Recently in Economics Category

Michael Giberson

Maybe you already knew this, but I just learned a few days ago that the United States Association for Energy Economics has a working paper series online, hosted at the SSRN. Your research paper can be included (see guidelines here).

And while we're talking about the USAEE, note that the 2008 annual meeting will be this December 3-5 in New Orleans. Next year's meeting of the International Association for Energy Economics will be held June 21-24 in San Francisco.

(HT to Cheryl Morgan/MorganEnergy)

Michael Giberson

Greg Mankiw called it "the Pigou Club in a Nutshell", quoting the following from Tim Kane:

we should aim to tax the bad things (noise, gasoline, trash, violent crime, evil foreign dictators) and untax the good things (homegrown profits, employment, innovation).

But take another look at that list of "bad things": noise, gasoline, trash, violent crime, evil foreign dictators. As they used to sing on Sesame Street (and maybe they still do), "one of these things is not like the others."

Can you tell which one is not like the others?

If you guessed this thing is not like the others, then you're absolutely...right!

Lynne Kiesling

The New York Times has an article today that supports the anecdotal evidence I reported last month: consumers are substituting out of low fuel economy cars and into high fuel economy cars.

With gasoline prices topping $4 a gallon, consumers are overwhelming dealerships with demand for the littlest vehicles in the showroom.

Mr. Libby said that the tiny Honda Fit is on a dealer's lot an average of 11 days before it is sold, half the time of traditional quick sellers like the Cadillac CTS and Mercedes-Benz C300 luxury sedans.

"These are amazingly low numbers for a car of this type," he said. "If gas prices stay where they are, I think we'll see this for quite a while."

Hybrids are even more difficult to buy. Four of the 10 fastest-selling vehicles are hybrids, led by the Toyota Prius, which sells within four days of arriving at the dealer, according to J. D. Power. The average time to sale for the industry in June, by comparison, is 57 days.

But while inventories are low, manufacturers cannot move quickly enough to increase production of popular small cars like the Toyota Corolla, Honda Civic and Ford Focus.

Michael Giberson

Arnold Kling has some interesting insights on what is sometimes pejoratively referred to as price gouging:

One of the issues that [Russ Robert's didactic novel, The Price of Everything] raises--the very first one, in fact--is the morality of raising prices when something becomes scarce, such as flashlights after a weather disaster. Russ makes the standard case for allowing the price to ration the scarce resource, but I don't think he will necessarily overcome people's moral intuition, and I think it is very important to understand why.

The basic moral intuition is, "Don't take advantage of somebody when they are in distress," and I think it has broad implications. It explains usury laws. It also may explain the way we approach health insurance....

Kling's conjectural history of the morality of usury seems to get it more or less right:

Back in Biblical times, when somebody came to you to borrow, it was not to build a steel mill or start a social networking site on the Web. Chances are, if somebody needed to borrow it was because of an illness, a famine, or other disaster. Since people in that situation were in distress, moral codes developed that prohibited charging interest for loans. Charging interest would have meant taking advantage of people in distress.

Jews and Christians overcame their aversion to usury when they saw money being lent to businesses and governments, rather than to people in distress. Even today, however, if a destitute person is sick or hungry, religious authorities would frown on your charging interest on a loan to that person. In that sense, the moral opposition to taking advantage of a person in distress persists.

So notice that while the moral intuition and the case of usury were initially bound together, in Kling's telling, some cultures developed distinctions between the concepts. We might view achieving this distinction as a kind of moral progress. Kling doesn't mention, perhaps because he sees the idea as too obvious to remark upon, that the business of borrowing and lending money has been an overwhelmingly positive development for humankind.

Kling continues:

I suspect that the moral opposition to raising the price of flashlights after a storm reflects that same intuition. It's one thing to charge what the market will bear in the normal course of business. It's quite another to profit from distress.

What changes in our moral concepts regarding price gouging would represent moral progress?

Many economists are of the view that "price gouging" is, as Lynne once put it, "a non-concept." Or, perhaps more exactly, a concept that actively makes people in distress worse off by interfering with the most efficient means of rationing limited supplies and motivating increased supplies of useful goods.

Kling advises economists "to justify confronting people in distress with market prices." Economists can do that, he says, but:

We have to persuade our fellow human beings ... that people in distress should receive support from charity or government, not from suppliers of loans or flashlights or medical care; and that there are reliable mechanisms to ensure that people in distress will receive support from those alternative sources, so that placing the burden on suppliers is as wrong-headed as we always allege it to be.

I once observed, "Few things drive economists crazy faster than a politician talking about price gouging."

Why? Because to economists, the economic lessons here are clear, commonsensical, and well settled, and politicians almost always advocate policies that appear to use the power of the state to make people worse off. In that post I also noted that while the fundamental economics appeared well settled, the policy debate remains as unsettled as ever. I suggested that economists needed new arguments.

Kling is on the right track.

RELATED POSTS:

• Price gouging laws: emotions, economics, and policy


• Price gouging: At the intersection of emotions, ethics, and economics

Lynne Kiesling

Note these items from the Financial Times:

1. Peugeot and Mitshubishi enter an electric car alliance, striving toward plug-in hybrid vehicles. The same article notes that Bosch and Samsung have entered into an alliance to develop better lithium-ion batteries.

