Month: April 2008

Europe fact of the day


At a time when the world’s top climate experts agree that carbon emissions must be rapidly reduced to hold down global warming, Italy’s major electricity producer, Enel, is converting its massive power plant here from oil to coal, generally the dirtiest fuel on earth.

Over the next five years, Italy will increase its reliance on coal to 33 percent from 14 percent. Power generated by Enel from coal will rise to 50 percent.

And Italy is not alone in its return to coal. Driven by rising demand, record high oil and natural gas prices, concerns over energy security and an aversion to nuclear energy, European countries are expected to put into operation about 50 coal-fired plants over the next five years, plants that will be in use for the next five decades.

Here is the full story.

Non-mainstream schools of thought

A loyal MR reader requests coverage:

On mainstream versus "fringier" economic schools of thought (and schools themselves too if you like); and on different schools of thought generally, and your take on them; where economic theory is at present.

Here is me on Sraffa and the neo-Ricardians and also post-Keynesians and the Cambridge capital debates.  The Austrians I cover all the time.  Here is my post on what is new and essential in economics.  Overall I don’t believe in schools of thought for modern economics.  Think of the notion of a school of thought as a brand.  The whole point of the internet is to break down branding into the evaluation smaller units, including individuals and their very particular ideas, even doing cite counts paper by paper.  Why move toward more macro branding in that kind of environment?  You can think of trustworthy bloggers as another means of branding and also as substitutes for schools of thought.

Today I see neuroeconomics and personality psychology as two frontiers, plus economic history, but I wouldn’t call any of those schools of thought, nor should they be.

Hendrik Houthakker dies at 83

Here is the Post obituary.  Here is Houthakker at, most of all on consumer behavior and conditions under which revealed preference is a coherent theory of individual behavior.  Here is another obituary; not only did he serve on the CEA twice but he was selected by the Pope as Knight Commander with Star in the Papal Equestrian Order of St. Gregory the Great.

Demand Response

A large share of the special green issue of the NYTimes Magazine was closely tied to economics.  I find this encouraging.  Here is one interesting bit:

…demand response has become one of the most powerful
green techniques for protecting the nation’s overtaxed power grids. When
a blackout looms, utilities call a small coterie of demand-response firms. These
firms prearrange for major users of electricity – factories, shopping
malls, skyscrapers – to shut down all nonessential electricity in exchange
for payments, often totaling tens of thousands of dollars each year. It’s
expensive, but far less so than a blackout that cascades across the country….ConsumerPowerline controls 300 huge buildings in
New York alone, where hastily brokered turnoffs by Macy’s
and major hotels prevented the spread of a 2006 blackout in Queens
– a blackout that lasted for more than a week – into Manhattan.

From the comments: “America the Beautiful”?

I’m always one for airing grievances:

Tyler, Common among economists and some among the autisitic spectrum is the tenedency to belive the map is more real than the landscape, the model complete and accurate and that everything you were taught in econ seminars came donw on tablets. The Candide, America love it or leave it attitude is a tad tiresome. There are problems out there big guy and the Solow model or the Romer Model don’t mean shit.

Here is a compendium of my anti-American attitudes:

1. The number of Americans in prison remains an underreported scandal, as well as the conditions they face.

2. Problems of race relations are underestimated, to this very day.

3. For whatever reasons, smart American women seem to be more insecure than are Western European women.  Yes that’s a vulnerable overgeneralization and I will take some lumps for it in the comments but I still think it’s basically true.

4. I could not live in rural America and be happy.

5. America faces a massive current and future problem resulting from the apparent uneducability of a large chunk of its citizens.  While I do favor school choice, it’s not just government education which is at fault; many better school systems around the world are government-run.

6. Gun owners may well be happy, but it is not a culture I relate to.

7. The American culture of individual freedom is closely linked to the prevalence of mental illness and gun-based violence in this country.  We can’t seem to get only the brighter side of non-conformity.

