Relevant and even prescient commentary on news, politics and the economy.

Corporate/shareholder value, energy market and global warming

Updated: Renewable Germany bailing out Nuclear France

I just read the following in an article by a Mr. Bill McKibben and thought it to be an interesting perspective on why climate change/global warming is being so vigorously denied.

If we spew 565 gigatons more carbon into the atmosphere, we’ll quite possibly go right past that reddest of red lines. But the oil companies, private and state-owned, have current reserves on the books equivalent to 2,795 gigatons — five times more than we can ever safely burn. It has to stay in the ground.
Put another way, in ecological terms it would be extremely prudent to write off $20 trillion worth of those reserves. In economic terms, of course, it would be a disaster, first and foremost for shareholders and executives of companies like ExxonMobil (and people in places like Venezuela).
If you run an oil company, this sort of write-off is the disastrous future staring you in the face as soon as climate change is taken as seriously as it should be, and that’s far scarier than drought and flood. It’s why you’ll do anything — including fund an endless campaigns of lies — to avoid coming to terms with its reality.
Never thought of the resistance to moving away from carbon fuels as an issue of having to write off company value in order to save the planet. As shown with the housing bubble, writing off inflated value (inflated for what ever reason) is a rather difficult thing to do. I mean, when you have so much down stream of that artificial value dependent on it (think currency based on oil), the engineering challenge is like playing Jenga only no one will be laughing if you fail and the tower falls.  Also, you have a timer running in this version of Jenga.

I believe Mr. McKibben refers to the issue as a bubble in that the current price of raw carbon fuel is based on the idea that fuel in general is becoming less available. But fuel or energy is not less available. It is only one source of fuel that is becoming less in quantity. The only means to keep this conflation of less carbon based energy means less energy fuel in total is to deny the application of science in the energy market place as it relates to a competitor product. It is artificial price manipulation via psych-ops.
In other words, the only way to keep the carbon energy market alive is to not have a free energy market. Part of assuring not having a free energy market is to deny the need for a free energy market, thus, deny climate change do to human extraction of carbon from the ground and it’s ever increasing rate of conversion to a gas of CO2. It is artificial price manipulation via psych-ops.
Let’s take the write off issue one step further. How does the value of a company such as Exxon/Mobil which is based on ever rising price do to ever declining product with ever increasing demand keep this model for valuing the company if the product becomes essentially limitless? Now we’re up against our entire paradigm as to how we understand free market value and thus construct value.
Carbon based energy is currently view as land. No new land is being made and demand is rising thus ever increasing value. The proper model for carbon fuel is that of a market where over time the product becomes obsolete. This I think is the fault in thinking that has created the aberrant paradigm which lead to the bubble Mr. McKibben sees. Our entire energy market, viewed in this way is a complete illusion as seen from the owners side of the energy equation and a complete delusion as seen from the market economist side of the energy equation, though I would say the economist delusion has lead the owners to create their illusion.
Just one more problem with running an economy based on the efficiency of money as oppose to the efficiency of people.


From Real Economics I read an article from Der Spiegel regarding France struggling with electricity shortages do to the cold spell. Seem France, not normally experiencing cold winters uses electricity for heating homes. This year they needed 7000 megawatts per hour more power. 100 gigawatts one evening was need, the equivalent of 80 nuclear power plants. Germany was sending them a net 3000 megawatts/hour because:
It is interesting, said the federal environment minister, that Germany, especially in these days with a very high demand, can even export power—thanks to photovoltaic and wind energy. “We had in the last days a capacity of up to 10,000 megawatts of solar power, which corresponds to the output of ten nuclear power plants, and up to 11,000 megawatts of wind power,” said Röttgen.
Read another take here at Lenz Blog.
This is significant, because back in May of 2011 all the rage was how France was bailing out Germany after Germany announced its nuclear generation shut down. As with Jonathan Larson at Real Economics, no one is saying this means we can scrap all other power generation tomorrow as this Spiegel article notes the lack of solar generated power in Germany during a spell this winter and the need to import electricity.
The January article (not pro solar at all) notes:
Until now, Merkel had consistently touted the environmental sector’s “opportunities for exports, development, technology and jobs.” But now even members of her own staff are calling it a massive money pit.

