Month: September 2011
Is the economic crisis still making Americans unhappy?
In a new paper, Angus Deaton says maybe not so much (pdf). Happiness surveys show a big negative effect from the downturn in 2008, but most of it has since evaporated. You can conclude that a) things really are better, b) they are not focusing enough on the long-term unemployed, c) I shouldn’t trust happiness surveys, d) this explains why we are still headed off a cliff, or some combination of the above. For the pointer I thank Eric Barker.
Why they call it Green Energy: The Summers/Klain/Browner Memo
The LA Times reports that Larry Summers and Timothy Geithner “raised warning flags” about the loan guarantee program for renewables long before the Solyndra bankruptcy. The article doesn’t have a lot of new information (the key players are clearly protecting themselves) but it does link to a fascinating briefing memo written for the President in October of 2010 by Summers, Ron Klain (then chief of staff to the Vice President), and energy advisor Carol Browner.
The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and “non-incremental investment,” the funding of projects which would occur even without the loan guarantee.
The memo then illustrates with one such program, the Shepherds Flat Loan guarantee. Here is the relevant portion of the memo:
The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.
The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.
Double dipping: The total government subsidies are about $1.2 billion.
Subsidy Type Approximate
Amount
(millions)Federal 1603 grant (equal to 30% investment tax credit) $500
State tax credits $18
Accelerated depreciation on Federal and State taxes $200
Value of loan guarantee $300
Premium paid for power from state renewable electricity standard $220
Total $1,238
Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).
Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.
Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).
In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy.
In short, the Shepherds Flat project was corporate welfare masquerading under an environmental rainbow.
So are you surprised to learn that shortly after the memo was written the Shepherd Flats loan guarantee of $1.3 billion was approved? Of course not; no doubt you also saw that the memo authors were careful to inform the President that the “338 GE wind turbines” were to be “manufactured in South Carolina and Florida.” Corporate welfare meet politicized investment.
In the Solyndra case just about everything went wrong, including bankruptcy and possible malfeasance. Caithness Energy and GE Energy Financial Services are unlikely to go bankrupt and malfeasance is not at issue. As a result, this loan guarantee and the hundreds of millions of dollars in other subsidies that made this project possible are unlikely to create an uproar. Nevertheless, the real scandal is not what happens when everything goes wrong but how these programs work when everything goes right.
*When the Sleeper Wakes*
Reading this H.G. Wells novel (free on Kindle), I kept on thinking of Robin Hanson in the lead role, which I suppose means I enjoyed it. The basic premise is that a man wakes up after a two-hundred year coma, and because of compound interest he owns half the earth. He is also feared and worshiped, and over the previous two hundred years more than a few people have tried to speak and rule on his behalf.
The story predicts that future hypnosis techniques will allow everyone to calculate math problems and play chess like a savant, “relieved from the wanderings of imagination and emotion.” Years of study will be replaced by a “few weeks of trances.” Memories will be grafted, but not desires. There will be silk-like threads running through all banknotes and they will offer the blurred image of a temple and promise miracles, sound familiar?
I consider Wells to be an underrated author, especially in some of the “minor” works. There is all of Wells for $3.00 here.
Sentences to ponder
Crime-fiction buffs are perhaps America’s least parochial readers. They certainly seem to be the only ones still buying imported and even translated novels in large numbers.
That is from a story on Peter Temple, Australian crime writer.
Michael Lewis’s *Boomerang*, and the new Richard Pomfret book
The subtitle is Travels in the New Third World, and it is a convenient collection of Lewis’s recent and sometimes controversial writings on the financial crisis. I liked the Iceland piece best, the German one least. It is out next week, but a review copy is in my hands.
There is also in my pile Richard Pomfret’s The Age of Equality: The Twentieth Century in Economic Perspective, Belknap Press, a popular economic history of the 20th century, listed as due out October 15 but my paid-for copy just arrived.
Assorted links
1. How Asia will build up its top business schools, and the advent of the seven-figure salary.
2. Update on the worst idea ever; this will just mean that employers won’t want to get anywhere near the unemployed.
3. Jeremy Nalewaik on gdp vs. gdi.
4. What is an empirically empty economic theory used for?
5. Biodegradable toilets, and can European banks fund themselves?
Milton Friedman on the Euro and QE3
In 2000 Milton Friedman gave the keynote address to a conference at the Bank of Canada on flexible exchange rates. A Q&A at the end of the talk featured David Laidler, Michael Bordo, John Crow and others.
Michael Bordo asked Friedman about the Euro:
Milton Friedman:…I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. …
If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.
David Beckworth and I think a few others have already pointed to Friedman’s answer to David Laidler’s question but it is so appropos of the moment that it is worth repeating:
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasirecession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?” It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan
needs is a more expansive domestic monetary policy.
What I’ve been reading
1. David Stevenson, With Our Backs to the Wall: Victory and Defeat in 1918. Thorough, readable, never thrilling but consistently satisfying. It is a good follow-up to Niall Ferguson’s splendid The Pity of War.
2. Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World. No surprises, good, perhaps best on the evolution of the natural gas market.
3. Colm Tóibín, Brooklyn. Never bad, it becomes excellent by the end.
4. Roger Ebert, Life Itself: A Memoir. One-fifth or so of this book is interesting, so some small number of you should wade through it. I liked the discussion of black and white cinema best, but most of it is rambling and insufferable.
5. Steve Sem-Samberg, The Emperor of Lies, A Novel. “I don’t want to read any more about the Holocaust” is not good enough reason to neglect this stunning Swedish novel. A fictionalized account of the Lodz Ghetto, it looks at the lives of the ghetto rulers and whether they were heroes or collaborators. I found it tough to read more than one hundred pages of this at a time; by focusing on the suicides rather than the murder victims, it is especially brutal. Definitely recommended, I urge you to get up the gumption.
