Recently in Politics Category

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!

Michael Giberson

What is the current and future state of regional wholesale electricity markets?

FERC wants to know, and so it has assembled a panel of experts to appear at a July 1, 2008, technical conference to be held at the Commission. All interested persons are invited to attend, and there is no registration required.

The conference also will be webcast - the official notices says it will be available for a fee, but the event page on the Commission's web calendar says the webcast is free. I don't know which version is correct, but maybe someone from FERC will clear up the confusion.

The agenda (as included in the second notice):

Review of Wholesale Electricity Markets

9:30 Opening Remarks

9:45 ISO New England, Inc.

Gordon Van Welie, President and Chief Executive Officer
Hung-po Chao, Director, Market Monitoring

New York Independent System Operator
Karen Antion, Interim Chief Executive Officer
David Patton, President, Potomac Economics

PJM Independent System Operator, Inc.
W. Terry Boston, President and Chief Executive Officer
Joseph Bowring, Manager, Market Monitoring Unit

12:00 Break

1:00 California Independent System Operator

Yakout Mansour, President and Chief Executive Officer
Keith Casey, Director, Department of Market Monitoring
Frank Wolak, Chairman, Market Surveillance Committee

1:45 Midwest Independent Transmission System Operator

T. Graham Edwards, President and Chief Executive Officer
David Patton, President, Potomac Economics

Southwest Power Pool, Inc.
Nick Brown, President and Chief Executive Officer
Richard Dillon, Director, Market Development and Analysis

3:15 South and West Regions

Charles Whitmore, Senior Market Advisor Division of Energy Market Oversight, Office of Enforcement

4:00 Adjourn

For those of you interested in looking this stuff up on the FERC website, the official docket number is AD08-9-000.

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.

Michael Giberson

Word is, the Alaska natural gas pipeline is just about ready to get started. The thing is, it has been just about ready for 30 years. In the Energy Tribune, Alaska-born Ron Oligney diagnoses the problems that have kept progress on the Alaskan gas line at bay. Posturing by populist politicians plays a big role, but Oligney's analysis is deeper and richer.

The common theme for these governors ... was that they were "seeking the highest good for all Alaskans." The current governor is better than any of her predecessors ... in that she has an almost unbelievable approval rating of 90 percent. She has charmed the masses, which in Alaska means a few hundred thousand people. The problem is that Alaskans and their politicians feel quite certain that they are just one BP-Conoco news release, one governor, one special session away from getting The Gas Line. A common statement in Alaska is, "Have you heard the news? The Gas Line is getting ready to take off." And so it has been. For 30 years.

The principle of "highest good" is a lopsided concept in a state where there is very little private ownership of land or minerals. Just as in a foreign country, the game is one of inducing investment from those with the money (oil companies) and then changing the rules as necessary to extract the maximum benefit for the locals. Stirring up the mob against the evil outsiders (oil companies) keeps the populist in power. In foreign countries, the end game is nationalization, sometimes once per generation. In Alaska, taxes are the proxy. (Note: the situation in Texas and Oklahoma is much more intrinsically stable because of private land ownership - many legislators and some of the voting public are also mineral owners.)

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

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.

Michael Giberson

In an op-ed in the Washington Post, Lester Brown and Jonathan Lewis seem overly generous in their interpretation of the motivations for the now-obvious-failure of ethanol policy in the United States:

Food-to-fuel mandates were created for the right reasons. The hope of using American-grown crops to fuel our cars seemed like a win-win-win scenario: Our farmers would enjoy the benefit of crop-price stability. Our national security would be enhanced by having a new domestic energy source. Our environment would be protected by a cleaner fuel. But the likelihood of these outcomes was never seriously tested, and new evidence has shown that the justifications for these mandates were inaccurate.

I must have missed the analysis indicating that ethanol was intended to create crop price stability. I thought the hope was always that the policy would push food prices up. Isn't that how increases in demand work?

Also, the national security argument for ethanol always struck me as false. We import most of our oil from Canada and Mexico, and with oil a fungible product in an international market, it is hard to see just how some other nation might wield oil-withholding as an offensive threat.