How quickly fortunes can change. All the more reason to view carbon based energy in the energy market as a product that can be made obsolescent.  You know, a true free market with competition which purpose is to serves the efficiency of people and not money. Maybe then even Germany would not be so reactionary when their plan stumbles.  Heck, it took the Wright Brothers over a 1000 flights, just to learn how to fly!  Over 200 wings and airfoils!  They did not concern themselves with the issue of scaling it up for use by a planet of 6 billion people.

Stick to your plan Germany because you have the correct intention.

Screw Austerity, I have a new theme song

by Daniel Becker

Being that we’re about to experience austerity because we are convinced we can’t spend money properly such that we actually end up with more after rather than less …  which is very depressing to me and defeatist in presentation, I present my new theme song:  That’s how it goes.

I just find it fascinating that we will accept the argument that government needs to run as we run our own houses and thus need to not spend more than we have, blah, blah, blah yet we seem not willing to apply the concept that we apply daily in our own household to get ourselves an education, a house, our own business, improvement to our property and self.  We do this all the time because we understand it is building our wealth, and we do it even though we can’t print our own dollars like the government can.  (Yeah, we’re not Greece in that way.)

Really, just listen to both sides presenting the austerity program arguments.  Can’t you hear how disjointed the reasoning is?  Can’t you hear how selective they are in presenting examples of proof of their argument which is resulting is a totally disjointed line of reasoning.  Ask one question you are told we need to save to prosper.  Ask another question you are told we need to spend less just like you, to prosper.  Ask a third question and you are told we have no money, just like you.  Ask a forth question and we’re told the economy is growing (more money produced) NOT LIKE YOU.  Ask a fifth question and we are told to better yourself, NOT LIKE WE THE PEOPLE.  Ask a sixth question and we are told to get an education, NOT LIKE WE THE PEOPLE.  Ask a seventh question and we are told to…(fill in your own).

My favorite verses of the song and why it is my new theme song:

I help you and you help me
That’s the way the world should be
Tit for tat and give and take
Just be good for goodness sake
I’ll pick you up if you should fall
It works both ways if it works at all
Hold in your heart the people you love
Always thank the powers above
Everyone deserves a share
So keep your promise, fair is fair

So gather ‘round me people
And help me while I sing this song
I’d rather have you with me
Together as we travel along
It’s the feeling of the wind in your face
The sound of the music they play
The friends you make along the way
Don’t you know, that’s how it goes

Why There’s Little Inflation, In One Easy Graphic

Ex-food and energy, inflation is at 0.9% for the past twelvemonth. Even if you include those in the longer measure, annual inflation has been 1.7%. (Recall that we paid an average of more than $3.00/gallon for most of the Spring of 2010, for instance.)

There is a simple reason “everyone” expected higher numbers: they were looking at money supply, not circulation.

As Jim Hamilton notes, money is only supply when its being circulated.

The “intermediaries” aren’t intermediates; they’re SPOFs. Hamilton’s graphic tells all:

All that “extra” money is being kept in mattresses. Financial-Institution-shaped mattresses, but mattresses nonetheless. The velocity of monetary reserves is 0. So the weighted-average velocity of money is much less than the standard formula would imply.

There is inflation out there. For instance, China, whose “stimulus” was an impossible 17% of its GDP (h/t Susan of Texas, of course), is seeing inflation.

The U.S. needs to deal with financial institution mattress stuffing before it can have such problems.

