The difficulty lies, not in the new ideas, but in escaping from the old ones.
-John Maynard Keynes (1936)
Hung-po Chao from ISO New England used this quote in his talk, with reference to what I think of as the crucial need to clear the overgrowth in the regulatory underbrush, and the perverse incentives that underbrush creates (and the special interests that perpetuate it).
Some of the best environmental projects also save money. This post at The Atlantic’s Cities blog highlights urban green infrastructure such as permeable pavement projects, including a recent study finding that they can also be economical:
Looking at 479 case studies of green infrastructure projects around the U.S., the report finds that the majority of projects turned out to be just as affordable or even more so than traditional “grey” infrastructure. About a quarter of projects raised costs, 31 percent, kept costs the same and more than 44 percent actually brought costs down.
Here’s the logic: suppose you are, as Chicago is doing, using permeable concrete now when repaving alleys. Permeable concrete is more expensive than traditional concrete, but because it allows rainwater to return to groundwater, it reduces the water flow into storm drains, the sewer system, and wastewater treatment facilities. So you have to evaluate the higher construction costs versus the lower wastewater treatment cost and other reduced costs of storm runoff, including lower operating and maintenance costs. As reported in the post:
The costs of traditional infrastructure are especially pronounced in cities and regions with combined sewer systems that collect both sewage and stormwater. During heavy rainfall, these systems are often overwhelmed, pouring sewage-laden water into drinking water sources and greatly increasing water treatment costs.
Technologies like permeable pavements and rain gardens can capture, naturally treat and filter stormwater back into the ground, preventing overflows and reducing reliance on treatment centers. Chicago’s existing green infrastructure, including its green alleys, diverted about 70 million gallons of stormwater from treatment facilities in 2009, according to the report.
I can attest to the existing strains on the sewer/storm runoff system in Chicago; we live just off of a main north-south surface street, and after a heavy rain like last night’s there are substantial pools of water backed up onto the street around several of the storm drains (my neighborhood hasn’t had our alleys repaved yet). Moreover, this runoff frequently overflows from the sewer system into Lake Michigan, leading to beach closures on the days following rainstorms. I could channel my inner John Whitehead to do a travel-cost estimate of the value of the lost recreation, which reinforces the value of permeable concrete. One thing we don’t know yet, though, is if it’s as durable as traditional concrete, or if it depreciates more quickly.
All of this reminds me that I have to get the KP Spouse moving on that rain barrel …
Just a quick note to accompany the discussion in the comments on Mike’s post about Southwest Airlines, Delta Airlines, and fuel price hedging: a couple of weeks ago Virginia Postrel had a very good analysis of the reasons why the Delta-Conoco transaction is not a good idea, in her regular column at Bloomberg View. Virginia’s analysis emphasizes the extent to which vertical integration is only profitable when transaction costs make markets and contracting more expensive ways to accomplish the transaction. In this case, markets do not have substantial transaction costs.
But what about fuel price risk? Here Virginia quotes friend of Knowledge Problem Craig Pirrong:
The proposed purchase “doesn’t make a huge amount of economic sense — in fact quite the opposite,” says Craig Pirrong, a finance professor and director of the Global Energy Management Institute at the University of Houston’s Bauer College of Business.
You might think that owning a refinery would at least protect the airline from price fluctuations. But, Pirrong notes, crude oil prices affect the profits of airlines and oil refineries exactly the same way. When oil prices go up, their profits go down. Owning a refinery would simply magnify the effect. “If anything,” he says, “it increases the risk exposure that has bedeviled the airline industry for years.” …
Delta simply seems to be falling for the great fallacy of vertical integration: the belief that the inputs you get from an in-house supplier are cheaper than those you buy in the open market. There’s no markup. You’ve cut out the middle man!
But this story misses the real cost of those inputs.
Basically, if fuel prices are high, Delta will still not fly those costly half-full flights, but will instead sell their fuel in the low-transaction-cost markets. So what’s the point of owning the refinery when it’s not their comparative advantage and refining is such a low-margin business?
For the past year and a half a lot of my mental bandwidth has been dedicated to learning how to teach principles of macroeconomics. It’s harder than you think, and harder than I thought; yes, every academic economist should be able to teach it in terms of the knowing the material, but that’s only part of effective teaching of an introductory course. You have to make the ideas come alive, to be compelling and interesting and related to the real world that the students experience. In an introductory class you also have a group of students with backgrounds and interests ranging from the student who is afraid of math and only taking it for a prerequisite to the engineering student who may end up double-majoring in economics. That’s hard to balance, and it’s been humbling to see how much of a learning curve there is in it for me.
