Friday, August 29, 2008
Auto Da Fé
Who will get burned by the conjuncture of rising fuel prices and household debt deflation? The Frankfurter Allgemeine Zeitung reports that some corporate paper issued by GM is now trading at 50% of face.
The Beauty of Markets and Markets of Beauty
In looking through William Stanley Jevons' Principles of Economics, mostly a collection of unpublished fragments, Jevons concluded a section on negative value with a fascinating story from Herodotus on auctions in the Babylonian marriage market. The story speaks for itself and requires no commentary on my part.
137: "According to Herodotus the Babylonians managed to find husbands for all their young women. They collected together whatever maidens might be of marriageable years and sold them by auction, beginning with those esteemed the most beautiful. They gradually proceeded downwards in the scale of comeliness until some damsel equidistant between beauty and plainness had to be given away gratis. Then the plain and the ugly and the deformed were brought out by degrees, and the bidding went on; but in the other way, the premiums obtained for beauty being spent as dowries for the less favoured. All the women found husbands, and all the husbands found what they desired."
137: "According to Herodotus the Babylonians managed to find husbands for all their young women. They collected together whatever maidens might be of marriageable years and sold them by auction, beginning with those esteemed the most beautiful. They gradually proceeded downwards in the scale of comeliness until some damsel equidistant between beauty and plainness had to be given away gratis. Then the plain and the ugly and the deformed were brought out by degrees, and the bidding went on; but in the other way, the premiums obtained for beauty being spent as dowries for the less favoured. All the women found husbands, and all the husbands found what they desired."
Thursday, August 28, 2008
They're called the 'Unholy Trinity' – the IMF, the World Bank and the WTO. Part One.
Introduction.
The IMF and the World Bank were originally established in 1944 at the Bretton Woods conference between allied forces (essentially the US and Britain). It was a response to a wide range of international economic problems in relation to global trade that were experienced at the time and in the preceding decades. The most notable examples of such difficulties were exchange rate instability, ‘hot’ money flowing in and out of nations unpredictably, and the lack of a mechanism to adjust the balance of payments problems of countries, post-World War II debt and the need for the reconstruction and development of economies across the globe.
The IMF was designed to put in place a stable exchange rates regime with some scope for revaluation and convertibility of currencies when required. Short-term liquidity crises were to be managed by lending money to nations that experienced a temporary balance of payments crisis or by providing some form of orderly devaluation of the affected nation’s currency in times of more persistent BOP problems. It was hoped that these two latter processes would allow nations to reduce their deficits without resorting to protectionism or by experiencing deflation.
The International Bank for Reconstruction and Development (the World Bank) had the purpose of financing projects and infrastructure development in the war-torn European nations as well as to assist the industrialisation of post-colonial societies.
Under Bretton Woods the US dollar became the global reserve currency. This meant, amongst other things, that while every other national currency could devalue against the dollar, the US dollar could be devalued only against gold.
John Maynard Keynes and other negotiators at Bretton Woods had originally advocated a global reserve currency that was not, in fact, to be linked to any particular national currency. But the US held the hegemonic power at the time of these negotiations and its leaders designed the system to serve their priorities [1]. They wanted an up-dated gold standard to facilitate the liberalization of global trade and they wanted financial power concentrated in Washington and New York. US ‘negotiators’ won the day and lost the cause by doing so.
Because of the economic asymmetry between he United States and the rest of the world it soon began to experience a persistent balance of payments deficit. This situation arose under Bretton Woods because without the persistent US capital outflows the world experienced (for a number of reasons) a liquidity shortage. “In the early postwar years, the capital outflow consisted largely of foreign aid. By the end of the 1950s, private long-term investment abroad (mainly direct investment) exceeded military expenditures abroad and other official transfers (Eichengreen 199 1).” [2]
That Bretton Woods system crumbled after 1968 and ended with the closing by President Richard Nixon of the gold window on 15 August 1971. Prior to that at least one US presidential administration had used the nation’s economic hegemony to intervene and disrupt the operations of the Bretton Woods institutions. [3]
By the early 1970s the free market had become largely a historical relic in any case. “It [had] been transformed by three systemic forces over the [previous] 40 years: accelerating concentration of industry and banking, increasing intervention of government into the “private sector”, and…the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies.”[4]
For more on the background and history of the Bretton Woods system see: The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo.
END OF PART ONE
[1] Keynes’ Achilles’ heel was his lack of political sense, according to his biographer Robert Skidelsky. “He never studied the sources of power nor how society is affected by social stratification or the forces of social control.’. Page 494 ‘John Maynard Keynes, Fighting for Freedom, 1937 – 1946’ by Robert Skidelsky.
