You should probably raise prices a bit during emergencies

At the Master Resource blog today: “In Defense of Price ‘Gouging’ (lines and shortages are uneconomic, discriminatory).”

In the essay I emphasize the unintended bias that results when consumer demand surges and supplies are tight, as for example when winter storm forecasts lead consumers to rush to the grocery store for bread and milk. Because retailers rarely raise prices in such situations, shortages are the predictable result. The burden of those shortages isn’t spread randomly, however, but rather tends to fall more heavily on certain segments of the population.

When emergencies happen (or are first forecasted) some consumers are readily able to rush to the store while other consumers are not so lucky. The early bird gets the bread and milk and eggs, the late arrival finds little or nothing available….

Households with … “high opportunity costs of shopping,” for example those households with infants or with both parents working full time, were more likely to miss out on the opportunity to buy foods before they ran out. It is easy to see that elderly and mobility-impaired consumers, too, would be more likely to be shut out by any sudden rush of consumers to the store after a disaster.

Higher prices would discourage over-buying and help ensure that useful consumer goods get distributed to more households, not just the households best able to rush to the store.

We can debate how significant the effect is, and I do not argue that raising prices solves all interesting problems, but a modest increase in consumer prices would likely be an improvement.

How about grocery stores imposing a 5 percent storm surcharge that goes to charity, with an ability to opt out? Maybe a sign next to the bread shelves saying “Help those most hurt by the storm: We recommend you donate 25 cents to [name of charity] for every loaf of bread you buy. Our checkout staff will be happy to help you with your donation!”

While I have targeted many complaints at anti-price gouging laws here at Knowledge Problem, in the Master Resource post I broaden my focus a bit to encompass the consumer sentiment against price increases during emergencies. We need a social change to enable markets to work as best they can in such situations. More effective markets aid by reducing the scope of the problems to be addressed by charitable work (as Dwight Lee argues in his essay in Regulation magazine – see the related discussion and link in the Master Resource post).

The quoted part above in part relies on research done on consumer purchases in Japan after the Great East Japan Earthquake of March 2011:  Naohito Abe, Chiaki Moriguchi, and Noriko Inakura, “The Effects of Natural Disasters on Prices and Purchasing Behaviors: The Case of Great East Japan Earthquake.” DP14-1, RCESR Discussion Paper Series, September 2014.

When does state utility regulation distort costs?

I suspect the simplest answer to the title question is “always.” Maybe the answer depends on your definition of “distort,” but both the intended and generally expected consequences of state utility rate regulation has always been to push costs to be something other than what would naturally emerge in the absence of rate regulation.

More substantive, though, is the analysis provided in Steve Cicala’s article in the January 2015 American Economic Review, “When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation.” (here is an earlier ungated version of the paper.)

Here is a summary from the University of Chicago press release:

A study in the latest issue of the American Economic Review used recent state regulatory changes in electricity markets as a laboratory to evaluate which factors can contribute to a regulation causing a bigger mess than the problem it was meant to fix….

Cicala used data on almost $1 trillion worth of fuel deliveries to power plants to look at what happens when a power plant becomes deregulated. He found that the deregulated plants combined save about $1 billion a year compared to those that remained regulated. This is because a lack of transparency, political influence and poorly designed reimbursement rates led the regulated plants to pursue inefficient strategies when purchasing coal.

The $1 billion that deregulated plants save stems from paying about 12 percent less for their coal because they shop around for the best prices. Regulated plants have no incentive to shop around because their profits do not depend on how much they pay for fuel. They also are looked upon more favorably by regulators if they purchase from mines within their state, even if those mines don’t sell the cheapest coal. To make matters worse, regulators have a difficult time figuring out if they are being overcharged because coal is typically purchased through confidential contracts.