I’m using the Cowen & Tabarrok macro textbook, and one reason I’m using it is the material on which my students took an exam on Tuesday — the Solow growth model. Tyler and Alex prioritize growth in the material covered, including the Solow model and the role of new ideas and technological change. It’s a really rich way to communicate a lot of important economic ideas to principles students — the complementarity of labor and capital, the relationship among consumption, investment, and output, the balance between investment and depreciation, and the role of technological change and new ideas in changing the amount of output value we can create from our physical inputs.
Being economically aware of these relationships enables you to see them all around you in the world, even in philanthropic aid. Take, for example, one of my favorite charities: World Bicycle Relief. WBR builds on the bicycle design and engineering knowledge at SRAM, one of the top bicycle component manufacturers in the world (and located here in Chicago), to construct sturdy bicycles with standardized parts that are easy to repair. They distribute these bikes, mostly to schoolgirls in their teens, in African countries such as Zambia. Another group of people targeted for receiving bikes are home health caregivers, who travel among distant homes to tend to their patients.
What’s the Solow growth model connection? Teenage girls in Zambia are responsible for house chores before school, and then often have to walk up to two hours each way to school. Given these opportunity costs of their time and attention, school attendance rates are lower for girls and are more variable. Girls walking to school may also face personal safety risks. But with a bike, a girl can cover that two hours in less than an hour. She can also haul heavy items like water on the gear rack on the back of the bike, so she can be more productive in accomplishing her house chores because of the bike.
The WBR bike is a canonical example of the growth dynamic and how new ideas interact with other factors of production to increase productivity, and ultimately living standards, and WBR highlights that feature in their mission description:
Compared to walking, bicycles represent an enormous leap in productivity and access to healthcare, education and economic development opportunities. The simple, sustainable nature of bicycles empowers individuals, their families and their communities.
The bike combines with labor to provide more effective household chore completion per unit of labor. The bike increases the amount of schooling and the combination of education with labor, which creates human capital, ultimately increasing living standards. If you have a standard two-dimensional production function model in which output is a function of capital (with a given amount of labor, Y=f(K) given L), then introducing bikes increases K, which increases Y for a given production function. That can reflect the ability to perform more chores more efficiently. But there’s more — the bike increases school attendance, thus increasing human capital, which shifts the production function up. Better educated girls are more able to create output with a given amount of capital. Another aspect of human capital formation that WBR enables is through training mechanics in how to maintain and rebuild the bikes.
I said this was also a story about technological change. When WBR started, it was focused on increasing K, on getting bikes of whatever kind to these people in these communities. But they quickly found that some were not sturdy enough, and that broken bikes sat unused and unrepaired. This realization led the SRAM engineers to design a purpose-made bike that was sturdy, made with standard parts that were interchangeable, and easy to repair. That’s the combination of new ideas that constitutes technical knowledge, which also shifts the production function up and is the best source of continuing economic growth, because it arises from our boundless creativity.
This video does a great job of communicating the productivity-enhancing aspects of WBR’s programs (as they say, the power of bicycles). Note, in particular, the caregiver who says she used to only have time to visit two patients per day when walking, but can now visit 15 patients per day, and the dairy farmer who says that he can now carry all of his milk to market, whereas before he only had the capacity to carry some of his milk. That’s progress.
The idea is simple: give fishermen an ownership stake in a particular fishery through the assignment of quotas, which can be traded. The quotas give individual fishermen — not bureaucrats — responsibility for managing each fishery. They, in turn, will work to maximize the longevity of that fishery, as it is in their long-term interest to do so. …
For an example of how successful this approach can be, look to New Zealand. There, the value of fishing exports has increased from $469 million in 1986, when the program began, to $923 million today. Fish landings have significantly increased. Almost all the fish stocks originally included are now above sustainable levels.
Given how abysmally some other fisheries are faring, the successes of catch shares are striking and worth trying. Particularly in Atlantic bluefin tuna, where the species is on the verge of extinction and the fishery trade association hasn’t mustered the gumption to stand up to Japan to reduce quotas. The position of the Japanese fishers is mystifying — would they really rather have the short-term tuna harvests in return for making the species extinct, forever? How high a discount rate must they have to hold that narrow a perspective? How sure are they that they’ll find other jobs in a couple of years once they’ve destroyed their livelihood?
“The most vicious and, perhaps, disgraceful first round of the Stanley Cup playoffs” was the verdict of Stu Hackel, the former director of broadcasting for the N.H.L., and this is now close to a universal view—if you except Don Cherry and Mike Milbury, who may not actually live in this universe, but rather in some other, remote dimension, where it is forever 1959. The list of uglinesses allowed is too long and depressing to entirely enumerate, but it runs from Nashville’s Shea Weber’s slamming the head of Detroit’s brilliant Swede, Henrik Zetterberg, against the glass—not once, but twice—in what was clearly a deliberate attempt to injure, and could easily have ended with a concussion, not to mention a broken neck; to our own Rangers’ Carl Hagelin elbowing the Senators’ highly skilled captain, Daniel Alfredsson (good trade for the Rangers); to the assault of the Coyotes’ Raffi Torres on the Blackhawks’ Marian Hossa.
