Two foreign policy initiatives contrasted

Michael Giberson

Two foreign policy initiatives, both began in mid-March, one a year old and the other started ten years ago, have had dramatically different effects on the world. Eric Shierman celebrates the wiser of the two efforts:

I have considered writing about the Iraq War on the tenth anniversary of our collective, bi-partisan decision to make one of the greatest strategic mistakes in American military history, but it’s just too depressing to put words into sentences describing the cost in lives and treasure we paid….

Thus the most encouraging anniversary to reflect on is not our invasion of Iraq ten years ago this week, but the wise implementation of our free trade agreement with South Korea one year ago. … From that body of peer reviewed literature [on foreign relations] there has emerged little empirical evidence of a correlation between peace and the pursuit of ever greater military strength among states, but there is overwhelming evidence that the single most powerful pacific force in foreign policy is trade….

The empirical evidence is just overwhelming, … the more exposed people are to complex trading economies with a higher degree of specialization and division of labor, the more empathy they employ in their decision making and the more rational they are in seeking their own selfish ends through the voluntary cooperation of others. It’s not enough to know what you want; successful exchange requires a focus on what others’ want as well. This paradigm spills over into other aspects of our lives even when we are not aware of it.

Of course this is not the primary goal of free trade agreements, economic growth is. The pacifying effects of trade are merely a positive externality….

Worth reading the full thing.

Ralph Nader on gasoline prices

Michael Giberson

If you’re looking for another point of view on gasoline prices, Ralph Nader has an article in Counterpunch, “The Gas Gougers.” In the article Nader blames speculators, a lazy media, and a business-friendly government for the recent 50-cent run up in gasoline prices.

There was a time when even a few cents increase in the price of gasoline or natural gas would provoke Congressional investigations, actions by state Attorneys General, and condemnations of the producer countries, the OPEC cartel and Big Oil from presidents and the heads of antitrust divisions of the Justice Department or the Federal Trade Commission. That is, until smooth, smiling Ronald Reagan came to Washington, D.C. with his mantra that “government is not the solution; government is the problem.”

Curiously, “Reagan came to Washington” back in January of 1981, so I’m having trouble understanding how that moment connects to a gasoline price increase in January 2013, some 32-years later.

Nader might say his point is that now the industry can raise prices and not worry about government interference. But if the industry could freely raise prices without government interference, why did they wait 32 years to claim this particular 50-cent per gallon prize? Why didn’t the oil and gas industry raise their prices this much a year ago, or two years ago, or thirty?

Each price surge in recent decades seems to have different principal causes. This time it seems to have been precipitated by surging prices of crude – easily manipulated – and in the U.S. the permanent or temporary shutdown for repairs, of too many refineries.

Believe it or not, the U.S. is now a net refined petroleum importer because of the continuing refusal by the industry to rebuild or expand refinery capacity on the very sites where many refineries have been shut down, often in favor of offshore, cheaper installations.

Whenever supply and demand for refined oil products is tight, all it takes is for one or two refineries to suspend operations, other than for repairs, and the prices surge all over the country.

The “easily manipulated” price of crude oil? So again, explain why the industry keeps manipulating the price up and then back down again? Perhaps more to the point, why did the industry tolerate 15 to 20 years of low and relatively stable crude prices starting in the mid-1980s (during the Reagan administration!)?

“Easily manipulated” and yet seemingly so hard to control.

And, believe it or not Mr. Nader, the U.S. is now a net refined petroleum products exporter–not a net importer–and has been since mid-2011. Somehow, despite the continuing refusal to rebuild or expand refinery capacity, we have petroleum products in such abundance that we can ship them overseas. I’m sure once Mr. Nader figures out his facts are exactly backwards, he will immediately revise his claim and give the oil and gas industry credit for maintaining surplus refining capacity.

And it turns out that one or two refineries (in California) can suspend production and have essentially zero effect on prices anywhere in the country (but in California, as price data from last year reveals). Similarly, disruptions of refineries in the Northeast don’t seem to spread consequences too broadly across the country.

Nader thinks political grandstanding and government participation in oil markets and refinery operations is called for: Obama should use his bully-pulpit to put the heat on Congress; Obama should release oil from the Strategic Petroleum Reserve to push prices down; the Defense Department should build it own refinery capability and sell excess products into the market to suppress prices.