[2] The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo, professor of economics at Rutgers University.
www.nber.org/chapters/c6867.pdf
[3] Documents show that the Nixon administration engaged in an invisible economic blockade against the Allende government in Chile, intervening at the World Bank, IDB, and Export-Import bank to curtail or terminate credits and loans to Chile before Allende had been in office for a month. See: Department of State, Memorandum for Henry Kissinger on Chile, December 4, 1970:
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB8/ch20-01.htm
[4] ‘Global Reach – The Power of the Multinational Corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback.
The IMF and the World Bank were originally established in 1944 at the Bretton Woods conference between allied forces (essentially the US and Britain). It was a response to a wide range of international economic problems in relation to global trade that were experienced at the time and in the preceding decades. The most notable examples of such difficulties were exchange rate instability, ‘hot’ money flowing in and out of nations unpredictably, and the lack of a mechanism to adjust the balance of payments problems of countries, post-World War II debt and the need for the reconstruction and development of economies across the globe.
The IMF was designed to put in place a stable exchange rates regime with some scope for revaluation and convertibility of currencies when required. Short-term liquidity crises were to be managed by lending money to nations that experienced a temporary balance of payments crisis or by providing some form of orderly devaluation of the affected nation’s currency in times of more persistent BOP problems. It was hoped that these two latter processes would allow nations to reduce their deficits without resorting to protectionism or by experiencing deflation.
The International Bank for Reconstruction and Development (the World Bank) had the purpose of financing projects and infrastructure development in the war-torn European nations as well as to assist the industrialisation of post-colonial societies.
Under Bretton Woods the US dollar became the global reserve currency. This meant, amongst other things, that while every other national currency could devalue against the dollar, the US dollar could be devalued only against gold.
John Maynard Keynes and other negotiators at Bretton Woods had originally advocated a global reserve currency that was not, in fact, to be linked to any particular national currency. But the US held the hegemonic power at the time of these negotiations and its leaders designed the system to serve their priorities [1]. They wanted an up-dated gold standard to facilitate the liberalization of global trade and they wanted financial power concentrated in Washington and New York. US ‘negotiators’ won the day and lost the cause by doing so.
Because of the economic asymmetry between he United States and the rest of the world it soon began to experience a persistent balance of payments deficit. This situation arose under Bretton Woods because without the persistent US capital outflows the world experienced (for a number of reasons) a liquidity shortage. “In the early postwar years, the capital outflow consisted largely of foreign aid. By the end of the 1950s, private long-term investment abroad (mainly direct investment) exceeded military expenditures abroad and other official transfers (Eichengreen 199 1).” [2]
That Bretton Woods system crumbled after 1968 and ended with the closing by President Richard Nixon of the gold window on 15 August 1971. Prior to that at least one US presidential administration had used the nation’s economic hegemony to intervene and disrupt the operations of the Bretton Woods institutions. [3]
By the early 1970s the free market had become largely a historical relic in any case. “It [had] been transformed by three systemic forces over the [previous] 40 years: accelerating concentration of industry and banking, increasing intervention of government into the “private sector”, and…the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies.”[4]
For more on the background and history of the Bretton Woods system see: The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo.
END OF PART ONE
[1] Keynes’ Achilles’ heel was his lack of political sense, according to his biographer Robert Skidelsky. “He never studied the sources of power nor how society is affected by social stratification or the forces of social control.’. Page 494 ‘John Maynard Keynes, Fighting for Freedom, 1937 – 1946’ by Robert Skidelsky.
[2] The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo, professor of economics at Rutgers University.
www.nber.org/chapters/c6867.pdf
[3] Documents show that the Nixon administration engaged in an invisible economic blockade against the Allende government in Chile, intervening at the World Bank, IDB, and Export-Import bank to curtail or terminate credits and loans to Chile before Allende had been in office for a month. See: Department of State, Memorandum for Henry Kissinger on Chile, December 4, 1970:
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB8/ch20-01.htm
[4] ‘Global Reach – The Power of the Multinational Corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback.
Wednesday, August 27, 2008
Rubonomics for the People
Like many of you, I was a bit dismayed when Obama turned to Robert Rubin and his coterie for economic advice. I now admit that I was mistaken. According to Tuesday's Wall Street Journal, Citicorp has been paying Robert Rubin $17 million a year for a part-time job with no responsibility. Judging by the company's performance, the expectations placed on him might not be particularly high.