Possibly the move to increased ethanol could have lead to environmental improvements, but biofuel mandates are a bad way to implement policy even if it were true that they produced benefits. As a practical matter, the environmental arguments for ethanol have always been mostly a smokescreen. Ethanol policies were never popular in Iowa because of their potential for improving air quality in Los Angeles or New York City. "Food-to-fuel mandates" always smelled like political pork to me, so I guess I've never had a generous opinion of the motives of its political supporters.

(In fact, there is some danger that all ethanol technologies will be unfairly tainted by an association with current failed policies mostly intended to drive up corn prices. Supporters of non-corn-based alternatives for making ethanol may want to distance themselves from the pork-barrel politicking of the agribusiness lobby.)

Of course, Brown and Lewis are promoting a change in policy, for which the support of politicians is needed. I suppose, purely as a rhetorical device, it is useful to not describe the targets of your appeal as a bunch of .... Well, it is probably useful not to finish that sentence.

The Brown and Lewis editorial does bother me in parts. Does most of the energy used to make ethanol actually come from coal? I would have guessed oil for fuel and natural gas for fertilizer. Also, like many people (myself included), Brown and Lewis are eager to blame world-wide high food prices on ethanol policy, but most of the analysis I've seen in the newspapers is thin. The argument makes a lot of sense, but there are other obvious factors (high fuel costs, increasing world demand for meat consumption, increasing world demand for food generally), so it would be nice to see a careful sorting out of the contributing factors.

The conclusion, however, is good:

[I]t is impossible to avoid the conclusion that food-to-fuel mandates have failed. Congress took a big chance on biofuels that, unfortunately, has not worked out. Now, in the spirit of progress, let us learn the appropriate lessons from this setback, and let us act quickly to mitigate the damage and set upon a new course that holds greater promise for meeting the challenges ahead.

(HT to Tim Haab at Environmental Economics)

Michael Giberson

As I mentioned yesterday, I thought the Washington Post's story ("Decade of deregulation felt in climbing bills") on various costs embedded in electric power bills was reasonably good. But the article covers several aspects of the overall picture without always being clear about the role played by the charges. From the economics point of view, the vital element of any charge included in the consumer's bill is whether it tends to contribute more or less to efficiency in the production and consumption of electric power. One step toward sorting out the issues here is to sort out the different charges depending on whether they arose under the old or new regulatory regime.

Re-reading the article, I counted about nine overlapping categories of costs or charges that feed into a consumer's bill. Below I identify the nine types of costs and assign them to one of three categories: (1) Costs left over from the old regime, (2) Costs arising in the new regime, and (3) Continuing cost types. Each of the categories is illustrated by a quote from the article.

Of course the biggest factor of influence over the bill -- fuel costs -- is mostly ignored in the article by design. The focus was explicitly on elements of a consumer's bill "that have nothing to do with the rising price of fuel."

Costs left over from the old regime/Transitional costs:

• Stranded costs - "Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built."
• Rate freezes (aka Performance-based ratemaking) - "The charges include $238 million for a new nuclear reactor at its plant outside Richmond. Dominion canceled plans to build the plant 26 years ago amid safety concerns about nuclear power. The last of the charges was set to expire in 1999. But when rates were frozen during the transition to deregulation, the charges stayed. They'll continue until at least next year.

Costs associated with the new regime:

• Congestion pricing - "Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power."
• Uniform marginal price - "Now, on hot summer days, for example, when the demand for electricity is high, the price is set by the last, most expensive plant that is needed to supply power. These are typically natural gas plants. But the rising price of natural gas has produced a windfall for owners of older nuclear and coal plants."
• Capacity market payments - "And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia."
• Structural impediments to competition - "Critics say the supply has increased so little because the existing system not only benefits the companies in the region, it gives them an incentive to constrain the supply of electricity to keep prices high..."

Same as it ever was:

• Funds for eventual decommissioning of nuclear plant - "More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear ... off-line in 2034...."
• Continued political influence over rates - "The deal reached between Constellation and Maryland Gov. Martin O'Malley (D) this month blunted two years of recrimination over a 72 percent rate increase for 1.1 million Baltimore Gas and Electric customers. They will get a $170 one-time credit and relief from future decommissioning costs.
• Flawed consumer incentives to use power economically - "PJM spokesman Ray Dotter said the Aug. 1 price reflected the cost to produce electricity that day. But customers pay a flat rate, giving them little reason to use less power, he said. "A more ideal situation would be that the price sends a signal that people conserve more.""
• Hmmmm... - "Electric bills in Virginia are expected to climb when the state returns to regulation next year, although it's unclear by how much."

