Students: A message from the elderly — join Students for Liberty!

Lynne Kiesling

A couple of weeks ago, a few friends and I had some fun making this promotional video for Students for Liberty:

If you are a student and want to get more involved in creating a future in which our civil liberties still exist, economic freedom prevails, and we interact with others through peaceful exchange, join Students for Liberty. SFL is one of the most important and valuable organizations today in creating community for those who support peaceful, responsible civil society and the ideas and principles undergirding such a society.

Bright Automotive can’t get federal loan after four year wait, folds

 Michael Giberson

In other transportation alternatives news, Bright Automotive is folding after spending $15 over four years in an effort to secure a $450 million low-interest loan from the U.S. Department of Energy through the Advanced Technology Vehicles Manufacturing Loan Program.

The Advanced Technology Vehicles Manufacturing Loan Program was created in the Energy Independence and Security Act of 2007. The law passed in December, and a month later the company was formed. According to the company website:

In January 2008, Bright Automotive launched from Colorado-based Rocky Mountain Institute (RMI) with the goal of building on the work of a consortium of organizations to map an automotive solution to tackle the challenges of our economy, air pollution and diminishing oil supplies.

Enter: Bright Automotive

We are an American company comprised of automotive entrepreneurs, including some of the most experienced hybrid-electric vehicle and battery pack engineers in the industry. We created in less than 12 months what some automotive companies take years to achieve: an all-new, efficient, plug-in hybrid electric vehicle that customers want to buy and can afford.

It is efficient, customers want to buy it, customers can afford it, so what could possibly go wrong? This, from news reports:

After failing to secure a federal loan to finance its operation and production costs to build a hybrid delivery vehicle, Bright Automotive said Tuesday that it will cease operations….

“Bright has not been explicitly rejected by the DOE; rather we have been forced to say ‘uncle.’ As a result, we are winding down our operations,” Bright CEO Reuban Munger and Chief Operating Officer Mike Donoughe said in a scathing letter to Energy Secretary Steven Chu.

The company spent three years and $15 million negotiating with the DOE for the loan, said Michael Brylawski, vice president of corporate strategy. Each time the company submitted a proposal, he said, the government responded with more onerous requirements. [...]

“Last week, we received the fourth ‘near final’ Conditional Commitment Letter since September 2010. Each new letter arrived with more onerous terms than the last,” Munger and Donoughe wrote. “The first three were workable for us, but the last was so outlandish that the most rational and objective persons would likely conclude that your team was negotiating in bad faith.” [...]

In November 2010, Bright officials announced the opening of a research plant in Rochester Hills and, a year later, a production facility in Mishawaka.

Neither choice was in Bright’s original loan application, Brylawski said. The company’s original plan was to locate all its facilities at the Flagship Business Center.

“We were told by the DOE in August 2010 that Bright would get the ATVM loan ‘within weeks, not months’ after we formed a strategic partnership with General Motors (Corp.) as the DOE had urged us to do,” the two executives wrote.

“We lined up and agreed to private capital commitments exceeding $200 million — a far greater percentage than previous DOE loan applicants. Finally, we signed definitive agreements with state-of-the-art manufacturer AM General that would have employed more than 400 union workers in a facility that recently laid-off 350 workers.”

And then the company waited.

“We continued to play by the rules, even as you and your team were changing those rules constantly — seemingly on a whim,” the letter said.

Obviously the “efficient,”  “customers want to buy it,” and “customers can afford it” claims stretched the truth just a bit, else sometime in the last four years they would have found a willing investor. Instead, the project lived on dreams of a federal loan and died when the company woke up to reality.

Ethanol industry struggles through regulatory change

Michael Giberson

Usually I wouldn’t take pleasure in reports an industry is losing money. But when the industry is is a net drag on society sustained almost entirely by governmental action rather than economic contribution — when we’re talking about ethanol — then I will take a bit of pleasure.

Reported by Minnesota Public Radio: “Ethanol industry lurches in wake of lost subsidy, oversupply“:

WORTHINGTON, MInn. — After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation’s ethanol producers may have been too optimistic.

Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.

Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.

At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.

Unfortunately, it is mostly transitory pain, and the industry will survive this little economic storm under the sheltering arms of the Renewable Fuels Standard.