Nader seems to pine for the energy policies of the 1970s–before Reagan came along–but maybe he should review that decade of periodic energy crises, government oil and gas price controls, import tariffs and oil allocation schemes, calls for energy independence, and repeated Presidential addresses to the nation about the seriousness of increasing energy scarcity. I don’t think it worked as well as he seems to think it did.

Dr. Ehrlich, call your office

Michael Giberson

I ended my semester in “Energy and Environmental Economics” talking about resource optimism and resource pessimism, framed mostly as a big picture debate between Julian Simon and others against Paul Ehrlich and Neo-Malthusians. Simon reports being puzzled at how folks could look at data showing human health and well-being getting better and better and come to the conclusion we were all doomed and it was probably too late to do anything about it.

I’m sure upon reading this New York Times story the pessimists will be as troubled as ever: “Life Expectancy Rises Around the World, Study Finds.”

Is the Great Society a less mobile one?

Michael Giberson

Timothy Taylor observes Census Bureau data showing “geographic mobility in 2011 were at their all-time low since the start of the data in 1948, and were only a tad higher in 2012.” Here is the Census Bureau chart illustrating the data:

Annual Geographical Mobility Rates, 1947-2012 (U.S. Census Bureau).

Annual Geographical Mobility Rates, 1947-2012 (U.S. Census Bureau).

Taylor considers a number of possible explanations, including many explored in a recent article in the Journal of Economics Perspectives (which Taylor edits), and concludes economic research has not yet explained the trend.

My un-researched, eyeball-based study of the chart suggests that LBJ’s Great Society and War on Poverty kicked off the trend and the only significant bump in the road was the early Reagan years.

Coasean taxes and other energy economics stories

Michael Giberson

Of note.

  • Daniel Cole, “Thinking About an Optimal Coase Tax

    “Economists have spilled a lot of ink trying to specify what an ‘optimal’ Pigou tax would be… Haven’t any of these people read Coase (I mean read him carefully)? One of his explicit aims in ‘The Problem of Social Cost’ (1960) was to correct an important mistake in Pigou’s theory of externalities. Reconceiving externalities (convincingly) as joint- or social-cost problems, Coase argued that the socially efficient level of a Pigovian externality is hardly likely to be zero, as Pigou presumed….

    “According to Coase, externalized costs should be reallocated to the producer up to that point where the costs of internalizing the next unit would exceed the social benefits (a standard MC = MB equation). Thus, an ‘optimal’ Coase tax would imply not the Polluter Pays Principle but the ‘Polluter Pays for Inefficient Externalities Principle.'”

    Also recently at Cole’s Law, Economics, and Cycling blog: “Group Size, Transaction Costs, and the Robustness of Common Property Regimes” and “Sandel on Economics.”

  • Elsewhere, Severin Borenstien has some nice words for energy efficiency rebound effects: “Rebound is a benefit of [energy efficiency] investment, not a drawback.”
  • The new issue of Energy Policy includes a special section, “Past and Prospective Energy Transitions – Insights from History,” with 13 papers and an introduction by Roger Fouquet and Peter J.G. Pearson. (Access to articles will require a subscription, check with your library.)

 

A proposal for Fisk power plant: museum of history and industry

Lynne Kiesling

After a long and contentious series of battles over the past three decades, two of the original coal-fired steam turbine power plants in Chicago powered down at the end of August. The Fisk plant and the Crawford plant were the last two coal-fired power plants in operation within a major U.S. city, and they closed due to a combination of the economics of natural gas relative to coal and the potency of neighborhood opposition to having large power plants situated in Pilsen (Fisk) and Little Village (Crawford), which are densely-populated neighborhoods in Chicago.

These two power plants are important landmarks in our economic history, industrial history, regional history, and entrepreneurship. Fisk, in particular, opened in 1903, and was a bold, innovative, and controversial investment decision on the part of Samuel Insull:

The day the Fisk plant began operating — Oct. 2, 1903, only a decade after electricity debuted at Chicago’s World’s Fair — some feared it might explode, including its financier, Samuel Insull, according to a “A Spirit Capable,” a history of Commonwealth Edison Co.

“If it blows up, I will blow up with it,” Insull reportedly said, apparently figuring that if the plant’s massive boiler blew up, his career was finished anyway. Insull was the forefather of what would become Commonwealth Edison.

Fisk, in what became the Pilsen neighborhood, was a significant step forward because it marked the first time electricity became available on a large scale in Chicago. Until then dynamos supplied electricity to Chicago’s Loop and a few wealthy neighborhoods, but most homes were still lighted by gas.

