Knowledge Problem

Michael Giberson

You don't want them picking up their ideas about oil on the streets:

And the education must begin early, he told a luncheon crowd of industry professionals at OTC.

"When we don't inform our children about petroleum facts," he said, "someone else is going to do the job for us."

"He" is Abe Palaz, director of educational and R&D Partnership at Halliburton, talking about the engineering talent pool for the oil and gas industry, to an audience at the Offshore Technology Conference. The OTC, apparently the place to see and be seen in the oil and gas business last week, recently concluded in Houston.

The Houston Chronicle has had coverage, supplemented by the Chronicle's own energy blogging at NewsWatch: Energy.

ADDED: A related story from the Houston Chronicle: Worker shortage looms large.

Lynne Kiesling

Is this a misguided attempt to protect intellectual property? TechDirt reports that the BBC is threatening knitters that are knitting Dr. Who characters with legal action See also the Boing Boing post on the same story, not only for Cory's discussion, but also for the awesome picture of the knitted Ood!

While I'm not a specialist in UK intellectual property law, there seem to be both legal and practical reasons why this action is misguided. Legally, doesn't UK copyright law allow for fair use? Creating a knitting pattern is an original activity, and if the pattern refers to the copyright holder of the original character, doesn't that constitute fair use? And it's not like he was selling the patterns, so he was not profiting from the intellectual property developed by others. So where's the legal standing?

Second, isn't it impractical and counter-productive to alienate (pun intended!) your fan base? Seriously. There are three Dr. Who groups on Ravelry, with over 2,000 members worldwide. I think that's a big enough group that I wouldn't want to reduce their incentives to buy my stuff.

Is the BBC really trying to follow the lead of RIAA and piss off their customer base? I basically agree with TechDirt's observation:

It's nearly impossible to see how a fan getting people to knit versions of Dr. Who characters somehow diminishes the rights of the BBC. All it's doing is enabling fans (who are also into knitting) to express their fandom. If anything, the BBC should be encouraging this kind of fan support, rather than trying to stifle it and shut it down. It's stunning that after all these years, people still don't realize that helping fans express their feelings towards something is a good thing, rather than infringement.

The Open Rights Group, which also commented on this action, made a very trenchant observation:

The approach the BBC have taken with Mazz's knitting patterns demonstrate a distinct lack of flexibility. It is quite possible that through transforming the characters in Doctor Who into knitting patterns, Mazz may have infringed upon the BBC's copyright. But it's hard to see how Mazz's non-commercial knitting patterns actually damage the commercial interests of the BBC.

The situation also touches on the growing need for UK copyright law to allow transformative use of works. In 2006, the Gowers Review of Intellectual Property asked the UK Intellectual Property Office to propose amendments to the European Copyright Directive that allowed for creative, transformative or derivative works.

Michael Giberson

The U.S. Commodity Futures Trading Commission is thinking about prediction markets and is inviting public comments on several questions as it attempts to sort out questions of public interest and appropriate regulatory treatment. (Now that I've mentioned that the CFTC is concerned with prediction markets, I'll switch to the term the CFTC uses, "event contracts.") According to a "Concept Release on the Appropriate Regulatory Treatment of Event Contracts" issued by the CFTC last week, the agency seek public comment to help determine:

1. Whether event contracts are within the Commission's jurisdiction and if so, why (or why not)?
2. If event contracts are within the Commission's jurisdiction, should there be exemptions or exclusions applied to them and if so, why (or why not)?
3. How should the Commission address the potential gaming aspects of some event contracts and the possible pre-emption of state gaming laws?

The concept paper provides a brief review of the CFTC's experience with event contracts, namely a "no-action letter" issued by the Commission to the Iowa Electronic Markets, then discusses various elements of the Commission's legal mandate that may be related to its possible jurisdiction over event contracts. Finally, the CFTC lists twenty-four questions on which it specifically seeks comment.

The CFTC divides the questions into four categories: public interest, jurisdictional determinations, legal implementation, and market participants. I don't have much hope of developing an informed opinion on narrow legal issues of current CFTC jurisdiction or appropriate legal implementation of CFTC policies (at least not by the July 7, 2008 filing deadline for comments established for this process).