In One Sentence What Once Took Four LONG Parts

Once Again, D-Squared Explains It All:

[T]he Big Mac Index can plausibly claim to be the major methodological forerunner of Freakonomics, as it combines the two methodological techniques of choosing “quirky” instruments more valuable for their amusement value than their validity, and not checking anything to see whether it’s economically meaningful.

I’m not certain that “economically” is strictly necessary there.

Travels of a Cheap Tire in the Global Economy

Tom Bozzo

agrees with Ken (but observes that even Garth Brazelton falls for the ‘Pareto fallacy’ [*]), and sees Brazelton’s (so far) one anonymous comment, which takes issue with Brazelton’s hypothesis that the Obama administration is giving us a backdoor safety-enhancing Pigovian tax:

This is probably incorrect. Tires like many other things need to meet standards. Tiers [sic] for America must meet American standards etc.

Indeed they do, but there’s the econoworld of frictionless international trade in widgets and then there’s the sausage making of actual trade in manufactured goods. Let’s set the Way-Back Machine just two years ago to the case of Foreign Tire Sales below the jump.

Here’s the lede of the NYT account:

Federal officials have told a small New Jersey importer to recall 450,000 radial tires for pickup trucks, sport utility vehicles and vans after the company disclosed that its Chinese manufacturer had stopped including a safety feature that prevented the tires from separating.


[NHTSA’s] top officials were “outraged” that Foreign Tire Sales’ executives waited more than two years to pass on their suspicions about problems with the tires. The company first suspected problems in October 2005. Almost a year later, in September 2006, the Chinese manufacturer, Hangzhou Zhongce Rubber, a former state-owned company based in eastern China, acknowledged that a gum strip that prevents the tread from separating was left out of the manufacturing process.

Now Foreign Tire Sales did not intend to import substandard tires:

The tires were supposed to exceed federal safety standards, partly by including a gum strip between the plies to prevent separation, and ultimately passed a road test in which they were driven 40,000 miles…

Nevertheless, a few years into the relationship with its factory, problems started to appear:

In October 2005, the company said it became concerned because of a sharp increase in customer complaints about the Hangzhou Zhongce radial tires. In investigating the complaints, Foreign Tire Sales’ officials became suspicious that Hangzhou Zhongce was manufacturing the tires without the gum strips or with inadequate gum strips, but the Chinese company denied it.

Tests of tire segments conducted by an outside firm were not conclusive but “seemed to indicate that there were no gum strips or insufficient gum strips in the inspected tires,” Foreign Tire Sales wrote in its June 11 report to the National Highway Traffic Safety Administration.

Foreign Tire Sales’s ability to monitor its contract manufacturer and get to the bottom of the quality problems was surely compromised by the fact that it was a seven-person office that never actually touched the tires it brought into the country.

For the money shot:

Hangzhou Zhongce admitted in September 2006 that it had “unilaterally decided to omit the gum strips” in the tires, the report says. The Chinese company was “generally unresponsive” when asked how many tires were involved and what they were going to do to resolve the problem, the report says.

With little or no monitoring and financial returns to cutting corners, amazingly corners are cut. Lo, incentives matter! But that’s not all!! Foreign Tire Sales, being asset-light, lacked the wherewithal to actually shoulder its obligations in the event of a large-scale recall. An account at the Huffington Post says that they were spared bankruptcy by virtue of most of the recalled tires having stayed on the road, sparing F.T.S. the expense of actually replacing them with tires more-or-less known to be up to standard.

The anonymous commenter makes a follow-up point:

There used to be a term Jap Crap for Japanese stuff. Now Japan sets the standard for manufactured items. China will do the same eventually.

This post was written on a Chinese-assembled laptop computer which, at age 3, is still working pretty well, so it’s not that Chinese stuff necessarily is crap. Of course, Apple’s handle on the product quality lead of its supply chain may be better than that on its contract workplace conditions. Certainly Korean products have improved radically since, say, Hyundai’s entry into the U.S. auto market.