2. Ford and GM call on the federal government to support plug-in hybrid development; from a speech at a Google/Brookings plug-in hybrid conference last week:

Ford Motor has joined General Motors in calling for direct US government intervention to boost the market for plug-in electric vehicles, which Detroit's carmakers fear could become dominated by Asian manufacturers.

Mark Fields, head of Ford's Americas business, said that government should be a "key partner in promoting American manufacturing" of plug-in cars and the lithium-ion batteries that power them through tax incentives, research subsidies and other measures.

"A business case will not evolve, in the near term, without support from Washington," Mr Fields said on Wednesday in a speech at Washington DC.

Really? Really? Does he mean that $4 gas, which has torpedoed the market for Hummer, isn't shifting consumer demand sufficiently to create a near-term business case for plug-in hybrid R&D?

Did he say that with a straight face?

Meanwhile, Wired writer Chuck Squatriglia complains about the federal research commitment announced at the same conference:

The Department of Energy made a big deal of the hand-out, announcing it at a plug-in hybrid conference in Washington D.C., but c'mon -- $30 million? To be spread out among three companies over three years? What'd it do -- scrounge change from couch cushions in the Pentagon? EV advocates were quick to thank Uncle Sam for the money but said it's going to take a whole lot more than that to wean us from oil -- which, by the way, will collect $17 billion in tax breaks during the next decade.

Toyota is getting right to it, and will release a plug-in in two years. Other aforementioned companies are also proceeding with plug-in R&D.

Why are Ford and GM pleading to the government for subsidies? They have made horrendous business decisions, and now they are suffering the consequences. [snark]It didn't take long for the business case for some of those bad decisions to evolve, did it!?![/snark] Are they really so behind the curve, and is the overall social benefit so large, that taxpayer money should subsidize their previous bad business acumen? I say no.

I agree with Squatriglia that the oil company tax concessions should not exist, but I can't see the economic argument for spending taxpayer money to subsidize research that other companies are already voluntarily performing.

Lynne Kiesling

This ars technica article on energy storage provides a concise summary of the challenge of energy storage and the current technology options. Focusing on the power needs of datacenters, the article describes the intermittency problem associated with renewable sources (in normal language, the sun doesn't necessarily shine and the wind doesn't necessarily blow at times that coordinate naturally with electricity demand).

Energy storage is the Holy Grail of the electricity system. Even if we did have dynamic pricing to enable decentralized coordination between supply and demand, it would be highly unlikely to match up perfectly all the time. Storage bridges that gap. Storage also changes the market power dynamic; if I have a storage option I can buy more when it's cheaper and use it when it's pricier. That alternative creates a substitute for generated on-demand peak power.

Lynne Kiesling

... or he's being fatuous; I prefer to think he's trying too hard.

Bryan Caplan's got a challenge to come up with an example of radical ignorance/Knightian uncertainty that's better than the Trojan horse example. Arnold Kling's got a response for him, as does Tyler Cowen. They are all focused on the important distinction between situations in which you can reasonably assume that there is a known probability distribution and situations in which there is not.

I think they are all thinking too hard, although perhaps Bryan, Arnold, Tyler (and Robin, in Tyler's comments) will all say that my example is degenerate: technological change and consumer adoption of new technologies. Sure, we can say that there is some path dependence in the development and adoption of new technologies ex post. But ex ante, given that we live in a non-ergodic world (to use Doug North's phrase), can we really say that which inventions get invented, and which inventions get adopted, can be draws from a known probability distribution?

For example, in 2000 we could reasonably have argued that there was a known probability distribution out of which we could draw a probability that Apple would develop a music player. But that's too obvious a question. The real problem of radical ignorance comes in the form that their innovation would take, and whether or how consumers would adopt it and use it, and adapt it to their various heterogeneous purposes. Could we have drawn those outcomes out of a known probability distribution?

No. And the precise reason we couldn't is because of the non-ergodic nature of life. We simply cannot know either the exact form of future technologies, or how they will interact with and shape consumer preferences.

For me, that's the canonical example of radical ignorance.

UPDATE: I said "ergodic" when I meant "non-ergodic"; that'll learn me to post when I'm rushing off somewhere! Thanks to Gabriel for the catch.

Lynne Kiesling

Did the Reason article from the Kiesling/Bailey/Smith carbon policy panel that I linked to earlier this week just whet your appetite? Then this Reason Roundtable on Climate Change is for you!

There has been much discussion in free market circles about market-based solutions to global warming that minimize the threat that big government poses to property rights. But less attention has been paid to the threat that greenhouse gas emitters themselves might pose to private property. This is the issue that Jonathan Adler, Professor of Law and Director of the Center for Business Law & Regulation at the Case Western Reserve University School of Law and Indur Goklany, author of The Improving State of the World: Why We're Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet discuss in this edition of Reason Roundtable in two radical and provocative essays.

I like Shikha Dalmia's introductory essay, particularly where she says

Indeed, regardless of whether climate change eventually turns out to be real or not, the libertarian goal ought to be to ensure the protection and advancement of freedom - and all its attendant institutions: free markets, limited government and property rights. These rights enhance human welfare by allowing individual choice and experimentation and creating an incentive for individual entrepreneurship and economic growth. But more: they are both the base of - and bulwark for - all other rights. They have normative value quite apart from their utilitarian value.