The jurisdictional questions are best addressed by a lawyer with experience in commodities law, though other folks may have useful opinions on questions #12 and #13, how or why to distinguish between event contracts and activities that are governed by laws concerning gambling, (#14) whether certain types of events like assassination or terrorist acts should be prohibited, and (#15) whether political event markets or other specific kinds of event markets may require separate treatment. (Tom W. Bell's posts at Agoraphilia provide an introduction to jurisdictional issues; start with "Architzel on Legality of Prediction Markets.")

The legal implementation questions ask about the wisdom of various potential regulatory approaches that the CFTC may be able to take, such as (#16) treating research and academic markets, internal corporate markets, and very small stakes markets differently from other kinds of event contract markets; whether the CFTC should rely on (#17) its exemption authority, or (#18) no-action letters or a policy statement in order to provide greater regulatory certainty; and (#19) the benefits and drawbacks of permitting additional markets under the kind of limits provided in the IEM no-action letter.

The questions concerning market participants address whether the Commission should be concerned about protecting retail participants in any Commission-regulated event contract markets and whether participation in these markets by intermediaries (think "brokers" or "investment advisers" or "investment pool" or "hedge fund") raises special problems. Without concluding whether event contract markets are or should be within CFTC jurisdiction, I can't imagine that there is a special role required to protect retail consumers. Event market trading can be risky business, participants ought to be aware that it can be risky, and if participants don't realize risk is involved they ought not to participate in the markets. I would think that existing anti-fraud law and other consumer protections should be sufficient.

I'm probably naive about the many benefits of the Commission's protection of retail consumers within Commission-jurisdictional markets. In any case, my impulse is to think that the questions in the "market participant" category raise issues about consumer protection that consumers ought to worry about, but not issues that would benefit from CFTC initiatives. Of course, mere expression of a general laissez faire attitude is not of much help to the CFTC, and achievement of results consistent with my general laissez faire attitude may be more likely from actual engagement with the five questions in this section. Please, someone, take on the hard work of presenting good reasons for the CFTC not to get involved in protecting retail consumers in event contract markets.

That leaves us with the three questions of "public interest":

1. What public interests are served by event contracts that are designed and will principally be traded for information aggregation purposes and not for commercial risk management or pricing purposes?
2. How are these interests consistent with the public interest goals embodied in the Act?
3. What calculations, analyses, variables, and factors could be used to objectively determine the social value of information to the general public that may be discovered through trading in event contracts? Should this be a factor in determining whether the Commission plays a role in regulating these markets?

These are questions most suitable for an economist's analysis, and all are worth a little work before I spout off.

A number of folks interested in prediction markets have made preliminary remarks on the CFTC concept paper. David Pennock is excited by the development, Chris Masse is more reserved, Chris Hibbert thinks the industry would be better off if the CFTC waits. I haven't seen Tom Bell's response to the recent announcement, but prior remarks on CFTC regulation may be relevant. See earlier related remarks by Jason Ruspini, too: Credit Event Futures and other fauna, and Flora of North America (CFTC regulation again).

My preliminary reaction is to be encouraged. Growth of the industry in the United States is frustrated by a lack of clarity over the CFTC's role. The CFTC should be encouraged to sort out its position. If CFTC's conclusions are too restrictive, then appeals can by made - to the Commission itself, to courts, or to Congress. If real money event contract markets are to become serious business in the United States, the government will have to figure out where these markets fit within the legal and regulatory world. The CFTC is taking a step toward figuring these things out.

Whether their next steps are in the right direction, who knows. I think that their steps are more likely to be in the right direction if they get high quality responses from event contract proponents.

I would expect additional comments may come from other experts in the field. Midas Oracle will be the best place in the blogosphere to follow the commentary.

Michael Giberson

Chris Dillow at Stumbling and Mumbling considers the move of the UK Financial Services Authority to crack down on insider trading:

The FSA is promising to crack down on insider dealing. No-one in the City feels the need to change his underpants. After all, what chance do public sector workers have of ever recognizing a well-informed decision?