One part of the problem is that the petroleum refining industry stocked up on ethanol at the end of last year, when the blenders tax credit was still in place. Not surprisingly, demand for ethanol dropped in January (and yet some in the ethanol business seem surprised). In addition, the high price of gasoline is leading consumers to drive less, also reducing demand for the ethanol blended into gasoline.

[Doug Punke, CEO of Renewable Products Marketing Group] said another plus for the ethanol industry is the overseas market. Brazil, a country that produces its own ethanol, but where demand is high, has been a major customer.

“We’re seeing some export demand pick back up, which is necessary for this industry right now to balance out that supply and demand,” he said.

Last year U.S. ethanol companies sold about 8 percent of their production abroad.

What? We’re exporting home-grown American energy? Quick, somebody call Congressman Markey’s office, I’m sure he’ll want to put a stop to it right away!

RELATED: The Des Moines Register , “Ethanol 11 cents per gallon in red in January.”

My congressman invites me to Submit & Join*

Michael Giberson

In the inbox this afternoon, an emailed letter from my Congressman, Randy Neugebauer, who queries me (and I guess thousands of my neighbors as well) in this manner:

Neugebauer, "Dear Friend" letter, February 27, 2011.

Notice the congressman’s question, “do you believe we should be maximizing the development of our domestic oil and gas resources?” and the button labeled “Submit & Join*”

The  *, which is in the original, links to this explanation: “*By submitting your answer, you are subscribing to the weekly e-newsletter I send out every Monday.

There was no opportunity to “Submit but not Join,” apparently meaning if I don’t want to subscribe to the weekly newsletters then he isn’t interested in my opinion. (Do I want to be spammed about Congressional pork? No, not really.)

But my real problem with this opportunity to communicate with my member of Congress on energy is that I’m not sure I understand the question: “Do you believe we should be maximizing the development of our domestic oil and gas resources?”

  1. Does “maximizing the development” mean producing as much oil and gas as possible? If so, then I’d vote “No.” I’d rather maximize the value of resources than maximize  development. Many fields are unprofitable to develop, because mostly depleted or just not very promising. Let’s not maximize the development of these fields – that’d be wasteful.
  2. Also, though I’m not the sort of person that get’s too worked up by, for example, the fragmenting habitat of the dunes sagebrush lizard, there are other things of value beyond development of oil and gas resources. “Maximizing the development of our domestic oil and gas resources” without consideration of the trade-offs involved would be wrong.
  3. More generally, I wonder just what he means by “our domestic oil and gas resources”? Since Mr. Neugebauer and I are not joint owners in any oil and gas resources (foreign or domestic), who’s resources are “we” talking about? The best answer may be those oil and gas resources that are under federal government ownership, and here again I’d favor maximizing the overall value of the resources, not maximizing the development of them per se.
  4. If, on the other hand, by “our domestic oil and gas resources,” he means to encompass privately owned oil and gas resources in addition to federally-owned property, then I’d say it is nothing I should be voting on. Private resource owners should free to maximize their value, or maximize their development, or turn their properties into duck ponds if that is what suits them (assuming they hold surface rights as well). We have no more business voting on what a private resource owner does with his property than we have voting on which church, if any, the congressman attends.

I’m pretty generally in favor of oil and gas resource (and related) development: ANWR? Open it up! Keystone XL? Permit it! Fracking? Yes, please! I’m pretty sure I’m supposed to say “Yes” to the Congressman’s question, but each time I try to read it carefully I end up saying “No.”

ASIDE: By the way, you might think it not necessary to specify that privately owned oil and gas resources are not some sort of common property of the state, but on the other hand: Bill O’Reilly and Lou Dobbs. (Not recommended viewing, by the way, because economic illiteracy is no laughing matter.)


Forum on behavioral law and economics

Lynne Kiesling

Have you been tempted to nudge? Persuaded by arguments in favor of default opt-ins for things like retirement savings plans? Or do you think behavioral economics is largely about committing the Nirvana fallacy by holding out for some perfection that is only possible in theory? Regardless of your familiarity with or persuasion by behavioral economics, the behavioral law and economics forum right now at the new Library of Law and Liberty will inform you, and may influence your opinion on the foundations, usefulness, and policy relevance of behavioral law and economics. While I found all of the contributions valuable, in particular I found that the lead essay by Joshua Wright and Douglas Ginsburg gave thorough background and articulated many of both the exciting and original ideas in behavioral economics and the criticisms and concerns that I have had.