8. America is the worst offender when it comes to factory farming and the treatment of animals.

On the brighter side, America has a decent economic track record, the Solow model does matter (try living and earning in countries with poor Solow indicators), America remains the world’s leading innovator, and most Americans — at least those not in prison or on drugs — can expect a bright future.  It’s not as if I’m pushing the future economic prospects of Suriname. 

I also believe (contra the blogging progressives) that America is fated (for better or worse, but in my view not worse) to remain predominantly captured by corporate interests and that America does a better job absorbing and elevating immigrants than perhaps any other country. 

Many Europeans fear deep down that America will have a permanently higher growth rate and that the European way of life will, sooner or later, be forced to disappear.  Right now I would bet against this proposition, as I see a new Europe revitalized by intra-EU immigration.  But there is still, say, a 30 percent chance it is true and polemics against Uncle Sam are in part a reflection of that deep insecurity.   

More on energy pessimism

Paul Krugman writes:

You might say that this is my answer to those who cheerfully assert that human ingenuity and technological progress will solve all our problems. For the last 35 years, progress on energy technologies has consistently fallen below expectations.

It’s worth noting that if we had to build today’s energy infrastructure working under the current regulatory and NIMBY burden, it probably could not be done.  So it shouldn’t be surprising that building a new energy infrastructure is proving so hard.  There’s a reason why many of us think deregulation is a big issue and it’s not because we want to see people poisoned by Chinese botchagaloop.

Division of labor is limited by the extent of the market

His specialty is static apnea: holding your breath while remaining immobile in a swimming pool. It requires some of same skills as being buried alive for a week, Mr. Blaine said: “It’s all in your mind. You’ve got to stay calm and slow everything down.”

The guy can hold his breath for sixteen minutes; here is the article, interesting throughout.  He is also versatile:

As a self-described endurance artist, he’d spent 35 hours atop a 105-foot pole and survived a week buried in a coffin. He’d fasted for 44 days in a box suspended over the Thames, a nutritional experiment that was written up in The New England Journal of Medicine (with Mr. Blaine listed as a co-author).

Nor had I known this:

Immersing the face in water produces a protective action in humans similar to that in dolphins, seals, otters and whales. Called the mammalian diving reflex, it quickly lowers the heart rate and then constricts blood vessels in the limbs so that blood is reserved for the heart and the brain.

What will happen with commodity prices?

Megan McArdle gives one bottom line, referring to Paul Krugman’s somewhat pessimistic column.  I would say that China has been massively productive but not so much in producing commodities.  That means the demand for commodities has gone up much more rapidly than the supply.  You could imagine an alternative universe in which China grew by figuring out ways to produce oil, copper, and rice much more cheaply.  Of course that’s not what happened and it is relatively easy to see why not.  Following some good policy changes, Chinese growth has been driven by a massive rural to urban migration and yes we are talking about hundreds of millions of people.  It’s plastic basketballs that have become cheaper, not the products of farms.

The mere addition of labor inputs to urban areas doesn’t, in the short run, help you produce commodities more cheaply.  Think of the Solow model where K and L have gone up lots but the rate of generating new ideas is only slightly higher.

When all those new Chinese engineers and scientists are at the peak of their creative powers, this relationship will reverse itself and commodities prices will plunge.  But it’s quicker to produce another toy than to bring about a new Green Revolution, so in the meantime commodity prices are very high.  I give the current price trend another ten or fifteen years or so to run.  Eventually high commodity prices will seem permanent and then the bottom will drop out.

We’ve never had a rapid and successful migration of hundreds of millions before, ever.

What I’ve Been Reading

1. The World is What It Is, by Patrick French.  This authorized (yes, authorized) biography digs up all the dirt on V.S. Naipaul; I’ve never read anything like it.  Here is a Paul Theroux review.  Here is another rave review.  Theroux’s own self-loathing, quasi-fictional biography of his "friendship" with Naipaul — Sir Vidia’s Shadow — remains one of my favorite books but this is a wonderful sequel.  And if you haven’t read through Naipaul’s ouevre you should, especially A Bend in the River, A Turn in the South, and Among the Believers, among others.  There is something to be said for misanthropy raised to an art form and packed with intellectual content.

