Wednesday, December 12, 2007 [by Greg "I worked for Dubya" Mankiw]
How do the right and left differ?
The conclusion of today's ec 10 lecture:
In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary. [I replaced his asterisks with "GM," while my comments are labelled "JD."]
JD: first of all, I should note that Mankiw is only talking about one dimension of the political spectrum. I'd define left vs. right in terms of class, with the left siding with the poor and working classes and the right siding with Mankiw's employers. This left vs. right mostly coincides with democracy vs. dictatorship. There's also a centralized vs. decentralized spectrum, which is what Mankiw mostly describes. Finally, there's the tradition vs. modernism spectrum.
GM: The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
JD: Mankiw implicitly assumes that taxes "distort" markets, i.e., that the markets were "perfect" ahead of time. He assumes, for example, that no deadweight loss arises from the business sector. But even in the simplest neoclassical theory, it can do so: monopolies and monopsonies impose deadweight losses.
GM: The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
JD: This might be right, i.e. that the difference is empirically-based. But it should be mentioned that the right also likes to use methodological fiat to rule out the role of an important class of externalities, the pecuniary ones. They'd like to ignore such events as towns being destroyed economically when the major employer shuts down its operations, along with the Keynesian multiplier effect and the like.
GM: The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
JD: This defines the "left" as antitrust liberals. It ignores those of us who want to replace the capitalist monopoly on political power (unless we make a big noise) with real democracy, both in politics and in the economy.
GM: The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
JD: The right's notion of "rationality" is close to tautological: rationality involves people doing what they want to do. Individual preferences are taken for granted and unexplained. A heroin addict is "rational" according to the right-wing economists. Further, "rationality" is totally an individual thing that can be expressed only in markets. This forgets the role of social values, which typically cannot be expressed through markets (no matter how rational they are) but can be expressed via democracy.
GM: The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
JD: Again, this "left" is the liberals. It ignores the left which wants to end the artificial distinction between the state (government) and the "market" and to subordinate both of these to democracy.
GM: There is one last issue that divides the right and the left -- perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.
JD: Is it a "market-based distribution of income"? Not according to the standard economics which Mankiw professes to profess. Standard neoclassical economics starts with the distribution of _assets_. Then the market results reflect that distribution (along with differences in preferences).
At this point, we should bring in non-standard economics: those with the most assets benefit most from the market. This allows them to accumulate more assets, so that they benefit even more from the market.
This kind of snowballing inequality of asset-ownership (and power) can be seen happening during the last 27 or so years of US economic history. This is now being admitted by mainstream economists. See the interview with Frank Levy in the current issue of CHALLENGE.
Jim Devine / "The conventional view serves to protect us from the painful job of thinking." -- John Kenneth Galbraith
Thursday, December 13, 2007
Now that's a free ride!
It's that time of year again, time to make the donuts....er, grade final exams. I had a question on the Principles exam asking whether a tunafish entrepreneur - Charley "The Tuna" Sharkspear by name - who knew that consumers value safe dolphins more than the added cost of fishing in a dolphin-safe fashion could make money providing the dolphin-safe tuna. The idea I wanted them to get was that the safety of the dolphins, if accomplished, is a public good. From one student I learn that:
"People will continue to buy a cheaper tuna and still 'free-ride' on the dolphins that Charley is saving."
That sounds like fun. Back to work!
"People will continue to buy a cheaper tuna and still 'free-ride' on the dolphins that Charley is saving."
That sounds like fun. Back to work!
Wednesday, December 12, 2007
CNN Caught Mimicking Faux News with Iran Nuclear Weapons "Speculative Documentary"
CNN was to air today a "speculative documentary" entitled "We Were Warned - Iran Goes Nuclear" with actors playing real officials and hyperventilating on the now discredited non-data about Iran's nonexistent nuclear weapons program. The program has been postponed for now, given the recent NIE report. This shows how CNN has been under pressure to imitate the war hysteria of Faux News. An old friend of mine, who is quite progressive, was involved in helping make this, and had been bamboozled by briefings from unnamed national security officials. Details on this story are available from Bill Gallagher at http://www.niagarafallsreporter.com/gallagher344.html, and if this is not right, you can find it by linking through today's posting by Juan Cole.
Credit Crunch and Sudden Stop: Can We Avoid a Perfect Financial Storm?
Credit markets are all a-jitter again. No one knows how many assets will be nonperforming, which ones they will be, how much total value is at stake. We also know that there has a been a sudden stop, a complete cessation of net long-term private capital inflows to the US; nearly all of the financing burden of the US current account deficit has to be shouldered by central banks and sovereign wealth funds. These two events are related.
It is US debt, mortgage items but perhaps not only, whose quality is in doubt. This is why there is little appetite for such goodies among private investors. But if enough liquidity is pumped in to dissuade investors from wholesale dumping, and if the CB’s continue to do what it takes to keep the dollar afloat, we may continue to muddle through.
The risk is that the two dangers will interact. The Fed and its partners can support asset values by buying into these markets, as they have indicated they will. But if for any reason this effort falls short, it is possible that default risk and currency risk could spiral upward in tandem. Fear of default could push private capital flows into the red; this would ramp up the pressure on the dollar, increasing currency risk, and so on. It is not beyond the realm of the possible that this nasty synergy could erupt within the time frame of a few hours or even minutes. It would be sudden and unexpected: one morning you could go online to scan the headlines and find out we were already in the thick of it.
I’m not saying that a crisis is inevitable, but I’m not saying it can’t happen either.
It is US debt, mortgage items but perhaps not only, whose quality is in doubt. This is why there is little appetite for such goodies among private investors. But if enough liquidity is pumped in to dissuade investors from wholesale dumping, and if the CB’s continue to do what it takes to keep the dollar afloat, we may continue to muddle through.
The risk is that the two dangers will interact. The Fed and its partners can support asset values by buying into these markets, as they have indicated they will. But if for any reason this effort falls short, it is possible that default risk and currency risk could spiral upward in tandem. Fear of default could push private capital flows into the red; this would ramp up the pressure on the dollar, increasing currency risk, and so on. It is not beyond the realm of the possible that this nasty synergy could erupt within the time frame of a few hours or even minutes. It would be sudden and unexpected: one morning you could go online to scan the headlines and find out we were already in the thick of it.
I’m not saying that a crisis is inevitable, but I’m not saying it can’t happen either.
All We Are Saying is Give Peace a Chance
My view on Iraq was: (a) we never should have started this stupid war, and (b) once we did, we should have declared victory and come home a long time ago. For those who get their “news” from Faux News, it would seem the Iraq war is no more. And now David Brooks says we’ve gotten past this idiotic episode as well:
Including the title, I counted five instances where Mr. Brooks used the word “postwar”. There is only one problem, which Greg Mitchell articulates:
Hawks like Brooks and Beinart were over-hyping the treat of Saddam Hussein as they underestimated the potential costs of invading Iraq back in 2002 and early 2003. So why is Greg surprised that these pundits are at it again with their dismissing the fact that this failed and very destructive adventure continues? Brooks does have not the courage to do what Paul Harvey did in 1970 when Mr. Harvey told President Nixon that the Vietnam War was a mistake that should be ended immediately. As a kid, I had to endure the fact that my parents made me watch Mr. Harvey’s conservative rants on a daily basis. As an adult, I miss the old fashion conservatives. No, having to endure hacks like David Brooks is so much worse.
But the more comprehensive difference between a wartime election and a postwar election is that there is a shift in values. In wartime, leadership traits like courage, steadfastness and ruthlessness are prized. Voters are willing to vote for candidates they distrust so long as they seem tough and effective (Hillary Clinton, Rudy Giuliani). In a postwar election things are different. When Wall Street Journal/NBC pollsters asked voters what qualities they were looking for in the next leader, their top three choices were: the ability to work well with leaders of other countries; having strong moral and family values; bringing unity to the country. Those are cooperative qualities, not combative ones. They require good listening skills, openness and the ability to compromise.
Including the title, I counted five instances where Mr. Brooks used the word “postwar”. There is only one problem, which Greg Mitchell articulates:
Postwar? Peace? Try telling that to the soldiers in Iraq, and the families whose kids are still coming home minus a limb or part of their brain. Last I checked we were still spending billions of dollars a month Over There and I haven't heard about any bases, or the grand embassy, being dismantled. A new Gallup poll (see below) disputes the notion, anyway. Is the issue a little less "hot"? Surely. But to say it is over is an obscenity. With rose-colored glasses still in place, Brooks takes a world tour, finding more reason to relax about Iran, Pakistan (?), even the Palestinian question. My favorite line then follows: "The world still has its problems." Gosh, you think? Later he admits, "Something terrible could happen in the world" to change the hopeful mood. As if little terrible is happening now. This all started last week with Peter Beinart’s self-serving column in The Washington Post -- Brooks cites it today -- which flatly called the war a "non-story." He took as his main evidence that questions about the war were not being asked all that much at the Democratic and Republican debates. The fact that all of the Democrats are much in agreement against the war, and all of the leading Republicans in agreement in support of the venture, apparently did not occur to Beinart as an explanation. Of course, if any of the Democrats faced off against any of the Republicans right now, is there any doubt what would be the hottest issue? But Beinart – an original hawk on the war, like Brooks – had good reason to downplay the disaster he helped cause.