Which raises the question. Why should insider trading be illegal at all?

He links to a post of mine summarizing Henry Manne's retrospective look at the insider trading literature. In that post I note that Manne considers the "adverse selection" argument for insider trading laws to be the only significant new defense of the laws. Dillow explains that argument like this:

"Imagine an oil company's geologist knows he is about to discover a big oil deposit. Before announcing his finding, he and his friends buy the company's stock at a low price. The gains from his discovery therefore accrue to him, rather than to shareholders. If shareholders fear this will happen, they'll under-invest in oil companies, with the result that we'll get too little investment in resource discovery. Efficiency requires that the property right in oil discoveries lie with shareholders, not employees."

Dillow suggests that the argument might support a restriction embedded in the geologist's contract, but doesn't justify laws prohibiting insider trading.

I don't have a firm belief one way or another on the value of insider trading laws. I'm not a specialist in the area, and I'm content to let others work it out. (It is hard enough work keeping up with a small corner of the energy economics world, much less all of the other interesting work out there.) But I have enough libertarian bent left in me to be inclined to favoring making insider trading optional for corporations. So why not let a company declare, "Beginning on day X, insider trading laws will no longer apply to trading in our company stock," and let the market sort out whether companies are better off with or without the restrictions.

But merely granting the option may not be enough to gain the efficiency benefits that advocates of repeal promote. After all, some of the suggested benefits are in the form of overall informational efficiency. Some of the benefits of insider trading and more efficient pricing of General Motors stock, for example, would spillover to shareholders of Ford or Nissan (i.e. I notice that the price of GM begins crashing which clues me in that my Ford shares may need a closer look). Would enough benefit accrue to current shareholders in GM for them to be willing to accept whatever risks insider trading might present?

If companies were free to opt out of insider trading restrictions, would too many or too few companies opt out? And if too few would opt out, would there be efficiency grounds for requiring companies to allow insider trading, i.e. reasons to advocate simple repeal of insider trading laws, or even to prohibit contractual prohibitions on insider trading by employees?

Would efficiency arguments for allowing insider trading also justify outlawing voluntary restrictions on insider trading?

(Thanks to Chris Masse for tipping me to the Stumbling and Mumbling post.)

Michael Giberson

While Lynne was visiting Maryland in search of the perfect yarn score, I was in New Orleans for the Jazz and Heritage festival. I'll share a photo or two once I have a chance to sort through them myself. In the meantime, I'll share this article from the Monday morning Times-Picayune, which reveals how hare-brained schemes from economists of 30 or 40 years ago are now being used to manage over-fishing of red snapper in the Gulf of Mexico.

As part of a new plan to manage harvest of the popular but ailing red snapper, [Walter] Heathcock and [Kirk] Fitzgerald are among the Gulf's pioneers in a privatization of fish in the sea.

Unlike the past, where snapper fishers competed for the catch in brief, 10-day-long fishing seasons each month, Gulf commercial snapper fishers now are assigned individual, personalized quotas they can fish at any time throughout the year. Every pound they catch is monitored and tallied by the federal government, and fishers can buy, sell or lease their rights to the fish like stock brokers.

The tradable quota system works much better than the earlier limited fishing seasons:

In the past, regulators managed commercial fishers by saying when and how they could fish. The idea was that those limitations would translate into fewer fish harvested.

But unintended consequences soon followed. Allowing snapper to be caught the first few days of each month meant that every licensed boat was sent scrambling after the same fish. The "derbies" became costly, as fishers braved high seas and stormy weather to pursue the signature bright-red Gulf fish.

"You were basically forced to fish," said Wayne Werner, a snapper fisher from Galliano. "There were a lot of days in the derby when we shouldn't have been out there. Personally, it was a nightmare. Biologically, it was a nightmare."

The new approach of dividing the catch among individuals puts emphasis on personal responsibility.

A Times-Picayune video explains a bit more about fishing under the system:

Meanwhile, from about 350 miles to the west, the Houston Chronicle reports that recreational fishers in Texas are not so happy about how the new system limits their take of red snapper.

