSJ graphic shows the pipeline footprints of Kinder Morgan and El Paso Corp.

Separately, pipeline company Kinder Morgan has offered to buy El Paso Corporation for $21.1 billion (and assuming 17 million in debt, raising the cost of the deal to $38 billion). The WSJ says Kinder Morgan is “making a big bet that natural gas blasted from shale rocks around the country will become a huge force in America’s energy future.”

Brett Clanton and Purva Patel offer a similar assessment in the Houston Chronicle:

Kinder Morgan on Sunday made a huge bet in the future of natural gas, with word it will buy El Paso Corp. for $21.1 billion in a deal that will make it the largest operator of natural gas pipelines in the country, as well as the fourth-largest energy company in North America.

The cash-and-stock deal combines two of Houston’s biggest companies into a single industry titan, with …  access to virtually every natural gas field and consuming market in the country.

It comes as pipeline companies are repositioning themselves amid a recent surge in U.S. natural gas and crude oil production from shales and other so-called unconventional formations from Texas to North Dakota, and it finds another major energy company signaling its belief that the trend is more than hype.

At $21.1 billion, that’s a mighty expensive signal.

Admittedly, there is a lot of hype. Some people believe the large resource and reserve additions are almost all hype. Others – and I put myself in this category – believe there is a lot of new very real access to and production from reserves that could not have been legitimately booked as resources five or ten years ago. The trend is more than hype.

Posted in Energy markets | Tagged , , | 2 Comments »

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Video: recent data on economic freedom and economic growth

October 14, 2011

Lynne Kiesling

I first saw this outstanding short video a few weeks ago at the Students for Liberty Chicago conference. It does an excellent job of capturing recent data on economic performance and on economic freedom from the recently-released Economic Freedom of the World report that I discussed in late September.

In particular, the video very effectively visualizes data on economic activity, freedom, and both the size and economic burden of government spending. It communicates a lot of ideas very well in under three minutes!

Posted in Economics | Comments Off

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Horwitz and Carden on corporatism

October 14, 2011

Lynne Kiesling

Steve Horwitz continues to provide excellent focal point arguments about political protests and crony corporatism. In his Freeman column yesterday, he elaborated on the arguments that I developed here earlier in the week and that others have made elsewhere, that the core problem underlying corporate power is its connection to government power:

The question is just what is the nature of their objection to the role of corporations and the bailout culture.  To complain about bank bailouts while also arguing, as some have, for student-loan debt forgiveness would suggest the problem is not that government shouldn’t bail out failed investments, only that it shouldn’t bail out failed investments by corporations.  (It would be interesting to see if the Occupiers opposing bailouts also oppose agricultural subsidies and subsidies for alternative energy like wind and solar.)

This point gets to the larger issue at the core of the Occupiers’ criticisms of corporations: Is the problem corporations per se or is it that they align themselves with government?  One other tension we see in these protests is that even as they object to corporate power, they make use of technology and social media that are the products of the very corporate form they critique.  This is not necessarily hypocritical, no more than libertarians using various government-supplied goods that we think would be better supplied by the market.  However, it does suggest that the Occupiers should be asked why some corporate products are good and others not. …

Perhaps the problem is best phrased as “corporatism.”  The core complaint seems to be that corporations have too much power over people’s lives.  This is a complaint that libertarians should not dismiss;  corporations do have too much power.  But as Sheldon Richman has noted, the only way they get that kind of power is be in cahoots with government.  Corporations, whether Apple or Bank of America, that are forced to compete in a genuinely freed market would have to work to please consumers and would have market power only to the extent that we grant it to them by purchasing their products.  Market power thus granted can also be taken away.  (Ask Borders).

Just saying “corporations have too much power” is insufficient. Much of that excess power is a result of their ability to manipulate government power to their own benefit. As Steve rightly notes, in the absence of this corporatism, the only power that companies can amass is the power derived from consumers who choose freely to buy their products.

I also recommend Art Carden’s new Forbes column, in which he makes this cogent observation:

While a lot of people envision a model of politics as a form of noble savagery that is corrupted by evil people who stubbornly refuse to play the game the “right” way, the kinds of intrigue that have the Occupiers (and the Tea Partiers) so exercised are (to borrow from Steven Horwitz again) features of political society, not bugs. As the economist Gordon Tullock has argued, what should puzzle us is not that politicians are for sale. What should puzzle us is that the supply side of the market for political favors is so competitive that favors can be had for such low prices.

Posted in Economics, Liberty, Politics | 1 Comment »

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Levi: What The Nobel Prize Tells Us About Oil

October 11, 2011

Michael Giberson

Michael Levi, at his CFR blog, explains “What The Nobel Prize Tells Us About Oil“:

Do you think that it’s straightforward to figure out whether high oil prices cause recessions? Many people apparently do. The 2011 Nobel Prize in Economics, awarded today to Thomas Sargent and Christopher Sims for “empirical research on cause and effect in the macroeconomy”, should make them reconsider. The basic reason is simple: if it was easy to separate cause from effect and thus measure the relationship between stimulus and response, they wouldn’t be awarding Nobel Prizes for related progress.