Adam Gopnik mentions it only generally, but I am angry and disappointed that some of my Pittsburgh Penguins belong on that list of ugliness too. In fact, last Saturday’s Penguins-Flyers game and its 160-plus penalty minutes was so vile that it doesn’t even deserve to be called hockey. Yes, it’s a physical game, yes, you have to be tough and to expect physical play, but the brutality of the past couple of weeks that includes elbows up, leaving the feet, aiming for the heads of opponents, and slamming heads into glass is not simply physical. It’s barbaric.
It’s also not in the long-run interest of the sport, either as a sport or as a business, as Sidney Crosby’s long, long concussion and TBI recovery attests to. Injuries that reduce the productivity of the athletes and shorten their careers are not long-run profit maximizing, despite the troglodytic protestations of the retrograde few who claim that fighting is the reason they watch and attend games.
In a post I wrote on moral hazard and protective gear and rules in hockey seven years ago, I suggested a rule that the KP Spouse and I have discussed for a long time that could induce better long-run incentive compatibility in the violence in the NHL: if you injure another player and he misses a number of games, you must sit out that same number of games, without pay.
Since that time the NHL has instituted coach fines as well as player fines for injury-producing violence; sometimes those fines are laughable, such as the $2500 fine levied against Weber for the double-whammy Zetterberg hit. They also do suspend players, but there’s a lot of tension and disagreement about how long is too long; GMs don’t want their aggressive players out of commission for too long, but the NHL recognizes the long-run negative consequences of head injuries. But what I don’t understand is why the team GMs think in such a static manner that they object to long suspensions for violence — they object to the short-run loss of the use of the athlete, but they fail to internalize the longer term negative effects. If their enforcers dial it back and still play physically but within the rules, all teams will benefit from the productivity and the longevity, particularly of the star players that are frequent targets of less-skilled hit-oriented players. Those star players are the ones that most people pay to see play, and the GMs thinking statically are putting themselves in a low-payoff outcome of a repeated Prisoner’s Dilemma.
Fines and suspensions for head-targeted injury-producing hits have been an issue all year, as newly-appointed NHL head disciplinarian Brendan Shanahan has tried to balance these competing perspectives on injury-producing violence. Yesterday he announced the terms of the suspension that Raffi Torres will serve for his horrific, late, calculating hit on Marian Hossa on Tuesday night: a 25-game suspension, the third-longest suspension ever in the NHL.
But it’s not just the long suspension; because Torres has a history of such violations he’s classified as a repeat offender, so he will forfeit $21,341 in salary per regular season game that he misses next season. That rule has some of the incentive effects of what I’ll call “the KP rule” that you sit out without pay for as long as the person you injured is out. His penalty does not tie the duration of his suspension without pay to the duration of Hossa’s injuries, but I agree with Isaac Smith at the Bleacher Report that Shanahan’s decision is a good one, for two reasons — it punishes Torres for his vicious behavior, and it also indicates that Shanahan is willing to set a precedent and make an example of chronic violators to reduce the career-ending head injuries that threaten the game, as a sport and as a business.
Adam Gopnik makes the important general point:
The supposedly self-policing ethic points to the real problem: games are played by rules, and we enjoy them because they involve wild improvised action in a context of rules. Without them, the game can’t count as one of our pleasures. … The rules are the game. The Sedins are skill players playing within the rules, and the other guy is playing outside of them, and [by not penalizing Brad Marchand for his vicious hit on Daniel Sedin last fall] the league effectively sides with the guy who doesn’t want to play by the rules.
As Art argues, the War on Drugs is a policy poster child for unintended consequences, because the inelastic demand for the regulated good means that stronger enforcement leads to more profits from selling the good. The War on Drugs increases drug dealer profits.
Because of those profits relative to other alternatives, the War on Drugs just doesn’t work. An example: here in Chicago we had a recent spate of unusual gun violence, and even though new police chief Garry McCarthy said last year that he thought the War on Drugs was ineffective, after this violent weekend he joined mayor Rahm Emanuel in promising more vigorous and aggressive enforcement and targeting of drug transactions. Note at the head of the lede that Mick Dumke says “The first time I heard a police officer argue that the war on drugs wasn’t working was in 1994.” Law Enforcement Against Prohibition has been saying it since 2002.
The War on Drugs violates the fundamental individual right that humans have of self-ownership; individuals have the right to choose their own actions without interference as long as their actions do not violate the fundamental individual rights of others.