"Nobody in the Gulf of Mexico is happy. I'm not happy. You're not happy," [Roy] Crabtree, regional administrator for the National Marine Fisheries Service's southeast region, said to a crowd of about 100 aggravated anglers during a meeting Friday evening at the University of Houston-Clear Lake.

"I can understand your frustrations," he said to the group who had come, mostly, to voice their exasperation with increasingly tighter federal regulations on recreational red snapper harvest. "But I need real solutions that are consistent with the science and that will stand up in court."

The meeting, arranged and attended by Congressman Nick Lampson, D-Stafford, was meant as a way for Texas anglers to hear the reasoning behind recent moves to further tighten the already choked recreational snapper regulations in federally controlled Gulf waters and to question the point man for the federal agency responsible for managing the snapper fishery.

It was a grim 2 1/2 -hour session. And at its conclusion, it was obvious that the controversy surrounding the red snapper fishery is not going to fade any time soon.

Lynne Kiesling

In a post about how reducing your meat consumption can help you manage food costs, Megan McArdle has the best quote I've seen thus far about the food chain:

Also, you may have noticed that meat is getting kind of pricey. Best bet is that it will go up before it goes down, since meat is essentially grain cubed, with a time lag.

UPDATE: As you can see from the comments, a better model is

Meat(t1) = (grain(t0))^3 + [grassfed_dummy(t0)) * (grass(t0) - (grain(t0))^3] + water(t0)

Lynne Kiesling

Long-time KP readers know that I am from Pittsburgh and I am a hockey fan. Newer readers may not realize that, because I don't write as much about hockey here as I used to. In part that's the disillusion and ennui that set in during and after the lockout. In part it's been the light TV coverage, even though Versus has a contract with the NHL; they don't show that many games. Once the late season kicks in and NBC starts showing some Sunday afternoon games, then I'm more likely to catch one. But I'm not likely to go out of my way to watch a game any more.

But the economics of technological change is reviving my love of hockey. When we moved back into our renovated house at the end of March, we also bought ... a 40" LCD 1080p high-definition TV. We hooked it up on a Sunday, and what was the first thing we saw when we turned it on? A Penguins-Rangers game. In Pittsburgh. And the Pens won.

All I can say is this: woof. Hockey is fabulous in HD. Of course I'm watching my Penguins (and I got home from my woolly weekend in enough time yesterday to see them win the series against the Rangers in overtime, yay!), but I'm also watching the other series. Because it just looks so freaking awesome in HD.

The increasing image quality of television, and the Moore's Law-like continuous increase in value-for-money as the technology gets cheaper, has reinvigorated my lifelong love of hockey. If this is the perennial gale of creative destruction, bring it on, baby!

Lynne Kiesling

I spent the weekend with two friends at the Maryland Sheep and Wool Festival, the second largest sheep-based livestock and fiber festival in the U.S. It's an overwhelming combination of county fair (complete with fair food), livestock show, livestock market, and fiber festival. It's all about turning this

into this

And yes, I was as ecstatically happy as I look in the picture. Total hog heaven, or sheep heaven, to be more accurate.

Much of our chit-chat during the day involved the economics of this industry, as both of my friends who accompanied me are economists (and one is also a knitter). One reason why this event and others like it are so popular is that they provide access to small-batch, hand-dyed yarns that are not widely commercially available. For example, in the above picture I'm standing in front of the fabulous, wonderful offerings from Brooks Farm (and I dropped some serious cash there, as you can see from the pile in my arms). They only sell at festivals and online, not through bricks-and-mortar stores.

The growth of the Internet, and of online social communities for knitters through blogs and Ravelry, a sort-of Facebook for knitters, has increased the demand for such distinctive fibers. Folks like Brooks Farm have seen their businesses grow as more people become aware of their products. The evidence of this connection was very apparent at Maryland Sheep & Wool.