Hawks like Brooks and Beinart were over-hyping the treat of Saddam Hussein as they underestimated the potential costs of invading Iraq back in 2002 and early 2003. So why is Greg surprised that these pundits are at it again with their dismissing the fact that this failed and very destructive adventure continues? Brooks does have not the courage to do what Paul Harvey did in 1970 when Mr. Harvey told President Nixon that the Vietnam War was a mistake that should be ended immediately. As a kid, I had to endure the fact that my parents made me watch Mr. Harvey’s conservative rants on a daily basis. As an adult, I miss the old fashion conservatives. No, having to endure hacks like David Brooks is so much worse.
Tuesday, December 11, 2007
Where Does John Edwards Stand on Social Security?
Barkley accuses John Edwards of drinking the Kool Aid, while Phillip Elliot praises Mr. Edwards for “real leadership” thusly:
The last quip seems to confirm Barkley’s suggestion that Mr. Edwards has fallen for the GOP spin that the Social Security system is in imminent danger. We in more of an imminent danger of a mushroom cloud over Manhattan from an Iran nuke that a Social Security meltdown.
But I’m going to try to be fair to Mr. Edwards by asking what he means by this alleged very clear statement of what he would do. It would seem his policy position is basically status quo with the exception that he’d lift the payroll caps. That’s it! And Phillip Elliot calls this leadership? Fine – Senator Clinton hasn’t exactly stated where she’d change the status quo either. OK, the GOP debates are incredibly stupid on just about every issue- but if this is all we Democrats have got, maybe I should go back to watching my Atlanta Falcons pretend to pay football. Ho-hum!
But to be fair – I’m sort of a status quo bear when it comes to this issue. Next topic – please?
Democrat John Edwards yesterday criticized rival Hillary Rodham Clinton, saying candidates who seek the White House should take strong, clear stands on difficult issues like Social Security. Clinton has said she doesn't want to put forward a specific plan now to shore up Social Security, but would wait for recommendations from a bipartisan commission because any plan will need the support of Democrats and Republicans to be enacted. Asked about her stance at an AARP-Divided We Fail lunch on health and financial security, Edwards told seniors: "If you want to be President of the United States, you should lead. Leadership means taking clear, strong positions for the American people. ... I've said very clearly what I would do, not said I'm going to wait and figure this out later."
The last quip seems to confirm Barkley’s suggestion that Mr. Edwards has fallen for the GOP spin that the Social Security system is in imminent danger. We in more of an imminent danger of a mushroom cloud over Manhattan from an Iran nuke that a Social Security meltdown.
But I’m going to try to be fair to Mr. Edwards by asking what he means by this alleged very clear statement of what he would do. It would seem his policy position is basically status quo with the exception that he’d lift the payroll caps. That’s it! And Phillip Elliot calls this leadership? Fine – Senator Clinton hasn’t exactly stated where she’d change the status quo either. OK, the GOP debates are incredibly stupid on just about every issue- but if this is all we Democrats have got, maybe I should go back to watching my Atlanta Falcons pretend to pay football. Ho-hum!
But to be fair – I’m sort of a status quo bear when it comes to this issue. Next topic – please?
Is Kos Drinking Social Security Kool Aid?
Continuing an old tradition from Maxspeak, let me dump on Daily Kos. I just noticed a long post there about "leadership" among Dems and Dem candidates in particular. Much of it was anti-Hillary and mostly focused on her war views. On those, I join in criticizing her. However, this "lacking leadership" is the line being handed out previously by Obama and more recently very loudly by Edwards in attacking her on not proposing changes to social security. I confess that I am not sure what Kos's views on social security are, but at least rhetorically, he, or they, are adding to the rhetoric of those who have drunk the kool aid of "Social Security is in Crisis and we must do Something!"
Sunday, December 9, 2007
thoughts on the Prisoner's dilemma.
While trying to teach my students about the (non-repeated) "Prisoner's Dilemma" (PD) game, I had the following thoughts. I hope some of them are vaguely original -- or at least interesting.
The usual view of this "game" is that it turns Adam Smith's "Invisible Hand" (IH) on its head (or on its heel). In the Greatest Economics Story Ever Told, the IH says that in exchange, individual greed leads to the production of mutually-beneficial gains for all (or almost all) people, especially when organized by a competitive market. On the other hand, in the PD story, individual greed (possessive individualism) leads to mutual destruction of the prisoners. This occurs even though there exists a mutually-advantageous solution for them (collusion, cooperation, conspiracy, other "c" words).
There's another way of looking at the PD. The problem is that the police have set up a special social structure that pushes the prisoners to hurt each other. They aren't allowed to talk to each other. They have to make their decisions (rat[*] on each other or keep quiet) simultaneously (in effect). The cops create incentives that push each prisoner to rat. Thus, the prisoners both "defect" and suffer.
(For simplicity, I'm ignoring degrees between "ratting" and "staying mum." I'm also ignoring the honor among thieves, which can encourage tacit collusion, so that both refuse to "rat" on the other.)
This might be thought of in terms of "transactions costs" which make it extremely expensive for the prisoners to get together and strike a deal. But that would be misleading.
The problem is that exchange can also be like a PD game. Orthodox economists don't tell you that in the act of exchange, the two "players" are colluding to not rob each other. If we drop this usually-covert assumption, we see four possible choices. (Again, the choice is binary, ignoring intermediate choices between the extremes. Again, the two "traders" are assumed to embrace possessive individualism.)
1. Cain and Abel swap their goods with each other, with mutually-beneficial effects (collusion, IH result).
2. Cain slays Abel, stealing his goods. Cain gains in a big way (getting both sets of goods) while Abel obviously suffers.
3. Abel slays Cain, reversing the roles.
4. Both fire their weapons at each other, so both die (both defect, the usual PD result).
As in a PD game, the incentive is there for Cain to kill Abel. Naturally, Abel will fear this event and find that he has an incentive to preempt Cain's dirty deed (done dirt cheap). So Cain may react by shooting first. Mutual destruction ensues...
What's the solution to this mess? Orthodox economics (Orthonomics?) simply assume it away. More seriously, the English political philosopher Thomas Hobbes advocated bringing a very Visible Hand, the Leviathan, the unified state which monopolizes the means of violence. This prevents mutual destruction. It sets up incentives for the two traders to cooperate.
Another English political philosopher, John Locke, naturally enough didn't trust the state. His solution was to advocate merging the propertied class (what we would call the capitalists) with the state. The former should dominate the latter, to the maximal possible extent, natch. In this scenario, Cain and Abel _are_ the state, colluding to prevent the odious option #4.
An incentive problem still exists, however. Suppose that we see trading between the two brothers. Cain could see the benefits of having both of the guys' goods rather than simply getting Abel's goods in exchange for his own. He might then cheat or rob or kill Abel. This unhinges the collusion (or turns the game into a one-person affair, which I'll ignore).
But Locke had a solution: he proposed that people accept each others' property rights as "natural." If they accept this fiat, then trading can occur and both can benefit. It's as if he were proposing that the "honor among thieves" that allows real-world prisoners to collude in real-world dilemmas should apply to all property owners. They should see themselves as a community, with common interests.
Though Hobbes and Locke were a little silly (seeing imaginary "social contracts" as providing insight into what's happening in the real world), they captured the two main elements of what allows the IH to work, at least some of the time. These are the coercion of the state and the generally-accepted legitimacy of property rights.
The latter element, I believe, needs a lot of shoring up. After all, if profits are to be made, why accept the ideology of "natural" property rights? But there are two reinforcing elements that Karl Marx might suggest. The property owners cling to the ideology of natural property rights because it unites them against those who lack significant property rights (capital). The ideology helps maintain ruling-class solidarity. Second, if the capitalists believe it, or at least generally act as if they did, then it's easier to teach to the underclasses.
This analysis says that the mutually-beneficial exchange of the IH story is just as artificial as is the mutual destruction of the PD case. Both are based in human-made institutions. For one, the IH, the structure is created allowing collusion, while for the other, the PD, it's set up to encourage defection.
Those in power decide which activities fit in which box. For example, for you hemp-heads out there, the capitalist state in the US has decided that pot sellers belong in the PD box, while alcohol purveyors belong in the IH box.
To choose a less heady example, the social structure puts purely private goods in the IH box, while purely public goods are in the PD box. (The "public goods problem" is a version of the PD game, with a large number of participants. The "rats" are called free-riders.) Of course, in the real world, almost no products are purely public or purely private.
BTW, if this story is revealing, that indicates (once again) that game theory can say something about the world, as long as we don't obsess with equilibrium situations (Nash or otherwise).
[*] This is unfair to rats. Recent research indicates that those cute and furry creatures are more cooperatively-minded than the stereotypes say.