Jonathan Adler's essay focuses on thinking about climate policy from a property rights perspective, and I think he's broadly correct throughout. But his discussion leaves a gaping hole: there are substantial transaction costs associated with a property rights approach, given existing institutions. Some policy change is required to reduce the transaction costs that currently reduce the capacity of the global network to achieve private ordering. Bringing either tort claims or nuisance claims in this highly diffuse and distributed situation would be prohibitively costly. So how do we use his insights to help us design a set of institutions that enable private climate ordering to occur?

I encourage you to read all three essays.

Lynne Kiesling

On Wednesday Toyota announced that they would release a plug-in hybrid vehicle by 2010, and that they will manufacture hybrid versions of all vehicles over the next 20 years. The battery in the PHEV will be lithium ion, but Toyota is working on developing nickel metal hydride batteries, as well as other battery technologies and storage options.

Toyota seems to be taking what I think of as a portfolio approach to our vehicular future, as described in this Wired article:

The company's ambitious "low-carbon" agenda includes cranking out 1 million hybrids a year and eventually offering hybrid versions of every model it sells. In the short-term, Toyota says it will produce more fuel efficient gasoline and diesel engines and push alternative fuels like cellulosic ethanol and biodiesel. It's also pumping big money into lithium-ion batteries. With fuel prices going through the roof and auto sales going through the floor because of it, Toyota president Katsuaki Watanabe says the auto industry has no choice but to move beyond petroleum.

"Without focusing on measures to address global warming and energy issues, there can be no future for our auto business," he told reporters in Tokyo, adding, "Our view is that oil production will peak in the near future. We need to develop power train(s) for alternative energy sources."

He then goes on to point out that oil supplies will not dry up and internal combustion will not disappear overnight, and that a portfolio approach will address the various uncertainties and differences in local market conditions across time and place.

Lynne Kiesling

Another rollercoaster day on oil markets ... here's an interesting observation from a Bloomberg article on the topic:

"Refiners are managing the crude supply they have on hand because they are worried about weak product demand,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. "Both gasoline and distillate demand over the last four weeks are down from a year ago.''

Fuel consumption averaged 20.4 million barrels a day in the four weeks ended June 6, down 1.3 percent from a year earlier, the department said.

U.S. gasoline demand increases during the summer, when Americans take to the highways for vacations. The peak- consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September.

On a related note, I am glad to see more and more analysis and discussion about the interaction of the weak dollar and higher commodity prices (including oil, metals, and food). One reason commodity markets are so unsettled right now is that interaction, and while I'm not expert enough to comment on it, I'm glad to see it discussed (in, for example, Steve Hanke's op-ed in the Wall Street Journal yesterday on rice prices).

Lynne Kiesling

The Economist has an article this week on the energy efficiency and reliability-enhancing characteristics of intelligent appliances, with the catchy title of "fridges of the world, unite!". They discuss the GridWise Olympic Peninsula Testbed project in which I participated, although they focus on the frequency control aspect of the project and not on the price-responsive capabilities of the devices.

The most advanced project is the brainchild of the American Department of Energy's Pacific Northwest National Laboratory (PNNL). Last year it completed the first residential trial of its "Grid Friendly Appliance" controller--a small device that listens to the AC-frequency hum of the electricity supplied by the grid. If the hum goes a little flat, that indicates too much demand on the grid, so whenever a controller notices the American standard 60Hz grid frequency dipping to 59.95Hz (something that usually happens at least once a day) it shuts off the heating element in the appliance it is regulating for two minutes. If, at the end of that time, the grid is still unstable, the element stays off for another two minutes, and so on until a maximum of ten minutes have elapsed.

It then goes on to discuss a British firm, RLtec, which is making refrigerators with "Dynamic Demand" technology to enable them to adapt dynamically to even smaller fluctuations in grid conditions. They believe that in aggregate, even such minute responses can lead to meaningful improvements in efficiency.

Lynne Kiesling

Here's an online edited version of the transcript, and a link to the video of a discussion panel that Ron Bailey, Fred Smith, and I did at a Reason in DC event in October 2007. It was a very lively conversation!

The transcript is in the July 2008 print edition of Reason.

Lynne Kiesling

Check out this cool Financial Times article on Dutch use of operations research to optimize their train network and timetable.

Imagine trying to create a system detailing the precise movements of 5,500 daily train services, thousands of pieces of rolling stock and all the personnel needed to run a railway network (a typical day on the Dutch railway involves 15,000 driver journeys). Then figure that, as with a Rubik's Cube, moving any piece of the puzzle could have knock-on effects on another part - meaning that the problem always has to be tackled as a whole, rather than in its component pieces.

Imagine, also, that the timetable must be flexible enough to withstand everyday disturbances and that it needs to strike a balance between operating costs and service quality. Quite complex.

This is a problem for operations research! The article then goes on to describe how academics, Netherlands Railways, and ProRail worked together to devise algorithms to come up with 10 alternative timetables, depending on the objective function that they wanted to maximize.

So far, so good:

The new timetable, introduced in December 2006, has been a success by a number of measures. Passenger demand has increased by 15 per cent on some lines. Passenger satisfaction, measured in surveys, has gone up. More trains arrive on time. And Netherlands Railways makes better use of its resources. Its profits rose by €40m ($61.8m) in the first year of the timetable, with more profit growth expected down the line.