Indeed the difficulty of distinguishing economic cause from effect is a big reason for economists’ longstanding interest in oil price shocks, particularly those of the 1970s. Those price hikes were clearly spurred by events outside the economic system, in 1973 by the Arab oil embargo, and in 1979 by the Iranian revolution (though even on these points there is some dissent). Identification should thus be simple: the oil shock is the cause, and any macroeconomic change is a consequence. This provides an unusually clean laboratory in which to study economics.

Alas, there is a problem. The oil price shocks of the 1970s prompted big interest rate hikes in consuming countries, as policymakers tried to stem inflation. One now must ask: were the economic slowdowns that followed the oil price shocks the result of the shocks themselves, or consequences of the monetary policy reaction? The difference matters, because one leads to an energy policy solution, while the other points to better monetary policy as the right response.

Levi then explores a paper by Bernanke, Gertler, and Watson (BGW) examining the connections between oil price shocks and monetary responses that draws upon methods developed by recent Nobel laureate Christopher Sims. As it happens, Sims contributed a critique that accompanied the publication of the BGW paper in Brookings Papers on Economic Activity (1997). Levi summarizes the Sims critique and concludes by examining whether BGW or Sims’ response has better stood the test of time.

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

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A political economy model for Occupy Wall Street

October 10, 2011

Lynne Kiesling

What’s a political economy-oriented economist to make of Occupy Wall Street? So far I’ve found two complementary commentaries that reflect my analysis of the deeply flawed policies of the past couple of decades that have enabled the crony corporatism that seems to be at the core of the protest (just in my phrasing it that way you can see what my model is). The first is summarized in this Venn diagram from James Sinclair, in his insightful post about the false dichotomy between Occupy Wall Street and the Tea Party:

His entire analysis is worth reading (and is consistent with this excellent investigative citizen journalism from the protest in New York, thanks to Nick Gillespie for the link), concluding with

In other words, aren’t these two groups—Occupy Wall Street and the Tea Party—raging against different halves of the same machine? Do I have to draw a Venn diagram here? …

Yeah, I’m oversimplifying, but only a little. The greatest threat to our economy is neither corporations nor the government. The greatest threat to our economy is both of them working together. There are currently two sizable coalitions of angry citizens that are almost on the same page about that, and they’re too busy insulting each other to notice.

Hitting a complementary note (and hitting the nail on the head, from my perspective) is Sheldon Richman at the Freeman, noting that Wall Street couldn’t have done it alone:

To: Occupy Wall Street:

Wall Street couldn’t have done it alone. It takes a government and/or its central bank, the Federal Reserve System, to:

  • Create barriers to entry for the purpose of sheltering existing banks from competition and radical innovation, then regulate for the benefit of the privileged industry;
  • Issue artificially cheap, economy-distorting credit in order to, among other things, give banks incentives to make shaky but profitable mortgage loans (and also to grease the war machine through deficit spending);
  • Make it lucrative for banks – and their bonus-collecting executives — to bundle thousands of shaky mortgages into securities and other derivatives with the knowledge that government-sponsored enterprises Fannie Mae and Freddie Mac and other companies, all subject to powerful congressmen looking for campaign contributions, will buy them after a government-licensed rating cartel scores them AAA;
  • Inflate an unsustainable housing bubble by the foregoing and other methods, enticing people to foolishly overinvest in real estate.
  • Work closely with lending companies to establish a variety of programs designed to lure people with few resources or bad credit into buying houses they can’t afford;
  • Attract workers to the home-construction bubble, setting them up for long-term unemployment when the bubble inevitably bursts;
  • Implicitly guarantee big financial companies and/or their creditors that if they get into trouble they will be rescued;
  • Compel the taxpayers to bail out those companies and/or creditors when the roof finally falls in.

No bank or group of banks could do these things on its own in a freed market. It takes a government-Wall Street partnership – the corporate state — to create such misery and exploitation.

So demonstrators, you are right. Something is dreadfully wrong. But your list of culprits is far from complete. So go ahead and protest outside Goldman Sachs and Bank of America. But also spend some time outside the White House, the Fed, the Treasury, and the Capitol Building. Together they are responsible for our current economic woes. These are the entities that control our fate and over which we have no real say. It’s time for things to change.

The freed market is the alternative to what you properly despise.

Yep, that about sums it up.

Posted in Economics, Liberty, Regulation | Tagged , , , | 8 Comments »

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Sargent-Sims Nobel 2011

October 10, 2011

Lynne Kiesling

Congratulations to Thomas Sargent and Christopher Sims for the 2011 economics Nobel. Marginal Revolution has developed a well-deserved reputation for go-to commentary on the Nobel; see Alex’s overview, Tyler’s comments on Sargent, and Tyler’s comments on Sims. Note also the Tyler points out Sargent’s work in economic history (his “small change” book with Francois Velde is a particularly good example of economic history).

