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 She talks about how economists superseded lawyers in that role, implying that lawyers were somehow better connected to society.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