My full-time teaching job leaves me little spare time, but I think I could put aside a few hours each week in return for $17 million. I would be willing to take a pay cut in return for cutting back a few extra hours.
If you're like me, and think that you would want an opportunity like that, I would hope that Pres. Obama would enact policies that would give everybody an opportunity like Robert Rubin. With this in mind, I will put myself an unofficial adviser to the Obama campaign, suggesting the slogan: Rubinomics for the People.
Go Barak!
My full-time teaching job leaves me little spare time, but I think I could put aside a few hours each week in return for $17 million. I would be willing to take a pay cut in return for cutting back a few extra hours.
If you're like me, and think that you would want an opportunity like that, I would hope that Pres. Obama would enact policies that would give everybody an opportunity like Robert Rubin. With this in mind, I will put myself an unofficial adviser to the Obama campaign, suggesting the slogan: Rubinomics for the People.
Go Barak!
Tuesday, August 26, 2008
The Father of Rent Seeking Retires
I have just learned that the "father of rent seeking," 86-year-old Gordon Tullock, professor of economics and law at George Mason, suddenly decided a couple of weeks ago to retire, and has done so, moving to Arizona to live with his sister. Many readers and contributors to this blog probably do not think much of Tullock, given his quite strongly pro-free market orientation. However, he has been one of the more interesting characters in economics in recent years, who has arguably not received his proper due. In particular, James Buchanan received the Nobel Prize about 20 years ago for discovering/inventing public choice theory, with his 1960 book, _The Calculus of Consent_, being the source for this that was cited. There was a minor problem: Gordon Tullock was coauthor of that book and did not share the prize, although he was the founder and longtime editor of the journal Public Choice. (Rumor has it that the Nobel Committee had Richard Musgrave in mind to share it with Buchanan, but never gave it to him, and he is now dead, with Tullock somehow not even on their radar screen. Probably all three should have shared it, although many here probably think that neither Buchanan nor Tullock deserve(d) it).
Tullock may still get the prize, and has been high on some betting pools in recent years. He would get it for his discovery/invention of the concept of "rent seeking," although Anne Krueger invented the term some years later. Concern with corruption might lead to an award for this idea, that interest groups get governments to create artificial monopolies that create scarcity rents that can often get taken by those interest groups, often through bribery or corruption. Tullock's original paper on the matter was "The welfare costs of tariffs, monopolies, and theft," Western Economic Journal (now Economic Inquiry), 1967, 5: 224-232. I also note that some think he will not get the prize because he is very curmudgeonly, long showing his respect for somebody by insulting them. If he did not think much of someone, he simply ignores them.
Tullock may still get the prize, and has been high on some betting pools in recent years. He would get it for his discovery/invention of the concept of "rent seeking," although Anne Krueger invented the term some years later. Concern with corruption might lead to an award for this idea, that interest groups get governments to create artificial monopolies that create scarcity rents that can often get taken by those interest groups, often through bribery or corruption. Tullock's original paper on the matter was "The welfare costs of tariffs, monopolies, and theft," Western Economic Journal (now Economic Inquiry), 1967, 5: 224-232. I also note that some think he will not get the prize because he is very curmudgeonly, long showing his respect for somebody by insulting them. If he did not think much of someone, he simply ignores them.
The Mirage of Economic Efficiency
Almost 70 years ago, George Stigler introduced the concept of flexibility. A business might be highly efficient, but it may not have the flexibility to meet changing conditions. Stigler's point is largely ignored. I would prefer that other parts of his work were ignored, but I do not have much say in such matters.
Stigler, George. 1939. "Production and Distribution in the Short Run." Journal of Political Economy, 47 (June): pp. 304-27.
Stigler' point is fairly simple. Nuclear power plants are often used to explain what he meant. Assume, for the sake of argument only, that a nuclear power plant can produce electricity much cheaper than other forms of generation (by the way, I do not believe this assumption is correct). The problem is that demand shifts. The capacity to produce for peak demand might not be needed 90% of the time, making it an economical.
A coal fueled plant might be far less efficient, but it can be brought online relatively quickly when it is needed. Even though the engineering efficiency of the coal-fired plant might be low, it might be appropriate for handling peak loads.
Uncertainty makes Stigler's theory even more compelling. A biological example from my book, The Perverse Economy, might be appropriate.
