Bauman, the Stand-up Economist, Updated

(Edited 2/2/2011) Yoram Bauman, the stand-up economist, is a funny man and a good economist, and apparently, that is not an oxymoron.  Watch his new video for two reasons.  First, Bauman humorously explains Mankiw’s ten principles of economics, and second, he gives an example of an external cost and why markets cannot solve the problem.  The standard solutions are a tax on the good producing the pollutant or a cap-and-trade system.  He then pushes a carbon tax as a replacement to some part of the current tax system such as the corporate tax or the payroll tax. 

I am skeptical about some results that climate scientist reach.  Data may be corrupted by the urban heat island effect.  Proxies used to estimate past temperatures beyond fifty years do not seem to be statistically robust.  I also believe that the opportunity cost of alternative energy is well above the $.30 per gallon tax he seems to support, meaning that the cost of solving the problem is greater than the cost of the problem.  Finally, I doubt that unilateral action by the United States would significantly reduce global carbon emissions; it is a global emissions problem without a global enforcement mechanism.  With all my doubts, I still favor a carbon tax as a substitute to some other portion of our tax code.  It is a better, meaning less distorting tax.
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Spontaneous vs. Government Order and Oil

In 1973, Arab oil producers cut production and began an embargo of the United States in response to the government’s decision to supply the Israeli military during the Yom Kippur War.  In the short run, neither demand nor supply are responsive to prices.  As Arab nations withheld oil, prices surged and in a misguided attempt to manage rising prices, the government instituted price controls that added fuel to the crisis and energized a government subsidized search for alternatives to oil.  

Wind, solar and ethanol have largely been failures and still heavily rely on subsidies.  Programs to encourage conservation have spent taxpayer dollars but were the expenditures necessary?  In the summer of 2008, did consumers need incentives from Uncle Sam to conserve gas?

The spontaneous interactions of consumers and producers has mitigated the problem.  High prices encouraged oil exploration.  New sources oil were found.  Deep water drilling and other technologies were developed.

This is but one chapter in a long story of the battle between scarcity and market led innovation in oil production.  Jonathan Fahey reports in “New drilling method opens vast oil fields in US” that a new and non subsidized drilling technology first developed for extracting natural gas but now applied to oil has the potential to greatly expand U.S. production.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

As with other market developed technologies, it is cost effective.

…drilling for shale oil is not dependent on high oil prices. Papa [chief executive of EOG Resources, the company that first used horizontal drilling to tap shale oil] says this oil is cheaper to tap than the oil in the deep waters of the Gulf of Mexico or in Canada's oil sands.

Problems remain.  Oil is still a finite resource and like all energy sources, it pollutes.  If environmental critics are right, and burning oil results in global warming by releasing carbon into the atmosphere and warming is costly, then developing relatively cheap new sources of oil is a mixed blessing, but a blessing nonetheless.  Other things equal, I would rather struggle with carbon emission with relatively cheap oil prices.
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Sessions Wrong on Trade

Since Adam Smith wrote the An Inquiry into the Nature and Causes of the Wealth of Nations economists have supported removing restrictions on trade.  Alston, Kearl and Vaughn reported the results of a survey of economists in “Is There Consensus among Economists in the 1990’s?” which was published in the American Economic Review.  Of those responding to the survey, 93% agreed with the statement that “tariffs and import quotas usually reduce general economic welfare.”

I am assuming that Jeff Sessions is a smart man and understands the economics of trade as well as the calculus of governing. In an ugly example of relationship capitalism, he has apparently concluded that it is more important to make constituents happy than it is to do what is best for the American economy.  The Wall Street Journal reports in “Fair Trade for One” that in December, Sessions “put a hold on the renewal of GSP [Generalized System of Preferences] on behalf of Exxel Outdoors, which makes sleeping bags in his state.”   The General System of Preferences was a program that has been in place since the 1970s that aided poor countries by lowering our tariffs on their products.  This was not only beneficial to poor countries but to consumers and the economy as a whole.  The program had a review process conducted by a subcommittee in the House and Exxel Outdoors had appealed to the subcommittee and lost.  They made a second appeal but Sessions intervened before the second decision.

Bangladesh is the economic powerhouse that Sessions claims is pushing its way into U.S. markets by unfairly subsidizing its products.  Their sleeping bag sales rose to 8.4% of U.S. imports due to manufactures moving production from China to escape “high cost” labor.  Bangladesh has a per capita GDP of $1,500, about the same as Haiti.  Perhaps Bangladesh has a comparative advantage in the production of products manufactured with low skilled labor.
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The Chevy Volt

The video is of a test drive of the Volt in which the reviewer comments on the quality and price of the Volt.