Perhaps if we could just trade with the Aspirational China with its fast trains, gleaming 500-meter skyscrapers, massive renewable energy investments, and middle class, some of the conditions might actually hold to justify the U.S. economist hand-wringing. Meanwhile promotion of trade should not be a suicide pact.

[*] I.e., because a policy may be Pareto-improving after the losers are compensated, it is worth implementing from a social welfare perspective even if we all know that the losers won’t be compensated.

I Remember When Mankiw was still a Neo-Keynesian

Cassander, writing at Steve Keen’s Debtwatch,* puts the hammer to those arguing that the death of the patient had nothing to do with the doctor:

What a load of bollocks.

The “principles of economics” that [N. Gregory] Mankiw champions, and the “More economic research (and teaching)” that [Doug] McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.

If they meant “Principles of Hyman Minsky’s Financial Instability Hypothesis”, or “More Post Keynesian and Evolutionary economic research”, there might be some validity to their claims. But what they really mean is “principles of neoclassical economics” and “More neoclassical economic research (and teaching)”—precisely the stuff that led to this crisis in the first place. [emphases in original]

Go Read the Whole Thing: a worthy spew of bile from one of the blogs that I’ve been reading a lot recently, in part so I don’t feel guilty not having written the same thing.

*Cassander is, I believe, Keen’s nom-de-blog for non-personal posts. But I could be wrong.

UnReal Business Cycle

Via Dr. Black, those RBC models may be missing a variable or two:

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993….

First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it.

Because the alternatives are either direct government unemployment benefits on top of a decrease in GDP or a decline in social welfare with generational implications.

Another factor may be the lack of an economic boom in many European countries, which has left them less vulnerable to recession-related cutbacks.

Ah, pure RBC theory: the seeds of the next recession are sown in the economic growth that preceded it, even if that growth was somewhat enhanced by long-term liabilities:

Interesting, not unrelated, notes:

Then, the United States had an unemployment rate of 4.7 percent, lower than all but three of the 15 European Union countries — Denmark, the Netherlands and Ireland — and equal to that of a fourth, Luxembourg.

As the graphic shows, the March rate for the United States was higher than the rates of 11 of the 15. The exceptions were Portugal, which has the same rate, and Spain, Ireland and France.

The Irish story was truly a country-wide “miracle,” now featuring both higher highs and lower lows than even the U.S.

Spain and Ireland, two of the highest unemployment countries in Western Europe, suffered housing booms and busts that were comparable to the cycle in the United States.

Spanish banks hit the news earlier this week. U.S. banks are evermore heavily subsidized by the U.S. taxpayer (or that taxpayer’s debt; see above). Or, as Robert Lucas told Arjo Klamer in May of 1982:

But I don’t think unemployment is at the center of the story [of the Great Depression]. For those who do think it is the center, I can see why they don’t look to me for enlightment.

What a difference 27 years makes.

Will the stimulus package be a pork fest?

by Bruce Webb
reader Buffpilot in comments insists the answer is clearly yes on the grounds

The Dems, have NEVER, shown fiscal responsibility when in charge of the purse strings (or at least since before LBJ). So you have zero track record to back you up on thinking that the Dems will suddenly cut back government expenditures and raise taxes to at least get close to balancing the budget. Can you imagine the Dems actually cutting the size of the Federal governemnt? Or reducing its power? Neither do I. BTW the Rs have not been any better.

Well the historical record tells us something different. If we examine Total Debt as a percentage of GDP it went down or stayed even under every post-war President not named Reagan or Bush. We were able to fund the post-war GI bill, the Marshall Plan, Korea, the Great Society, Vietnam, navigate the first Oil Shock all of it except for two years with a Democratically controlled house. And came through the whole thing with debt as a percentage of GDP bottoming out in 1980. I am afraid the old narrative of Democrats as the party of tax and spend policy leading to ever increasing deficts while Republicans being the party of fiscal responsibility has really not been the case since Eisenhower left office. Instead the whole concept of Small Government has since 1964 and the birth of the Modern Republican Party meant “don’t spend tax money on undeserving poor people”.