This is just sort of a rough draft approach at a sorting. I know we have some expert readers and I'd be happy to receive comments from them. Each of these topics could bear individual attention. I'll post on some of them over the next several days.

You may have noticed I referred above to "the old or new regulatory regime," and not to "the regulated or deregulated regime." Yep. I am one of those wackos that prefers the ugly word "restructuring" to the apparently more catchy term "deregulation" when talking about the changes in public policy toward certain elements of the electric power industry over the last ten to twenty years.

Michael Giberson

The Washington Post today contains a story titled, "Decade of Deregulation Felt in Climbing Bills":

As they watch their bills climb, electricity customers in the Washington region might be surprised to know they are paying costs that have nothing to do with the rising price of fuel.

Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built.

More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear plant -- now owned by shareholders of Constellation Energy Group -- off-line in 2034 before state lawmakers agreed to a deal this month requiring the company to take over the federally mandated decommissioning costs.

Maryland customers also paid almost $1 billion to reimburse power companies for constructing plants. Today, thousands of Virginians are still paying these charges, regulators say, although the plants' value has soared.

These costs were added to residential customers' bills under deals struck by lawmakers almost a decade ago when the region's electricity markets were opened to competition.

Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power. And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia.

The article hits many of the key parts of the story behind retail electric rates in DC, Maryland, and Virginia over the last ten years. Overall the story is probably good enough to deserve a thoughtful going over, to explain with more care the background and context of some of these "key parts."

For now, however, just my initial reaction: For a story purportedly about deregulation and climbing bills, the story seems to spend a lot of time talking about legislative and regulatory decisions made five or ten years ago. Some of those decisions of ten years ago involved deciding how consumers would be made to pay off the costs of regulated utility and regulator choices of ten+ years earlier which turned out to be mistakes.

So how is this a "deregulation" story?

And, by the way, while consumers do continue to pay for decades-old choices made under the old regulatory regime, these payments are relatively fixed and have almost nothing to do with the "climbing bills." In general, the climbing part of the bill is almost all "the rising price of fuel."

Michael Giberson

Tom Weber said that neither word in the phrase "congestion pricing" is too upbeat, and strung together "the combination evokes thoughts of opening one's wallet while suffering a sinus headache." He suggests that the unappealing phrase may have had something to do with the failure of Mayor Michael Bloomberg's congestion pricing plan for New York City.

Zubin Jelveh, at Odd Numbers, collects some alternatives from branding experts and others, including "EZ-Zone," "FreeFlow," and "StreetSmart." But Jelveh notes that most congestion pricing plans in place around the world don't seem to need an appealing brand name to succeed: in London the phrase used is "Congestion Charge," and in Singapore their program is "Electronic Road Pricing."

On the other hand, Jelveh notes that Milan has styled their plan as "EcoPass."

Beginning in January this year, to enter the central district of Milan with an automobile required purchase of a pass, with the fee tied to the emissions level of the car. One early report suggests the plan is working to improve air quality in the city. (Of course, improving air quality is easy -- economists would want to know how much it is costing to achieve the improvements.) I was unable to locate a more current report in English.

RELATED: In 2006, Lynne posted on Road Congestion Pricing in Stockholm. Last October, I argued that, "Economists do not understand the opposition to congestion pricing."

Michael Giberson

The Washington Post reports on their hometown industry - lobbying Congress - in a report on efforts by the wind and solar power industry to have tax credits renewed.

Some of the quotes have me wondering whether John Whitehead has had any success with his "lost green jobs challenge." Here, for example, is the closing quote from a lobbyist for the American Wind Energy Association (AWEA):

"In the absence of an extension by Memorial Day, we're looking at 116,000 jobs at risk -- 76,000 in wind and 40,000 in solar -- and $19 billion in clean energy investment. ... We have a lot of friends in the House, and we need to make them understand that time is imperative."

For those pursuing Whitehead's challenge, the Post article helpfully points out the wind industry has had its production tax credits lapse three times: 1999, 2001 and 2003. AWEA said that "new installed wind capacity declined 93, 73 and 77 percent, respectively."