--
Jim Devine
The usual view of this "game" is that it turns Adam Smith's "Invisible Hand" (IH) on its head (or on its heel). In the Greatest Economics Story Ever Told, the IH says that in exchange, individual greed leads to the production of mutually-beneficial gains for all (or almost all) people, especially when organized by a competitive market. On the other hand, in the PD story, individual greed (possessive individualism) leads to mutual destruction of the prisoners. This occurs even though there exists a mutually-advantageous solution for them (collusion, cooperation, conspiracy, other "c" words).
There's another way of looking at the PD. The problem is that the police have set up a special social structure that pushes the prisoners to hurt each other. They aren't allowed to talk to each other. They have to make their decisions (rat[*] on each other or keep quiet) simultaneously (in effect). The cops create incentives that push each prisoner to rat. Thus, the prisoners both "defect" and suffer.
(For simplicity, I'm ignoring degrees between "ratting" and "staying mum." I'm also ignoring the honor among thieves, which can encourage tacit collusion, so that both refuse to "rat" on the other.)
This might be thought of in terms of "transactions costs" which make it extremely expensive for the prisoners to get together and strike a deal. But that would be misleading.
The problem is that exchange can also be like a PD game. Orthodox economists don't tell you that in the act of exchange, the two "players" are colluding to not rob each other. If we drop this usually-covert assumption, we see four possible choices. (Again, the choice is binary, ignoring intermediate choices between the extremes. Again, the two "traders" are assumed to embrace possessive individualism.)
1. Cain and Abel swap their goods with each other, with mutually-beneficial effects (collusion, IH result).
2. Cain slays Abel, stealing his goods. Cain gains in a big way (getting both sets of goods) while Abel obviously suffers.
3. Abel slays Cain, reversing the roles.
4. Both fire their weapons at each other, so both die (both defect, the usual PD result).
As in a PD game, the incentive is there for Cain to kill Abel. Naturally, Abel will fear this event and find that he has an incentive to preempt Cain's dirty deed (done dirt cheap). So Cain may react by shooting first. Mutual destruction ensues...
What's the solution to this mess? Orthodox economics (Orthonomics?) simply assume it away. More seriously, the English political philosopher Thomas Hobbes advocated bringing a very Visible Hand, the Leviathan, the unified state which monopolizes the means of violence. This prevents mutual destruction. It sets up incentives for the two traders to cooperate.
Another English political philosopher, John Locke, naturally enough didn't trust the state. His solution was to advocate merging the propertied class (what we would call the capitalists) with the state. The former should dominate the latter, to the maximal possible extent, natch. In this scenario, Cain and Abel _are_ the state, colluding to prevent the odious option #4.
An incentive problem still exists, however. Suppose that we see trading between the two brothers. Cain could see the benefits of having both of the guys' goods rather than simply getting Abel's goods in exchange for his own. He might then cheat or rob or kill Abel. This unhinges the collusion (or turns the game into a one-person affair, which I'll ignore).
But Locke had a solution: he proposed that people accept each others' property rights as "natural." If they accept this fiat, then trading can occur and both can benefit. It's as if he were proposing that the "honor among thieves" that allows real-world prisoners to collude in real-world dilemmas should apply to all property owners. They should see themselves as a community, with common interests.
Though Hobbes and Locke were a little silly (seeing imaginary "social contracts" as providing insight into what's happening in the real world), they captured the two main elements of what allows the IH to work, at least some of the time. These are the coercion of the state and the generally-accepted legitimacy of property rights.
The latter element, I believe, needs a lot of shoring up. After all, if profits are to be made, why accept the ideology of "natural" property rights? But there are two reinforcing elements that Karl Marx might suggest. The property owners cling to the ideology of natural property rights because it unites them against those who lack significant property rights (capital). The ideology helps maintain ruling-class solidarity. Second, if the capitalists believe it, or at least generally act as if they did, then it's easier to teach to the underclasses.
This analysis says that the mutually-beneficial exchange of the IH story is just as artificial as is the mutual destruction of the PD case. Both are based in human-made institutions. For one, the IH, the structure is created allowing collusion, while for the other, the PD, it's set up to encourage defection.
Those in power decide which activities fit in which box. For example, for you hemp-heads out there, the capitalist state in the US has decided that pot sellers belong in the PD box, while alcohol purveyors belong in the IH box.
To choose a less heady example, the social structure puts purely private goods in the IH box, while purely public goods are in the PD box. (The "public goods problem" is a version of the PD game, with a large number of participants. The "rats" are called free-riders.) Of course, in the real world, almost no products are purely public or purely private.
BTW, if this story is revealing, that indicates (once again) that game theory can say something about the world, as long as we don't obsess with equilibrium situations (Nash or otherwise).
[*] This is unfair to rats. Recent research indicates that those cute and furry creatures are more cooperatively-minded than the stereotypes say.
--
Jim Devine
The Death Grip of Savings Mania on Mainstream Democrats
Bob Frank is a smart guy with progressive instincts. His take on economic policy today is probably what we will see in a Democratic administration in 2009. That’s why it’s worth pointing out that the conventional wisdom he channels is politically and intellectually bankrupt.
He wants us to raise taxes because of “the deficits”, conflating the government’s fiscal deficit with the country’s current account deficit. Aside from sewing the sort of confusion that educators should be pledged to dispel, this argument recycles the discredited “twin deficits” hypothesis of the 1990's. Our external deficit, according to this view, is the product of our lack of savings, particularly public savings. (The fiscal deficit is a deduction from our national savings account.)
Been there, disconfirmed that. Over the course of the 90s the fiscal balance went from negative to positive, but the current account balance went down, down, down. Here’s how it looked:
Both the fiscal and current account balances are expressed as percentages of GDP, with bigger deficits pushing south. Except for a few years in the early 2000's, the two balances move in opposite directions. Shrink the government deficit (or squeeze out a surplus) and watch the current account drop. Of course, simple correlations like this are just the beginning of the story, but even fancy manipulations don’t turn this negative relationship into a positive one.
As I’ve argued before and at greater length, while everything affects everything else, the current account determines savings to a far greater extent than the other way around. The trade deficit is a drag on incomes, made up by the borrowing we do when the money comes back to us in the capital account. That transmission mechanism is obvious and visible. What about the effects of savings on trade?
There are only two routes. Either low savings leads to higher GDP (Keynes) and therefore a higher trade deficit, or it raises interest rates, which boosts the value of the dollar, which feeds the trade deficit. The first is empirically marginal at the present time: the US trade deficit is not driven by faster growth rates here compared to abroad. Even if it were otherwise, fixing trade by inducing a recession is curing a disease by killing the patient. The second route is counterfactual at two crucial points: domestic savings (low) do not drive interest rates (low) in the US, and interest rates do not drive the value of the dollar. Both are controverted by the willingness of foreign central banks and sovereign investment funds to buy dollar assets, thus far without limit.
So there is no compelling economic argument for obsessing on savings.
The political case is even weaker. The Democrats have become the party of sacrifice. They worry about Social Security (yes, that’s mentioned in Frank) because it will become a net draw on savings ten years out, so we have to “fix” it. We have to raise taxes because the fiscal deficit (currently within the Maastrict limit imposed on the Eurozone) is bad for savings. It’s all about savings, and it’s all wrong.
My suggestions: (1) Deal with the current account directly. If we cannot get international cooperation on the dollar, create a system of tradeable import permits. Take urgent action to cut the demand for petroleum, good for our trade balance and the earth’s carbon balance. Take an honest look at industrial policy. (2) Accept a fiscal deficit of 2-3% of GDP, as long as it makes sense as a national income stimulant, and as long as a substantial portion of public spending goes to investment in people and technology. (3) Finance large increases in public investment and energy transition by drastically cutting military spending. With a more modest military we could make more alliances, fewer wars and enjoy greater true security.
He wants us to raise taxes because of “the deficits”, conflating the government’s fiscal deficit with the country’s current account deficit. Aside from sewing the sort of confusion that educators should be pledged to dispel, this argument recycles the discredited “twin deficits” hypothesis of the 1990's. Our external deficit, according to this view, is the product of our lack of savings, particularly public savings. (The fiscal deficit is a deduction from our national savings account.)
Been there, disconfirmed that. Over the course of the 90s the fiscal balance went from negative to positive, but the current account balance went down, down, down. Here’s how it looked:
Both the fiscal and current account balances are expressed as percentages of GDP, with bigger deficits pushing south. Except for a few years in the early 2000's, the two balances move in opposite directions. Shrink the government deficit (or squeeze out a surplus) and watch the current account drop. Of course, simple correlations like this are just the beginning of the story, but even fancy manipulations don’t turn this negative relationship into a positive one.
As I’ve argued before and at greater length, while everything affects everything else, the current account determines savings to a far greater extent than the other way around. The trade deficit is a drag on incomes, made up by the borrowing we do when the money comes back to us in the capital account. That transmission mechanism is obvious and visible. What about the effects of savings on trade?