"Biologists of all stripes acknowledge an amazing ability of various plants and animals to adapt to specialized niches. For example, scientists have recently discovered a new species, wholly unrelated to any previously known species, which survives on the lips of one particular type of lobster (Morris 1995). Although this form of evolution is remarkable, it also leaves the creatures vulnerable to even a slight change in the environment. The same specialization that made these creatures so dependent on the success of a relatively small group of lobsters makes them less adaptable to relatively small changes in the global environment. For example, this particular group of lobsters may decline or migrate to a less desirable location, threatening the existence of their tiny lip dwellers."
In the Perverse Economy, I used another example, regarding a glue shortage -- not glue in general, but a particular kind of glue. A computer chip is a silicon wafer, which is useless without the capacity to send and receive signals from a circuit board. A plastic package allows the chip to make the connection between the chip and the board. The industry uses specialized epoxy glue for fabricating these packages.
During the 1990s, a single Sumitomo Corporation plant manufactured the majority of the world's supply of the epoxy resin. About 60% of all memory modules depended on the product of this particular factory, when in July 1993 a fire destroyed this factory.
Ordinarily, an event like a fire in a glue factory not be of very much interest except for the people close to the event, but this fire ravaged the chip market. Dealers had been paying about $33 for a megabyte of memory before the fire. By the end of the month, the same memory commanded $95. The industry feared that prices would go even higher.
Bill Clinton's trade policy with Haiti illustrates a similar danger. Clinton forced Haiti open up its agricultural markets. Heavily subsidized US rice destroyed Haiti's capacity to produce rice. In terms of conventional economic theory, some economists might have seen Clinton's policy as efficient, following the laws of conventional economics (subsidies are ignored in this logic, especially the heavy water subsidies given to California rice growers). Relatively unproductive rice farmers would give up that activity to participate in the modernization of Haiti, presumably in some sweatshop.
Unfortunately, when agricultural prices began to soar, Haiti was unable to quickly resuscitate its previous capacity to grow rice. Food riots soon followed.
The recent sawdust shock is relevant here. Here is what the Wall Street Journal reported about sawdust:
"The price of sawdust has soared since 2006, up from about $25 a ton to more than $100 in some markets. Blame the housing slump: Fewer new homes mean fewer trees cut for use in construction, which leads to less sawdust and other wood waste, driving up the price."
"Farms use sawdust and wood shavings as cozy and clean bedding for horses and chickens. Particle-board makers devour it by the boxcar to fashion a cheap building material. Auto-parts manufacturers blend a finely pulverized sawdust called "wood flour" with plastic polymers to make a lightweight material to cover steering wheels and dashboards."
"Wineries use oak sawdust as a flavoring agent for some wines. Perdue Farms, which raises broiler chickens, goes through seven million cubic feet of wood shavings a year. Oil-rig operators in Wyoming and Colorado pour sawdust into the caverns they find deep inside rock formations as they hunt for pools of petroleum. Sawdust gives drill bits something to grind through."
"The housing slump has devastated sawmill production across the country."
Millman, Joel. 2008. "Sawdust Shock: A Shortage Looms As Economy Slows." Wall Street Journal (3 March): p. A 1.http://online.wsj.com/article/SB120451039119406735.html
Stigler, George. 1939. "Production and Distribution in the Short Run." Journal of Political Economy, 47 (June): pp. 304-27.
Stigler' point is fairly simple. Nuclear power plants are often used to explain what he meant. Assume, for the sake of argument only, that a nuclear power plant can produce electricity much cheaper than other forms of generation (by the way, I do not believe this assumption is correct). The problem is that demand shifts. The capacity to produce for peak demand might not be needed 90% of the time, making it an economical.
A coal fueled plant might be far less efficient, but it can be brought online relatively quickly when it is needed. Even though the engineering efficiency of the coal-fired plant might be low, it might be appropriate for handling peak loads.
Uncertainty makes Stigler's theory even more compelling. A biological example from my book, The Perverse Economy, might be appropriate.
"Biologists of all stripes acknowledge an amazing ability of various plants and animals to adapt to specialized niches. For example, scientists have recently discovered a new species, wholly unrelated to any previously known species, which survives on the lips of one particular type of lobster (Morris 1995). Although this form of evolution is remarkable, it also leaves the creatures vulnerable to even a slight change in the environment. The same specialization that made these creatures so dependent on the success of a relatively small group of lobsters makes them less adaptable to relatively small changes in the global environment. For example, this particular group of lobsters may decline or migrate to a less desirable location, threatening the existence of their tiny lip dwellers."
In the Perverse Economy, I used another example, regarding a glue shortage -- not glue in general, but a particular kind of glue. A computer chip is a silicon wafer, which is useless without the capacity to send and receive signals from a circuit board. A plastic package allows the chip to make the connection between the chip and the board. The industry uses specialized epoxy glue for fabricating these packages.