But it was not a Pareto move, as we economists say; some passengers in some locations complain that their journeys are longer now with the new timetable.

The participants see this collaboration as a great example of academic and business interaction, with each one feeding into the other.

Lynne Kiesling

There are a couple of very interesting recent solar developments that have substantial economic implications. First, the blue sky stuff: courtesy of Slashdot, a team of researchers in the Netherlands have demonstrated avalanche effects in semiconductors that can be used in solar cells (here's the original article). Avalanche effects mean that instead of having a 1:1 relationship between a photon and an electron, in which 1 photon releases 1 electron, it's physically possible in these nano-scale semiconducting materials to have 2:1 or even 3:1 -- 2 or 3 electrons released per photon in the material. This means twofold or threefold increase in the possible energy intensity of the solar cell material. These nanocrystals are even inexpensive to manufacture. How cool is that?

What are the economic implications of this new material and new knowledge? The low energy intensity of solar cells has been a factor in making solar a less cost-effective means of generating electricity than fossil fuels, which are extremely energy intensive. This avalanche effect can mean smaller, more energy intensive solar cells, which changes the cost structure for solar. I think it will certainly shift the long-run average cost curve downward, which creates an opportunity for solar retailers to reduce prices. A lower solar retail price shifts the price ratio between solar power and all other electricity power sources. For example, the price ratio between solar-generated and coal-generated electricity would shift such that at the margin, consumers would substitute out of coal-powered electricity and into solar-powered electricity. If I were better at generating the isoquant and indifference curve graphs electronically, I'd show it here graphically ... but the logic is straightforward.

In brief, innovations like this one increase the margin on which solar can compete with fossil fuels.

Another solar development that's amenable to economic analysis is described in this Financial Times article from Monday.

The solar power business is bracing itself for a collapse in prices that could lead to a shake-out in one of the most promising areas of the renewable energy sector.

However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.

Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels. This is likely to lead to demand outstripping supply for the first time in years.

Another factor driving prices is uncertainty over the degree of government subsidies in some key markets for the technology.

Interesting, interesting, interesting. Over the past decade the demand for solar cells has shifted out, leading to increased prices and to supply pressure on inputs like silicon (which is also an input into a lot of other products, so it's a very competitive global market). Now we are starting to see the supply response, with more solar manufacturing capacity coming online and the use of other materials, as entrepreneurs wanting to enter the market innovate around input supply constraints and costs. This market entry is shifting out the supply curve, and from the sounds of the FT article, the magnitude of the supply shift is large relative to current demand. Consequently, they anticipate a fall in solar cell prices due to the large supply shift. Even if the demand curve stays the same, this supply shift means that retail prices of solar cells would fall, leading to increased adoption of solar technology. More realistically, demand is likely to continue shifting out, which may mitigate some of the price reduction.

Another interesting fact in this article: where is a lot of this new manufacturing capacity coming online? China.

Think about the economics of the interaction of these two developments. Taken together, they imply a potentially dramatic decrease in solar power manufacturing costs and retail prices. It will be fascinating to see how this market continues to develop.

Lynne Kiesling

I seriously gave myself an injury yesterday morning when I saw the Wall Street Journal article on the Congressional bill to nationalize hurricane reinsurance. Have we learned nothing about moral hazard from flood insurance, from the savings and loan fiasco, and so on?

So I'm glad that Tim Haab's on the case, pointing out the stupidity of such a policy. Please go read his remarks, but only after you have put something soft on the desk in front of you, for your own protection.

Lynne Kiesling

One of the things I like about publication is that I don't ever seem to lose that childlike fascination that Steve Martin had in The Jerk when he saw his name in the phone book and declared "I'm somebody!"

With that same childlike fascination I am pleased to announce that you can now pre-order my forthcoming book on electricity restructuring at Amazon. And I just put the edited page proofs in the mail to the publisher yesterday. Here's a summary of what it's about:

Over the past 50 years the US economy has experienced economic dynamism and technological change at a dizzying pace, driven substantially by innovation in digital communication technology. This dynamism has had limited effects in the electricity industry, and institutional change within the industry to adapt to these changes has been variable. Many states in the U.S. do not participate in open wholesale markets, and even more states have either no retail markets or have implemented such a restricted and politicized version of retail markets that potential retail market entrants still face substantial entry barriers. This book explores institutional design and regulatory policies in the US electricity industry that can adapt to unknown and changing conditions produced by economic, social, and technological change.

Whereas the dominant regulatory paradigm has traditionally been centralized economic and physical control based on natural monopoly theory and power systems engineering, the ideas presented and synthesized by Kiesling compose a different paradigm - decentralized economic and physical coordination through contracts, transactions, price signals, and integrated intertemporal wholesale and retail markets. Digital communication technology, and its increasing pervasiveness and affordability, make this decentralized coordination possible. Kiesling argues that with decentralized coordination, distributed agents themselves control part of the system, and in aggregate their actions produce order. Technology makes this order feasible, but the institutions, the rules governing the interaction of agents in the system, contribute substantially to whether or not order can emerge from this decentralized coordination process.

This book will be of interest to students and researchers engaged with electricity regulation and deregulation in the US, as well as institutional economics and technological change in industry.

