Tag Archives: economic incentives

Commentary on the “The Road from Serfdom”

Danielle Allen writes eloquently in the December issue of the Atlantic Monthly in the “The Road from Serfdom” about how too many Americans rightfully feel disenfranchised today and many of the reasons why they feel that way. Her description of how we got here is well worth the read. However, she misattributes the roles of economists (and lawyers) and errors in their recent prognostications on how economic progress would unfold.

Allen blames much of the current economic woes on the rise of economists in policymaking. She talks about how economists superseded lawyers in that role, implying that lawyers were somehow better connected to society. The real transformation happened several decades earlier when lawyers took over from the broader set of general citizenry. Just as she identifies how economists (of which I am one) are trained to think in one fashion, lawyers are similarly taught to think in another way that tends to focus on identifying constraints and relying on precedent. Lawyers are also taught that the available solutions require directives through laws and contentious conflict resolution. Lawyers are rarely instructed in how actual institutions work, contrary to Allen’s assertion–lawyers usually learn that as on-the-job training. In fact, it is economists who developed institutional economics that studies the role of such organizations. Economists arrived to propose solutions that could work through incentives and choice and negotiated solutions. So we traded one set of technocrats for another set. Perhaps we have not done well by either set, but we also should not ignore why we chose those professions guide us.

The mistakes that economists made were not as simplistic as Allen describes. She points to a claim that economists did not understand how disruption would impact specific communities and what two decades of disruption would look like in those communities. As contrary examples, I wrote here about how climate change will impact communities, and about how we need to compensate coal mining communities as part of our reductions in greenhouse gas emissions, and even the shaky foundations of benefit-cost analysis.  Instead economists did not foresee two important transformations since the 1970s. (Economists made a similar mistake after the fall of the Berlin Wall, failing to acknowledge that markets need well functioning institutions and laws to facilitate beneficial transactions.)  The first was that agglomeration of knowledge industries (technological and financial) would be so geographically intensive and that these industries would accrue so much wealth. The second was that Americans would become so much less mobile, both geographically and socially. There are many social and policy factors that have led to these trends, but these stories are much more complex than Allen describes. No one could have foreseen these unprecedented changes that have shattered the lives of too many people that have remained behind in communities emptied of economic purpose.

That said, identifying the rise of the ideologies of Nobel Prize winners Friedrich Hayek and Milton Friedman (who were economists) as a key source of our conundrum is accurate. Allen does not discuss the parallel rise of the fantasies of Ayn Rand that fueled the mythologies of Hayek and Friedman. Rand’s work was a surprising path for spreading those ideologies, particularly given how bad her writing was. We now have a core of elites who believe that they somehow are “self made” with no outside help and even overcoming the “parasites” of society. That will be a difficult self image to overcome.

Housing can’t escape economics

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One aspect of the debate over housing policies is whether increased housing supply or some type of demand management will mitigate create a more affordable housing market. Davis is one of the centers of this debate, where strict load growth controls has led to lower income households being closed out of the market. But contrary to assertions by those who want direct interventions, the housing market isn’t immune from economics.

One problem is that critics in Davis of relying on market mechanisms work from the false premise that the housing markets across the region were all in equivalent equilibriums in 2010, immediately after the Great Recession. The fact is that the Davis housing market, due to a combination of its restrictive housing policies and education value premium, had not declined as much in price as other communities in the region. The amount of surplus housing stock that was available in 2010 had a wide variation across many cities. So of course the towns which were hit the hardest in 2008 have typically had higher price appreciation since 2008, no matter what their housing policies have been.

Here’s a few studies that support the proposition that housing supply and demand drive prices:

CPUC proposes radical restructuring of PG&E

104778251-gettyimages-861000956In PG&E’s safety order institution investigation (OII), outgoing CPUC President Michael Picker (along with senior administrative law judge Peter Allen) has put on the table four dramatic proposals to address governance and incentive issues at the utility. These proposals are:

  1. Separating PG&E into separate gas and electric utilities or selling the gas assets;
  2. Establishing periodic review of PG&E’s Certificate of Convenience and Necessity (CPCN);
  3. Modification or elimination of PG&E Corp.’s holding company structure; and
  4. Linking PG&E’s rate of return or return on equity to safety performance metrics.

The OII originally was opened to investigate PG&E’s management of its natural gas infrastructure, but the series of electricity-sparked wildfires reinfused the OII with a new direction. The proceeding has been a forum for various dramatic proposals on how to handle wildfire-related issues and PG&E’s subsequent bankruptcy filing.

 

Moving beyond the easy stuff: Mandates or pricing carbon?

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Meredith Fowlie at the Energy Institute at Haas posted a thought provoking (for economists) blog on whether economists should continue promoting pricing carbon emissions.

I see, however, that this question should be answered in the context of an evolving regulatory and technological process.

Originally, I argued for a broader role for cap & trade in the 2008 CARB AB32 Scoping Plan on behalf of EDF. Since then, I’ve come to believe that a carbon tax is probably preferable over cap & trade when we turn to economy wide strategies for administrative reasons. (California’s CATP is burdensome and loophole ridden.) That said, one of my prime objections at the time to the Scoping Plan was the high expense of mandated measures, and that it left the most expensive tasks to be solved by “the market” without giving the market the opportunity to gain the more efficient reductions.