During the 1990s, a single Sumitomo Corporation plant manufactured the majority of the world's supply of the epoxy resin. About 60% of all memory modules depended on the product of this particular factory, when in July 1993 a fire destroyed this factory.
Ordinarily, an event like a fire in a glue factory not be of very much interest except for the people close to the event, but this fire ravaged the chip market. Dealers had been paying about $33 for a megabyte of memory before the fire. By the end of the month, the same memory commanded $95. The industry feared that prices would go even higher.
Bill Clinton's trade policy with Haiti illustrates a similar danger. Clinton forced Haiti open up its agricultural markets. Heavily subsidized US rice destroyed Haiti's capacity to produce rice. In terms of conventional economic theory, some economists might have seen Clinton's policy as efficient, following the laws of conventional economics (subsidies are ignored in this logic, especially the heavy water subsidies given to California rice growers). Relatively unproductive rice farmers would give up that activity to participate in the modernization of Haiti, presumably in some sweatshop.
Unfortunately, when agricultural prices began to soar, Haiti was unable to quickly resuscitate its previous capacity to grow rice. Food riots soon followed.
The recent sawdust shock is relevant here. Here is what the Wall Street Journal reported about sawdust:
"The price of sawdust has soared since 2006, up from about $25 a ton to more than $100 in some markets. Blame the housing slump: Fewer new homes mean fewer trees cut for use in construction, which leads to less sawdust and other wood waste, driving up the price."
"Farms use sawdust and wood shavings as cozy and clean bedding for horses and chickens. Particle-board makers devour it by the boxcar to fashion a cheap building material. Auto-parts manufacturers blend a finely pulverized sawdust called "wood flour" with plastic polymers to make a lightweight material to cover steering wheels and dashboards."
"Wineries use oak sawdust as a flavoring agent for some wines. Perdue Farms, which raises broiler chickens, goes through seven million cubic feet of wood shavings a year. Oil-rig operators in Wyoming and Colorado pour sawdust into the caverns they find deep inside rock formations as they hunt for pools of petroleum. Sawdust gives drill bits something to grind through."
"The housing slump has devastated sawmill production across the country."
Millman, Joel. 2008. "Sawdust Shock: A Shortage Looms As Economy Slows." Wall Street Journal (3 March): p. A 1.http://online.wsj.com/article/SB120451039119406735.html
Monday, August 25, 2008
Henri Cartan, RIP
Henri Cartan, the grand old man of French mathematics, has died at 104. He was the founder and leader of the "Bourbaki" movement in the 1930s, a group that tried to redo mathematics as a totally formalized and axiomatized system, following deep intellectual traditions in France of hyper-rationalism that go back to Descartes, if not all the way to Thomas Aquinas, and which in French socio-economics was associated with the social engineering idealism of Saint-Simon and the dirigiste tradition of French indicative central planning. The group operated, at least initially, anonymously, signing their papers with the name of a dead French general, Nicholas Bourbaki. They hoped to clarify mathematics and remove from it any mysticism or fuzzy thinking.
One of Cartan's most assiduous students in the immediate post-WW II period was the late Gerard Debreu, the more mathematical and austere half of Arrow and Debreu, who famously proved the existence of competitive general equilibrium in 1954, both of them eventually receiving the Nobel Prize in economics. Debreu was probably the most articulate and influential spokesman for axiomatizing economic theory, something now very much out of favor for many reasons. Indeed, as Roy Weintraub has noted in his book, _How Economics Became a Mathematical Science_, the trends of uses of math in economics tend to repeat trends in math itself, with the Bourbakist approach having fallen out of fashion within math itself some time ago. Simulation and many other approaches have picked up, and we see this in economics with agent-based modeling and more emphasis on empirics and induction from that now.
Even though Cartan and his allies dominated French mathematics for decades, two of the most interesting mathematicians to come out of France, Rene Thom, the founder of catastrophe theory, and Benoit Mandelbrot, the inventor/discoverer of fractals, were both very bad at proving theorems and following the Bourbakist approach. Indeed their great success, including with influence on economics, was perhaps a sign of the limits of Bourbakism more generally.
One of Cartan's most assiduous students in the immediate post-WW II period was the late Gerard Debreu, the more mathematical and austere half of Arrow and Debreu, who famously proved the existence of competitive general equilibrium in 1954, both of them eventually receiving the Nobel Prize in economics. Debreu was probably the most articulate and influential spokesman for axiomatizing economic theory, something now very much out of favor for many reasons. Indeed, as Roy Weintraub has noted in his book, _How Economics Became a Mathematical Science_, the trends of uses of math in economics tend to repeat trends in math itself, with the Bourbakist approach having fallen out of fashion within math itself some time ago. Simulation and many other approaches have picked up, and we see this in economics with agent-based modeling and more emphasis on empirics and induction from that now.