Although they didn't get the title quite right; it's Deregulation, Innovation and Market Liberalization: Electricity Regulation in a Continually Evolving Environment.

Lynne Kiesling

Wired provides a wiki for collecting ideas and techniques for automating your home. Even though we do not yet have widespread retail choice in electric power service as residential customers, these ideas can reduce energy bills and reduce overall resource use:

Aside from the nerd bragging rights, fully-automated homes can be much more energy efficient. Left the light on in the basement after that last-minute laundry dash? That's money out of your pocket. But an automated home could have killed the lights as soon as you came upstairs.

Ditto for the A/C you left running all night or the blinds you always forget to close in the afternoon heat. Your forgetfulness is wasting money and using energy you don't need to use. Automation cuts down on your energy use by doing the smart and simple tasks for you.

Aside from the potential savings in money and energy, you can perform other practical tasks like monitor your pets, detect unwanted visitors or even send yourself an e-mail when the water pipes in your basement burst.

And then just imagine how valuable and useful it will be to have that automation capability once we really do get retail dynamic pricing! Then we really can deliver on the promise of sending prices to people, and their devices!

Lynne Kiesling

Thanks to Market Urbanism for linking to Mike's "prices change everything" post this morning. I encourage you to check out Market Urbanism!

Lynne Kiesling

I've written a lot here before about dynamic pricing, and Mike has too. Electricity is one of the most poorly-priced services we consume; only water is priced in a way that communicates even less about its scarcity and about the true costs of providing the service. If we are going to meet the combined challenge of rising electricity demand, environmental quality, and cost minimization, implementing dynamic retail pricing of electricity is crucial. Without dynamic retail pricing, we will continue to invest in expensive and underutilized generation and wires resources to meet peak demand, peaks that could be reduced using the price signals inherent in dynamic pricing.

Smart grid technologies, including communicating digital meters, enable this dynamic pricing by reducing the costs of communicating price signals to more and more consumers. Smart grid technologies also enable the communication of more varied and diverse information, in addition to reducing the costs of communication.

I've written a short article on the symbiotic relationship between smart grid technology and dynamic pricing in the Smart Grid Newsletter, which is a great resource for smart grid information.

Dynamic pricing is one of the most valuable direct consumer benefits enabled by a Smart Grid. Dynamic pricing makes the value and cost of their energy use transparent to consumers, and it enables consumers to see when cost exceeds value. Dynamic pricing particularly benefits consumers whose consumption is flexible; however, it does not harm the inflexible customer because it reduces the quantity of peak power demanded, thereby reducing average prices paid by inflexible customers. When dynamic pricing reduces peak demand, it also reduces transmission and distribution losses, and associated operating costs.

The rest of the article focuses on how the combination of smart grid technology and dynamic pricing can deliver environmental benefits.

Michael Giberson

Steven Stoft, at the EU Energy Policy Blog, observes that market driven conservation is a slow process:

Conservation is the main way consumers respond to high market prices. When price goes up, consumption comes down--but it takes a while for the full price effect to play out.

Market-driven conservation is a slow process--slow to get going and even slower to stop. Looking at recent high oil prices, people noticed that gasoline use was slightly higher in 2006 than in 2005, and many concluded that higher prices were not working to curb gas consumption. People thought the same in 1974, when the price of oil tripled and world oil consumption fell only 1 percent.

Market-driven conservation starts slowly because the best way to conserve is to switch to better technology. People don't buy cars and refrigerators until they need new ones, and companies take years to design new, more efficient models. It wasn't until 1980 that changes in technology began to pay off.

After 1980, oil prices went on a sustained nosedive, but, Stoft observes, the conservation effects of consumers choices in response to the higher prices continued to be felt.

Stoft also notes the broad power of prices:

The power of price lies in its ability to act in a million ways at once, many unexpected. Even when price directly affects people, they don't always recognize it. ... Even the energy gurus of the physics camp, who now push for stricter standards and ignore energy prices, owe their careers to OPEC's high prices. I say this not to belittle their work, but to point out how fundamental and varied the price effect is. Price changes everything. And the whole world responded to OPEC's high prices.

Michael Giberson

Grant McCracken cries out: "JSTOR, get out of the way!"

[T]his stuff is bought and paid for. It is time to release it into the public domain. Surely, there is a university server somewhere that would assume the costs. Google, I am quite sure, would be willing to shoulder the burden.

The fact of the matter is JSTOR is holding precious resources captive to sustain itself...and its ability to hold precious resources captive. This content was created by academics funded by not-for-profit institutions. JSTOR is not reinvesting revenue in academic production. It is, as I say, now self sustaining in the worst sense of the term.

JSTOR is taxing public knowledge in order to sustain its ability to block access to public knowledge.

Time to let go.

If you have a university connection, you probably haven't felt the sting of what Grant calls "the red light from JSTOR" - knowing that the information you want is just a mouse click away for those people with the right kind of connections, not you.

I know the feeling. Many times I've been reduced to copying down a citation, saving it for when I could clear time to head over to a university library and track down a hard copy.

Of course, I've been around long enough to remember when there was no JSTOR, and nothing like it. I remember when the university library began offering searchable electronic databases that would turn up a citation only, and I was thrilled. While there was some charm in paging through the Social Sciences Citation Index in the Reference Room, tracing the influence of articles past, a searchable database was such a boon.