Michael Giberson

At the Becker-Posner Blog, the authors tackle rising food prices and the latest Neo-Malthusians concerns that the world is reaching the limits of the earth to produce food. Curiously, both cite the thoroughly flogged old Neo-Malthusian book, Paul Ehrlich's The Population Bomb, but no current examples.

Gary Becker writes to claim the Neo-Malthusians are wrong, again, and besides, the current high prices, "has nothing to do with population growth, and is only a little related to the rapid expansion in world incomes in recent years." Instead, he said:

Rather, the boom in petroleum prices and subsidies to ethanol and other biofuels are the most important forces explaining the recent increase in food prices. Both the sharp run up in oil prices, and the continuing subsides to ethanol production in the United States, and to a lesser extent Europe, induced an increasing diversion of corn from feed and human consumption to the production of biofuels. The main goal of the diversion has been to produce more ethanol as a substitute for gasoline. During the past year, one quarter of American corn production, and 11 percent of global production, was devoted to biofuels, and the US contributes a lot to the world corn market.

The huge increase in petroleum prices also pushed up the cost of producing foods, and hence food prices, since energy is an important input in the production of fertilizers and agricultural chemicals.

Richard Posner asserts that Malthus's analysis is sound, given his assumptions, but his frightening forecast -- and that of the Neos -- failed to result because of technological and social progress.

Posner also links higher food prices to biofuels and economic growth in China and India. The supply response to that increased demand for food has been constrained by the high cost of fuel. We may be seeing the beginnings of an "attenuated Malthusian response", Posner said, in countries where food riots lead to increasing subsidies for urban consumers and export restrictions on domestically-produced food, which limit rural income and dampen the domestic supply response.

Both Becker and Posner trace poor policies to the political clout of urban consumers in developing countries and rural agricultural interests in among developed countries, and neither shows much cause for optimism.

Michael Giberson

The New York Post explains political prediction markets in this 2 1/2 minute video clip featuring the Intrade exchange, among others, and including a interview with Yahoo! prediction market scientist David Pennock.

See also Chris Masse's comments on the piece at Midas Oracle and David Pennock's comments at Oddhead Blog.

ADDENDUM: Also on Midas Oracle, NewsFuture CEO Emile Servan-Schreiber observes that James Surowiecki's book, The Wisdom of Crowds has been published in French: La Sagesse Des Foules.

Michael Giberson

An article in the Houston Chronicle reports that the high price of corn is putting the squeeze on the cattle feedlot business:

[John] Van Pelt, the manager of a cattle feedlot in this town 50 miles south of Amarillo, is now paying $215 a ton for cattle feed -- double what he spent just three years ago. With 20,000 cattle in his yard, that works out to about $25,000 per day, just in feed, and what could become several million dollars in added costs this year.

Van Pelt blames a surge in U.S. ethanol production for a near tripling in the price of corn, the main ingredient in cattle feed, and for cutting into profits across Texas' massive cattle feeding industry.

... Cattle feeders won a victory last fall when the state Legislature killed a key incentive that had helped attract ethanol and biodiesel plants to Texas, a provision the feeders said gave preferential treatment to biofuels.

But U.S. ethanol production continues to rise amid growing demand for the fuel and as new plants come online, including several in Texas. The situation is likely to keep pressure on corn prices for both ethanol producers and cattle feeders.

The article includes a quote from an ethanol industry representative who makes the reasonable claim that not all of the blame for higher food prices can be placed at the ethanol industry's feet. Rising demand for food from growing economies around the world have also put upward pressure on food prices.

...The matter has drawn attention from the top of state government.

"Finding that balance is what this is all about," Gov. Rick Perry said last summer in Houston. "We don't want to be put in the place of having to decide whether we are going to feed cattle or fuel vehicles."

Not to mention, of course, the possibility of feeding people. Given that curious omission, I'm sure we can say we don't want the government "to be put in the place of having to decide" between alternative uses of valuable resources.

ELSEWHERE, Time magazine connects the dots: "An explosion in demand for farm-grown fuels has raised global crop prices to record highs, which is spurring a dramatic expansion of Brazilian agriculture, which is invading the Amazon at an increasingly alarming rate."