Even though Cartan and his allies dominated French mathematics for decades, two of the most interesting mathematicians to come out of France, Rene Thom, the founder of catastrophe theory, and Benoit Mandelbrot, the inventor/discoverer of fractals, were both very bad at proving theorems and following the Bourbakist approach. Indeed their great success, including with influence on economics, was perhaps a sign of the limits of Bourbakism more generally.
How the Gnome of Zurich Got It Wrong
Last week I was at a conference in Zurich, Switzerland, site of the HQs of all those Swiss banks. At Einstein's alma mater, the Swiss Federal University of Technology (ETH) there is a mathematics professor named Paul Embrechts whom I like to think of as being the actual Gnome of Zurich. About a decade ago he succeeded in convincing the leading Swiss banks to use the mathematical entity known as a copula as the basis for measuring risk. They did so, and from them it spread to become the most widely used method in the financial world, displacing the Black-Scholes formula, although one is hard pressed to find a definition of it in any financial economics textbooks. I will say that it is based on a stationary distribution that attempts to take into account more fully covariances among events. It also has the advantage of actually admitting that there are lots more extreme events than does the Gaussian normal that underlies Black-Scholes, which after the 1987 crash most of the practitioners knew was garbage. So, it admits the stylized fact that all asset markets exhibit "fat tails" or kurtosis, those more frequent extreme events.
However, it turns out that the copulas have not proved sufficient to deal with the events of the last year, with most funds and banks and whatnot still getting into trouble. One of the conference participants was an econophysicist colleague of Embrechts, Didier Sornette, who runs an "Observatory of Financial Crises." While he has made some not so accurate public forecasts himself (see my "Econophysics and Economic Complexity," available at http://cob.jmu.edu/rosserjb), Sornette described the problem with the copulas: they do not take into account how herding can happen. So, they can give the right probability that a 10% decline in a market can happen in one day, but will understate the probability that this might happen for three days in a row. This would suggest that Nassim Taleb with his black swans might be right, although anybody trying to follow his "barbell strategy" to make money on really big crashes would probably have lost money over most of the last several years, despite the big crashes that have been going on over the past year.
However, it turns out that the copulas have not proved sufficient to deal with the events of the last year, with most funds and banks and whatnot still getting into trouble. One of the conference participants was an econophysicist colleague of Embrechts, Didier Sornette, who runs an "Observatory of Financial Crises." While he has made some not so accurate public forecasts himself (see my "Econophysics and Economic Complexity," available at http://cob.jmu.edu/rosserjb), Sornette described the problem with the copulas: they do not take into account how herding can happen. So, they can give the right probability that a 10% decline in a market can happen in one day, but will understate the probability that this might happen for three days in a row. This would suggest that Nassim Taleb with his black swans might be right, although anybody trying to follow his "barbell strategy" to make money on really big crashes would probably have lost money over most of the last several years, despite the big crashes that have been going on over the past year.
TWO THINGS
by the Sandwichman
"'Two things,' he said, as we were standing outside the first-class bathroom. 'One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?'
"I didn’t, I said."
"'Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,' Obama said.
"In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, 'counts special locks for our doors and the jails for those who break them -- but not the health of our children, the quality of their education or the joy of their play.'"
"How did we get to this strange pass, where up is down and down is up? How did it happen that the nation’s economic hero is a terminal-cancer patient going through a costly divorce? How is it that Congress talks about stimulating 'the economy' when much that will actually be stimulated is the destruction of things it says it cares about on other days?
"How did the notion of economy become so totally uneconomic?
"The story begins in Ireland in the 1650s..."
"'Two things,' he said, as we were standing outside the first-class bathroom. 'One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?'
"I didn’t, I said."
"'Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,' Obama said.
"In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, 'counts special locks for our doors and the jails for those who break them -- but not the health of our children, the quality of their education or the joy of their play.'"
"How did we get to this strange pass, where up is down and down is up? How did it happen that the nation’s economic hero is a terminal-cancer patient going through a costly divorce? How is it that Congress talks about stimulating 'the economy' when much that will actually be stimulated is the destruction of things it says it cares about on other days?
"How did the notion of economy become so totally uneconomic?
"The story begins in Ireland in the 1650s..."