There are only two routes. Either low savings leads to higher GDP (Keynes) and therefore a higher trade deficit, or it raises interest rates, which boosts the value of the dollar, which feeds the trade deficit. The first is empirically marginal at the present time: the US trade deficit is not driven by faster growth rates here compared to abroad. Even if it were otherwise, fixing trade by inducing a recession is curing a disease by killing the patient. The second route is counterfactual at two crucial points: domestic savings (low) do not drive interest rates (low) in the US, and interest rates do not drive the value of the dollar. Both are controverted by the willingness of foreign central banks and sovereign investment funds to buy dollar assets, thus far without limit.
So there is no compelling economic argument for obsessing on savings.
The political case is even weaker. The Democrats have become the party of sacrifice. They worry about Social Security (yes, that’s mentioned in Frank) because it will become a net draw on savings ten years out, so we have to “fix” it. We have to raise taxes because the fiscal deficit (currently within the Maastrict limit imposed on the Eurozone) is bad for savings. It’s all about savings, and it’s all wrong.
My suggestions: (1) Deal with the current account directly. If we cannot get international cooperation on the dollar, create a system of tradeable import permits. Take urgent action to cut the demand for petroleum, good for our trade balance and the earth’s carbon balance. Take an honest look at industrial policy. (2) Accept a fiscal deficit of 2-3% of GDP, as long as it makes sense as a national income stimulant, and as long as a substantial portion of public spending goes to investment in people and technology. (3) Finance large increases in public investment and energy transition by drastically cutting military spending. With a more modest military we could make more alliances, fewer wars and enjoy greater true security.
Saturday, December 8, 2007
Pharmaceutical Crackup?
The Wall Street Journal has a great article about the big players in the pharmaceutical industry, showing how it is dealing with its lack of progress in developing new drugs -- by more intensive marketing, taking over smaller, more innovative companies, and laying off workers. Even so, Wall Street is looking forward to lower profits. Here is the article & another on the layoffs.
Martinez, Barbara and Jacob Goldstein. 2007. "Big Pharma Faces Grim Prognosis: Industry Fails to Find New Drugs to Replace Wonders Like Lipitor." Wall Street Journal (6 December): p. A 1.
"Over the next few years, the pharmaceutical business will hit a wall. Some of the top-selling drugs in industry history will become history as patent protections expire, allowing generics to rush in at much-lower prices. Generic competition is expected to wipe $67 billion from top companies' annual U.S. sales between 2007 and 2012 as more than three dozen drugs lose patent protection. That is roughly half of the companies' combined 2007 U.S. sales."
"At the same time, the industry's science engine has stalled. The century-old approach of finding chemicals to treat diseases is producing fewer and fewer drugs. Especially lacking are new blockbusters to replace old ones like Lipitor, Plavix and Zyprexa."
"The coming sales decline may signal the end of a once-revered way of doing business. "I think the industry is doomed if we don't change," says Sidney Taurel, chairman of Eli Lilly & Co. Just yesterday, Bristol-Myers Squibb Co. announced plans to cut 10% of its work force, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants by 2010."
"Between 2011 and 2012, annual industry revenue will decline, estimates Datamonitor, a research and consulting firm. That would be the first decline in at least four decades.'
"Once it hits the market, however, the patent-protected drug is highly profitable: Typical gross margins are 90% to 95%.'
"The rise of generics wouldn't matter so much if research labs were creating a stream of new hits. But that isn't happening. During the five years from 2002 through 2006, the industry brought to market 43% fewer new chemical-based drugs than in the last five years of the 1990s, despite more than doubling research-and-development spending."
""There haven't been any new therapies that are proven to reduce death and disability for atherosclerosis since the introduction of the [cholesterol-lowering] statins" in the late 1980s, said Richard C. Pasternak, vice president of Cardiovascular Clinical Research at Merck. Atherosclerosis, a buildup of arterial plaque, is a major cause of heart disease."
"Biotech drugs are especially appealing because they face no competition from generics: No regulatory pathway yet exists in the U.S. for bringing to market generic biotech drugs. So until Congress creates such a pathway, no generic threat will exist to the $4,400 a month that Genentech Inc. charges for its cancer drug Avastin, or the $200,000 a year that Genzyme Corp. gets for Cerezyme to treat Gaucher disease. And biotechnology products tend to target specialized areas of medicine that don't require mass advertising or armies of salespeople."
"So big pharmaceutical companies have spent nearly $76 billion since 2005 to buy biotech companies, according to Health Care M&A Information Service, a unit of Irving Levin Associates Inc., a Norwalk, Conn., research company. While in 2005 there were 33 deals amounting to $16.5 billion, in the first nine months of this year there were 49 deals totaling $28.7 billion, including AstraZeneca PLC's $15.6 billion acquisition of MedImmune, which followed a bidding war against Eli Lilly, among others."
"The dearth of new products has led the industry to invest heavily in marketing and legal tactics that squeeze as much revenue as possible out of existing products. Companies have raised prices; the average price per pill has risen 63% since 2002, according to Michael Krensavage, Raymond James analyst. Companies raised advertising spending to $5.3 billion in 2006 from $2.5 billion in 2001 and since 1995 have nearly tripled the number of industry sales representatives to 100,000."
"The industry spent $155 million on lobbying from January 2005 to June 2006, according to the Center for Public Integrity, on "a variety of issues ranging from protecting lucrative drug patents to keeping lower-priced Canadian drugs from being imported." The industry also successfully lobbied against allowing the federal government to negotiate Medicare drug prices, the center said. The lobbying has drawn fire from politicians, doctors and payers, and damaged the industry's public image."
==========
Loftus, Peter and Sarah Rubenstein. 2007. "Bristol-Myers Cuts Jobs, Plants to Shore Up Profit." Wall Street Journal (6 December): p. D 6.
"Bristol-Myers Squibb Co. is the latest big pharmaceutical company to announce a restructuring in the face of looming generic competition and pipelines with few potential blockbusters. The New York drug maker said it will cut its work force by 10%, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants in a plan to save about $1.5 billion by 2010 and boost profitability."
"Bristol-Myers Chief Executive James Cornelius told investors that the company faces a "patent cliff" early next decade, when its popular antiblood-clotting drug Plavix will lose U.S. market exclusivity."
Martinez, Barbara and Jacob Goldstein. 2007. "Big Pharma Faces Grim Prognosis: Industry Fails to Find New Drugs to Replace Wonders Like Lipitor." Wall Street Journal (6 December): p. A 1.
"Over the next few years, the pharmaceutical business will hit a wall. Some of the top-selling drugs in industry history will become history as patent protections expire, allowing generics to rush in at much-lower prices. Generic competition is expected to wipe $67 billion from top companies' annual U.S. sales between 2007 and 2012 as more than three dozen drugs lose patent protection. That is roughly half of the companies' combined 2007 U.S. sales."
"At the same time, the industry's science engine has stalled. The century-old approach of finding chemicals to treat diseases is producing fewer and fewer drugs. Especially lacking are new blockbusters to replace old ones like Lipitor, Plavix and Zyprexa."
"The coming sales decline may signal the end of a once-revered way of doing business. "I think the industry is doomed if we don't change," says Sidney Taurel, chairman of Eli Lilly & Co. Just yesterday, Bristol-Myers Squibb Co. announced plans to cut 10% of its work force, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants by 2010."
"Between 2011 and 2012, annual industry revenue will decline, estimates Datamonitor, a research and consulting firm. That would be the first decline in at least four decades.'
"Once it hits the market, however, the patent-protected drug is highly profitable: Typical gross margins are 90% to 95%.'
"The rise of generics wouldn't matter so much if research labs were creating a stream of new hits. But that isn't happening. During the five years from 2002 through 2006, the industry brought to market 43% fewer new chemical-based drugs than in the last five years of the 1990s, despite more than doubling research-and-development spending."
""There haven't been any new therapies that are proven to reduce death and disability for atherosclerosis since the introduction of the [cholesterol-lowering] statins" in the late 1980s, said Richard C. Pasternak, vice president of Cardiovascular Clinical Research at Merck. Atherosclerosis, a buildup of arterial plaque, is a major cause of heart disease."
"Biotech drugs are especially appealing because they face no competition from generics: No regulatory pathway yet exists in the U.S. for bringing to market generic biotech drugs. So until Congress creates such a pathway, no generic threat will exist to the $4,400 a month that Genentech Inc. charges for its cancer drug Avastin, or the $200,000 a year that Genzyme Corp. gets for Cerezyme to treat Gaucher disease. And biotechnology products tend to target specialized areas of medicine that don't require mass advertising or armies of salespeople."
"So big pharmaceutical companies have spent nearly $76 billion since 2005 to buy biotech companies, according to Health Care M&A Information Service, a unit of Irving Levin Associates Inc., a Norwalk, Conn., research company. While in 2005 there were 33 deals amounting to $16.5 billion, in the first nine months of this year there were 49 deals totaling $28.7 billion, including AstraZeneca PLC's $15.6 billion acquisition of MedImmune, which followed a bidding war against Eli Lilly, among others."