And then JSTOR came, with page images and searchable text and accessible on the internet, years and years of the American Economic Review and the Journal of Political Economy and more.

And then I graduated. A post-doc kept me with the JSTOR crowd for a year, but eventually I was out in the private sector, and no longer good enough for JSTOR.

I retain a continuing fondness for JSTOR, left over from the glorious first years of access when still in graduate school. I can't quite bear to cry out, with Grant, "JSTOR, get out of the way!" But, when Grant shouts his challenge at the JSTOR gate, inside me a small voice says, "He is right."

So I'm sure that there are many little details to work out. Money must change hands a few times, and lawyers will have papers to be signed. Maybe, like Grant suggests, Google can fund it. Or perhaps Universities can wrangle a way in for their alumni, and the Bill and Melinda Gates Foundation picks up the bill for users from developing countries.

But somehow JSTOR should find a way to throw open its doors.

Michael Giberson

Julio J. Rotemberg has a paper out about emotional reactions to prices and their policy implications. ("Behavioral aspects of price setting, and their policy implications.") I think he is working on some interesting issues, but he comes up with such lousy "policy implications" at the end of the article that it ruined it for me.

In fact, the policy implications were so weakly presented, it made me mad for his having spoiled the article with it. You might say I had an emotional reaction to an article about emotional reactions to prices.

Rotemberg mentions that when people are angry, their utility is increased when the target of their anger is harmed. If we now jump to the conclusion that authors of articles with badly argued policy implications should be penalized, perhaps tossed into jail would be satisfactory, then we would be guilty of the same kind haphazard non sequitur as Professor Rotemberg. So rather than jump to that conclusion, let us move more cautiously.

Rotemberg discusses consumers' cognitive and emotional reaction to prices in two different contexts in which restrictions on prices appear to have consumer support - laws limiting the terms of mortgages and price gouging laws. He also throws in a discussion of monetary policy for good measure. I'm most interested in the price gouging discussion and will focus on it here.

He notes that economists should be puzzled by support for the laws, which since they cap prices or otherwise interfere with the ability of consumers and suppliers to come to terms, can't but work to reduce overall welfare. Success of the laws, too, appears to be a puzzle since the beneficiaries are presumably widely dispersed and unlikely to be organized: consumers who would have entered into a disadvantageous loan but for the protections offered by mortgage regulations, consumers able to obtain emergency goods without facing substantial mark ups. Weighed against such dispersed political beneficiaries are the mortgage industry and various retailers.

I raised the 'emotional response to prices' angle in March when I was writing about Matt Zwolinski's article on price gouging in Business Ethics Quarterly. I liked his analysis, but decided it would fail to persuade his opponents because it failed to grapple directly with the emotional and moral aspects of support for price gouging laws. I wrote:

I think most proponents of anti-price gouging laws, even if they agreed point by point with Zwolinski's analysis, would still feel that price gouging was morally wrong, and would not oppose anti-price gouging laws. I'm increasingly convinced that morality is fundamentally a social manifestation of emotions. Zwolinski's point-by-point rebuttal of anti-price gouging positions barely touches on the emotional component. I suspect opponents of Zwolinski's view would feel he just doesn't "get it."

So while Zwolinski is doing useful work ... something more will need to be done before the anti-price gouging folks will finally "get it." To understand the feelings behind price gouging, economists need to delve into the broader mysteries of emotional reactions to prices and allocations. Most economists don't want to go there, and so they are left only to scratch the surface of the problem they want to resolve.

Rotemberg takes up the emotional reaction to prices directly in the context of price gouging laws, so I hoped he was going to get somewhere.

His basic idea is that consumers become angry at firms that accentuate feelings of regret, because firms that were minimally altruistic would refrain from doing so. "Firms that raise their prices in circumstances where this has a big effect on regret thus demonstrate their selfishness," he writes.

An individual, who failed to buy a snow shovel in advance, regrets that action when a heavy snow falls. When the individual then discovers that the price has been marked up, the feeling of regret is accentuated and the individual becomes angry at the firm.

The policy implication that Rotemberg tags on to this piece amounts to this: if the anger experienced by consumers in the face of a price increase is counted sufficiently in social welfare, this anger (or at least the social welfare implications of the anger) can rationalize government intervention in the market.

Presumably before we reach a policy recommendation on economic matters, some sort of cost-benefit calculus is called for. Isn't this a fairly basic idea in economics? Surely it can't be enough to observe that some people sometimes get mad in response to price mark-ups, and these people would feel better if the party responsible were to be punished.

Zwolinski's piece ultimately did not satisfy me because it failed to grapple with the core emotional issues motivating the desire of some consumers for price gouging laws. Rotemberg's piece was more frustrating in its policy discussion. While Rotemberg recognizes that emotional reactions to price increases are at the core of the issue of price gouging, he seems to conclude on those grounds alone that price gouging laws can be rationalized. It isn't enough.

Lynne Kiesling

As authorized by the Energy Independence and Security Act of 2007, the U.S. Department of Energy has announced the Bright Tomorrow Lighting competition, the L Prize (here's the prize website). Cash prizes and other inducements for the development of solid state lighting to replace standard incandescent and fluorescent bulbs.

Rather like the Google Lunar X Prize, but with taxpayer money instead of private money.