Although power plants that burned natural gas were subject to the exact same regulations as the coal-fired plants, there was no drop in the price paid for gas after deregulation. Cicala attributed the difference to the fact that natural gas is sold on a transparent, open market. This prevents political influences from sneaking through and allows regulators to know when plants are paying too much.

What’s different about the buying strategy of deregulated coal plant operators? Cicala dove deep into two decades of detailed, restricted-access procurement data to answer this question. First, he found that deregulated plants switch to cheaper, low-sulfur coal. This not only saves them money, but also allows them to comply with environmental regulations. On the other hand, regulated plants often comply with regulations by installing expensive “scrubber” technology, which allows them to make money from the capital improvements.

“It’s ironic to hear supporters of Eastern coal complain about ‘regulation’: they’re losing business from the deregulated plants,” said Cicala, a scholar at the Harris School of Public Policy.

Deregulated plants also increase purchases from out-of-state mines by about 25 percent. As mentioned, regulated plants are looked upon more favorably if they buy from in-state mines. Finally, deregulated plants purchase their coal from more productive mines (coal seams are thicker and closer to the surface) that require about 25 percent less labor to extract from the ground and that pay 5 percent higher wages.

“Recognizing that there are failures in financial markets, health care markets, energy markets, etc., it’s critical to know what makes for ‘bad’ regulations when designing new ones to avoid making the problem worse,” Cicala said. [Emphasis added.]

The spin on wind, or, an example of bullshit in the field of energy policy

The Wall Street Journal recently opined against President Obama’s nominee for Federal Energy Regulatory Commission chairman, Norman Bay, and in the process took a modest swipe at subsidies for wind energy.

The context here is Bay’s action while leading FERC’s enforcement division, and in particular his prosecution of electric power market participants who manage to run afoul of FERC’s vague definition for market manipulation even though their trading behavior complied with all laws, regulations, and market rules.

So here the WSJ‘s editorial board pokes a little at subsidized wind in the process of making a point about reckless prosecutions:

As a thought experiment, consider the production tax credit for wind energy. In certain places at certain times, the subsidy is lucrative enough that wind generators make bids at negative prices: Instead of selling their product, they pay the market to drive prices below zero or “buy” electricity that would otherwise go unsold to qualify for the credit.

That strategy harms unsubsidized energy sources, distorts competition and may be an offense against taxpayers. But it isn’t a crime in the conventional legal sense because wind outfits are merely exploiting the subsidy in the open. The rational solution would be to end the subsidies that create negative bids, not to indict the wind farms. But for Mr. Bay, the same logic doesn’t apply to FERC.

The first quoted paragraph seems descriptive of reality and doesn’t cast wind energy in any negative light. The second quoted paragraph suggests the subsidy harms unsubsidized competitors, also plainly true, and that it “distorts competition” and “may be an offense against taxpayers.” These last two characterizations also strike me as fair descriptions of current public policy, and perhaps as mildly negative in tone.

Of course folks at the wind industry’s lobby shop are eager to challenge any little perceived slight, so the AWEA’s Michael Goggin sent a letter to the editor:

Your editorial “Electric Prosecutor Acid Test” (May 19) ignores wind energy’s real consumer benefits by mentioning the red herring of negative electricity prices. Negative prices are extremely rare and are usually highly localized in remote areas where they have little to no impact on other power plants, are caused by inflexible nuclear power plants much of the time, and are being eliminated as long-needed grid upgrades are completed.

Wind energy’s real impact is saving consumers money by displacing more expensive forms of energy, which is precisely why utilities bought wind in the first place. This impact is entirely market-driven, occurs with or without the tax credit, and applies to all low-fuel-cost sources of energy, including nuclear.

The tax relief provided to wind energy more than pays for itself by enabling economic development that generates additional tax revenue and represents a small fraction of the cumulative incentives given to other energy sources.