"The dearth of new products has led the industry to invest heavily in marketing and legal tactics that squeeze as much revenue as possible out of existing products. Companies have raised prices; the average price per pill has risen 63% since 2002, according to Michael Krensavage, Raymond James analyst. Companies raised advertising spending to $5.3 billion in 2006 from $2.5 billion in 2001 and since 1995 have nearly tripled the number of industry sales representatives to 100,000."
"The industry spent $155 million on lobbying from January 2005 to June 2006, according to the Center for Public Integrity, on "a variety of issues ranging from protecting lucrative drug patents to keeping lower-priced Canadian drugs from being imported." The industry also successfully lobbied against allowing the federal government to negotiate Medicare drug prices, the center said. The lobbying has drawn fire from politicians, doctors and payers, and damaged the industry's public image."
==========
Loftus, Peter and Sarah Rubenstein. 2007. "Bristol-Myers Cuts Jobs, Plants to Shore Up Profit." Wall Street Journal (6 December): p. D 6.
"Bristol-Myers Squibb Co. is the latest big pharmaceutical company to announce a restructuring in the face of looming generic competition and pipelines with few potential blockbusters. The New York drug maker said it will cut its work force by 10%, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants in a plan to save about $1.5 billion by 2010 and boost profitability."
"Bristol-Myers Chief Executive James Cornelius told investors that the company faces a "patent cliff" early next decade, when its popular antiblood-clotting drug Plavix will lose U.S. market exclusivity."
Friday, December 7, 2007
Does Wall Street Lead to Socialism?
It is fun to push Brad Setser's words to suggest that socialism (not real socialism, but the way the public understands it -- public ownership) may be the ultimate outcome of finance capital.
Brad Setser (December 06, 2007)
http://www.rgemonitor.com/blog/setser/230793
Brad Setser (December 06, 2007)
http://www.rgemonitor.com/blog/setser/230793
It wasn’t all that long ago that Wall Street -- Citi bankers included -- were scouring the emerging world for state-owned companies that could be sold to private investors in the US and Europe. Now the world’s investment bankers seem to be scouring the US and Europe for private assets that can be sold to government investment funds and state-owned companies in the emerging world.
Privatization is out. Selling private companies – or big chunks of a private company -- to another country’s government (partial renationalization?) is in.
Fatal Truck Crashes: A Publishing Opportunity for Economists
From the Pump Handle comes this. I’m too busy to turn these findings into an economics journal article, but I’ll tell you how to do it so you can pad your own CV.
First you need a theoretical model. You can show that, with a fixed salary and positive barriers to mobility (for instance in a searching/matching model of the labor market), truck drivers are unable to optimize on their relative preferences for money income and safety. This welfare loss can be overcome by the payment of piece rates. Now each truck driver can locate his or her own personal optimum in wage/risk space. (We abstract from the welfare benefits/costs of the direct effects of amphetamine use.) But there is also a potential externality, in that other drivers or pedestrians may be killed or maimed in truck accidents. The solution is a nonlinear wage schedule that reduces effective hourly pay by the expected cost of the externality according to increasing effect of work hours on accident rates. If you want to get even fancier, you could throw in the principal-agent dimension and put your solution in the context of optimal contract theory.
For the empirical section you would need the raw trucker data. It would be very simple, really a spreadsheet exercise, to impute the marginal value of an extra hour’s work from the piece rate schedule, and to calculate the marginal increase in the probability of a fatal accident. From this you could determine the VSL (value of a statistical life). The required level of analytical foggery could be achieved by testing for baseline effects, income and substitution effects, lots of stuff.
One thing that would not go into the article would be the observation that all of the above smiles on personnel practices that kill truckers.
It’s really a shame that they don’t let me supervise Ph.D. theses.
First you need a theoretical model. You can show that, with a fixed salary and positive barriers to mobility (for instance in a searching/matching model of the labor market), truck drivers are unable to optimize on their relative preferences for money income and safety. This welfare loss can be overcome by the payment of piece rates. Now each truck driver can locate his or her own personal optimum in wage/risk space. (We abstract from the welfare benefits/costs of the direct effects of amphetamine use.) But there is also a potential externality, in that other drivers or pedestrians may be killed or maimed in truck accidents. The solution is a nonlinear wage schedule that reduces effective hourly pay by the expected cost of the externality according to increasing effect of work hours on accident rates. If you want to get even fancier, you could throw in the principal-agent dimension and put your solution in the context of optimal contract theory.
For the empirical section you would need the raw trucker data. It would be very simple, really a spreadsheet exercise, to impute the marginal value of an extra hour’s work from the piece rate schedule, and to calculate the marginal increase in the probability of a fatal accident. From this you could determine the VSL (value of a statistical life). The required level of analytical foggery could be achieved by testing for baseline effects, income and substitution effects, lots of stuff.
One thing that would not go into the article would be the observation that all of the above smiles on personnel practices that kill truckers.
It’s really a shame that they don’t let me supervise Ph.D. theses.
Mark Perry and Greg Mankiw Say Bill Gates Can Afford Gasoline
I’m not sure why Greg Mankiw choose to peddle the latest be happy spin from Mark Perry:
Fine – Goldilocks, Warren Buffet, and Bill Gates can afford gasoline but what about the average Joe who has little wealth and must live paycheck to paycheck? Perry does compare gasoline prices over time to disposable income per capita. Looking at mean incomes (not median) and ignoring all those deferred tax bills from the Federal fiscal irresponsibility of this Administration, we are in the same relative place as we were in the mid-1980’s. OK, but one has to wonder if this were done relative to median income with those deferred taxes factored into the calculation of disposable income how this spin that Mark Perry puts forth and Greg Mankiw endorses would actually look.
Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.
Fine – Goldilocks, Warren Buffet, and Bill Gates can afford gasoline but what about the average Joe who has little wealth and must live paycheck to paycheck? Perry does compare gasoline prices over time to disposable income per capita. Looking at mean incomes (not median) and ignoring all those deferred tax bills from the Federal fiscal irresponsibility of this Administration, we are in the same relative place as we were in the mid-1980’s. OK, but one has to wonder if this were done relative to median income with those deferred taxes factored into the calculation of disposable income how this spin that Mark Perry puts forth and Greg Mankiw endorses would actually look.
Destroying Science in a Helium Balloon
A few years ago I published a book The Perverse Economy: The Impact of Markets on People and Nature (NY: Palgrave, 2003), which included a short discussion about the dangers created by the right wing of obsession about privatizing helium. The Wall Street Journal just published an article confirming my speculations, that the privatization represents a major threat to science. Campoy, Ana. 2007. "As Demand Balloons, Helium Is in Short Supply." Wall Street Journal (5 December): p. B 1.
http://online.wsj.com/article/SB119682793344314212.html
What follows is first the extract from my book, and then the article itself:
Helium
No matter that present values are generally illusory. Present value calculations serve a vital purpose for economic theory. Once the world is reduced to present values, economists can treat the world as if the future does not exist: each decision becomes a once-and-for-all choice without any regard for the future other than what the price system was already signaling.
Concerns about resources have no place within this framework. If a real danger of resource scarcity were looming on the horizon, markets would recognize that fact. The price structure would induce firms to take action by economizing on the resource and by developing alternatives.
The treatment of the national helium reserves illustrates this troubling relationship between discounting and scarcity. Helium is a remarkable substance. Because it is inert, it does not combine with other substances. Because of its perceived military importance in dirigibles, during the 1920s the United States began to collect helium under a federal monopoly.
Helium has properties other than being lighter than air. No other element can reach the low temperature of liquid helium. This property makes it useful in a broad array of high-tech industrial, research, and medical technologies, such as fiber-optic cables and magnetic-resonance imaging systems (National Research Council 2000).
The government later established a facility in Texas to store crude helium (National Research Council 2000). The Texas location is not accidental. Although atmospheric helium is plentiful, it is dispersed. Extracting this helium from the air is a very expensive proposition since only minute quantities of helium exist within a fairly large volume of air.
The sedimentary rocks that form the gas carry about one part per million of uranium. According to Kenneth Deffeyes, "During the slow decay to lead, each uranium atom spits out six to eight alpha particles. An alpha particle in physics is identical to the nucleus of a helium atom in chemistry. The helium gas that we put in party balloons is simply used alpha particles" (Deffeyes 2001, p. 66).
In contrast to its dispersion in the atmosphere, helium in natural gas deposits is relatively concentrated. Some natural gas deposits have helium concentrations as high as 8 percent, making them the most economical source of this element (National Research Council 2000, p. 40). Separating helium from natural gas costs only about 1/1000 as much as obtaining it from the atmosphere (Koopmans 1979).
In 1960, Congress amended the Helium Act, which had originally authorized the helium depository. This new legislation eliminated the federal monopoly of helium, although the Bureau of Mines continued to collect helium. Several companies in the United States entered the market to collect and sell the gas. These companies sold their excess helium to the federal government, which stored it in the National Helium Reserve in Texas.
