Antony Davies’ sobering federal debt summary

Lynne Kiesling

While we’re at Learn Liberty, and in light of today’s Congressional Republican federal government budget proposal, here’s economist Antony Davies on the implications of our government’s indebtedness.

When we covered this in my intro macro class this winter, it was sobering for my 18-20-year old students to realize that they are the people who will bear the costs of this debt burden.

Economists and philosophers on value

Lynne Kiesling

Got two spare minutes and want to spend it enriching yourself? Then watch this great Learn Liberty video from Aeon Skoble. Aeon’s a philosopher who also reads a lot of economics, so he’s in a distinctive position to make this important point — both economists and philosophers use the word “value”, but we mean different things by it. For economists, value is subjective and arises from preferences, context, perceptions that individuals possess. For philosophers, value is objective values, like rights, that are part of our objective moral framework for living together as heterogeneous individual agents in civil society. Moreover, the two concepts are complementary; for individuals to be able to act on and satisfy their diverse individual preferences, they rely on living in a social system grounded in respect for individual rights. Aeon explains that distinction beautifully here.

IHS’s great summer workshop for college teachers

Michael Giberson

Last summer I had a lot of fun at the too-short IHS Liberty and the Art of Teaching workshop. Well, I say “too short,” but the truth is that they packed so much information into 2 days that I couldn’t absorb it all.

I did absorb a few bits, though, as related in my reflection on what I gained from the teaching workshop, which has been posted at Kosmos Online. The workshop was a great production on IHS’s part, filled with teaching advice backed by years of successful practice (and in many cases, also backed by systematic study of student progress and retention).

As reported in my Kosmos post, I used what I learned at the workshop to reorganize my U.S. Energy Policy and Regulation course as well as (less successfully) to tweak my Energy Economics course. In addition, I’ve made several more minor adjustments in classroom practice, partly due to presentations at the IHS workshop and partly as a consequence of reading Teaching With Your Mouth Shut prior to this Spring semester.

I continue to be amazed at how willing universities are to push graduate students into the classroom with little actual guidance on successful teaching, at how often PhD programs will send their students out into the academic workforce with little training in this key job skill, and at how little supervision universities provide to newly-hired teachers fresh from the graduate programs that provided little training in teaching well. Teaching well can be hard work, yet often it is treated as so obvious as to be beneath serious concern. The IHS workshop helps fill the gap.

They are taken applications for the Summer 2012 workshop up until April 15, 2012.

Are refiners and wholesalers price gouging on petroleum products in Alaska?

Michael Giberson

As the chart below shows, during the summer of 2008 gasoline prices in Anchorage, Alaska switched from following typical prices in the lower 48 to a modest but notable amount above such typical prices. Not shown, but you can check it out at Gasbuddy.com where I generated the chart, after the summer of 2008 Anchorage prices have tracked more closely with Honolulu, Hawaii prices instead of prices in the continental United States.

Anchorage, Seattle and Houston gasoline prices from March 2006-March 2012

Anchorage, Seattle and Houston gasoline prices from March 2006-March 2012

We’ve discussed this before. As noted here in a post in 2009, “For years, average prices in Alaska were about the same as the U.S. average price.  Higher costs of delivery in Alaska were mostly offset by the nation’s lowest gasoline tax, just 8 cents a gallon, and the result was a price that more or less tracked the U.S. average price.” More from that post:

That pattern changed beginning in June 2008.  Prices had been marching up everywhere, but the price march stalled in the lower 48, while in Alaska (and Hawaii) prices continued to rise for another month.  Prices fell sharply throughout the country from July through December – excepting a short pause during the late hurricane season in the lower 48 – but Alaska’s prices now seemed to track the higher prices of Hawaii rather than returning to the U.S. average.

The 2009 post reported the conclusions of an Alaskan investigation: no illegal collusion found, but oligopoly probably is minimizing competitive pressure.

Some Alaskan politicians want to do something about current, continuing, relatively high (compared to nearby Seattle) prices. A committee of the Alaskan state senate just held hearings on SB 28, an act that would declare it illegal to sell or offer to sell certain petroleum products at unconscionable prices. (More information on SB 28 here.)