Both gentlemen work in empirical macro, an area in which I have no expertise. But I have always found Sargent’s work in particular valuable because he has delved into the micro-foundations of aggregate phenomena (including subjective expectations, adaptation, and learning), and to me seems to push beyond the representative agent macro models that are so justly criticized.

Posted in Economics | Tagged , | Comments Off

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Markets make you more trusting, but not necessarily more trustworthy

October 10, 2011

Michael Giberson

In a randomized control experiment, subjects unconsciously primed to think about markets were more trusting in a subsequent anonymous economic exchange. The authors note that the positive effect of trust on economic growth is well documented — in particular, widespread market activity requires people to trust anonymous strangers — but scholars have been divided on whether markets promote trust or tend to undermine it. The authors’ report that market priming leads subjects to become more trusting of anonymous strangers.

While market-primed first movers in the exchange were clearly more trusting, market-primed second movers showed only a small,  statistically insignificant, positive effect on trustworthiness. In each case the comparison is to similarly situated subjects exposed to a neutral priming exercise. You might sum it up as: markets make you more trusting, but not necessarily more trustworthy.

The study is “The causal effect of market participation on trust: An experimental investigation using randomized control,” by Omar Al-Ubaydli, Daniel Houser, John Nye, Maria Pia Paganelli and Xiaofie (Sophia) Pan. The authors are all with George Mason University but for Paganelli at Trinity University (Texas).

ABSTRACT: In randomized control laboratory experiments, we find that those primed to think about markets exhibit more trusting behavior. We randomly and unconsciously prime experimental participants to think about markets and trade. We then ask them to play a trust game involving an anonymous stranger. We compare the behavior of these individuals with that of a group who are not primed to think about anything in particular. Priming for market participation affects positively the beliefs about the trustworthiness of anonymous strangers, increasing trust.

Posted in Economics | Tagged , , | Comments Off

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A disturbing historical parallel: The Patriot Act and the Star Chamber

October 7, 2011

Lynne Kiesling

While I’m delving into history, consider this week’s revelation that a secret panel drawn from the White House National Security Council can put the names of any American on a watch list and “kill list” — and that action is entirely secret.

American militants like Anwar al-Awlaki are placed on a kill or capture list by a secretive panel of senior government officials, which then informs the president of its decisions, according to officials.

There is no public record of the operations or decisions of the panel, which is a subset of the White House’s National Security Council, several current and former officials said. Neither is there any law establishing its existence or setting out the rules by which it is supposed to operate.

If you know British constitutional history, this secret panel sounds disturbingly similar to the Star Chamber court in Britain:

Finding its support from the king’s prerogative (sovereign power and privileges) and not bound by the common law, Star Chamber’s procedures gave it considerable advantages over the ordinary courts. It was less bound by rigid form; it did not depend upon juries either for indictment or for verdict; it could act upon the petition of an individual complainant or upon information received; it could put an accused person on oath to answer the petitioner’s bill and reply to detailed questions. On the other hand, its methods lacked the safeguards that common-law procedures provided for the liberty of the subject. Parliaments in the 14th and 15th centuries, while recognizing the occasional need for and usefulness of those methods, attempted to limit their use to causes beyond the scope or power of the ordinary court.

It was during the chancellorship of Thomas Wolsey (1515–29) that the judicial activity of Star Chamber grew with greatest rapidity. In addition to prosecuting riot and such crimes, Wolsey used the court with increased vigour against perjury, slander, forgery, fraud, offenses against legislation and the king’s proclamations, and any action that could be considered a breach of the peace. Wolsey also encouraged suitors to appeal to it in the first instance, not after they had failed to find an efficient remedy in the ordinary courts.

The Star Chamber played a crucial role in facilitating the corruption and power-mongering of Henry VIII’s reign, but attracted more opposition in the 17th century when it enabled Charles I’s reign to execute religious dissenters. It  was finally eliminated in the mid-17th century.

Posted in Liberty | 3 Comments »

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Boulton & Watt on new £50 note

October 7, 2011

Lynne Kiesling

Industrial revolutionaries, rejoice! The Bank of England is honoring one of the most fruitful and enterprising inventor-entrepreneur partnerships in economic history, Matthew Boulton and James Watt, by putting their images on the new £50 note.

You are probably familiar with James Watt as the inventor of the double-acting steam engine and other accompanying improvements that enabled mechanization and the ultimate replacement of animate, water, and wind power for the industrial transformations of the 19th century. Watt’s hard work and vision created a power source that enabled a dramatic increase in productivity, innovation, living standards, and transformational economic growth.

But Watt was also an irascible inventor who did not relish the customer-facing aspect of commercializing his inventions, which was where Matthew Boulton came in. Boulton’s background in manufacturing metal products, combined with his business sense and his “people skills”, made the partnership of Boulton and Watt a commercial success and the firm of Boulton & Watt one of the most profitable and influential pioneers of mechanization and industrialization. They truly changed the world for the better.

HT: Boing Boing

Posted in Economic history | Comments Off

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