Private consumption of helium reached a low point in the 1970s, even though private production was still vigorous. As a result, the government continued to accumulate more helium in the reserves until around 1980. With the build-up of federal stockpiles, conservatives singled out the helium reserves as a particularly egregious example of government waste (see Stroup and Shaw 1985). Christopher Cox, the California Congressman who led the fight to privatize helium labeled the reserve: "The poster child of Government waste" (Verhovek 1997).
In 1996, Congress eliminated the National Helium Reserve, leaving the management of helium to the free market and the likes of Enron, Exxon, and Panhandle Eastern Corporation. Well, not exactly, the free market. The law required that the government dispose of its helium over a couple of decades to prevent privatization from decreasing the price that the private producers charge. The promised cost savings have yet to appear.
The American Physical Society, a prominent group of physicists, has warned that the privatization plan is dangerous, because it has no requirement that a large stockpile will be maintained (Verhovek 1997; Powell 1996). Helium demand is now increasing at about 10 percent per year. The supply may be largely depleted by 2015, the date by which Congress proposes to phase out the reserve.
Indeed, a federal report says that the current trends indicate that shortages will appear within less than 20 years, unless private business develops new technologies. However, these experts are confident that business will somehow meet the challenge, although they give no indication of what this new technology might be (Natioal Research Council 2000).
Discounting Helium
The helium story is interesting in several respects, especially, taken in conjunction with the role of natural gas. As is well known, natural gas is probably the least environmentally destructive fossil fuel. Of course, the consumption of natural gas is not without problems, over and above the damage involved in moving it from its natural state to the place where it is ultimately burnt. In addition to obvious costs of the depletion of the gas itself and the contribution to global warming, the careless consumption of natural gas causes the dissipation of helium.
In this sense, the helium story brings us back to the theme of extraction versus production, but with a twist. Ironically, this same helium, which is being squandered because of the inattention to storing it for the future may well prove to be a vital part of high technology that could possibly lead to significant savings in energy, including natural gas.
In addition, the helium story serves as a useful reminder of the complex pathways of cause and effect typical of most environmental systems. Push in any direction and unexpected consequences crop up. In contrast, the contemporary profit system works with an appallingly simple mindset. Here is a resource that can benefit some corporations. Give it to them to exploit without much thought about the ultimate consequences.
The economist who may have given the most attention to the question of helium is the late Tjalling Koopmans, whom I noted in the discussion of hyperbolic discounting. Koopmans was a distinguished theoretical economist and winner of the 1975 Nobel Prize in economics. He proudly associated himself with the study of pure economics. He violently denounced those economists who relied on empirical data, without first carefully situating it in abstract theory (Mirowski 1989b). He was so fanatically committed to abstract economic theory that he even "seriously opposed ... fine writing in economics, not a common crime in our field. According to his code of scientific honor, mere elegance must not give ideas an unfair boost" (Samuelson 1989).
In 1978, Koopmans delivered the presidential address to the American Economic Association (Koopmans 1979). His lecture concerned the difficulties that economists had in communicating with natural scientists. Koopmans was not speaking out of ignorance of the ways of natural science. In fact, he had earned a degree in quantum physics. Koopmans explained to a meeting of the American Physical Association in 1979 that he initially decided to switch from physics to economics because he "felt the physical sciences were far ahead of the social and economic sciences" (cited in Mirowski 2002, p. 251).
By the time that he gave his lecture, Koopmans seemed to think that economics had advanced to the point where he could confidently recommended that scientists learn to accept the economists' approach.
In effect, harkening back to Adam Smith's account of the complex production process behind the appearance of a single coat, Koopmans attributed a superiority to economics over natural science. Whereas a scientist might be inclined to think of a helium policy in terms of the use or the production of helium, the economist uses monetary values to capture the systemic ramifications of a helium policy. In Koopmans's words:
In the present context, an important trait of the neoclassical (economic) model is that it does not postulate one sole primary resource, be it labor, energy or any other, whose scarcity controls that of all other goods, and which thereby becomes a natural unit of value for all other goods. [Koopmans 1979, p. 7]
Instead, as Lionel Robbins observed in his influential study of economic methodology, the economy is a "complex of 'scarcity relationships'" (Robbins 1969, p. 19). Within this context, prices take into account a wide array of factors, rather than a single objective, such as the conservation of helium.
In his address, Koopmans related his experience working on the report to the Helium Study Committee of the National Research Council. Most of Koopmans's discussion of helium merely dealt with technical questions regarding the supply and the extraction of helium. The one point that Koopmans kept returning to was the scientist's insistence that "Btu's are the same everywhere and at all times" (Koopmans 1979, p. 8). Koopmans wanted to teach the scientists that discounting future benefits, which lay behind the calculations justifying privatization, was rational.
Even if you grant the importance of discount rates, nobody knows how to select the appropriate discount rate for determining whether or not responsibility for collecting and storing helium should be privatized. Some discount rates would have been consistent with privatization. Other lower rates would not. Koopmans never mentioned how to decide on the correct discount rate. Nor did Koopmans indicate that he had any inkling of the possibility of hyperbolic discounting. In fact, the absence of an adequate theory of discounting represents a major challenge that stands in the way of the scientific aspirations of economists.
Tjalling Koopmans, the National Research Council, and most economic and political forces aligned themselves against those who express any concerns about sustainability. Presumably, if a problem occurs, they proposed that the resulting profit opportunities will create sufficient incentives to generate a solution. Their proposed solution is not sustainable, but instead an outcome in which the system efficiently maximizes discounted present values. Unfortunately, they did not have a clue as to what that discount rate should be.
======
Syracuse University physicist Gianfranco Vidali spends most of his time studying how molecules are made in outer space, but a couple of months ago he abruptly dropped his interstellar research to address an earthly issue: the global shortage of helium.
The airy element best known for floating party balloons and the Goodyear blimp is also the lifeblood of a widening world of scientific research. Mr. Vidali uses the gas, which becomes the coldest liquid on earth when pressurized, to recreate conditions similar to outer space. Without it, he can't work. So when his helium supplier informed him it was cutting deliveries to his lab, Mr. Vidali said, "it sent us into a panic mode."
Helium is found in varying concentrations in the world's natural-gas deposits, and is separated out in a special refining process. As with oil and natural gas, the easiest-to-get helium supplies have been tapped and are declining. Meanwhile, scientific research has rapidly multiplied the uses of helium in the past 50 years. It is needed to make computer microchips, flat-panel displays, fiber optics and to operate magnetic resonance imaging, or MRI, scans and welding machines.
The technology explosion is sucking up helium supplies at dizzying rates. U.S. helium demand is up more than 80% in the past two decades, and is growing at more than 20% annually in developing regions such as Asia.
"We've not seen the supply and demand at this imbalance in the past. We're running on the edge of the supply-demand curve," says Jane Hoffman, global helium director for Praxair Inc.
Supplies in the world's largest helium reserve near Amarillo, Texas, are expected to run out in eight years. Finding and developing new helium sources will take years and millions of dollars in investment.
Glitches at some of the world's biggest helium-producing plants have put a further pinch on supplies in the past year. As supplies have tightened, prices have surged in recent months. For one New York laboratory, prices have increased to $8 a liquid liter, from close to $4 at the end of the summer.
The upshot: Helium users -- from party planners to welding shops -- are having to do with less. Large industrial manufacturers are better able to weather the helium shortage, taking steps like installing equipment that can recycle the gas. So it is the nation's cash-strapped scientific community that is getting the worst of the crunch.
Soaring helium expenses could shut the doors of some independent labs, many which have produced important research over the years, and slow down work at bigger research centers. Helium is used in research to find cures to deadly diseases, create new sources of energy and answer questions about how the universe was formed.
Helium is essential to cool the magnets in nuclear magnetic resonance, or NMR, instruments used to map the chemical structure of molecules. Dale Ray, from The Cleveland Center for Structural Biology, an association that groups researchers from several institutions, says he is considering selling or shutting down two machines at the NMR lab he manages. The increase in helium prices is making it unaffordable to run the equipment, which is used to study proteins responsible for Alzheimer's disease, among other things.
Physicists are particularly affected by the helium shortage because their equipment requires more frequent helium refills. After experiencing interruptions in his helium deliveries, Moses Chan, a physicist at Penn State, launched a poll among his colleagues to find out how widespread the problem was. The results: the majority of helium users at 26 different institutions experienced canceled deliveries at least once, as well as price increases, some of them as much as 100%.
Myriam Sarachik, a physicist at City University of New York, might have to shut down her research. Among other things, Ms. Sarachik studies new materials that could bring a quantum leap in computing capabilities. Helium now absorbs most of her lab's budget, leaving little extra for everything else.
"I'm going to retire. That's the handwriting on the wall," says Ms. Sarachik, who has been doing experiments with helium for more than 40 years.