Fast forward to today, and we face an interesting situation because the cost of renewables and supporting technologies have plummeted. It is possible that within the next five years solar, wind and storage will be less expensive than new fossil generation. (The rest of the nation is benefiting from California initial, if mismanaged, investment.) That makes the effective carbon price negative in the electricity sector. In this situation, I view RPS mandates as correcting a market failure where short term and long term prices do not and cannot converge due to a combination of capital investment requirements and regulatory interventions. The mandates will accelerate the retirement of fossil generation that is not being retired currently due to mispricing in the market. As it is, many areas of the country are on their way to nearly 100% renewable (or GHG-free) by 2040 or earlier.

But this and other mandates to date have not been consumer-facing. Renewables are filtered through the electric utility. Building and vehicle efficiency standards are imposed only on new products and the price changes get lost in all of the other features. Other measures are focused on industry-specific technologies and practices. The direct costs are all well hidden and consumers generally haven’t yet been asked to change their behavior or substantially change what they buy.

But that all would seem to change if we are to take the next step of gaining the much deeper GHG reductions that are required to achieve the more ambitious goals. Consumers will be asked to get out of their gas-fueled cars and choose either EVs or other transportation alternatives. And even more importantly, the heating, cooling, water heating and cooking in the existing building stock will have to be changed out and electrified. (Even the most optimistic forecasts for biogas supplies are only 40% of current fossil gas use.) Consumers will be presented more directly with the costs for those measures. Will they prefer to be told to take specific actions, to receive subsidies in return for higher taxes, or to be given more choice in return for higher direct energy use prices?

Will Amazon’s HQ2 pay off for New York?

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Even though I have conducted regional economic impact studies, I’m always a bit skeptical when a project is touted as a huge payoff for taxpayer investment. Amazon’s HQ2 is a case in point. New York is claiming a $24 billion net return over 25 years from the $3.6 billion in tax breaks, based on impact analysis done with the REMI economic model. I would be interested in a retrospective analysis on the impact of Amazon’s HQ1 in Seattle. The campus is fairly self contained and it should be fairly straightforward to track the growth of Amazon employment in Seattle since the last 1990s. Clearly, there would be uncertainty about how to attribute regional economic activity to Amazon activity, but we could see bounds on various factors such as jobs and tax revenues. We could then see a comparison against the estimates for New York City.

Reaganomics for fuel economy?

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I chuckled when I saw this article extolling how CAFE fuel economy standards should be replaced with “clean tax cuts.” One proponent said, “If you want more of something, tax it less.”

But apparently, these incentives work only one direction. “It’s very common, historically, for companies to not meet the targets and just pay the fines,” said Josiah Neeley, a senior fellow for the R Street Institute. However, the auto companies were not happy with a proposal to increase the penalty 155%.  Does that mean that the penalty got large enough to incent greater compliance?

Where Should All the Coal Miners Go? – Pacific Standard

An interesting discussion about the failures and lessons for broad scale retraining programs.

My own thought is that we need to buy out the homes of displaced workers at the higher of either their purchase cost or the assessed value to facilitate moving to a new job location.

Source: Where Should All the Coal Miners Go? – Pacific Standard

How to misconstrue statistics in your favor: an example arguing against SB 32

 

statebystatechangeinco2emissionrateThis blog post on Fox & Hounds is an example of how to take statistics of one cause-and-effect relationship and misapply them to another situation. In this case, this graphic above shows how GHG emissions have dropped dramatically in states that used to burn coal to generate electricity, but now rely much more on natural gas. The decline in coal emissions has occurred over the last half-decade due to the fall in gas prices and the increased stringency in air quality regulations. But more importantly, those states had higher emissions that California to start with because they have been laggards in protecting their environments. The chart shows that these states are finally starting to catch up! If anything, this supports adopting SB 32 as a follow on to AB 32!

Yet the blog post misconstrues this situation to argue that it’s the “free market” that somehow is generating these greater reductions, implying that California and Mississippi had started from the same place–which of course if far from the truth. Yes, the market push from natural gas fracking explains some of this, but California was already so far ahead due to its own efforts that it has less room to improve.

Watch for these types of misrepresentations. Understand the initial premises by the authors. Ask hard questions before you accept their conclusions.

Source: There’s a Better Way :: Fox&Hounds

Let’s end being NIGO’d in California

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I was struck by the juxtapose of these two items:

  • AquaMetal is building a new environmentally-friendly battery recycling plant near Sparks, NV. They considered California, but “In California, you put in your permit application, and six months later, someone tells you you filled out line 26 wrong.”
  • “(T)he Governor’s Office of Business and Economic Development (GO-Biz) today awarded 23 state officials across various agencies and departments certificates of completion for the Lean 6-Sigma training program administered by GO-Biz which helps streamline permitting and make state government more business friendly.”