Michael Giberson

In a post titled "The $100 Billion Windfall: Why Utilities Love Cap-and-Trade", Environment Capital notes the release of a new study by Point Carbon, financed by the WWF, which sought to estimate the "potential and scale of windfall profits in the power sector in selected countries (UK, Germany, Spain, Italy and Poland) during the second phase of the EU Emissions Trading Scheme (ETS), which runs from 2008 to 2012." Point Carbon provides an estimate of between 23 and 71 billion Euros, depending on assumptions.

We should be clear here. It isn't the cap-and-trade that utilities love, its the multi-billion Euro windfall.

(NOTE: Rich Sweeney at Common Tragedies also comments on the Point Carbon study and Environmental Capital post.

Michael Giberson

Maria Cantwell (D-Wash.), co-sponsor of the proposed Clean Energy Tax Stimulus Act, says if Congress and the President don't act fast to enact the bill, as much as $20 billion in investment will be delayed or canceled and and more than 100,000 jobs lost.

At the Environmental Economics blog, John Whitehead says, "Show me empirical evidence":

My contention is that tax credits can increase employment in preferred sectors but this employment is taken from other sectors of the macroeconomic. Employment and unemployment is unaffected in the aggregate.

Are any of the dips caused by a lack of targeted environmental policy? I'll send a free "Drive Less! www.env-econ.net" bumper sticker to the first person who shows me empirical evidence that the U.S. loses jobs from expiration of renewable energy tax credits or some such policy using appropriate econometric methods and the 1946-2007 employment data....

His post includes monthly employment numbers from the U.S. Bureau of Labor Statistics since 1946.

Michael Giberson

A few scattered stories:

In testimony to the US House and Senate Joint Economic Committee on Wednesday, Fed chief Ben Bernanke said, "the one small silver lining" in $100/barrel oil is that "a lot of alternatives become economically feasible." In fact, well before $200/barrel, biking to work would become feasible for a lot of Americans, and so would staying home for Thanksgiving instead of taking that trip down I-95 to see grandma, and chopping down trees in the neighborhood to stay warm in winter. I think this is a "cart before the horse" conclusion that comes from spending too much time in Washington policy circles.

EnergyBiz Insider on the U.S. effects of the Asian energy boom: "In 2006, China built 90,000 megawatts of coal-fired power plants, which exceeds the entire generation capacity of the United Kingdom by 13,000 megawatts... India built 22,000 megawatts of new electricity plants in the last five years... [Stanford researcher Jeremy] Carl says that Asia's electricity boom is causing them several problems. 'China has vacuumed up the technology and personnel needed to implement these power plants,' he says. Hence, domestic utilities are having problems with 'equipment availability, getting construction equipment on time, and obtaining the necessary number of engineers,' he says."

At Grist, Ryan Avent says transit is "the forgotten solution." He asserts that "our best hope for near-term reductions in emissions is a significant increase in transit investment." Interesting, but I don't think so. I'd like to see the analysis that underlies such a bold claim.

The Baltimore Sun reported on April 1: No collusion found in Maryland power auctions:

Steven B. Larsen, chairman of the Public Service Commission, told state lawmakers yesterday that the regulatory body found no evidence of collusion in the 2005-2006 wholesale power auctions that caused a 72 percent price increase for households buying power from Baltimore Gas and Electric Co., which is a subsidiary of Constellation....

O'Malley, a Democrat, asked Larsen to look into the auctions last year after the Illinois attorney general filed a complaint alleging price manipulation by energy suppliers that helped lead to a $1 billion rate rebate for customers there. O'Malley had campaigned on a pledge to roll back steep BGE rate increases.

But after O'Malley took office, the PSC concluded that it had no cause to deny rate increases sought by BGE, finding that Constellation followed the auction procedures set up by previous PSC members.

Michael Giberson

On Monday night, Republicans in the Kansas House voted to apply a tax of $37 per ton of CO2 emitted from coal fired power plants for emissions in excess of 110 percent of the statewide average. Proceeds from the tax would be distributed to the large coal plants in the state with the lowest average carbon emissions.

The Salina Journal quoted Rep. Clay Aurand, R-Courtland, as saying, "This is like a giant race to be the cleanest."

Only, as written, the tax would apply to a single power plant in the state, one owned by the Kansas City Board of Public Utilities, and the money would flow to one or more of the competing coal-fired generators owned by Westar Energy, Kansas City Power Light and Sunflower Electric. Generators with much lower emission rates, which includes just about everything from gas-fueled generators to nuclear power to wind power, would neither be taxed or subsidized. Some members of the Kansas House saw the proposal as an attempt to punish opponents of proposed coal-fired power plants in western Kansas.