The Winners Compensate the Losers? Thoughts on Armistice Day + 90

Ken Houghton

Not Veteran’s Day, which is a U.S. construction to make certain we don’t have to give another Federal holiday to Those Who Served. And arguably not Remembrance Day, the version here in Canada, since (as Rob[ert] Farley notes) there are “only” ten known survivors remaining of The War to End All Wars, which ended ninety (90) years ago today. (Ten is pretty good, if you think about it; the youngest two are 107.)

So let’s talk, in broad terms, about why it was not The War to End All Wars, why remembrance of mustard gas and Verdun and the Somme didn’t cause everyone to realize we never wanted to do it again, at any price.

As I said, we’re using wide brush strokes here, and this is an economics blog. SO let’s talk about the Treaty of Versailles.

The U.S. was in the War to End All Wars for just over 18 months (6 April 1917 – 11 November 1918). For the time running up to the declaration of war, they sold equipment to both sides. Not necessarily equally, and maybe at a reduced pace to the German side after 7 May 1915, but there was commerce going on. (Same story in World War II, as followers of Henry Ford’s career know all too well.)

France, by contrast, lost 1,400,000 soldiers in that war. There is a generation taken from the country, and a country to rebuild without those on whose backs such building usually occurs.

Can anyone wonder that France wanted the Germans penalized to the extent that they would not be able to support an armed force again? There would be no one to fight.*

And yet all one ever hears is the John Maynard Keyneses and Bernard Baruchs decrying the terms of the Treaty—how they were unfair to Germany.

And the subsequent talk has all been about how Keynes and Baruch and the others were correct, and it was a mean, evil thing to make poor Germany suffer after they destroyed the breeding-age male population (and then some) of another country. From that perspective, it is difficult to imagine a different Treaty being agreed, since anything less penurious would make France worse off, and therefore not be even weakly Pareto-optimal.

Which is where we turn this into an economics post.

Because there is a way to improve the solution: Compensating Variation. Everyone’s lot is improved by some reallocations. And while Hicks does the mathematics in 1939, it isn’t as if such a general pattern cannot be seen on the schoolyards of Flanders and Eton.

In this case, the United States was the clear winner of the War to End All Wars. THe British did not suffer so much as the French. And in both cases, prominent public officials (Baruch from the United States, Keynes from Britain) spoke out about the Treaty, forcing one to the suspicion*** that leaders in both countries suspected from the start that the terms were penurious, and would lead to resentment among the German people.

Which brings us to Compensating Variation. Why would not the U.S. and the U.K. (such as it were) not be offering aid to France, in exchange for terms in the Treaty of Versailles that would lessen the likelihood that Flanders Field would again be invoked?

The next time someone tells you that all will be well when a Treaty is executed, because all we need is that some of the winners offer compensating variation to the losers, ask them why Armistice Day now must honor not only its own dead, but also the dead of the wars that followed The War to End All Wars.

*And, indeed, the demographics corroborate this. In 1940, the total population of France is 42 million people. The population of Germany and Austria is 78 million. 1.86 to 1. More significantly, the Armed Forces of the respective countries stand at 4.6 and 17.9 million: 3.9 to 1.

The result is inevitable: the French have more civilian casualties (470K) than the U.S. does military ones (405K).**

**Canada, by the way, loses 3.57% of its military force in World War II: more by percentage than France, the U.S., Australia, or the Netherlands.

***I said I’m talking broad strokes here, but the 1919 publication of The Economic Consequences of the Peace and the necessity of publishing The Making of the Reparation and Economic Sections of the Treaty in 1920 makes it clear that the arguments over the harshness of the treaty were contemporaneous. (Baruch, in fairness, was one of the negotiators of the Treaty, and only later became discouraged as he saw both how the results were handled, and how Ford maligned and slimed him while profiteering.