Monthly Archives: August 2017

Renewable != Sustainable

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Benjamin Zycher writes,

there is nothing “clean” about renewables. There is the heavy-metal pollution created by the production process for wind turbines, along with their noise and flicker effects. There is the large problem of solar panel waste. There is the wildlife destruction caused by the production of renewable power. There is the land use both massive and unsightly, made necessary by the unconcentrated nature of renewable energy.

And above all: There is the increase — yes, increase — in the emissions of conventional effluents caused by the up-and-down cycling of the conventional backup generation units needed to avoid blackouts caused by the unreliability of wind and solar power.

(links omitted)

In Specialization and Trade, I make the point that sustainability is best measured by profitability at market prices. The attempt by environmentalists to second-guess prices is misguided. Recycling, if measured at market prices, is not sustainable. The use of renewable resources for energy, if assessed at market prices, is not sustainable. It is likely that from a strictly environmental point of view, practices like buying local and subsidizing renewable energy have adverse effects.

Is the economy illegible?

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In the model of the economy as a GDP factory, the most fundamental equation is the production function, Y = f(K,L).

This says that total output (Y) is determined by the total amount of capital (K) and the total amount of labor (L).

Let me stipulate that the economy is legible to the extent that this model can be applied usefully to explain economic developments. I want to point out that the economy, while never as legible as economists might have thought, is rapidly becoming less legible.

For example, the analysis of changes in the trend in productivity requires extremely fine legibility. You start with the measure of Y/L, which is problematic, because you have to add together disparate goods and services to get Y. You have to aggregate all sorts of different specialized workers to get L. Next, to get a trend in productivity, you have to compare Y/L between two periods relatively far apart, say 1986 and 2016. The difference between what you are aggregating then and now is staggering.

Once you look at differences across decades, adjusting for price changes becomes important but impossible. For example, Bret Swanson says that the computing power in his iPhone would have cost $12 million in 1991. If for the purpose of comparing Y/L today to Y/L in 1991 you valued every iPhone at $12 million, you would report an enormous increase in real GDP and hence in productivity.

Finally, to get the change in the productivity trend, you have to attach meaning to the difference of the difference, e.g., the difference between the change in Y/L from 1986 to 2001 and the change in Y/L from 2001 to 2016. That is asking the data to be correct to an additional decimal point.

Here are some other indicators of the decline in legibility:

1. The increasing disconnect between stock prices and earnings. I have made the point about Amazon. In fact, Amazon typifies the decreasing legibility of corporations. Commenters who gave me pushback on Amazon said that they do not think it will end up primarily as a retailer. To me, all the top tech companies have vague business models, particularly if you look ahead several years, and particularly if you compare them with the old industrial giants. Bethlehem made steel. GM made cars. What does FaceGoogle make? Space for ads? Do you think that will still be their primary business five years from now? If so, do you like their prospects? Folks like Ben Thompson seem to think that the business models of all the major tech companies necessarily must evolve radically, which to me makes their future earnings harder to predict.

2. The increasing disconnect between corporate earnings growth and GDP growth. Some of this is due to the fact that a lot of important U.S. corporations are multinationals, so that their earnings are not just a function of what goes on in the U.S. [corrected]

3. The increasing disparities in individual earnings. I bet if you looked at the ratio of the pay of a college president to that of a cafeteria worker today and compared it to that ratio in 1980, it would blow your mind.

4. The increasing disparities in cost of living. I bet if you looked at the ratio of the cost of living in San Francisco to the cost of living in Peoria and compared it to that ratio in 1980, it would blow your mind.

5. Increasing disparities in tastes. The usefulness of a single price index, such as the Consumer Price Index or the GDP deflator, to describe inflation depends on the validity of the assumption of a representative consumer. I don’t see that today. One family shops for groceries at Walmart, and another shops at Whole Foods. One household puts discretionary income into private school for the children, and another puts it into home entertainment.

Still, economists want to treat the economy as if it were legible.