Not exactly the approach the members of the Pigou Club have in mind.

Apparently on Tuesday morning Kansas House Republicans reconsidered their enthusiasm for carbon taxing, and voted to eliminate the carbon tax proposal.

Pigovian taxes are great in theory, but even in theory sometimes quantity regulation is preferred. And, of course, in practice both price- and quantity-based regulation will be shaped by lobbyists and politicians, perhaps motivated by factors beyond pure economic efficiency. Economist-advocates should mind the gap between theory and practice; the Kansas coal carbon tax caper provides an illustrative example.

(HT the Carbon Tax Center blog.)

Michael Giberson

Usually, with annual Spring price increases, we hear the perennial allegations of gasoline price gouging from politicians. Despite all the talk about high gasoline prices, there hasn't been a lot of talk about price gouging this year.

The precise meaning of the term "price gouging" is sometimes hard to pin down, but a paper forthcoming in Business Ethics Quarterly tries to fix it enough that the meaning can be carefully examined. In "The Ethics of Price Gouging," Matt Zwolinski describes price gouging as "a practice in which prices on certain kinds of necessary items are raised in the wake of an emergency to what appear to be unfair or exploitatively high levels."

The definition includes three key elements that recur in most of the state laws against price gouging: an emergency period, necessary goods, and unfair price increases. Zwolinski surveys state laws to arrive at his definition, and while not every state law has all three elements, these three elements make up the core concept.

After defining price gouging, Zwolinski seeks to rebut three common beliefs about gouging: (1) that laws prohibiting price gouging are morally justified, (2) that price gouging is immoral, even if it is legal, and (3) that price gouging reflects poorly on the persons who engage in it, even if the act itself is not immoral. All three of these beliefs are wrong, or at least questionable, in Zwolinski's view.

His position emerges from a basic understanding of economics, and particularly the role of prices in society. Zwolinski argues that anti-price gouging laws work to prevent individuals already in a vulnerable position from entering into what would be a beneficial exchange. Further, drawing on Hayekian notions about prices as information and coordination devices, Zwolinski asserts that anti-price gouging laws discourage extraordinary (or perhaps even ordinary) efforts to aid persons in need, because the laws interfere with information about scarcity and reduce incentives to act.

All in all, I found myself generally in agreement with Zwolinski. But, since he starts with generally libertarian foundations and flavors his ethics and policy examination with a heavy dose of economics, what is not to like? I was sympathetic from the beginning.

Still, 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 - as are various economists who patiently explain the value of permitting "gouging" (or impatiently, and here, and here) - 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.

*NOTE: I'm slowly reading Jesse Prinz's book on the subject, The Emotional Construction of Morals. More on it later.

Lynne Kiesling

There is no economic model that can support the state buying Wrigley Field. The sports economists have to pay some attention to this one. It all stinks to me of political gambit. Heck, Wrigley sells out most games, and that's even when the team's having a crappy year. I am not persuaded by the argument that Wrigley's renovation requires so much capital that it exceeds the levels of private investment that a private owner can undertake.

Disgusting.

Michael Giberson

Arnold Kling notes Ray Kurzweil's optimistic forecast on solar power (from LiveScience). Here's the Kurzweil quote on solar power:

"It is doubling now every two years. Doubling every two years means multiplying by 1,000 in 20 years. At that rate we'll meet 100 percent of our energy needs in 20 years."

Kling's response:

This is a case where I have a hard time believing an autoregressive model. At some point, if folks do not come up with a scalable, efficient solar energy solution, the use of solar power is going to stop doubling every two years. If they do come up with such a solution, then the use of solar power should start doubling faster.

Kling offers his opinions on how energy technologies will shake out over the next twenty years -- he sees more promise in bio-engineered organisms than in the current crop of biofuels, for example, and includes a nod to KP's own Lynne Kiesling when mentioning upgrading the grid -- but ends with a reminder: "This is just intuition. I am not a scientist. The only people less qualified than I am in this area are the politicians who will be directing our energy policy."

It seems a less than cheery thought, but I don't think we can do better than having politicians directing policy. All of the plausible alternatives seem worse.