Solid-state lighting is a big deal. The light is emitted from a block of semiconductor material instead of in a vacuum in a tube or by exciting a gas in a tube. If you have any LED lights, that's an example of solid-state lighting. They use very little energy per lumen of light, and they emit very little waste heat.

There are a couple of academic research centers working on solid-state lighting, and there are some companies that offer solid-state lighting. Mass-market solid-state lighting is not there yet.

I have my concerns about government research funding crowding out private research funding, particularly when we get in this murky area that is moving toward commercialization research. I also have my doubts about the assertion in the DOE's solid-state lighting strategy statement that "its unique attributes drive the need for a coordinated approach that guides technology advances from laboratory to marketplace".

However, if the alternative to this kind of policy is command-and-control technology standards and building standards, then this prize-based policy is more likely to generate effective, commercializable solid-state lighting. At least it stipulates the performance objectives without stipulating how the technology is to achieve those objectives (other than the technologies having to be solid-state).

I think that's the real on-the-ground realpolitik comparison to make, although I also think that we should not ignore the crowding out question (especially as fuel prices and electricity prices rise).

Lynne Kiesling

This weekend the KP Spouse told me about a couple of his colleagues, both of whom drive Chevy Avalanches, live in the suburbs, and used to drive to work. One of them has started taking the train and is trying to sell his Avalanche, because he doesn't want to keep spending what he has to on gasoline.

The other one has parked his Avalanche, and has been shopping for a small car to drive. He found a dealership in the northern suburbs that had a Hyundai Elantra in that bleh green color that was just rolling off of the delivery truck; all of the other colors (black, silver, etc.) already had a waiting list. He put a deposit on the bleh green Elantra over the phone to make sure it didn't get sold while he was getting up there. Needless to say, he paid the sticker price for the bleh green Elantra.

See what $4.25 gas will drive people to do?

Michael Giberson

Today a Washington Post article discusses the most recent oil price forecast from Goldman Sachs analysts Arjun N. Murti and Jeffrey Currie, which have oil prices averaging $141/bbl for the second half of 2008. As usual, it isn't hard to find an analyst with a contrary view, and the article presents some counter arguments. (One observer notes that even with GS's prediction of a oil price between $150 and $200 in the next several months, the company merely rates Exxon Mobil as "neutral." Suggested is that even within the firm, not all persons are believers.)

The article notes Murti's track record for newsmaking high price forecasts which subsequently are reached, and presents a somewhat selective graphic in support. How good is Murti's record? The text explains that the famous $50-$105 prediction from March 2005 was directed at the next 6 to 24 months. (Discussed here in March 2008 as "Foreseeing $105/barrel oil") Price swung up to about $78, then down, and two years after Murti's prediction - in March of 2007 - prices were about the same level as March 2005: near $60/bbl. Of course, prices did mostly stay within the predicted range and some contemporary predictions had prices falling to $30, $20 or lower. Probably safe to say that Murti's risky forecast turned out to be better than most.

GS's Currie gives the short-hand version for the most recent forecasts:

"World GDP wants to grow at 3.8 percent, whereas the best we can come up with for trend supply growth is 1 percent," he said. "So something has to give. And that means prices have to rise to curtail demand growth."

Perhaps you'd like something more systematic than a newspaper account? For you, then, is James Hamilton's "Understanding crude oil prices" (title links to abstract, here is a direct link to the article).

Hamilton employs three different approaches to assessing crude oil prices. First, he takes a fairly basic look at statistical correlations in time series analysis. Second, he examines the lessons from economic theory. Third, he examines various fundamental conditions affecting supply and demand for oil.

One thing looking at the time series data tells you is that the current price tends to be the best predictor of the price a quarter from now ("the real price of oil seems to follow a random walk without drift"), but the variance is wide (beginning at a price of $115, it would not be surprising based on historical price movements for prices a quarter from now to be as high as $156 or as low as $85).

In his economic theory discussion he considers storage arbitrage effects, possible effects of financial market trading, and effects expected given that oil is a depletable resource. In the fundamentals discussion, Hamilton considers the role of the OPEC cartel, the changing elasticity of supply and demand, and whether oil markets may now be figuring in a scarcity rent (implied by Hotelling's model of a depletable resource).

He concludes "the low price-elasticity of short-run demand and supply, the vulnerability of supplies to disruptions, and the peak in U.S. oil production account for the broad behavior of oil prices over 1970-1997." As for the period after 1997, he tentatively concludes, "the profound change in demand coming from the newly industrialized countries and recognition of the finiteness of this resource offers a plausible explanation for more recent developments. In other words, the scarcity rent may have been negligible for previous generations but is now becoming significant."

Reader John Mashey, in a comment on my post "Are oil prices too high?", wonders whether we are at an inflection point (i.e. a fundamental change in the relationship between oil prices and the world economy). Hamilton seems to suggest that the inflection point was 1997/1998.

In my mind the interesting issue concerning the relatively tepid supply response to historically high oil prices concerns whether we are becoming short of producible oil resources, or just short of the tools to produce more oil resources with. My view remains the same as it was the other day, when discussing that confused New York Times article:

The world is running out of oil production capacity because there is a global dash for oil. This dash is the oil supply response, and it is probably not too soon to conclude the world oil production will be higher this year than last, even as we are short on oil production capacity.