–They tell you that we are in a productivity slump, and we need to explain it and figure out how to solve it. I think that the numbers are not reliable enough to say.

–They tell you that inflation is below target, and central banks are puzzled about how to respond. I think that we see such large changes in relative prices that the very concept of “overall inflation” loses meaning and monetary policy becomes irrelevant until the central banks get into an orgy of money-printing.

–They tell you that “the” real interest rate is low, but what happens if you take health care and education out of the inflation numbers? I mean, if as an entrepreneur you could respond to the scarcity of schools and hospitals (as indicated by rising prices) by borrowing money to launch a new one, then that low real interest rate would mean something. But you can’t do that. Meanwhile, if you’re borrowing to finance a new firm in the solar power business, where prices are going down every year, maybe that interest rate does not look so low.

Jean Twenge Update

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She writes,

Rates of teen depression and suicide have skyrocketed since 2011. It’s not an exaggeration to describe iGen as being on the brink of the worst mental-health crisis in decades. Much of this deterioration can be traced to their phones.

I don’t think a crusade against cyber-bullying is the answer. I am enough of a McLuhanite to say that the medium is the message. There is something about smart phones that is damaging, and I suspect it is the sheer immediacy of them. I think that this immediacy is what makes contemporary politics so stressful. You see what somebody posts online and if you like it, great, and if you don’t it really gets your fight-or-flight hormones raging.

Also, this is something I noticed and remarked on when I was teaching high school:

Even driving, a symbol of adolescent freedom inscribed in American popular culture, from Rebel Without a Cause to Ferris Bueller’s Day Off, has lost its appeal for today’s teens. Nearly all Boomer high-school students had their driver’s license by the spring of their senior year; more than one in four teens today still lack one at the end of high school.

The book is due out in less than two weeks.

Intangible factors and research methods

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A commenter writes,

How do you square this:
“…Nick Schulz and I tried to point out how much you miss when you ignore the intangibles in economics.”

with this:

“If you define self-interest broadly enough, then the statement “people pursue their self-interest” becomes irrefutable. And if you cannot refute it, then it is just an empty tautology.”

In other words, I am claiming that intangible factors matter (I think primarily of institutions, social norms, and innovations). But when someone wants to include intangible factors in self-interest (think of ideology or a desire to help others) then I think it degrades the notion of self-interest into an empty tautology.

Someone who broadens the definition of self-interest to include intangible interests is making a concession to reality. But in order to make useful statements about the world, you have to get specific about how intangible interests enter. For example, you could, as commenter Handle sagely suggests, talk about the desire for raising status within one’s reference group as a motivating factor, and this could help to make useful predictions about behavior.

But the statement that “people act in their self-interest,” without being more specific, does not help make any predictions. And when I see the words “self-interest,” I think that the logical way to make it meaningful is to associate it with economic gain.

House Prices in the 21st Century

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Alex Tabarrok writes,

Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.

As a matter algebra, house price = (rent) x (price/rent). If this time is different, it is due to a combination of higher rents and higher price/rent ratios. As I read the graph of prices against rents at the Economist, it looks like prices have been rising faster than rents, so an increase in the price/rent ratio is certainly a contributing factor, although more in other countries than in the U.S.

I think that in many parts of the world, including portions of the U.S., price/rent ratios are getting very high. If I were Alex, I would not stand in front of the sign that says “mission accomplished” claiming to have debunked the house price bubble.

Revisiting Halberstam’s The Best and the Brightest

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I write,

I have come to see the “can-do” attitude, and its attraction to politicians and the public, as very dangerous. On economic matters, the “can-do” adviser offers the promise of a free lunch: increased access to health care without raising health care spending; tax cuts that “pay for themselves”; budget deficits that will create millions of jobs, projected with outrageously exaggerated precision.

I credit this book with helping to start me on my political journey from left to right. Although it criticizes the Vietnam policy from a left perspective, it never endorses the Chomsky silliness of saying that Vietnam was a capitalists’ war for markets.