Michael Goggin
American Wind Energy Association
Washington, DC

Let’s just say I’ll believe the “impact is entirely market-driven” when someone produces a convincing study that shows the exact same wind energy capacity build-out would have happened over the last 20 years in the absence of the U.S. federal Production Tax Credit and state renewable energy purchase mandates. Without the tax credit, the wind energy industry likely would be (I’m guessing) less than one-tenth of its current size and without a big tax credit wouldn’t be the target of much public policy debate.

Of course, without much public policy debate, the wind energy industry wouldn’t need to hire so many lobbyists. Hence the AWEA’s urge to jump on any perceived slight, stir the pot, and keep debate going.

MORE on the lobbying against the Bay nomination. See also this WSJ op-ed.

 

A relatively thoughful view of libertarianism from a progressive-liberal perspective

Salon has published a lot of nonsense on libertarianism (e.g., anything by Michael Lind on the topic). So it was surprising, yesterday, to find that Kim Messick’s Salon essay on libertarianism was relatively thoughtful. No perfect, by any means, just better than most progressive-liberal attempts at criticizing libertarianism. The author at least gets basic points right and would surely score higher than most Salon writers on the relevant ideological Turing test (admittedly a low standard).

Just don’t take the title too seriously (“Libertarians’ reality problem: How an estrangement from history yields abject failure”). At Alternet the story is reproduced under the similarly silly title “How Libertarianism Would Actually Curtail Human Freedom.” Article writers often don’t choose their titles, editors do, so just skip ahead for the substance (you’ll have to similarly skim past the Tea Party and Republican chatter at the beginning and ignore the favorable linking to Lind’s Salon work). Once you skip ahead, you’ll find a reasonable journalistic effort to engage with and challenge an overly atomistic view of libertarianism.

Messick misses some things. He is apparently unfamiliar with left libertarianism (for example, the Center for a Stateless Society) or many of the writers at Bleeding Heart Libertarians; he thinks a libertarian free market would leave many people in soul-killing poverty; and at times his discussion confuses society with government. But the core of his challenge to (at least hard-core individualistic) depictions of libertarian principles makes useful work of the philosopher Charles Taylor’s writings on atomism.

In his essay “Atomism,” Taylor points out that we “only develop [our] characteristically human capacities in society” — including our capacity for choice. “Living in a society,” Taylor goes on, “is a necessary condition of the development of rationality … or of becoming a moral agent in the full sense of the term … or of becoming a fully responsible, autonomous being.” Given this, those who value personal autonomy must also affirm the value of its social sources: “[I]f we assert the right to one’s own independent moral convictions, we cannot… claim that we are not under any obligation ‘by nature’ to belong to and sustain a society of the relevant type”:

“[T]he free individual or autonomous moral agent can only achieve and maintain his identity in a certain type of culture… But these… do not come into existence spontaneously each successive instant. They are carried on in institutions and associations which require stability and continuity and frequently also support from the community as a whole… The crucial point here is this: since the free individual can only maintain his identity within a society/culture of a certain kind, he has to be concerned about the shape of this society/culture as a whole. He cannot… be concerned purely with his individual choices and the associations formed from such choices”.

Taylor shows us how to link the liberal concept of agency — the ideal of personal autonomy — with normative conclusions about what people should value. The connective tissue is the pattern of external resources on which our capacity for choice depends: the institutions, practices, and associations within which we develop and cultivate this capacity. For Taylor, it makes no sense to affirm the value of autonomy while denigrating (or simply ignoring) the social goods without which autonomy is impossible. Like communitarians, he thinks we should affirm these goods and not just our purely personal ends. Unlike them, he does not regard this as grounds for a wholesale rejection of liberal autonomy. Quite the contrary — he argues for a social element in ethical life precisely because he values autonomy and wants to sustain the cultural conditions upon which it rests.

On this I think Taylor (and by extension Messick) raises good points about the connections between society, moral development, and individual freedom. I just don’t think the only or even the best response to these points is to reject libertarian political philosophy. Messick sums up the above with, “The obvious inference is that we should see progressive liberalism as a kind of middle ground between communitarianism on the one hand and libertarianism on the other. It acknowledges the social dimensions of ethical life but accepts personal autonomy as a genuine ideal.”