Hamilton's piece didn't quite disrupt this view, but I am becoming more open to the possibility. I think additional careful look at world oil supply would be helpful.

Lynne Kiesling

Google's blog has a post describing their new investment in BrightSource Energy and linking to lots of background information on their renewable investments. BrightSource does large-scale solar.

This is part of Google's RE < C initiative, through which they channel their investments with an objective of making renewable energy cheaper than coal-fueled energy. Their FAQ gets at the question of why Google would be doing this:

This initiative is not just about creating clean, affordable electricity for Google - though we are keenly interested in making our business as environmentally sustainable as possible. If successful, this effort would likely provide a path to replacing a substantial portion of the world's electricity needs with renewable energy sources. We want to do our part, but that won't be enough alone to thwart climate change; we need a worldwide green electricity revolution to do that.

OK, fine. But what's the return to Google? They clearly don't see it as a short-run bottom-line reduction in their own energy costs. So what's motivating it? Brand capital and reputation capital? I have my ideas, but I would like to hear yours.

Lynne Kiesling

The WSJ Environmental Capital blog has been doing a great job of keeping up with the wind power industry in the U.S. lately. Today's post about Iberdrola's planned investment in wind power in the U.S. is a good summary, with links to some of their other recent posts on the subject.

How to read this? For starters, it's another sign the U.S. wind power market is going great guns regardless of what Congress does for clean-energy tax credits. As we noted last week, the Department of Energy figures wind power could provide 20% of U.S. electricity by 2030--with or without subsidies. And T. Boone Pickens put the first $2 billion down on his $10 billion bet on the world's biggest wind farm in Texas last week, without waiting for the tax credits to be renewed.

One interesting aspect of Iberdrola's investment plans is how the New York Public Service Commission's concerns about electricity prices may influence some of their investment decisions:

But the New York Public Service Commission, the five-person body that has to give the final green light, is leery. It's worried Iberdrola's deal could harm consumers by raising power prices; it argues the deal would give Iberdrola a virtual monopoly, since the Spanish utility could control both generation and transmission of electricity. So, the New York commission is proposing that the world's biggest wind-farm operator divest some of its wind farms to win regulatory approval.

The post then goes on to note that those who are interested in environmental policy are upset about the NYPSC's objections, because their highest priority is increasing renewable energy capacity to meet New York's goal of having 25% of their power generated from renewable sources by 2013. I think increasingly we will see the tension between the regulatory objective of low electricity prices and the regulatory objective of reduced fossil fuel generation that is evident in this example.

Michael Giberson

No doubt consumers think oil prices are too high. For the moment I'm wondering if oil prices are too high even for OPEC.

High prices induce a number of adjustments, some of which have long term repercussions. Last time there was an oil price shock at all comparable to the present was around 1979-1981, when world oil prices reached near $100 (in $2008). High prices then helped support continued growth in non-OPEC oil supply (which really got started during the oil crisis of 1973) and spurred substantial consumer interest and investment in energy efficiency. Over time the adjustments contributed to a nearly 20-year long period (roughly 1986-2004) of prices below 1973 prices in real terms.

Additional evidence comes from a paper, "OPEC's Demand Curve," by Marc Vatter. Vatter estimates world demand for oil, the effect of oil prices on world income, and non-OPEC supply in order to calculate the net demand for oil faced by OPEC. Vatter suggests that while oil price shocks can be profitable for OPEC - no surprise there - to the extent consumers and non-OPEC suppliers see the price increases as long lasting, they make adjustments which reduce OPEC's income in the longer term.

Most of the article itself is focused on explaining and defending various statistical assumptions and devices employed in the process of generating his estimates of supply and demand, but even a non-specialist reader may benefit from scanning the article. He sums up his estimates by saying, "we should not expect prices to fall below [$81 a barrel in $2008] for long" given current non-OPEC supply and world oil consumption. Below $81 a barrel, OPEC net income falls.

Vatter doesn't explicitly peg the upper end of OPEC's desired oil price range, and possibly the recent economic growth around the world - most obvious in China and India - makes his data analysis over the period 1974 to 2005 less than dispositive, but I would guess a price above $100 in real terms reduces the net present value of long term income for OPEC nations.

If real prices fall below $80 in the next few years and stay below $80 for a while, that will be reason to believe that oil prices now were too high even for OPEC.

Michael Giberson

We've played the food-into-fuel answer to the title question in previous posts, but Ajay Shah posts a deeper, more thoughtful explanation in which biofuel subsidies and mandates just barely warrant a mention.

He is not persuaded by the hypothesis that the "pike in world food prices is caused by increased demand in China and India, particularly the shift towards consumption of meat as people get richer." Not persuasive, he says, because it doesn't explain why "the price index for major food crops was stable ... from 1990 till 2005, and spiked thereafter. China and India had a massive transformation of incomes and the structure of the food basket from 1990 to 2005."

As he develops his story, it turns out that growth in China and India does play a central role, but the role is more nuanced that the simplistic version he first considers. Speculators, storage, and the Irish potato famine all get a mention. Worth reading. (HT to Marginal Revolution)

It is also worth remembering, as an anonymous commenter mentioned here a few days ago, that at the root of the rise in the price of oil (and the point applies to food as well) "is a positive development: an unprecedented boom in the world economy" as India, China, and other nations see transformational booms in economic activity.

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,