Saturday, August 23, 2008
Clothing for the 21st Century (the folly of mass production)
With the new clothing of the 21st century human labour will out-compete the machine because:
Human life and wellbeing will be safeguarded
** Ample land, water and other critical resources will be available for essential food production;
** People will not be poisoned by industrial processes;
** There'll be less superfluous consumption and production and therefore more leisure time;
** We'll be more satisfied with our products because we will design and make them;
** The monotony and drudgery of mass production will be reduced;
** Local production will result in the decentralisation of power and wealth in society.
** The imperative to condition us with advertising and 'education' will no longer exist.
Do you know who made this extravagant campaign promise?
"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but, given a chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation."
Hoover, Herbert. 1952. The Memoirs of Herbert Hoover: The Cabinet and the Presidency, 1920-1933 (New York: Macmillan): p. 184: while running for the Republican presidential nomination in 1928.
This, of course, compares with George Bush's promise of a humble foreign policy.
"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but, given a chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation."
Hoover, Herbert. 1952. The Memoirs of Herbert Hoover: The Cabinet and the Presidency, 1920-1933 (New York: Macmillan): p. 184: while running for the Republican presidential nomination in 1928.
This, of course, compares with George Bush's promise of a humble foreign policy.
Thursday, August 21, 2008
The Folly of Offshore Oil Drilling
The idea that the oil companies need to get permission to drill offshore is ridiculous. The majors are more intent in using their funds to buy back their stocks to raise the share price to help boost their bonuses. Here are my notes from an interesting study from the James A. Baker III Institute for Public Policy.
Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf
The idea that the oil companies need to get permission to drill offshore is ridiculous. The majors are more intent in using their funds to buy back their stocks to raise the share price to help boost their bonuses. Here are my notes from an interesting study from the James A. Baker III Institute for Public Policy.
Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf
This study looks at the outlays of the big five or companies, BP, Chevron, Conoco Phillips, Exxon Mobil, and Royal Dutch Shell, which had $120.8 billion in profits in 2006 with 9.7 million barrels a day of oil production. The next 20 largest firms had 31.2 billion in profits with 2.1 million barrels per day of production. In terms of operating cash flow, the big five registered $155 billion in 2006, compared to only 50 billion for the next 20 largest American oil firms.
"Cash flow is a better measure of the discretionary resources available to firms than profits. For the Big Five IOCs, operating cash flow, shown in Figure 2, was slightly more than two and a half times higher in 2006 than the average levels prevailing in the 1996-99 period, rising from roughly $60 billion in the late 1990s to $154.9 billion in 2005."
"But while prices, profits, and cash flow have risen dramatically, investment in exploration has not -- especially by the largest IOCs."
They look at outlays of the Big Five firms among the following categories: share buybacks, reserve acquisitions from other firms, exploration expenditures, development outlays, and dividend payments.
"Development expenditures reflect investments in fields that have already been discovered and are the easiest (most cost-effective) way to boost output in the short run. Nonetheless, it is investment in the exploration of new fields that will assure the long-term viability of these firms."
"Share buybacks (equity repurchases) have absorbed a growing share of these outlays, rising from only 1% in 1993 to 37.1% in 2006, while expenditures on exploration account for a decreasing proportion, declining from 13.8% in 1993 to only 5.8% in 2006. It is interesting to note that, despite an almost 50% increase in exploration expenditures from 2005 to 2006, these expenditures as a share of the total increased from 5.3% to only 5.8%."
"The data for the "next 20" firms reveals a pattern of expenditures that is quite different from that of the Big Five. Outlays for exploration have increased significantly in absolute terms, although not as a share of total outlays. Dividends account for a much smaller proportion of outlays while acquiring reserves from other firms is larger. Development expenditures have increased more than three-fold since 1999. However, as a percentage of these outlays, development expenditure has increased from 33.5 % to 47.3%."
"smaller firms are more aggressive in spending for reserves additions than the Big Five-through growing exploration outlays and through acquisitions from other firms."
"The gap [in absolute dollar terms" between the exploration expenditures of the Big Five and the smaller companies has closed, with the next top 20 firms now spending in absolute amounts roughly the same as the Big Five. This is especially telling when one considers the huge differences in operating cash flow between the two groups, where the Big Five registered $155 billion in 2006 against only $50 billion in operating cash flow for these next 20 oil independents."
"The Big Five are gradually depleting their reserves with an average replacement ratio of only 82% in the period since 1999, as compared with 147% for the next 20.8."
"To some extent the decline for the Big Five is attributable to the downward restatement of reserves, especially by Royal Dutch Shell."