My two main criticisms of behavioral economics (which also applies to behavioral law and economics) are that its practitioners are happy to recommend policies that constrain individual consumption choices due to individual biases but don’t treat individuals in their policy maker roles symmetrically, and that it ignores or undervalues the benefits of discovery and error correction processes in social systems. The first one is familiar to many classical liberal critics of behavioral economics — it’s essentially a public choice critique of behavioral economics. If individuals are cognitively limited and/or biased when making their individual consumption choices and you model them as such, why don’t you model them as similarly limited or biased when the same individuals are in the role of policy maker, making consumption choices on behalf of others? More prosaically, what makes you think that a cognitively limited policy maker will make any better decision on your behalf than you will?

The second criticism is the core knowledge problem point; inherent complexity and inescapable diffuse private knowledge means that social systems that reward error correction (e.g., enabling arbitrage that leads to goods movements and price convergence across markets) place a value on error and its correction, that it communicates information, and it is unavoidable in a complex system … but that in complex systems with “good enough” negative feedback loops, those systems are self-correcting over time without the need for constraints on individual choices.

Wright and Ginsburg articulate this second point quite clearly, in the course of laying out what they see as the high-level map of the behavioral research agenda:

The first stage of the behavioral economics research program is best described as developing a comprehensive theory of errors.  The theory-building exercise thus far has focused largely upon the effort to catalog circumstances in which economic decision-makers appear systematically to depart from rational choice behavior.  The second step required to make the theory of errors policy-relevant is to map the conditions under which specific errors are more or less likely to affect decisions and then to generate estimates of the social costs imposed by those errors.  This step is particularly important when the incidence of a particular decisionmaking error is context specific, unevenly distributed throughout the population, and likely to interact systematically with other errors.  The third step is to compare the costs of any proposed corrective intervention against the social benefits produced by reducing the rate of error.  At present, however, research in behavioral economics does not appear to have moved much beyond the first step.

The minimum required to correct recurring and systematic errors is an accounting of their social costs and benefits.  The behavioral law and economics literature exhibits a strong tendency to ignore the social benefits of error. At the same time, it tends to overestimate the social costs of errors or at least implicitly to assume the social benefits from reducing identified errors will be greater than the social costs of interventions aimed at correcting those errors.  This tendency explains the current condition under which “virtually every scholar who has written on the application of psychological research on judgment and choice to law has concluded that cognitive psychology supports institutional constraint on individual choice.”[6]

Now that I look at it, both of my criticisms are criticisms of asymmetry. I think a reasonable behavioral economics theory should treat individual biases symmetrically in the various roles they play in social systems, and I think that theory should also account for the fact that error has both social benefits and social costs. Yes, that makes the theory less tractable, but it makes it more useful, and to quote my favorite statistician George Box, “all models are wrong, but some are useful.”

This issue is certainly relevant in the electricity technology and regulation space. I can remember a couple of years ago, when Nudge first came out, a very thoughtful and forward-looking person I know in this area was excited at the prospect of using regulation to establish particular default choices for energy efficiency, for dynamic pricing, and so on. I think this person was surprised at my lukewarm response, which was lukewarm precisely because I don’t think we can assume that we’d have better outcomes from policy makers imposing their view of what’s socially optimal to overcome our biases that slow down innovation in smart grid and so on. How can we be so sure that what we policy makers, technologists, and analysts think would be the best thing for these individuals would actually be the best thing for them individually, and/or that it would overcome whatever biases we think are leading to less energy efficiency than we would experience otherwise? Moreover, unless we’re talking about pretty light-handed things like having time-of-use as the default pricing for default residential service, such regulation can play havoc with individual autonomy and agency and sovereignty, and I find that morally insupportable. Rather, why don’t we incorporate the idea that there are benefits from social error and its decentralized correction into our institutional design, and come up with regulatory institutions that remove the barriers to profiting from decentralized error correction?

A considered and thought-provoking read.

By the way, this forum will be at the top of their forum page for the next couple of days, but a new forum will be up soon! So the goodies will keep coming.

Green energy paradox: Hotelling’s exhaustible resource and consequences of improving the alternatives

Michael Giberson

The “green power paradox” grabs Hotelling by the ankles, turns him upside down, and shakes the change out of his pockets.