Halberstam offers lessons to both sides in the Trump era. The anti-Trumpers would do well to reflect on the way that establishment group-think can be costly. For Mr. Trump himself, I have this admonition.

he should try to restrain the urge to be an intimidator. The office of the President is intimidating in its own right. The President needs honest advisers more than he needs yes-men.

Jeffrey Hummel on central banking

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He writes,

The Fed cannot have much impact on market rates through pure intermediation—borrowing with interest-earning deposits to purchase other financial assets—any more than Fannie Mae or Freddie Mac can. The Fed can do so, even in a highly segmented market, only by altering the quantity of outside money. Only then will it have any temporary effect on the net quantity of loanable funds and the net portfolio of the public’s real assets. Today’s low interest rates are not ultimately the result of Fed policy but of a decline in the natural real rate.

Pointer from Scott Sumner.

If the Fed is just a bank, then it’s just another bank. And that is how I think of it. Where I disagree with Hummel is that I don’t think that altering the quantity of outside money by a few percent does anything, either.

In any event the paper is a good antidote to the magical thinking that tends to surround central banking.

Not surprisingly, Sumner has a take that differs from mine. He writes,

some people claim the Fed has little or no control over the economy. In that case they could set rates where ever they wished, and life would go on as usual. I take almost the opposite view. I believe they have very little room to adjust rates without creating a spiral toward hyperinflation or hyperdeflation. Why don’t we see those disasters more often? For the same reason we rarely see buses plunge off 100 foot cliffs–the Fed usually follows the road.

Think of the financial market as creating the road. I think of it as more like a set of railroad tracks than a paved road. In my view, the Fed has to really jump the tracks to have any effect. Small changes in policy, within the range of what we observe, don’t change where the train is headed.

Russ Roberts on emergent order

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He writes,

Then there are things that are out of our control but that happen on their own through a natural process no human being intends or designs. Breathing. The healing of a paper cut. Staying attached to the earth rather than floating off into space. We don’t have to lean into the curve as we go around the sun to keep the earth on orbit. No human being is in charge of making sure the sun comes up tomorrow. When it rains, we may be frustrated if we had hoped to go on a picnic in the park but there is no one to blame. And if it’s an especially beautiful day, we may thank God or simply be glad to be alive. But there is no person we owe thanks to.

There is more at the link.

From Prosperity to Poverty

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Ricardo Hausmann writes,

Income poverty increased from 48% in 2014 to 82% in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74% of Venezuelans involuntarily lost an average of 8.6 kilos (19 pounds) in weight. The Venezuelan Health Observatory reports a ten-fold increase in in-patient mortality and a 100-fold increase in the death of newborns in hospitals in 2016.

Pointer from Tyler Cowen.

Justin Fox blames the resource curse.
Pointer from Mark Thoma. I think that Fox, like too many economists, wants to look at material factors and ignore the role of ideas. Venezuela is cursed more by socialism than by oil.

TLP update

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1. A talk I gave for Cato on the Three Languages of Politics. Why don’t I modulate more (i.e., vary my tone of voice)? I sound more boring than I am.

2. Ryan Bourne writes,

The BBC is another example. Natural conservatives feel the need to highlight the Beeb’s historic role as a national institution, creating shared experiences, enriching our culture and providing a reasoned, shared platform in contrast to the brashness of US cable TV. Progressives like to think of the BBC as an island for the oppressed in a sea of commercial TV ruthlessly seeking profit. The classical liberals? They cannot abide that the BBC is funded by a compulsory licence fee, particularly given changing tastes and technologies.

He argues that Brexit produces divisions within the tribes. One can argue that the 2016 election did the same thing in the U.S. For conservatives, the divisions are obvious. Progressives are divided about what to do about white working-class voters–should progressives write them off as racist and sexist or try to win them over? As for conservatives and libertarians, the inability to coalesce around an alternative to Obamacare exposed the divisions between and within those tribes.