From the Associated Press:

JUNEAU, Alaska — A bill aimed at gasoline refiners that would ban price gouging received a hearing Tuesday before a skeptical Senate committee.

Sen. Bill Wielechowski said his proposal is a response to the “unconscionable” disparity between the prices Alaskans pay for gas and heating fuel compared to rates elsewhere on the West Coast that have traditionally been similar. …

Under the proposal, prices could not exceed 10 percent of those charged by Seattle-based refiners. Alaska’s attorney general would be allowed to investigate claims against companies refining more than 1 million gallons of fuel per year, and companies guilty of price gouging would face a penalty equal to at least 10 times the profit gained from the practice.

Sen. Cathy Giessel, R-Anchorage, said the proposal misses its target.

She said it amounts to a “jobs bill for attorneys” by setting up an environment for constant lawsuits, and that it would drain companies providing Alaskans a much-needed product. She also said Seattle isn’t a fair comparison. Tesoro has exorbitant transportation costs to get crude oil from the North Slope and elsewhere, she said, and they also run their production facilities on cheaper fuel.

“This appears to vilify refineries by saying that they’re ‘unconscionable’ and ‘disreputable,’” Giessel said.

How fear affects policy: Adam Thierer on technopanics

Lynne Kiesling

Fear is a strong motivating factor, having evolved over millennia as we have protected ourselves against predators. Fear supports self-preservation by making us risk-averse and cautious. But such a deep, visceral, evolved emotion does not always serve our long-term objectives of thriving; it leads to maximin outcomes, and it is often mismatched to the actual threats to our self-preservation. As our environments change around us, we can fear things we shouldn’t and may not fear things that we should; we overthink everything and tend toward a “precautionary principle” approach, making us risk-averse and cautious.

I think such fear is a component in the persistence of regulation when it’s maladaptive to technological change, so I was happy to read Adam Thierer’s new Mercatus working paper, Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle. Adam lays out a framework for analyzing fear-based attitudes toward technology and technological change that’s informed by economics, sociology, psychology, and rhetoric. He tackles the question of why, and how, participants in public policy debates use appeals to fear to sway opinion toward anticipatory regulation and forms of censorship:

While cyberspace has its fair share of troubles and troublemakers, there is no evidence that the Internet is leading to greater problems for society than previous technologies did. That has not stopped some from suggesting there are reasons to be particularly fearful of the Internet and new digital technologies. There are various individual and institutional factors at work that perpetuate fear-based reasoning and tactics.

He analyzes the use of “appeal to fear” and “appeal to force” logic in the construction of arguments in favor of regulation and censorship, focusing on case studies of online child safety and violent media and online privacy and cybersecurity. In deconstructing these arguments he identifies four ways that fear can be a myth: it may be empirically unfounded and lacking evidence, other variables may be more important in affecting behavior than the feared variable, not all individuals have the same reaction to the feared variable, and other approaches than regulation exist that can mitigate the consequences of the feared variable (pp. 5-6).

Adam introduces the phenomenon of the “technopanic”, which is “… a moral panic centered on societal fears about a particular contemporary technology” (p. 7). Because culture often evolves more slowly than technology, as we are adapting culturally to the new technology we can see these panic phenomena, which can result in demonizing the technology and can lead to calls to “do something”, typically some form of control-based anticipatory regulation or censorship. A crucial part of manipulating individual attitudes to tap into fear and create advocacy for and acceptance of such regulation is what Adam calls “threat inflation”:

Thus, fear appeals are facilitated by the use of threat inflation. Specifically, threat inflation involves the use of fear-inducing rhetoric to inflate artificially the potential harm a new development or technology poses to certain classes of the population, especially children, or to society or the economy at large. These rhetorical flourishes are empirically false or at least greatly blown out of proportion relative to the risk in question. (p. 9)