For one project, Ms. Sarachik and her students use 150 liters of liquid helium a week to cool the inside of a four-feet-high metal vessel to temperatures close to zero degree Kelvin, or about minus 459 Fahrenheit. Inside, they place tiny samples of materials mounted on chips and send electric currents to measure their properties. Without the helium, it would be impossible to monitor how the electrons respond because their behavior is masked by heat vibrations.
The National High Magnetic Field Laboratory, home of the world's strongest magnets, also is being affected. Hundreds of scientists travel from all over the world to Tallahassee, Fla., to use its magnets. They use the lab free of charge, but pay for their helium consumption. Many of them are on a very tight budget. To keep them coming, lab director Greg Boebinger will allocate $300,000 of his own tight budget to offer free helium.
"They need whatever relief we can provide," he says. "If they stop coming we're dead in the water."
There are a few helium projects scheduled to come on line in the next couple of years, but experts predict supplies will remain tight in coming years. Despite its higher prices, helium isn't expensive enough yet to warrant projects devoted to its extraction, so it must piggyback on investments made by natural-gas producers.
Additionally, the biggest helium reserve in the world, which is operated by the U.S. government, is in steady decline. Stored in a depleted natural-gas cavern known as the Bush Dome near Amarillo, it supplies 35% of the helium consumed in the world. The government started the reserve in 1925, but by the mid-90s decided to sell it to pay off debt it incurred from stockpiling helium over the years.
Under law, the entire contents of the Bush Dome should be sold by 2015. Helium is very expensive to store because, like a stranded party balloon, it floats up and disappears into the atmosphere. As a result, there is little storage capacity for the gas. Virtually all helium is processed and shipped to its final user as soon as it is extracted from the ground. Once the Bush Dome reserve is gone, there will be no stored helium to supply the market in case of disruptions at production facilities, making for even spottier deliveries and higher prices.
Experts predict this situation will eventually price out many helium users, who will find substitutes or modify their technology. Some party balloon businesses are filling balloons with mixtures that contain less helium. Some welders are using argon. Industrial users are installing recovery systems. In places where helium isn't easily available, like India, scientists already focus on experiments that can be done using liquid nitrogen, says Michael Cuthbert, a sales manager for Oxford Instruments, a company that sells scientific instruments all over the world.
Reem Jaafar, a researcher at Ms. Sarachik's lab at CUNY, says she will go into another area of physics if helium prices stay at their current levels. "If you have a fixed amount in a grant, and you have to spend it all on helium, you don't have anything left over," she says.
http://online.wsj.com/article/SB119682793344314212.html
What follows is first the extract from my book, and then the article itself:
Helium
No matter that present values are generally illusory. Present value calculations serve a vital purpose for economic theory. Once the world is reduced to present values, economists can treat the world as if the future does not exist: each decision becomes a once-and-for-all choice without any regard for the future other than what the price system was already signaling.
Concerns about resources have no place within this framework. If a real danger of resource scarcity were looming on the horizon, markets would recognize that fact. The price structure would induce firms to take action by economizing on the resource and by developing alternatives.
The treatment of the national helium reserves illustrates this troubling relationship between discounting and scarcity. Helium is a remarkable substance. Because it is inert, it does not combine with other substances. Because of its perceived military importance in dirigibles, during the 1920s the United States began to collect helium under a federal monopoly.
Helium has properties other than being lighter than air. No other element can reach the low temperature of liquid helium. This property makes it useful in a broad array of high-tech industrial, research, and medical technologies, such as fiber-optic cables and magnetic-resonance imaging systems (National Research Council 2000).
The government later established a facility in Texas to store crude helium (National Research Council 2000). The Texas location is not accidental. Although atmospheric helium is plentiful, it is dispersed. Extracting this helium from the air is a very expensive proposition since only minute quantities of helium exist within a fairly large volume of air.
The sedimentary rocks that form the gas carry about one part per million of uranium. According to Kenneth Deffeyes, "During the slow decay to lead, each uranium atom spits out six to eight alpha particles. An alpha particle in physics is identical to the nucleus of a helium atom in chemistry. The helium gas that we put in party balloons is simply used alpha particles" (Deffeyes 2001, p. 66).
In contrast to its dispersion in the atmosphere, helium in natural gas deposits is relatively concentrated. Some natural gas deposits have helium concentrations as high as 8 percent, making them the most economical source of this element (National Research Council 2000, p. 40). Separating helium from natural gas costs only about 1/1000 as much as obtaining it from the atmosphere (Koopmans 1979).
In 1960, Congress amended the Helium Act, which had originally authorized the helium depository. This new legislation eliminated the federal monopoly of helium, although the Bureau of Mines continued to collect helium. Several companies in the United States entered the market to collect and sell the gas. These companies sold their excess helium to the federal government, which stored it in the National Helium Reserve in Texas.
Private consumption of helium reached a low point in the 1970s, even though private production was still vigorous. As a result, the government continued to accumulate more helium in the reserves until around 1980. With the build-up of federal stockpiles, conservatives singled out the helium reserves as a particularly egregious example of government waste (see Stroup and Shaw 1985). Christopher Cox, the California Congressman who led the fight to privatize helium labeled the reserve: "The poster child of Government waste" (Verhovek 1997).
In 1996, Congress eliminated the National Helium Reserve, leaving the management of helium to the free market and the likes of Enron, Exxon, and Panhandle Eastern Corporation. Well, not exactly, the free market. The law required that the government dispose of its helium over a couple of decades to prevent privatization from decreasing the price that the private producers charge. The promised cost savings have yet to appear.
The American Physical Society, a prominent group of physicists, has warned that the privatization plan is dangerous, because it has no requirement that a large stockpile will be maintained (Verhovek 1997; Powell 1996). Helium demand is now increasing at about 10 percent per year. The supply may be largely depleted by 2015, the date by which Congress proposes to phase out the reserve.
Indeed, a federal report says that the current trends indicate that shortages will appear within less than 20 years, unless private business develops new technologies. However, these experts are confident that business will somehow meet the challenge, although they give no indication of what this new technology might be (Natioal Research Council 2000).
Discounting Helium
The helium story is interesting in several respects, especially, taken in conjunction with the role of natural gas. As is well known, natural gas is probably the least environmentally destructive fossil fuel. Of course, the consumption of natural gas is not without problems, over and above the damage involved in moving it from its natural state to the place where it is ultimately burnt. In addition to obvious costs of the depletion of the gas itself and the contribution to global warming, the careless consumption of natural gas causes the dissipation of helium.
In this sense, the helium story brings us back to the theme of extraction versus production, but with a twist. Ironically, this same helium, which is being squandered because of the inattention to storing it for the future may well prove to be a vital part of high technology that could possibly lead to significant savings in energy, including natural gas.
In addition, the helium story serves as a useful reminder of the complex pathways of cause and effect typical of most environmental systems. Push in any direction and unexpected consequences crop up. In contrast, the contemporary profit system works with an appallingly simple mindset. Here is a resource that can benefit some corporations. Give it to them to exploit without much thought about the ultimate consequences.
The economist who may have given the most attention to the question of helium is the late Tjalling Koopmans, whom I noted in the discussion of hyperbolic discounting. Koopmans was a distinguished theoretical economist and winner of the 1975 Nobel Prize in economics. He proudly associated himself with the study of pure economics. He violently denounced those economists who relied on empirical data, without first carefully situating it in abstract theory (Mirowski 1989b). He was so fanatically committed to abstract economic theory that he even "seriously opposed ... fine writing in economics, not a common crime in our field. According to his code of scientific honor, mere elegance must not give ideas an unfair boost" (Samuelson 1989).
In 1978, Koopmans delivered the presidential address to the American Economic Association (Koopmans 1979). His lecture concerned the difficulties that economists had in communicating with natural scientists. Koopmans was not speaking out of ignorance of the ways of natural science. In fact, he had earned a degree in quantum physics. Koopmans explained to a meeting of the American Physical Association in 1979 that he initially decided to switch from physics to economics because he "felt the physical sciences were far ahead of the social and economic sciences" (cited in Mirowski 2002, p. 251).
By the time that he gave his lecture, Koopmans seemed to think that economics had advanced to the point where he could confidently recommended that scientists learn to accept the economists' approach.
In effect, harkening back to Adam Smith's account of the complex production process behind the appearance of a single coat, Koopmans attributed a superiority to economics over natural science. Whereas a scientist might be inclined to think of a helium policy in terms of the use or the production of helium, the economist uses monetary values to capture the systemic ramifications of a helium policy. In Koopmans's words:
In the present context, an important trait of the neoclassical (economic) model is that it does not postulate one sole primary resource, be it labor, energy or any other, whose scarcity controls that of all other goods, and which thereby becomes a natural unit of value for all other goods. [Koopmans 1979, p. 7]
Instead, as Lionel Robbins observed in his influential study of economic methodology, the economy is a "complex of 'scarcity relationships'" (Robbins 1969, p. 19). Within this context, prices take into account a wide array of factors, rather than a single objective, such as the conservation of helium.