Within three years, what would later become Commonwealth Edison, was supplying 50,000 customers with electricity and double that number by 1909. Four years later that number again doubled. The Crawford plant, built only five miles from Fisk, came online in 1924. Between 1919 and 1929 the utility grew to supply nearly 1 million customers.

Fisk was considered so advanced that during a January 1921 trip to America, Queen Mary and King George V of England popped in to see it and signed their names in a huge visitors’ book. In 1912 visitor Thomas Edison had signed the same book, listing his profession as “inventor.” Fisk and Crawford’s turbines have since been replaced and upgraded many times over.

Rob Bradley also discusses Insull’s decision-making process regarding Fisk in his Edison to Enron, which I reviewed here recently. As the Smithsonian Institution notes, Insull had to work very hard to persuade General Electric to manufacture the 5-megawatt steam turbine for Fisk in 1902, when GE’s standard turbine size was 3MW. This is the Smithsonian’s picture of Fisk’s turbine in 1907:

Consider the economic impact of that bold investment — lighting and other electric services for residential customers who had heretofore relied on gas lighting, more reliable electricity at a larger scale for more industrial and commercial customers to run machines and shops, and the ability to serve more and more customers at increasingly lower average cost due to the dramatic economies of scale that the technology created. The Fisk station pioneered changes that truly transformed the daily lives and the economic well-being of Chicagoans, and then millions of people around the world. Electricity made Chicago prosper.

As Mayor Emanuel and others consider proposals for brownfield renovation of these areas and adjacent ones, think about how the power, the ingeneuity, the drive, the entrepreneurship of which the Fisk Street Station was emblematic have changed the world — mostly for the (dramatically) better, but also with the unintended by-products of pollution. Think about the history of industry and commerce in Chicago, and the role that Fisk Street Station played in making it possible. Think about places like the Tate Modern in London, situated in a decommissioned architecturally significant power plant on the Thames.

The Fisk Street Station could be a museum of history and industry. Perhaps a joint venture between the Museum of Science and Industry and the Chicago History Museum. The Galvin Center for Electricity Innovation at the Illinois Institute of Technology could provide exhibits on electricity technology innovation and sustainability. The Clean Energy Trust could showcase clean energy innovations. The museum could be a focal point for the local electricity, energy, and environmental community to develop and share new knowledge. And we could explore all of this innovation in the context of the very real and very important history of electricity in Chicago.

Even if the original 1903 structure can’t be salvaged or if the original 5MW turbine no longer exists, this site is an opportunity to celebrate and explore the benefits and tradeoffs of our industrial history, warts and all. Having such a museum in Pilsen would increase visitor activity, contributing to the neighborhood economy and our broader education with respect to electricity and our economic history.

Any economic historians in the audience who can spot check this energy development claim?

Michael Giberson

Please let me know ASAP if you can find any economic historians, energy policy specialists, economists or persons with at least a high school diploma who actually believes the following claim:

For over a century, every major energy source – petroleum, coal, nuclear, natural gas and renewables – has been developed due in large part to favorable federal policy that includes incentives. Without federal assistance of these fuel sources, it is unlikely that our nation would have grown to the economic superpower that it is today.

While the National Journal‘s collection of pro and con Production Tax Credit opinions includes a lot of bullshit, this pair of claims rises to the top. Fully 100 percent USDA prime bullshit, in my opinion.

But prove me wrong, please: find me an interested party with a plausible argument and a grasp on one or two facts that justifies the above claims.

MORE: By the way, the loose thinking and sloppy work isn’t only on the pro-PTC side. Guys arguing that wind power turbines are killing way too many birds slip in the claim that the PTC pays $2,200 per MWh. Um, no, only about $22 per MWh. And, of course, they are focused like a laser beam on the seen dead birds near wind turbines and ignore the unseen dead birds killed by other power production methods.

But thanks for joining us here on the “Let’s Pretend We’re Actually Serious People Doing Serious Thinking” show.

India’s electrical system produces largest power blackout ever

Michael Giberson

From the New York Times2nd Day of Power Failures Cripple Wide Swath of India

It had all the makings of a disaster movie: More than half a billion people without power. Trains motionless on the tracks. Miners trapped underground. Subway lines paralyzed. Traffic snarled in much of the national capital.

On Tuesday, India suffered the largest electrical blackout in history, affecting an area encompassing about 670 million people, or roughly 10 percent of the world’s population. Three of the country’s interconnected northern power grids collapsed for several hours, as blackouts extended almost 2,000 miles, from India’s eastern border with Myanmar to its western border with Pakistan.