I'll be happy as long as we can keep the politicians strictly within the policy realm and as far away as possible from managing the scientific efforts in this area.

Michael Giberson

"So, yeah, Hume’s being a supercilious jerk, too."

Yes, the above remark, from near the end of Wilkinson's post, Taste, was amusing. But it wasn't that remark, it was the whole of the post and the way he wrapped it up that led me to burst out laughing.

Michael Giberson

If you have a long political memory -- say going back about two weeks, which now seems like ages ago -- you might remember the furor over the "failure" of polls and prediction markets when Hillary Clinton won the New Hampshire Democratic primary. Prediction markets, the boastful new kid on the block, were singled out for special abuse by some pundits.

Were the prediction markets wrong? How should the market numbers be read, and how can the accuracy of these markets be judged?

Prediction market consultant Jed Christiansen provides the most thoughtful post-New Hampshire guide to reading the political prediction markets, with generous links to other sources.

(HT to Chris Masse at Midas Oracle, and Caveat Bettor, and Alex Kirtland at UsableMarkets.)

Michael Giberson

Columnist Jay Hancock of the Baltimore Sun takes note of a complaint filed at FERC by the Maryland Public Service Commission that alleges local market power in PJM's wholesale power market added $87.5 million to energy costs in the state. Hancock provides a link to the complaint at FERC for the curious.

Also in Maryland, some customers of Allegheny Power were upset that the utility mailed them two compact fluorescent bulbs. According to reports in the Cumberland Times-News, at first at least some customers thought the bulbs were free and later discovered the utility was tacking on an extra 96 cents a month over a year for the light bulbs. (While a different kind of program, it sounds kind of like the mandatory participation in utility program proposal that has customers upset in California. See Lynne's post: Programmable Thermostat Regulations in California: Big Brother or Control Freaks?)

Elsewhere, the Dallas Morning News wonders, "Is electricity deregulation a raw deal for Texas?" A follow-up story profiles PUC chairman Barry Smitherman and his efforts to let competition work in Texas. Likely the panelists at this Friday's conference at AEI will have something to say about competition and electric power in Texas.

Tim Harford provides some commentary on the Google prediction market paper. (See our earlier post: Prediction markets at Google.) By the way, Harford will be in DC promoting his new book, The Logic of Life, on January 24.

At Reason, Brian Doherty interviews New York Times reporter David Cay Johnston about Johnston's book, Free Lunch. Doherty points out that much of the abuse Johnston ties to a blind faith in free markets actually results from government action, but Doherty nonetheless finds that Johnston does employ some sound market-oriented arguments in the book. Marty Schladen of The Daily News in Galveston, Texas, also reports on the book. A short review of the book recently ran in Mother Jones magazine.

Stan J. Liebowitz and Stephen E. Margolis, bring us "Bundles of Joy: The Ubiquity and Efficiency of Bundles in New Technology Markets." (HT to the Antitrust & Competition Law Blog.)

UPDATE: In the comments, David Cay Johnston writes:

Your commentary on the Reason interview bollixes the facts.

In Free Lunch I cite hard data and a fascinating experiment by computer science professor, as well as tell a story, of how government created what might be called faux markets since they drive prices up. Free Lunch shows over three chapters that governments adopted laws, drafted by Enron, that created asymmetrical "markets."

Michael Giberson

*Well, almost real congestion pricing. It may not be the real thing, but it is a reasonable facsimile and a step in the right direction. It is not quite the real thing, because, as I observed last time, the FAA "will not allow airport authorities to charge prices sufficient to balance demand with capacity without regard to allowable costs." The underlying system remains explicitly cost-based ratemaking, only now the FAA is suggesting congested airports squish those costs around into rates that help reduce congestion.

Early reaction from the airline industry accuses the U.S. Department of Transportation of trying to sneak congestion pricing in the back door, and scolds the administration for pursuing the idea despite opposition from the airlines.

"We're concerned that Secretary Peters is still determined to pursue congestion pricing when we thought it was clear the idea of congestion pricing was rejected by the airlines," [International Air Transport Association] spokesman Steve Lott said.

I'm not sure how it could be considered a back door attempt when the FAA itself explicitly raises the issue in their policy document.