Harold Hotelling’s classic article, “The Economics of Exhaustible Resources,” observes that the owner of an exhaustible resource stock always is making choices in the shadow of the future. If the owner produces and sells a bit today, that necessarily involves sacrificing the opportunity to produce and sell that bit in the future. Given that the resource is exhaustible, we expect the price to increase as the stock of resources nears exhaustion. The resource owner’s choice, then, is whether to sell at a low price today or a higher price tomorrow.

Hotelling’s mathematics says the resource price will tend to increase at the rate of interest, at least under certain conditions (The intuition: if the rate of price increase is below the rate of interest then it will pay to produce more quickly now; if the  price increases are any faster then it will pay to produce more slowly. The adjustments will tend to keep the rate of resource price increases in line with interest rates.)

The green paradox emerges when, in a world of exhaustible energy resources, a new renewable energy supply is introduced. Suddenly, the heavy hand of the future is lifted a little. Therefore, even as the exhaustible energy resource dwindles, no longer can the owner expect ever rising prices. In fact, as the technology of the renewable energy resource improves, the price of all energy resources should drop.

In a world of constantly improving renewable energy technology, the owner of an exhaustible resource may be choosing between a low price today and an even lower price tomorrow. The implication: produce and sell now, before the price drops again!

Paradoxically, government promotion of alternative energy technology as a means to fight global warming may be encouraging the rapid exploitation of fossil fuels!

(This is my optimistic, Julian Simon-esque version of the Green Paradox, with resources becoming cheaper over time. A similar pessimistic version can obtain if owners of an exhaustible energy resource expect that regulatory controls on production will become increasingly onerous over time. Produce now while the controls are light instead of keeping your resource in the ground where future regulations may insist it stay.

And finally, if you are a combination resource optimist and a regulatory pessimist, then you ought to stop reading this post right now and go drill, baby, drill!)

SEE: Hans-Werner Sinn, The Green Paradox, MIT Press (2012). Related Sinn: “Greenhouse gases: Demand control policies, supply and the time path of carbon prices.

HT: Marginal Revolution.

The federal government’s natural gas R&D breakthrough

Michael Giberson

In the recent edition of The American magazine, the on-line journal of the American Enterprise Institute, Michael Shellenberger and Ted Nordhaus write in defense of the President’s State of the Union address claim of federal government credit for the shale gas revolution. (For those of you not keeping score at home, (1) I commented on a related Shellenberger and Nordhaus op-ed in two posts back in December 2011, here and here, and then (2) followed with a comment in response to the State of the Union remark in late January 2012, here.)

Shellenberger and Nordhaus begin this recent article:

In his State of the Union address, President Obama invoked the 30-year history of federal support for new shale gas drilling technologies to defend his present day investments in green energy. Obama stressed the value of shale gas—which will create thousands of jobs and billions in profits—as part of his “all of the above” approach to energy, and defended the critical role government investment has always played in developing new energy technologies, from nuclear to solar panels to wind turbines.

The president’s remarks unsurprisingly sparked a strong response from some conservatives (hereherehere, and here), who have downplayed and even attempted to deny the important role that federal investments in hydrofracking, geologic mapping, and horizontal drilling played in the shale gas revolution.

This is an over-reaction. In acknowledging the critical role government funding played in shale gas, conservatives need not write a blank check for all government energy subsidies. Indeed, a closer look at the shale gas story challenges liberal policy preferences as much as it challenges those of conservatives, and points to much-needed reforms for today’s mash of state and federal clean energy subsidies and mandates.

Note that the first of their “here” links is to the first of my two December 2011 blog posts in response to their op-ed, as it appeared at The Energy Collective site (where some of our KP energy-related posts get a second life). As it happens, after the President’s address, the Master Resource blog republished the post as a commentary in response to the President’s natural gas research claim, appending to my title “(December 20 post becomes part of a national debate).”

I want to object to a couple of pretty minor points below, but before I object let me emphasize my agreement with part of what they say about much-needed reforms to today’s state and federal clean energy policies. As they point out late in their article, they’d like to see a reduction or even an end to most current renewable energy production subsidies and direct some of that funding to energy research and innovation. I would completely support such a move, even though I wouldn’t defend the change on the same grounds that they do.

And now two petty objections, both in response to the sentence “The president’s remarks unsurprisingly sparked a strong response from some conservatives (here, ….”