In his address, Koopmans related his experience working on the report to the Helium Study Committee of the National Research Council. Most of Koopmans's discussion of helium merely dealt with technical questions regarding the supply and the extraction of helium. The one point that Koopmans kept returning to was the scientist's insistence that "Btu's are the same everywhere and at all times" (Koopmans 1979, p. 8). Koopmans wanted to teach the scientists that discounting future benefits, which lay behind the calculations justifying privatization, was rational.
Even if you grant the importance of discount rates, nobody knows how to select the appropriate discount rate for determining whether or not responsibility for collecting and storing helium should be privatized. Some discount rates would have been consistent with privatization. Other lower rates would not. Koopmans never mentioned how to decide on the correct discount rate. Nor did Koopmans indicate that he had any inkling of the possibility of hyperbolic discounting. In fact, the absence of an adequate theory of discounting represents a major challenge that stands in the way of the scientific aspirations of economists.
Tjalling Koopmans, the National Research Council, and most economic and political forces aligned themselves against those who express any concerns about sustainability. Presumably, if a problem occurs, they proposed that the resulting profit opportunities will create sufficient incentives to generate a solution. Their proposed solution is not sustainable, but instead an outcome in which the system efficiently maximizes discounted present values. Unfortunately, they did not have a clue as to what that discount rate should be.
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Syracuse University physicist Gianfranco Vidali spends most of his time studying how molecules are made in outer space, but a couple of months ago he abruptly dropped his interstellar research to address an earthly issue: the global shortage of helium.
The airy element best known for floating party balloons and the Goodyear blimp is also the lifeblood of a widening world of scientific research. Mr. Vidali uses the gas, which becomes the coldest liquid on earth when pressurized, to recreate conditions similar to outer space. Without it, he can't work. So when his helium supplier informed him it was cutting deliveries to his lab, Mr. Vidali said, "it sent us into a panic mode."
Helium is found in varying concentrations in the world's natural-gas deposits, and is separated out in a special refining process. As with oil and natural gas, the easiest-to-get helium supplies have been tapped and are declining. Meanwhile, scientific research has rapidly multiplied the uses of helium in the past 50 years. It is needed to make computer microchips, flat-panel displays, fiber optics and to operate magnetic resonance imaging, or MRI, scans and welding machines.
The technology explosion is sucking up helium supplies at dizzying rates. U.S. helium demand is up more than 80% in the past two decades, and is growing at more than 20% annually in developing regions such as Asia.
"We've not seen the supply and demand at this imbalance in the past. We're running on the edge of the supply-demand curve," says Jane Hoffman, global helium director for Praxair Inc.
Supplies in the world's largest helium reserve near Amarillo, Texas, are expected to run out in eight years. Finding and developing new helium sources will take years and millions of dollars in investment.
Glitches at some of the world's biggest helium-producing plants have put a further pinch on supplies in the past year. As supplies have tightened, prices have surged in recent months. For one New York laboratory, prices have increased to $8 a liquid liter, from close to $4 at the end of the summer.
The upshot: Helium users -- from party planners to welding shops -- are having to do with less. Large industrial manufacturers are better able to weather the helium shortage, taking steps like installing equipment that can recycle the gas. So it is the nation's cash-strapped scientific community that is getting the worst of the crunch.
Soaring helium expenses could shut the doors of some independent labs, many which have produced important research over the years, and slow down work at bigger research centers. Helium is used in research to find cures to deadly diseases, create new sources of energy and answer questions about how the universe was formed.
Helium is essential to cool the magnets in nuclear magnetic resonance, or NMR, instruments used to map the chemical structure of molecules. Dale Ray, from The Cleveland Center for Structural Biology, an association that groups researchers from several institutions, says he is considering selling or shutting down two machines at the NMR lab he manages. The increase in helium prices is making it unaffordable to run the equipment, which is used to study proteins responsible for Alzheimer's disease, among other things.
Physicists are particularly affected by the helium shortage because their equipment requires more frequent helium refills. After experiencing interruptions in his helium deliveries, Moses Chan, a physicist at Penn State, launched a poll among his colleagues to find out how widespread the problem was. The results: the majority of helium users at 26 different institutions experienced canceled deliveries at least once, as well as price increases, some of them as much as 100%.
Myriam Sarachik, a physicist at City University of New York, might have to shut down her research. Among other things, Ms. Sarachik studies new materials that could bring a quantum leap in computing capabilities. Helium now absorbs most of her lab's budget, leaving little extra for everything else.
"I'm going to retire. That's the handwriting on the wall," says Ms. Sarachik, who has been doing experiments with helium for more than 40 years.
For one project, Ms. Sarachik and her students use 150 liters of liquid helium a week to cool the inside of a four-feet-high metal vessel to temperatures close to zero degree Kelvin, or about minus 459 Fahrenheit. Inside, they place tiny samples of materials mounted on chips and send electric currents to measure their properties. Without the helium, it would be impossible to monitor how the electrons respond because their behavior is masked by heat vibrations.
The National High Magnetic Field Laboratory, home of the world's strongest magnets, also is being affected. Hundreds of scientists travel from all over the world to Tallahassee, Fla., to use its magnets. They use the lab free of charge, but pay for their helium consumption. Many of them are on a very tight budget. To keep them coming, lab director Greg Boebinger will allocate $300,000 of his own tight budget to offer free helium.
"They need whatever relief we can provide," he says. "If they stop coming we're dead in the water."
There are a few helium projects scheduled to come on line in the next couple of years, but experts predict supplies will remain tight in coming years. Despite its higher prices, helium isn't expensive enough yet to warrant projects devoted to its extraction, so it must piggyback on investments made by natural-gas producers.
Additionally, the biggest helium reserve in the world, which is operated by the U.S. government, is in steady decline. Stored in a depleted natural-gas cavern known as the Bush Dome near Amarillo, it supplies 35% of the helium consumed in the world. The government started the reserve in 1925, but by the mid-90s decided to sell it to pay off debt it incurred from stockpiling helium over the years.
Under law, the entire contents of the Bush Dome should be sold by 2015. Helium is very expensive to store because, like a stranded party balloon, it floats up and disappears into the atmosphere. As a result, there is little storage capacity for the gas. Virtually all helium is processed and shipped to its final user as soon as it is extracted from the ground. Once the Bush Dome reserve is gone, there will be no stored helium to supply the market in case of disruptions at production facilities, making for even spottier deliveries and higher prices.
Experts predict this situation will eventually price out many helium users, who will find substitutes or modify their technology. Some party balloon businesses are filling balloons with mixtures that contain less helium. Some welders are using argon. Industrial users are installing recovery systems. In places where helium isn't easily available, like India, scientists already focus on experiments that can be done using liquid nitrogen, says Michael Cuthbert, a sales manager for Oxford Instruments, a company that sells scientific instruments all over the world.
Reem Jaafar, a researcher at Ms. Sarachik's lab at CUNY, says she will go into another area of physics if helium prices stay at their current levels. "If you have a fixed amount in a grant, and you have to spend it all on helium, you don't have anything left over," she says.
Thursday, December 6, 2007
Happy 100th Birthday, Old Man!
Today is the 100th birthday of my late father, John Barkley Rosser, Sr., who died on September 5, 1989. One can learn from his Wikipedia entry that he was a famous logician who proved a generalization of Godel's Incompleteness Theorem, invented "Rosser Sentences," helped prove the Church-Rosser Theorem in computability theory, to discover the Kleene-Rosser Paradox in same, as well as the Rosser Theorem in prime
number theory. He was also involved in the study of rocket ballistics, which led to him advising the US military during World War II, and continuing this later, eventually serving as Director of the US Army funded Mathematics Research Center (1963-73) at the University of Wisconsin-Madison, which was bombed on August 24, 1970 by the anti-Vietnam War "New Year's Gang," resulting in the death of Robert Fassnacht, an anti-Vietnam War physics grad student.
I was a student there in those days, and while I have always disapproved of violence in protesting wars, I came to have strong political disagreements with my father, which ended up being reported in local newspapers ("the irony"), as well as eventually in books (_Rads_, Tom Bates, 1989, Harper Collins). However, later we reconciled personally, while continuing strong political disagreements. I always respected his intelligence and integrity, and this encourages me that it is possible to maintain civil discourse in this world across deep political divides, as long as mutual personal respect can be maintained.
number theory. He was also involved in the study of rocket ballistics, which led to him advising the US military during World War II, and continuing this later, eventually serving as Director of the US Army funded Mathematics Research Center (1963-73) at the University of Wisconsin-Madison, which was bombed on August 24, 1970 by the anti-Vietnam War "New Year's Gang," resulting in the death of Robert Fassnacht, an anti-Vietnam War physics grad student.
I was a student there in those days, and while I have always disapproved of violence in protesting wars, I came to have strong political disagreements with my father, which ended up being reported in local newspapers ("the irony"), as well as eventually in books (_Rads_, Tom Bates, 1989, Harper Collins). However, later we reconciled personally, while continuing strong political disagreements. I always respected his intelligence and integrity, and this encourages me that it is possible to maintain civil discourse in this world across deep political divides, as long as mutual personal respect can be maintained.
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