The New Jersey Port Authority, which operates the three major New York City area airports as well as two regional airports, was reportedly lukewarm, calling the proposal "small steps ... when dramatic action is needed." Meanwhile, Airport International said, "During 2007, airports in the US recorded their worst ever delays. Over three-quarters of these delays were recorded at the New York airports."

If the New Jersey Port Authority doesn't respond to this opportunity by implementing congestion fees of some sort, I'd encourage congested airports with flights departing into the New York City airports at congested times to consider figuring out the costs to the originating airports from NYC-based delays and reflecting that amount in their NYC-bound flights. (Or, to be fair, to the extent that an airport faces costs due to congestion at another airport, reflect those costs in fees on departing flights to those airports -- but of course over three-quarters of the delays in 2007 were recorded at the New York airports, so you can see where these fees would bite.)

Additional econoblogging of the FAA congestion fee proposal: "Rationales" by Daniel Hall at Common Tragedies and "Yes! FAA proposes regulation to allow congestion pricing"at Evan Sparks’s Aviation Policy Blog.

ADDENDUM: USA Today ran an editorial on the topic of airport delays on December 18 along with commentary from Senator Charles Schumer. USA Today wrote:

In recent months, the Bush administration has advanced several workable responses to JFK's delays, to the jeers of a gaggle of critics — airlines, the authority that runs the New York area airports, and the New York congressional delegation.

One of the most promising ideas is congestion pricing — charging airlines more to use valuable runway space at the busiest hours each day, usually the evening rush. This would push airlines to quit overscheduling at those times and space out flights more evenly through the day.

Sen. Charles Schumer, D-N.Y., argues in the space below that congestion pricing is not viable. How would he know? It's never been tried; foes oppose even a pilot program. Some of the other options Schumer suggests might work over time, but it's folly to pretend they'd do anything before next summer's peak travel period, much less this month's holiday season.

Schumer, in his companion piece, wrote:

Now, the Transportation Department is set to unveil a proposal to cut flights and sell hourly slots to the highest bidder. But auctioning flights would raise fares, limit consumer choice and strike a blow to the economy. It wouldn't shorten the wait at the gates or increase capacity. It would force airlines to pay a premium to fly that will surely be passed on to travelers. And it would reduce options for those flying to small and midsize cities.

Flight rationing, like congestion pricing, is not a viable solution. It is experimental game theory. America's busiest airports should not be the guinea pigs for an ideological solution that has never been tested at any airport, let alone the nation's busiest.

Unfortunately, the FAA is not proposing to auction off take-off and landing slots. (But see this post for more on that provocative idea.) Instead, Schumer likes opening up military air space for civilian air travel, installation of an "air czar" to manage operations in the Northeast, along with improving staffing and technology in air traffic control.

Michael Giberson

The New Jersey experience illustrates one other key insight into regulation of a network. In a network industry such as electricity, where the network extends across state lines, it is possible for one state to exert significance externalities on others. The siting of transmission lines or an electricity generator in one state can alter supply conditions in other states. Moreover, if transmission is natural monopoly, one has to decide how to pay for it. Attempts by one state to pay less could increase the burden on other states. It is not obvious that the optimal geographic scope for unified regulation necessarily follows state or country boundaries.

That's from "Mergers in Regulated Industries: Electricity," by Dennis Carlton of the University of Chicago, currently serving as the Deputy Assistant Attorney General for Economic Analysis. As the title of the paper indicates, the subject is primarily merger analysis in electric power markets. Carlton uses the abandoned merger between Exelon and PSEG for illustrative purposes. The "New Jersey experience" he refers to is the inability of the merging companies to sufficiently satisfy regulatory demands made by the state.

While a now-abandoned merger proposal may in itself be of little interest, the more general issue of mergers in network industries remains important. What's more, the question of appropriate policy for networks crossing political borders will only become more important as the efficient size of networks grows larger and larger.

(HT to the Antitrust & Competition Policy Blog.)

Michael Giberson

In yesterday's Washington Post, Robert Bryce wrote on Five Myths About Breaking our Oil Habit:

1. Energy independence will reduce or eliminate terrorism.
2. A big push for alternative fuels will break our oil addiction.
3. Energy independence will let America choke off the flow of money to nasty countries.
4. Energy independence will mean reform in the Muslim world.
5. Energy independence will mean a more secure U.S. energy supply.

A little realism and understanding goes a long way. Worth reading.