6. Jo Nesbo, Nemesis: A Novel. Highly entertaining, indeed gripping, but by the end I was wondering whether I had wasted my time. It turns out not to be conceptual after all. A good plane read, which is for me what it was.
I didn’t “get” the new Stephen Greenblatt book; was Poggio so important? I still find myself unable to enjoy Hollinghurst, though in the abstract I admire the writing. Bellow’s The Victim is beautifully written but seemed to me dated.
A simple cure for eurozone problems, requiring only one law
Give the United States Federal Reserve System the power to create euros at will, at its discretion, subject to no outside checks. This power may last for a specified number of years or who knows, maybe forever.
The Fed’s incentive is not exactly to maximize European social welfare, but it is probably close enough. The Fed’s incentive is to prevent contagion from spreading to the United States and its banking system. Toward this end it would create euros and distribute them to various European banking systems, or lend them out, do more swaps, etc. It would help Europe but in a fairly balanced way, in particular the Fed probably would not “screw over” the major U.S. allies on the Continent, namely France and Germany.
Bernanke has a track record of dealing with severe financial crises, no? And is he not insulated from the worst of European politicking and gridlock? Foie gras and feta probably would not sway him, and the EU would have to agree to this only once. No further plans need be announced and no coalition governments will have further checks. Stock markets would rise immediately.
Conservatives might not mind if the Fed “wrecked the European economies with inflation.”
This law need not preempt other European initiatives, if those initiatives were to prove desirable. The ECB would be ceding no powers whatsoever and it would not have to modify its charter.
Forget about the dual mandate, we need Dual Central Banks.
Such a rescue operation is not without historical precedent.
And while we’re at it, let’s give the ECB the power to create dollars! (just kidding folks…or am I?)
What are the side costs of trade with China?
There is a new study from David Autor, Gordon Hanson, and David Dorn:
The study rated every U.S. county for their manufacturers’ exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability payments.
The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn’t include any economic losses experienced by people who lost their jobs.
…Dartmouth College economist Douglas Irwin said the new research paints too bleak a picture. There are, he says, important benefits from trade that aren’t captured—because nobody has figured out how to measure them. For example, commodity-producing countries the U.S. exports to have been boosted by China’s growth, creating greater demand in those nations for U.S. goods. “But if we had more exports of (Caterpillar) heavy equipment to Australia, that’s not being measured” as a gain from trade with China, he says.
The original paper is here.
Assorted links
1. Do brains and markets share fundamental topological properties?
2. Riderless bikes, and research paper here (pdf).
3. What are the bestsellers in Dubai?
4. Which country has the second fastest internet speeds in the entire world? (no peeking!)
6. Avinash Dixit gives career advice (pdf).
Sentences to ponder, the real political business cycle theory
As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snap-backs that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic.
Taleb and Blyth write:
Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite.
Hat tips go to Nick Rizzo and Andrés Alonso and another MR reader.
From the comments
Here’s a Hill poll on inflation, and here’s a Gallup poll, and here’s a Rasmussmen poll.
While all differ on the exact numbers, they agree in broad strokes. The median voter is highly worried about inflation. Democrats are worried less about inflation, but still quite a lot. Indpendents are virtually indistinguishable from Republicans in worrying a lot about inflation.
That means that the inflation/hard money bit from the GOP is not an appeal to the base. It’s actually a reach to the center.
Worrying about inflation may be wrong– and I think it is wrong, according to the data– but it’s an attempt to go after the median voter, not play to the base.
Scott Sumner and Arnold Kling have related comments, and most directly here is Scott Sumner again.
Crowd Investing versus the SEC
Crowdfunding has become well known thanks to popular websites like Kiva and Kickstarter so it may come as a surprise that crowd investing, investing in order to earn a return as opposed to “investing” for philanthropic reasons, remains essentially illegal. If a website like Kiva or Kickstarter tried to connect small investors with small firms it would run afoul of state and Federal laws regulating securities. As Amy Cortese writes in the NYTimes:
Under those laws, crafted largely in the 1930s, the sites would have to either limit the fund-raising to wealthy investors, who the S.E.C. deems sophisticated, or go through a registration process that would prove too costly given the small sums being sought…
In the United States, these outdated laws are cutting off a huge pool of potential capital for small, private businesses that have been all but abandoned by banks and Wall Street.
…President Obama, as part of his jobs act, advocates an exemption for sums totaling up to $1 million. Representative Patrick McHenry, a Republican from North Carolina, has drafted legislation that would allow companies to obtain up to $5 million from individuals through crowdfunded ventures, with a cap of $10,000 per investor, or 10 percent of their annual incomes, whichever is smaller.
In Britain the regulations are less onerous:
For a glimpse of what is possible, look at Britain, where securities laws are helpful to crowdfunding and several start-ups are vying to be the Facebook of finance. The year-old Funding Circle, a business-lending site based in London, raises more than $2.3 million each month for small businesses from individuals who can invest as little as $30 and earn an average yield of roughly 7.3 percent after fees. Those are loans; two other start-ups are applying the model to equity shares in small companies.
Hat tip: Daniel Lippman.
TGS for anarchists
John Mauldin writes (pdf):
Few would argue that a healthy economy can grow without the private sector leading the way. The real per capita “Private Sector GDP” is another powerful measure that is easy to calculate. It nets out government spending—federal, state, and local. Very like our Structural GDP, Private Sector GDP is bottom-bouncing, 11% below the 2007 peak, 6% below the 2000–2003 plateau, and has reverted to roughly match 1998 levels. Figure 1 illustrates the situation. Absent debt-financed consumption, we have gone nowhere since the late 1990s.
There are some good diagrams at the link. For the pointer I thank Shiraz Allidina.