But acknowledging “the social dimensions of ethical life” and “accepting personal autonomy as a genuine ideal” is exactly the common ground I want to occupy as a libertarian. The libertarian minded thinkers I like tend to emphasize the connection between increasing liberty and a flourishing society.

Messick may be surprised to learn there is active debate among libertarians on these issues of politics, markets, and social relations. Some libertarians insist non-aggression is the only necessary principle, while others suggest the broader social order is also important. In the context of these discussions, Messick’s outsider perspective on libertarianism, while imperfect, is good enough to be of some value to libertarians.

Decarbonization Now? (No, not yet.)

Paul Krugman’s recent opinion column in the New York Times ran under the headline, “Salvation Gets Cheap.” At first I though Krugman was making a snarky comment on ex-Mayor Michael Bloomberg’s claim that the ex-mayor’s work on restricting access to guns, and efforts on obesity and smoking would ensure a place in heaven. But no, Krugman is opining that technology is providing an easy way forward on climate change:

The climate change panel, in its usual deadpan prose, notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions” since it released its last assessment, back in 2007. The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.

Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there.

It’s even possible that decarbonizing will take place without special encouragement, but we can’t and shouldn’t count on that. The point, instead, is that drastic cuts in greenhouse gas emissions are now within fairly easy reach.

The “Revolution Now” report, which was linked in Krugman’s column online, is surprisingly weak sauce. The U.S. Department of Energy report (your tax dollars at work) purports to describe “four technology revolutions that are here today” and “have achieved dramatic reductions in cost” and “a surge in consumer, industrial and commercial deployment” in the last five years. The four “revolutions” are onshore wind power, polysilicon photovoltaic modules, LED lighting, and electric vehicles.

Each “revolution” gets a two-page summary and a colorful chart showing declining costs and rising use. The summaries are footnoted, just like real research, and studded with more factoids than the front page of USA Today. Here’s a fun fact: the ratio of empirical claims to footnotes in the article’s two pages on wind power is 4-to-1.

You can get a sense of the quality of the report by considering the claims strung together on electric vehicles: First it is reported “more and more drivers are abandoning the gas pump for the affordability and convenience of in-home electric charging,” then that 50,000 EVs were purchased in 2012 and the rate of purchase doubled in early 2013. Next we are told “to maintain this momentum the most critical area for cost reduction is batteries.” A paragraph later the report said, “In many senses, EVs are already competitive with traditional cars.” In the final paragraph, however, a sober note: it will take “further progress on reducing the cost of EV batteries” to make “these benefits available to a larger audience.”

The sober note referenced a DOE battery cost target of $125/kwh by 2022, at which point the DOE expects ownership costs for a EV will be similar to a standard vehicle. A glance back at the chart suggests current battery costs nearer five times that level, leaving at least this reader wondering in which sense “EVs are already competitive with traditional cars” and part of the “technology revolutions that are here today.”

The revolution is here today! Or maybe in 2022!! Or maybe whenever “further progress” is made!!!

Overall the report is more enthusiasm than analysis, and not sufficient to justify changing beliefs on the cost of decarbonizing energy supplies.

Price gouging-moral insights from economics

Dwight Lee in the current issue of Regulation magazine offers “The Two Moralities of Outlawing Price Gouging.” In the article Lee endorsed economists’ traditional arguments against laws prohibiting price gouging, but argued efficiency claims aren’t persuasive to most people as they fail to address the moral issues raised surrounding treatment of victims of disasters.

Lee wrote, “Economists’ best hope for making an effective case against anti-price-gouging laws requires considering two moralities—one intention-based, the other outcome-based—that work together to improve human behavior when each is applied within its proper sphere of human activity.”