Allowing threat inflation and technopanics to drive policy outcomes is socially corrosive and wasteful; it diverts resources from their higher-valued uses in dealing with actual risks rather than inflated ones, and it creates an environment of suspicion and social control, particularly censorship and information control. After analyzing six factors that create conditions favorable for the development of threat inflation and technopanics regarding Internet technology (nostalgia, special interests, etc., well worth reading in detail), he proposes two categories of policy response that we should pursue instead of prohibition and anticipatory regulation: resiliency and adaptation. We build resiliency to threats through education, transparency, labeling, etc., and we adapt to living with risk through experimentation, trial-and-error, experience, and social norms. These two are complementary; information-sharing about best practices can shape social norms and get people to change their behavior without regulation. For example, I don’t sign my credit cards, but instead write “CHECK ID” in the signature line and present a photo ID when using them. Having store clerks and other shoppers witness my behavior to protect my identity may lead to their replication of it, and has led over time to a change in behavior (remember back in the 1990s when they used to write your phone number on the receipt? Yikes! But that behavior’s gone extinct.).

We cannot eliminate risk through resilience and adaptation, but we can’t eliminate it through regulation either. Better to have strong, flexible, adaptable institutions and practices that enable us to continue thriving in unknown and changing conditions, while we enjoy the substantial benefits of technological creativity. While I heartily recommend Adam’s paper to you all as a good and thought-provoking read, he also summarizes it in this recent Forbes column.

I would extend Adam’s argument to apply to two case studies. The first is smart grid technology. Fear-based arguments abound in electricity, usually grounded (pun intended!) in the physical reality that electricity is dangerous. But after a century of economic regulation to serve particular social policy objectives, fear-based arguments also show up in arguments against moving away from the status quo both technologically and more economically in general; in my experience these fear-based arguments are used most to advocate for the status quo on behalf of low-income consumers and the elderly, and for that reason I find the use of fear-based arguments heart-wrenching, because when they succeed they deprive vulnerable populations of the benefits of innovation. Another current example is the arguments that digital meters, which transmit data using radio frequency wireless networks and thus emit low-level electromagnetic fields, are making people sick. Despite the absence of any scientific evidence consistent with this hypothesis, California and Maine are using these fear-based claims as a basis for allowing customers to opt out of having a digital meter installed (I have other analyses of this phenomenon, but that’s for another time …).

The second case is threat inflation and the exaggeration of fear to extend the security state. Each of Adam’s six factors contributing to threat inflation is applicable to the growth of the security state — nostalgia, pessimistic bias, “bad news sells”, the political power of the military-security-industrial complex, and so on. The persistence of threat inflation enables these special interests to use fear-based arguments to perpetuate the false belief that we are under constant, persistent threat beyond the actual threat level; this false belief creates the incentives in politicians to “do something” so that they don’t appear “soft on terror” and therefore risk not getting reelected; that political incentive enables security and defense companies to lobby politicians to buy their cutting-edge technologies at very great taxpayer expense to demonstrate to voters that they are “doing something” (even though the technologies have high false positive rates, can be fooled easily, and are more for symbolic security theater than for addressing the most relevant risks that we actually do face).

In both cases, a resiliency-oriented public policy approach would be a substantial improvement on the control-oriented regulation that is not focused on the most meaningful or relevant threats, be they health threats, economic threats, or security threats, from technological dynamism.

The WSJ’s awful editorial against the wind power industry

Michael Giberson

Like the editorial board of the Wall Street Journal, I’d like to see the Production Tax Credit for wind and other renewable energy technologies expire at the end of this year as scheduled. So policy-wise, I’m with them. Still, their editorial against the wind power policy yesterday was awful and it deserves public criticism.

So here are quotes from the WSJ in italics, followed by my comments.

“The renewable energy tax credit—mostly for wind and solar power—started in 1992 as a ‘temporary’ benefit for an infant industry.”

Stick with “mostly for wind.” Other technologies qualify, too, including a variety of hydroelectric technologies and geothermal power, but not currently solar power.

Solar was briefly included in the PTC through the American Jobs Creation Act of 2004, but then was back out at the end of 2005. Solar power benefits from the Investment Tax Credit, and until December 2011 benefited from “Section 1603″ cash grants in lieu of the ITC.

If you’re tempted to argue they said “renewable energy tax credits”, not specifically the PTC, note that they clearly say the renewable energy tax credits that began back in 1992 (in that year’s Energy Policy Act) – they’re talking about the PTC and they get the solar reference wrong.