The War on Drugs has created horrific law enforcement violations of individual rights: police brutality, increased police militarization, no-knock raids resulting in property destruction and death of innocent citizens when they get the wrong addresses, civil asset forfeiture rules that police departments have incentives to exaggerate so they can sell assets to raise revenue. The actions that the police rationalize using the War on Drugs increasingly are the actions of a police state.
The War on Drugs has virtually eliminated the constitutional protection of individual rights against unreasonable search and seizure, and is seriously eroding judicial due process rights.
The War on Drugs has costly and socially corrosive blowback in other areas. If you think that the invasive actions of the TSA are solely related to the War on Terror, you haven’t been paying attention. When the TSA crows about its “successes” in airport security, they are often items of “contraband”. The War on Terror is in part a red herring for the War on Drugs, and the two combine to give law enforcement officials substantial discretion in the militarization, unreasonable search, etc. mentioned above.
The War on Drugs has destroyed the fabric of urban families and communities much more than drug use would, through the disproportionate incarceration of young African American men (see above point about how regulation increases the profits from the drug trade).
On Monday the Union of Concerned Scientists released an analysis estimating the MPG equivalence of electric vehicles. The point of the analysis is this: taking as given an objective of greenhouse gas emission reduction, how do electric vehicles compare to internal combustion vehicles in that dimension? To do such an analysis requires comparing the GHG emissions across the two types of engines, taking into account that the electricity generation fuel mix varies across the country. Here’s how they did that:
Most drivers are familiar with the concept of miles per gallon (mpg), the number of miles a car can travel on a gallon of gasoline. The greater the mpg, the less fuel burned and the lower your global warming emissions. But how can such consumption be figured for electric vehicles, which don’t use gasoline? One way is by determining how many miles per gallon a gasoline-powered vehicle would need to achieve in order to match the global warming emissions of an EV.
The first step in this process is to evaluate the global warming emissions that would result at the power plant from charging a vehicle with a specific amount of electricity. Then we convert this estimate into a gasoline mile-per-gallon equivalent—designated mpgghg, where ghg stands for greenhouse gases. If an electric vehicle has an mpgghg value equal to the mpg of a gasoline-powered vehicle, both vehicles will emit the same amounts of global warming pollutants for every mile they travel.
For example, if you were to charge a typical midsize electric vehicle using electricity generated by coal-fired power plants, that vehicle would have an mpgghg of 30. In other words, the global warming emissions from driving that electric vehicle would be equivalent to the emissions from operating a gasoline vehicle with 30 mpg fuel economy over the same distance (Table 1.1).3 Under this equivalency, the cleaner an electricity
generation source, the higher the mpgghg . When charging an EV from resources such as wind or solar, the mpg equivalent is in the hundreds (or thousands) because these resources produce very little global warming emissions when generating electricity.
The results reflect the regional variety in electricity generation fuel mix — hydro power in the Pacific Northwest increases the mpgghg there, as does the predominance of nuclear around Chicago. The results suggest that even in the coal-intensive Midwest and plains states, electric vehicles using coal-generated electricity outperform the standard 4-door 27 MPG sedan in the greenhouse gas dimension.
I found this analysis useful and informative. Frankly, I often take UCS analyses with a grain of salt, because they are an advocacy group and generally start their analyses with presumptions of catastrophic global warming that directs their conclusions, while I think it’s more scientific to make assumptions that weaken your conclusion so that you don’t bias your analysis toward your desired conclusion. This analysis, while still a piece of advocacy, presents the calculations and mpgghg comparisons in a more dispassionate fashion that I found informative. The New York Times also had an article on Sunday summarizing the report.
Last week the New York Times hosted a conference called “Energy For Tomorrow”, and they have made video from all of the sessions available; there are several sessions discussing energy efficiency, natural gas, renewables, etc. I watched the closing plenary on Friday, for which the topic was subsidies in any or all energy industries (sorry, WordPress and the embed code aren’t playing well together). Among the speakers it features Rice economist Amy Myers Jaffe (to whom we have linked here before), as well as friend-of-Knowledge Problem Branko Terzic from Deloitte Consulting.
The discussion was good and very informative, raising many of the aspects of the pros and cons of subsidies depending on their form and how they are implemented. Naturally, much of the discussion addressed solar and the unintended (but easily anticipated) costs illustrated by Solyndra and by Spain, whether subsidies generate more overall net benefits than a carbon tax would, and whether subsidies should focus on driving down costs and getting to grid parity or on R&D. I’ll let you form your own conclusions on those topics.
I found that Amy Myers Jaffe’s comments were the closest to what I would have said if I were on the panel. She critiques the use of subsidies very effectively, and encourages an energy policy focus on “targeting the externality” and pricing it in the market. Branko’s comments highlight the political economy of subsidies and whether subsidies are hidden or in plain sight.