Intention-based morality, that realm of neighbors-helping-neighbors and the outpouring of charitable donations from near and far, is good and useful and honorable, said Lee, who term this as “magnanimous morality.” Such morality works great in helping family and friends and, because of the close relationship, naturally has a good idea of just what help may be needed and when and where.

When large scale disasters overwhelm the limited capabilities of the friends and families of victims, large-scale charity kicks in. Charity is the extended version magnanimous morality, but it comes a knowledge problem: how does the charity identify who needs help, and what kind, and when, and where?

The second morality that Lee’s title referenced is the morality of “respecting the rights of others and abiding by general rules such as those necessary for impersonal market exchange.” This “mundane morality” of merely respecting rules does not strike most people as too compelling, Lee observed, but economists know how powerful a little self-interest and local knowledge can be in a world in which rights are respected. Indeed, the vast successes of the modern world–extreme poverty declining, billions fed well enough, life-expectancy and literacy rising, disease rates dropping–can be attributed primarily to the social cooperation enabled by local knowledge and voluntary interaction guided by prices and profits. The value of mundane morality after a disaster is that it puts this same vast power to work in aid of recovery.

The two moralities work together Lee said. Even as friends and families reach out in magnanimous morality, perhaps each making significant sacrifices to aid those in need, the price changes produced by mundane morality will engage millions of people more to make small adjustments similarly in aid. A gasoline price increase in New Jersey after Sandy’s flooding could trickle outward and lead gasoline consumers in Pittsburgh or Chicago to cut back consumption just a little so New Jerseyans could get a little more. Similarly for gallons of water or loaves of bread or flashlights or hundreds of other goods. Millions of people beyond the magnanimous responders get pulled into helping out, even if unknowingly.

Or they would have, had prices been free to adjust. New Jersey laws prohibit significant price increases after a disaster, and post-Sandy the state has persecuted merchants who it has judged as running afoul of the price gouging law.

Surely victims of a disaster appreciate the help that comes from people who care, but they just as surely appreciate the unintended bounty that comes from that system of voluntary social interaction guided by prices and profits called the market. Laws against post-disaster price increases obstruct the workings of mundane morality, increase the burden faced by the magnanimous, and reduce the flow of resources into disaster-struck regions.

Perhaps you think that government can fill the gap? Lee noted that restricting the workings of mundane morality increases the importance of political influence and social connections, but adds the shift is unlikely to benefit the poor. On this point a few New Jersey anecdotes may inform. See these stories on public assistance in the state:

We often honor the magnanimous, but we need not honor the mundane morality-inspired benefactors of disaster victims.  While the mundanely-moral millions may provide more help in the aggregate than the magnanimous few, the millions didn’t sacrifice intentionally. They just did the locally sensible thing given their local knowledge and normal self-awareness; doing the locally sensible thing is its own reward.

We need not honor the mundanely moral, but we also ought not block them from helping.

Looking for renewable policy certainty in all the wrong places

From EnergyWire comes the headline, “In Missouri, industry wants off the ‘solar coaster’.” (link here via Midwest Energy News).

A utility rebate program authorized by voters in 2008 is making Missouri into a solar leader in the Midwest. But $175 million set aside to subsidize solar installations is [nearly] fully subscribed … and the same small businesses that scrambled to add workers last year to help meet surging demand are facing layoffs….

Heidi Schoen, executive director of the Missouri Solar Energy Industries Association, said the industry, which has generated thousands of jobs and millions of dollars in new taxes for the state, is just looking for certainty.

“We want off the solar coaster,” she said. “We don’t want to be in this boom-and-bust situation.”

It is a patently false claim.

If they wanted off of the boom-and-bust policy ‘solar coaster,’ they’d get off. They could go do unsubsidized solar installations for example, or if (when?) that proves unprofitable get work doing something else. By their actions they signal that they prefer the booms-and-busts that come with reliance on politicians for favors.