Details on the PTC, via DSIRE.

“The ’1603 grant program’ pays up to 30% of the construction costs for renewable energy plants …. Wind producers then get the 2.2% tax credit for every kilowatt of electricity generated.”

No. To get the 1603 cash grant a developer has to forgo the Production Tax Credit. One or the other, but not both.

And for crying out loud, it is a 2.2 cents/kwh tax credit, not a “2.2% tax credit.” The Heritage Foundation can get this right, you’d think the WSJ could do as well.

(Or, more precisely, that was last year’s subsidy but the PTC is adjusted annually for the effects of inflation so in 2012 it will be slightly higher.)

… and Senator Jeff Bingaman of New Mexico has introduced a national renewable-energy mandate so consumers will be required to buy wind and solar power no matter how high the cost.

I didn’t notice this problem myself, not having dug through the details of the bill Sen. Bingaman introduced last week, but Richard Caperton and Stephen Lacey at Climate Progress point out that the bill caps the cost increase at 3 cents/kwh.

These sloppy errors don’t mean the WSJ is wrong, only that they’re willing to publish poorly researched opinion pieces.

The Caperton and Lacey post at the Climate Progress blog mentioned the above errors and raised some additional complaints. Most of their additional complaints concern the relative virtues of oil and gas production when compared to wind power, and who gets how much subsidy. On these points I mostly lean toward the WSJ‘s view. Suffice to say that wind power subsidies are orders of magnitude higher per unit of energy provided to consumers.

But this brings us to one key point they raise: “one justification for the tax credit is to makeup for the fact that taxpayers are bearing the harm from fossil fuels.”

There is, embedded in this idea somewhere, the foundation of an analytically sound justification for policy intervention. My problem with the Production Tax Credit for wind power is that it flows to wind investors for every qualifying kwh of power generated irrespective of any such benefit. The wind power investor gets the same subsidy whether the wind power produced displaces coal-fired electric power or efficient natural gas-fired power or hydropower. Wind would still qualify for a PTC even if its output was displacing solar power while wind turbines chopped up migrating birds.

While there may be an intellectually defensible case for a policy supporting renewable energy because it reduces a harm, the Production Tax Credit bears little resemblance to that policy.

So let’s let the Production Tax Credit die, and get on with the business of developing sound public policy on emissions. (And please, WSJ, stop embarrassing yourself with silly mistakes.)

 

Well, in that case I favor higher automobile fuel economy standards

Michael Giberson

Gasoline prices are relatively high and we’re well into the 2012 political campaign, so that means we have presidential wannabees and a wannabee-reelected promising to pass out candy to voters faster than a newly split piñata.

In North Carolina yesterday President Obama announced a $1 billion initiative for a “National Community Deployment Challenge to help selected communities invest in necessary infrastructure.” That effort promises to subsidize the building of electric vehicle recharging stations, or natural gas vehicle recharging stations, or “other alternative fuels [whichever] would be the best fit.”

About the only thing encouraging about that line was the President was embarrassed to say “ethanol” out loud.

But I found this discussion of automobile fuel economy standards notable, from the Detroit Free Press:

Obama was in North Carolina to discuss what the White House called “Daimler’s commitment to increasing fuel economy standards.” The White House and automakers agreed to new fuel standards for model years 2011 to 2025 that will push average fuel efficiency to 54.5 miles per gallon in the next 13 years. The administration says that could save consumers $1.7-trillion in fuel costs, or roughly $8,200 per gallon.

The higher standards will save consumers roughly $8,200 per gallon???!!?

Well, in that case I favor the higher fuel economy standards.

Bourgeois Virtues in Action

Sarah Skwire

The “most modern man” in Dickens, John Wemmick from Great Expectations, makes much of the importance of separating what Deirdre McCloskey calls the P-values of prudence from the S-values of sociability.  “The office is one thing, and private life is another. When I go into the office, I leave the Castle [his home] behind me, and when I come into the Castle, I leave the office behind me. If it’s not in any way disagreeable to you, you’ll oblige me by doing the same.” As McCloskey’s work suggests, such a division is not only disagreeable, it is deleterious. P values and S values must be mingled in order for our business lives and our social lives to function well.