The Chevy Volt is an interesting vehicle that makes use of new technology.  It uses a lithium-ion battery which holds more charge and is heavier and pricier than the nickel-metal hydride battery pack used in the Toyota Prius and similar hybrid vehicles.  The back up to the Volt is an electric motor that is powered by a gasoline electric generator.  A fully depleted battery takes eight hours to from a 120 volt outlet or three hours from a 240 VAC outlet.
The Volt will sell for approximately $42,000 but with $7,500 federal tax credit that will reduce the cost for most buyers to $34,500.  The EPA gives the Volt a combined gasoline/electric fuel economy of 60 mpg, or about twice the mileage of a similarly sized car.  Assuming that a typical Volt owner will drive 15,000 miles per year, and that gasoline costs $4.00 per gallon, the Volt will save its owner approximately $1,000 per year in fuel expenses.  If a traditional subcompact costs $20,000, the Volt will have a fourteen year payback period for the owner and a twenty-one year payback period for society due to the tax credit.The graph of the “Market for the Chevy Volt” provides some important economic details of the Volt market and the impact of the federal tax credit subsidy.  A lot of guess work went into the shape of the supply and demand curves, but the guess work does not affect the direction of movements of prices, only the size of the movements.  The supply (S) and original demand curve (DO) represent the market for the Volt prior to the federal tax credit subsidy.  At equilibrium on the supply and original demand, 34,667 cars sell for a price of $40,333.

With the subsidy, the demand expands (DN).  The new equilibrium quantity increases by 5,000 Volts to 39,667 and equilibrium price increases to $42,833.  The subsidy is shared by Chevrolet and the buyer.  Chevrolet charges $2,500 more per car (The difference between the new equilibrium price and the original equilibrium price), and after the subsidy, the consumer pays $5,000 less (The new equilibrium price less $7,500.  The price paid by consumers is shown on the graph at the point where the dashed line showing the new equilibrium quantity crosses the original demand curve and then moving horizontally to the price axes).

The private market has a new partner, the taxpayer.  The yellow rectangle is the subsidy paid by taxpayers.  It is $297.5 million dollars ($7,500 times 39,667 Volts).  The government estimates that approximately one third of buyers will not qualify for the subsidy, reducing the taxpayer’s bill to approximately $200 million, or approximately $40,000 per additional Volt sold.  To benefit society, the sale of Volts must generate sizeable positive externalities, reduction in pollution, etc.  Does the subsidy benefit taxpayers?         
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De Soto on Egypt

Hernando De Soto, a Peruvian economist argues that the economic situation of the poor can be substantially improved by establishing and enforcing property rights for all citizens within a country.  His books, “The Other Path: The Economic Answer to Terrorism”, and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” are important contributions to the economic literature.  He describes his involvement as an adviser to the Egyptian government and explains why the lack of property rights contributed to discontent in Egypt in “Egypt's Economic Apartheid.”

In 1997, the Egyptian government hired the Institute for Liberty and Democracy, De Soto’s think tank, to measure the size of the extralegal economy, those working and living without the protection of property through law and the institutions that enforce it.  Those living outside the boundaries of the property rights system define the economically and politically marginalized citizens.

De Soto led a team of over 120 experts who worked with over 300 local Egyptian leaders and interviewed thousands of marginalized Egyptians.  They issued a 1,000 page report in 2004 that estimated the underground economy hired 9.6 million people, 2.8 million more than the above ground legal private sector, and 3.7 million more than the public sector.  An astounding 92% of the population lives without legal titles to their homes.  De Soto’s team measured the value of extralegal businesses and homes at over $400 billion.  If afforded legal protection, the value of these assets would grow rapidly as would the Egyptian economy.The report was approved for implementation by Minister of Finance Muhammad Medhat Hassanein, but before the plan was to be implemented Hassanein was ousted and the reforms shelved.  Why would anyone oppose reforms that would directly improve the lot of the poor and contribute to the overall prosperity of Egypt?

North, Willis and Weingast suggest an answer in “Violence and Social Order.”  Governments in developing nations, termed limited access orders by the authors, trade economic rights to groups who can cause violence for a promise to maintain peace.  The marginalized citizens began a popular uprising that is at the point of turning violent as the powerful political insiders jostle violently or otherwise to establish a new political equilibrium that will maintain or enhance their privileged position in society.  The difficult to impossible task of democratic elements is to maintain the peace, disarm political insiders who can violently demand their privilege, and expand legal access to the economy to the marginalized Egyptians.
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Corn and Sugar Subsidies

As mentioned in previous posts, corn growers are subsidized by laws that require consumers to buy ethanol which is more expensive than gasoline.  If it were not more expensive, you would not have to force people to buy it.  The subsidies come in three forms: forced consumption of ethanol paid by consumers, blending fees paid by taxpayers, and tariffs on the importation of sugar based ethanol which is again paid indirectly by consumers.  Included below are quotes by two Nobel Laureates in economics and a former head of the Council of Economic Advisors to President Bush, the president who greatly increased the subsidies to corn growers.

Paul Krugman is a Nobel Prize winner who sometimes criticizes President Obama from the left.  He writes from his column, The Conscience of a Liberal in a post titled “Demon Ethanol,”

I’m almost never censored at the Times. However, I was told that I couldn’t use the lede I originally wrote for my column following the 2007 State of the Union address, in which Bush made ethanol the centerpiece of his energy strategy: “Before the State of the Union address, there had been hints and hopes that President Bush would offer a serious plan to reduce our dependence on imported oil. Instead, however, he took refuge in alcohol.”