2. Paradise with Serpents, by Robert Carver.  The only question is whether this is the first or the second best book on Paraguay in the English language; here is the other contender.

3. The wisdom of Arnold Kling

4. Problems with farm price futures, worth a read.

Answering your questions

Who knows, maybe I’ll try to get to them all.  Here’s the first:

What impact will algorithmic game theory have on economics?

I’d start by asking: will game theory pure and simple have (further) impact on economics?  And I’d say basically "no."  The common concepts and tricks of game theory are invaluable but we already have those and I don’t see any more coming down the pike.  Algorithmic game theory will address problems internal to game theory and within that context it will flourish.  Finding equilibria, and discriminating among multiple equilibria, are otherwise very difficult problems and AGT is a natural way to crack those nuts.  So AGT will have continued practical applications in computer science and problems of engineering.  But it won’t much affect how most economists think about the world or do their research.

As for NBA analysis, I’ll just say that a) Boston is still an odds-on favorite, b) No one ever really told us what happened to Andrew Bynum, and c) Even though Phoenix probably won’t make it, the Shaq trade was very clearly a good idea and all you doubters should offer up mea culpas.

Million dollar blocks

An innovative analysis by Eric Cadora highlights "million-dollar blocks" — individual city blocks where more than one million dollars per block per year are spent to incarcerate individuals from that block.  Some blocks cost over five million dollars per year…A million dollars, coincidentally, is roughly what it would cost to pay for one patrol officer, twenty-four hours a day, every day for one year.

That is from Peter Moskos’s Cop in the Hood: My Year Spent Policing Baltimore’s Eastern District.  In Brooklyn of 2003, there were 35 million dollar blocks.  Here is more information, plus maps and graphs.

Bad Money

That’s the new book by Kevin Phillips.  He concludes:

The thirty- to forty-year tumble from national preeminence that made life more glum for most folk in seventeenth-century Spain, and eighteenth-century Holland, and the Britain from the 1910s to the 1950s may be somewhat moderated for the United States because of a position as a North American continental economic power with a large resource and population base…

Boo hoo, I say; I’ll be crying all the way to Rio.  Overall this book is a catalog of the usual arguments about the financial problems of the United States, peak oil, the potential weakness of the dollar, and related worries.  Phillips doesn’t seem to think that finance is much of a productive economic sector.  He is keen on the "inflation is larger than we realize" line, citing high growth rates for M3 (he doesn’t realize how much the different aggregates can move around and differ from each other) and then the Fed’s discontinuation of that statistic.  But who has been tricked?  Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man.  I find the former scenario more plausible.

If there’s anything wrong with gdp statistics, it’s either environmental problems or that we don’t have good measures of the productivity of government itself.  Those problems are built into how the number is calculated and there is no conspiracy to make America look much richer than it really is.

There is remarkably little on future expected productivity growth or whether America will solve the problem of educating its non-upwardly-mobile, which are both (the?) major issues for our economic future.  The author should spend a week locked in a room with the Solow model.  There is also precious little recognition that America in twenty years’ time will almost certainly be a good bit wealthier than today.  Given that no other country is about to take us over, does relative international status really matter so much for the happiness of Americans?  I don’t think so.  The richer the Chinese get, the more I feel good about living in the world’s first country to be a true product of The Enlightenment.  If only Phillips could feel the same way.

The future of Toyota

Some of Toyota’s U.S. plans are now more than 20 years old, and a growing number of its workers are paid the top wage of about $25 an hour.  That’s less than Detroit’s veteran union hands make now, but a contract inked last fall will enable U.S. automakers to replace many highly paid employees with cheaper workers.  By 2011, Toyota’s cost advantage over Detroit could disappear.

By late 2009, Toyota’s assembly plant in Georgetown, Kentucky could have the highest labor costs of any auto factory in the country.  Here is the story.

When I visited Utah, I rented a Hyundai and I have to say it drove very nicely…