A fine example of the good results that arise from this kind of mingling is offered in Charles Duhigg’s new book The Power of Habit. The most frequently excerpted chapter of the book seems to be the chapter on Pepsodent that explains how those sneaky advertisers manipulate us to make us think that we have a nasty film on our teeth that requires frequent brushing with Pepsodent to make us socially acceptable. The most McCloskeyan chapter, is the chapter about Alcoa.

Alcoa is an aluminum manufacturing company that has “manufactured everything from the foil that wraps Hershey’s Kisses and the metal in Coca-Cola cans, to the bolts that hold satellites together.” There’s a lot of molten metal involved in what they do, and a lot of heavy machinery, and for a long time, there was a lot of worker injury.

In 1987 Alcoa hired a new CEO named Paul O’Neill who set Alcoa a single goal–No worker injuries. Zero. None. According to Duhigg, everyone thought he was nuts. Alcoa was beleaguered by all kinds of problems with profits and processes, and O’Neill wanted them to ignore all that and focus on worker safety to the exclusion of all else? This was sacrificing all kind of apparent P value stuff on the altar of S values. It was madness. But O’Neill held firm.

Duhigg writes, “In 2010, 82% of Alcoa locations didn’t lose one employee day due to injury…On average, workers are more likely to get injured at a software company, animating cartoons for movie studios, or doing taxes as an accountant than handling molten aluminum at Alcoa.”

Heck, I got a wicked bad paper cut looking for the Dickens quote at the top of this post.

And a funny thing happened on the way to satisfying O’Neill’s S values. A lot of P values got satisfied as well. Aloca’s safety obsession required a way to share real time safety data between offices, so O’Neill had the offices linked up in a computer network. It seemed natural to employees to use that network to share other useful business information, so Alcoa was faster to respond to market demands and price information. Alcoa doubled their profit from aluminum siding because a worker suddenly felt important and “listened to” enough to make a suggestion about the way Alcoa set up the machines that painted the siding. Machines were redesigned to protect worker safety, and their new reliability meant more reliable aluminum and better products. Alcoa’s costs went down. Their stock price went up by 200%.

That’s what happens when you bring your virtues, or your S values, or your good home-training, or whatever you’d like to call it, to the market. That’s what happens when the market is free enough to respond to those virtues. Virtue is its own reward, but when you bring it into the market with you, everybody wins.

Welcome Sarah Skwire!

Lynne Kiesling

I am thrilled to welcome my friend, knitting buddy, poetry expert, and all around Renaissance woman Sarah Skwire as a guest blogger! Sarah’s incisive intellect enables her to see connections across literature, economics, and political theory, and we welcome her insightfulness whenever the economics bug bites. Welcome, Sarah.

The Matt Ridley Prize for Environmental Heresy

Michael Giberson

The Spectator magazine in the U.K. announces the Matt Ridley Prize for Environmental Heresy:

Matt Ridley has long deplored the wind farm delusion, and was appalled when a family trust was paid by a wind farm company in compensation for mineral rights on land on which it wanted to build a turbine. The trust would be paid £8,500 a year for it, and Matt couldn’t abide the idea of profiting — even in part — from this. So he is donating £8,500 in an annual prize to be given to the best essay exposing environmental fallacies. Entries open today.

The rules are simple. We invite pieces from 1,000 to 2,000 words in length, to gore one of the sacred cows of the environmentalist movement. Matt says more in his cover essay for the new Spectator (which you can also read on Facebook) : ‘There are many to choose from: the idea that wind power is good for the climate, or that biofuels are good for the rain forest or that organic farming is good for the planet or that climate change is a bigger extinction threat than invasive species.’ A shortlist of six will be put to a panel of judges and the winning entry will be published in the magazine in July.

Entries … close on 30 June 2012.

More details at the first link above. £8,500? That is more than US$13,000. Hmmm, which sacred cow do I want to gore?

Matt Ridley is the author of several books on science and society, including The Rational Optimist, The Red Queen, The Origins of Virtue, and Genome.