I also enjoyed watching the feeder lamb auction, in which individual breeders (many of whom I saw were young, about 12-16) display a sheared lamb, and the auctioneer facilitates a single-price, ascending, open-outcry English auction. These lambs were going for around $150-200, which is high relative to the overall market average for feeder lambs in the U.S. markets. High quality, local lamb, some of which I had for lunch, and it was glorious.

Lynne Kiesling

I handed out the Washington Post story on biofuels that Mike posted on Wednesday in one of my classes, and it was very timely, as they were presenting case studies of proposed biofuels investments. The one thing I went out of my way to point out to them was an appalling, shocking example of flimsy and incorrect economic logic:

Don Endres, the chief executive of VeraSun and owner of 20 percent of its shares, grew up on a farm in Watertown, S.D., where his father and grandfather raised corn. His brothers are still farmers.

Endres says ethanol plants aren't to blame for high corn or food prices. He notes that the corn used to make ethanol isn't the kind that people eat anyway.

AAARGH! Does he fail to understand the principle of substitutability? Let me say this slowly and clearly: different crops compete for the use of scarce land. Ethanol plants, and the subsidies that make it more attractive to build them, increase the demand for a type of corn. That makes it more profitable for farmers to plant that corn, and to do so they reduce their plantings of soy and corn for food (for both humans and livestock). That reduction in supply, in combination with global economic growth that increases food demand, raises prices.

Thus Mr. Endres is entirely incorrect. Ethanol plants do contribute to high food prices, despite their use of non-food corn.

And he's not alone in making this fallacious argument. I'm sitting here listening to NPR's Morning Edition, which just did a story about this question (I'll post the link when it's available), and one of the contributors to the story was Iowa Senator Charles Grassley (who is himself a farmer). Not only did he make the same incorrect argument as Mr. Endres, he even went one further and bit into a kernel of the corn used for ethanol, to show how inedible it is!

Politics really is just theater, isn't it? Sadly, my taste in theater tends toward Shakespeare and Tom Stoppard, not toward self-aggrandizing gimmicks.

Here's my question: are folks like Mr. Endres and Senator Grassley really that economically illiterate, really that stupid? Or are they hoping that everyone else is that economically illiterate, and that they can use this fallacious argument for their own political expediency? In either case, I find it shocking.

Michael Giberson

If you haven't had your fill of ethanol-and-the-high-price-of-food-everywhere stories, today the Washington Post takes a look from the point of view of an Iowa farmer.

Johnson is a one-person summary of how high corn prices are washing through the world of agriculture and climate change. Normally, he plants half of his 900 acres with corn and half with soybeans. He alternates crops on each field because it is better for the soil.

But last year he planted 500 acres of corn and 400 of soybeans, and this year he will do the same. "The market was screaming, 'Farmer Johnson, plant more corn, plant more corn,' " Johnson says.

Well, the market may be screaming for more corn, but much of it is due to the hard, swift kick in the bushel-basket delivered by Congress:

In 2005, the Republican-led Congress and President Bush backed a bill that required widespread ethanol use in motor fuels. Just four months ago, the Democratic-led Congress passed and Bush signed energy legislation that boosted the mandate for minimum corn-based ethanol use to 15 billion gallons, about 10 percent of motor fuel, by 2015. It was one of the most popular parts of the bill, appealing to farm-state lawmakers and to those worried about energy security and eager to substitute a home-grown energy source for a portion of U.S. petroleum imports. To help things along, motor-fuel blenders receive a 51 cent subsidy for every gallon of corn-based ethanol used through the end of 2010; this year, production could reach 8 billion gallons.

The article is part four in a series on high food costs around the world.

Lynne Kiesling

By now you all have probably heard that Hillary Clinton and John McCain are proposing gasoline tax holidays this summer to take some budget pressure off of voters who drive a lot (c'mon, let's be honest about the true audience of these proposals). Barack Obama does not support such a proposal.

Criticizing this proposal is truly like shooting fish in a barrel, and others have done it more thoroughly and eloquently than I can (thanks to the WSJ's Environmental Capital for the link).

So will the populist impetus take the day on this issue, or will there be room for reasoned economic analysis to convince voters that this is a stupid policy? Depends on who they are and how much they drive, probably.