Perhaps counter-intuitively, India’s largest electrical blackout in history shows how much it has grown. Such a widespread outage means the Indian electrical system has grown large and has become thoroughly interconnected. Not so many years ago the system had too many locally unreliable parts to have brought about such a widespread failure. (And even now, as the article pointed out, “many people in major cities barely noticed the disruption because localized blackouts are so common that many businesses, hospitals, offices and middle-class homes have backup diesel fuel generators.”)

The article highlights some of problems that emerge with local political involvement in interconnected power system operations. Regional dispatch areas may have been able to avoid the blackout through coordinated use of rolling blackouts, but regional power system managers are appointed by local political authorities and are loathe to cut off their area’s customers for the benefit of power consumers elsewhere.

It is easy to say that they should have better procedures in place, but the United States power system has had its share of large-scale blackouts. Here, as elsewhere, experience provides the lesson and motivates improvements.

 

Should ice-making be a regulated utility?

Michael Giberson

Lynne’s post on early commerce in ice reminded me that ice making has made other appearances in economic history. For example, some U.S. states once required a state license to make and sell ice.

The question of the reasonableness of such licensing requirements reached the Supreme Court in 1932 in New State Ice Co. v. Liebmann. The New State Ice Co. had secured a license from the Oklahoma Corporate Commission to operate an ice-making plant in Oklahoma City. Subsequently Liebmann built his own ice-making plant in the city and began to operate without a state license. New State Ice sued to enjoin Liebmann from operating without a license.

At the time Oklahoma state law said: “the manufacture, sale and distribution of ice is a public business; that no one shall be permitted to manufacture, sell or distribute ice within the state without first having secured a license for that purpose from the commission; that whoever shall engage in such business without obtaining the license shall be guilty of a misdemeanor, punishable by fine not to exceed $25, each day’s violation constituting a separate offense, and that by general order of the commission, a fine not to exceed $500 may be imposed for each violation.”

The court said:

Stated succinctly, a private corporation here seeks to prevent a competitor from entering the business of making and selling ice. It claims to be endowed with state authority to achieve this exclusion. There is no question now before us of any regulation by the state to protect the consuming public either with respect to conditions of manufacture and distribution or to insure purity of product or to prevent extortion. The control here asserted does not protect against monopoly, but tends to foster it. The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it….

The court affirmed a lower court ruling against the state law:

The principle is imbedded in our constitutional system that there are certain essentials of liberty with which the state is not entitled to dispense … This principle has been applied by this court in many cases. [Citations omitted.] In the case last cited the theory of experimentation in censorship was not permitted to interfere with the fundamental doctrine of the freedom of the press. The opportunity to apply one’s labor and skill in an ordinary occupation with proper regard for all reasonable regulations is no less entitled to protection.

Justice Brandies dissented from the majority, saying “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country,” and “Denial of the right to experiment may be fraught with serious consequences to the Nation.”

While I’m a big supporter of the idea of social and economic experimentation, notice here that Oklahoma’s “experiment” with regulating the ice industry was itself a “denial of the right to experiment” by private businesses. Such denials, too, may be fraught with serious consequences.

Prices, property rights, profits … and ice?

Lynne Kiesling

The history of the commercialization of the ice market is a multi-layered case study in market processes. Who knew? This Freeman article from David Hebert, an economics graduate student at George Mason University, tells the economic history of the origins of the long-distance ice industry in the U.S. in the early 19th century:

In 1806 Frederic Tudor sailed a ship full of ice from Boston to the Bahamas. Two years earlier Tudor had begun experimenting with insulation with the goal of bringing ice to the Bahamas.  When he was ready to set sail, he found that the ship captains refused to carry his cargo for fear of damaging their vessels. So he bought his own brig, the Favorite, and set sail February 10, 1806. He arrived in Martinique with a large quantity of ice still intact and began selling. The Bahamians loved the ice, which they had never seen before. Yet that first year Tudor lost a substantial sum of money, although he proved that ice could be shipped to the Bahamas. Now the objective became doing it at a profit.  Convinced his idea would be wildly successful, he continued his attempts to drive down costs and increase demand.

How he does so is a tale of property rights over ice on a lake, how users of a common-pool resource established a system of use rights, and technological innovation to reduce costs while improving product quality. Highly recommended reading.