California has many progressive and necessary regulations, but the state does an awful job of administering them. Too often, the bureaucrats are too wrapped up in believing the process is actually important. Instead, they should be thinking about how they can ease the permitting and compliance process so that businesses can focus on achieving everyone’s goals.

A bureaucrat should be filling in the missing blanks rather than waiting for months to kick back an application. A friend noted the all too common “NIGO” response–“not in good order.” Being NIGO’d is not conducive to good business.

 

 

 

Today’s rise of populism and loss of economic opportunity

Robert Reich, the former Secretary of Labor, now UC Berkeley professor, and Friend of Bill (Clinton) wrote about how he found he agreed with the basic points of Tea Party supporters:

For example, most condemned what they called “crony capitalism,” by which they mean big corporations getting sweetheart deals from the government because of lobbying and campaign contributions…The more conversations I had, the more I understood the connection between their view of “crony capitalism” and their dislike of government. They don’t oppose government per se. …Rather, they see government as the vehicle for big corporations and Wall Street to exert their power in ways that hurt the little guy. They call themselves Republicans but many of the inhabitants of America’s heartland are populists in the tradition of William Jennings Bryan.

Eliana Johnson, a conservative columnist at the National Review, made a similar observation on NPR:

I actually think Donald Trump is really an embodiment of blue-collar frustration with what are really a bipartisan elite consensus on a number of issues that Republicans and Democrats in Washington agree on. One is free trade, and you see Donald Trump and Bernie Sanders taking similar positions there reflecting frustration. Another is immigration, where Donald Trump is an ardent opponent of letting more immigrants into the country. And I think you see the far left and the far right coming together on that issue. And so Barack Obama is certainly an embodiment of elite Washington opinion, but it’s really, I think, frustration among the grassroots of both parties about issues, really, that Republicans and Democrats agree on and where they feel they are not getting a hearing.

The first question is what is at the heart of the frustration among the white middle-class that is at the core of the Tea Party, and support for Donald Trump. Essentially the white middle class sees that the social compact that guaranteed a comfortable life style with little uncertainty by simply working steadily has come apart. The Great Recession accelerated a trend that was already gaining steam as unemployment and underemployment for older white men increased. Job security for a group that historically has enjoyed the greatest job security is disappearing. And they’re angry about it.

The next question is what is at the core of this trend. First a digression into what we do for “work.” Typically we can divide up what we work on into three areas: making things used by other people, directly serving people, and creating ideas and concepts that people can enjoy or use in the other two work areas. There are physical limits on the value that any one worker can create either in manufacturing or in services. A factory worker can produce only one car at a time and a consumer can buy and use only one car. A coffee barista can serve only one customer at a time, who in turn can only drink one coffee at a time. Nobel Prize winner William Baumol identified this “cost disease” 50 years ago, but he was focused only on services versus manufacturing. He observed that technology could help the factory worker make a car faster, but it wouldn’t be much help for a coffee barista.  But he hadn’t considered the role of workers who create ideas and concepts, simply because this wasn’t a big part of the economy then.

With the advent of computers and the Internet, along with other mass media, it’s now possible for a “worker” such as an entertainer, an athlete, an investment banker, or an app programmer, to create a “product” that can be consumed by millions with no limitations on how many can buy and use that product at one time. Distribution of the product is now almost costless. As a result, a single worker can create huge amounts of economic value single-handedly. That’s not the case with either manufacturing or services. The workers in the ideas and concepts industries can now command extraordinary salaries. Bay Area tech workers are earning an average of $176,275!

Who are these tech workers? Not older white middle class men with a high school education or less. Instead economic value is accruing to the younger, college educated (particularly in STEM fields) and the “middle class” is disappearing. The supporters of the populist causes and the demagogues who exploit those opportunities are those being left behind by this radical transformation of the economy.

The same thing happened at the turn of the twentieth century as the nation moved from an agrarian economy with a 38% of its population on the farm to an industrial powerhouse. William Jennings Bryant thrice ran for President as a populist, in his time railing against the gold standard and calling for “free silver.” His supporters were the farmers being left behind by rapid economic change.

As was the case then, the older dominant labor force working in traditional, stable industries today are not well equipped to adapt to the coming of disruptive changes. They have been extolled as the core of a virtuous workforce, as was the case with farmers then, so they have become part of the American pantheon. Just watch any pickup truck commercial. They understood the social compact as putting in a 40-hour week being sufficient to deliver a comfortable lifestyle. These workers understood that they wouldn’t have to change their careers or learn new skills to live the “American dream.” Unfortunately, that was a false promise. (We can’t really expect that everyone should understand how the economy works–at least not without major changes in our education and media systems.)

Now they look for “easy solutions” of the type long offered by politicians, and they are not disappointed by the offerings. Blocking immigration, imposing trade restrictions, and creating opportunity are all buzz word solutions without real substance or a likelihood for success in solving their problems (and may make the problems worse.)

The change a century ago led to economic benefits that few would dispute improved the well-being of most Americans; we would not have wanted to freeze the proportion of the U.S. economy devoted to agriculture. The final question then is what should be the appropriate policy responses to mitigate these harsh effects on a group that long enjoyed a favorable position in our economy while allowing for another beneficial economic transformation?