Well, anyway — the news on ethanol just keeps getting worse. Bad for the economy, bad for consumers, bad for the planet — what’s not to love?

Gary Becker is a Nobel Prize winner often associated with the political right.  He writes in “Let's Make Gasoline Prices Even Higher”

Other ways to reduce dependence on oil take much longer to implement, but a long view is necessary since the terrorism threat will last into the foreseeable future. The federal government has been trying to develop a cleaner substitute for gasoline by subsidizing production of ethanol, made primarily from corn. This program has essentially been a flop: Ethanol is still too expensive, and ethanol factories create pollution consisting of nitrogen dioxides and other gases. The ethanol subsidy of about 50 cents a gallon is just another way to subsidize corn growers, not a serious attempt to find efficient ways to reduce dependence on gasoline.

Greg Mankiw was a head of the Council of Economic Advisors to President Bush.  What follows is a post from his blog that quotes Thomas Friedman and Mankiw’s short reply to the comment (“Sugar Ethanol”).

In today's NY Times, columnist Tom Friedman arrives at the intersection of energy, farm, and trade policy and doesn't like what he finds:

Thanks to pressure from Midwest farmers and agribusinesses, who want to protect the U.S. corn ethanol industry from competition from Brazilian sugar ethanol, we have imposed a stiff tariff to keep it out. We do this even though Brazilian sugar ethanol provides eight times the energy of the fossil fuel used to make it, while American corn ethanol provides only 1.3 times the energy of the fossil fuel used to make it. We do this even though sugar ethanol reduces greenhouses gases more than corn ethanol. And we do this even though sugar cane ethanol can easily be grown in poor tropical countries in Africa or the Caribbean, and could actually help alleviate their poverty.

Friedman calls this state of affairs "stupid." This is a word I usually avoid (for it is hard to use politely), but it does seem particularly apt here.

Sugar growers are also subsidized by consumers.  Their subsidies come through quotas on foreign imports at the expense of domestic consumers and foreign producers.  Mark J. Perry, a professor of economics and finance in the school of management at the Flint campus of the University of Michigan describes the program’s cost to American consumers (“Sugar Policy: Sweet Deal for Producers, Sour for Consumers”).

Due to protectionist trade policies that limit the amount of sugar imports entering the United States at the much lower world price, the American sugar producers are protected from more efficient foreign sugar growers in Central America, Africa, and the Caribbean who can produce sugar at half the cost of beet sugar farmers in Minnesota, North Dakota, and Michigan…

Last year, Americans paid an average of 53.3 cents per pound for domestic sugar, almost double the average world price of 27.7 cents per pound. Exactly how much did Americans pay last year for our “no cost” sugar policy? An astounding $4.5 billion…

That is approximately $150 per American.  If all the money went to the 4,700 farmers that grow sugar beets, that’s about $950,000 per farmer.  Now that’s a sweet deal for farmers! 
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Wolf on Obama and Obamacare

Quoting from the Washington Time’s byline, “Dr. Milton R. Wolf is a board-certified diagnostic radiologist, medical director and cousin of President Obama. He blogs daily at miltonwolf.com.”  As an aside that must be dealt with, I do not care that he is a cousin to the president; it has nothing to do with his qualifications to write on healthcare reform.  His medical degree does. 

Section 2711 of the Public Health Service Act prohibits insurers from establishing annual or lifetime limits of benefits for any insured person or group.  In his Washington Times Op-ed, Wolf finds three problems with our nation’s recent healthcare reform based on the 733 exemptions to section of the act, political corruption, the implicit acknowledgement that healthcare reform increases healthcare costs, and lack of transparency.

Wolf views the granting of exemptions to several cities, Massachusetts, New Jersey, Ohio, Tennessee, businesses and unions including the Service Employees International Union as evidence of corruption.  Without additional evidence, I not only don’t see fire, I don’t even see smoke.  There were 733 exemptions granted.  Perhaps there were 733 applications.  Political donations are reported.  It would not be difficult to statistical estimate the probability of receiving an exemption for those making donations to the Obama campaign and comparing it to the probability of receiving an exemption for those making donations to the McCain campaign.  Until I see more rigorous evidence, I will not consider the allegation of corruption.

The other charges are more difficult to dismiss.  By prohibiting insurers from limiting coverage the cost the amount of claims paid must stay the same or increase.  They will only stay the same if the caps on coverage were set so high that they were never reached.  I believe that this hit low wage earners hardest.  Suppose your job is worth $10.00 per hour to your employer and that you receive this wage in the form of wages at $7.25 per hour and a healthcare benefit valued at $2.75 per hour.  If the cost of healthcare now rises to $3.50 per hour, the employer will either cancel the policy or fire the worker because the cost of the wages and benefits exceed the value of the job.

At best, the  lack of transparency is bad government.  I don’t know what the legal requirements of transparency are, and without additional information, I assume that the administration meets them.  Wolf writes that more than 500 waivers were granted in December but not reported until after the State of the Union.  That is not a high level of transparency from an administration promising new levels of openness.    
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