  • First, I am not a conservative. I am pro-dynamism, pro-market, pro-experimentation in many matters both economic and social, and pro-freedom. I don’t want to belabor the point, they probably didn’t mean to offend me, but I am libertarian not conservative.
  • Second, my December 20, 2011 response was not directed at President Obama’s State of the Union address in January 2012, but rather at the mid-December 2011 op-ed by Shellenberger and Nordhaus. (For what it’s worth, I find their arguments more thoughtful and more worthy of a thoughtful response than the President’s  remarks on the topic. So even though my first response to their piece started in somewhat flippant tone, I did try to engage with what they were saying.)

My less minor objections to this new article by Shellenberger and Nordhaus will require a bit more explanation, so I’ll defer them for now. In brief, I still object to how they characterize the significance of the federal role in drilling technology and especially to some of the policy inferences they want to make. In addition, I will want to explain how and why I would support the kind of renewable energy policy reforms they propose even though I disagree with the reasons they give for the reforms.

I should add that their article goes far beyond the first three paragraphs quoted above. You should read the whole thing.

A.C. Pigou, public choice economist, on the use of government

Michael Giberson

At the end of a comment on Windfall, a new documentary on the effects of wind power development on a community in upstate New York, Michael Munger pulls out the key Pigou quote.

Pigou is relevant because the best possible case to be made for subsidizing wind power production involves correcting for the externalities associated with conventional electric power production. Maybe we imagine a Pigovian tax on conventional generators as a sort of first-best solution, and direct subsidy to alternative generators as a second- or third-best solution.

Well, here Munger whips out the Pigou:

It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.

From A. C. Pigou, Economics of Welfare, chapter 20, paragraph 4, available online free via the Library of Economics and Liberty.

Yes, well before James Buchanan, Gordon Tullock, Mancur Olson, Robert Tollison or even Michael Munger were objecting that government intervention may go awry, Professor Pigou was already there.

[ASIDE: I was led to wonder why this insight was seemingly lost from economics for several decades after Pigou published his work. Maybe someone has researched the question carefully. In the absence of someone setting me straight, I'll blame Paul Samuelson.

Samuelson's influential Foundations of Economic Analysis refers to Pigou several times, according to the book's index, but so far as I noticed just once it mentions that the presence of Pigou's external costs means "there is of course need to interfere with the 'invisible hand'." (p. 196)  Samuelson neglects Pigou's qualification: "The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously." (And then Pigou continues with the public choice-like lines Munger quoted.)]

LNG exports, the view from the Brookings Institution

Michael Giberson

The Brookings Institution’s Energy Security Initiative has been looking at the changing natural gas market including, among other things, potential issues surrounding LNG exports from the United States. Overall it looks like reasonable stuff.

But one claim made in a recent Brooking report [pdf], highlighted in a Wall Street Journal article today, had me scratching my head. From Brookings:

Owing to growing gas demand, limited domestic supply, and a more rigid and expensive pricing structure, Asia represents a near-to-medium term opportunity for natural gas exports from the United States. The expansion of the Panama Canal by 2014 will allow for LNG tankers to traverse the isthmus, thereby improving the economics of U.S. Gulf Coast LNG shipments to East and South Asian markets and potentially allowing for an even shorter shipping route than from the Gulf Coast to the U.K. This would make U.S. exports competitive with future Middle Eastern and Australian LNG exports to the region.

The WSJ quotes from the middle sentence, and I’m having trouble believing it. No matter how I look at it, shipping from the U.S. Gulf Coast to the U.K. appears to be a shorter route than shipping from the U.S. Gulf Coast to any East and South Asian market. (I.e., Houston to Bristol is about 4800 nautical miles, Houston through the Panama Canal to Toyko is about 9400 nautical miles. Hong Kong and other major Asian ports are farther than Toyko. See shipping distance calculator here.)

The WSJ article is titled “Natural-Gas Glut Could Bypass Europe,” but if I were a European energy analyst, I wouldn’t bet on it. Sounds more like wishful thinking from Gazprom rather than reasoned analysis.


New video: Richard Epstein on simple rules

Lynne Kiesling

In one of the most incredible pieces of fortuitous timing, after I recommended Richard Epstein’s Simple Rules for a Complex World in my post on our regulatory thickets, here’s a new video of Richard discussing this exact topic!

A clear 22-minute discussion, well worth your time (and the time of any Congressional staffers you might happen to know …).

This video and others (some from the vault that are great!) are available at the website. is a project of the Cato Institute, and provides a lot of informative and thought-provoking content on the intellectual foundations of libertarian thought and classical liberalism.