"The oil production of the five largest oil companies has declined since the mid-1990s. Oil production for the five largest oil companies fell from 10.25 million b/d in 1996 to 9.45 million b/d in 2005 before rebounding to 9.7 million b/d in 2006. By contrast, for the next 20 U.S. independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006."
"Increasingly, the IOCs have become more like general contractors, coordinating the operation of a number of suppliers who themselves are the ones who undertake seismic work, analyze data, provide drilling rigs and crews and a host of oil field services. The larger IOCs also serve the function of bankers, providing the vast amount of financial resources required to mount greenfield projects in increasingly unfavorable and difficult environments. They also provide the management, organizational skills, and oversight that these large projects require."
"The question is whether NOCs will find this role increasingly useful or whether they believe that such operational planning functions can either be performed by themselves or be farmed out to a service company under a fee-for-service structure. The fact that IOCs have had a poor record in recent years avoiding giant cost overruns on mega projects in Kazakhstan, the Sakhalin Islands, and the Middle East means that NOCs might be skeptical of the benefits being offered by IOCs. Moreover, investors are also questioning whether there is a continued role for the largest firms in a world where the average size of new finds is declining. Smaller E&P firms have lower costs than the large bureaucratic IOCs. They might have an advantage in finding and developing the remaining reserves that are available to private firms. Stock markets reflect these perceptions, with the shares of NOCs and American independents generally performing better than IOC shares."
Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf
The idea that the oil companies need to get permission to drill offshore is ridiculous. The majors are more intent in using their funds to buy back their stocks to raise the share price to help boost their bonuses. Here are my notes from an interesting study from the James A. Baker III Institute for Public Policy.
Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf
This study looks at the outlays of the big five or companies, BP, Chevron, Conoco Phillips, Exxon Mobil, and Royal Dutch Shell, which had $120.8 billion in profits in 2006 with 9.7 million barrels a day of oil production. The next 20 largest firms had 31.2 billion in profits with 2.1 million barrels per day of production. In terms of operating cash flow, the big five registered $155 billion in 2006, compared to only 50 billion for the next 20 largest American oil firms.
"Cash flow is a better measure of the discretionary resources available to firms than profits. For the Big Five IOCs, operating cash flow, shown in Figure 2, was slightly more than two and a half times higher in 2006 than the average levels prevailing in the 1996-99 period, rising from roughly $60 billion in the late 1990s to $154.9 billion in 2005."
"But while prices, profits, and cash flow have risen dramatically, investment in exploration has not -- especially by the largest IOCs."
They look at outlays of the Big Five firms among the following categories: share buybacks, reserve acquisitions from other firms, exploration expenditures, development outlays, and dividend payments.
"Development expenditures reflect investments in fields that have already been discovered and are the easiest (most cost-effective) way to boost output in the short run. Nonetheless, it is investment in the exploration of new fields that will assure the long-term viability of these firms."
"Share buybacks (equity repurchases) have absorbed a growing share of these outlays, rising from only 1% in 1993 to 37.1% in 2006, while expenditures on exploration account for a decreasing proportion, declining from 13.8% in 1993 to only 5.8% in 2006. It is interesting to note that, despite an almost 50% increase in exploration expenditures from 2005 to 2006, these expenditures as a share of the total increased from 5.3% to only 5.8%."
"The data for the "next 20" firms reveals a pattern of expenditures that is quite different from that of the Big Five. Outlays for exploration have increased significantly in absolute terms, although not as a share of total outlays. Dividends account for a much smaller proportion of outlays while acquiring reserves from other firms is larger. Development expenditures have increased more than three-fold since 1999. However, as a percentage of these outlays, development expenditure has increased from 33.5 % to 47.3%."
"smaller firms are more aggressive in spending for reserves additions than the Big Five-through growing exploration outlays and through acquisitions from other firms."
"The gap [in absolute dollar terms" between the exploration expenditures of the Big Five and the smaller companies has closed, with the next top 20 firms now spending in absolute amounts roughly the same as the Big Five. This is especially telling when one considers the huge differences in operating cash flow between the two groups, where the Big Five registered $155 billion in 2006 against only $50 billion in operating cash flow for these next 20 oil independents."
"The Big Five are gradually depleting their reserves with an average replacement ratio of only 82% in the period since 1999, as compared with 147% for the next 20.8."
"To some extent the decline for the Big Five is attributable to the downward restatement of reserves, especially by Royal Dutch Shell."
"The oil production of the five largest oil companies has declined since the mid-1990s. Oil production for the five largest oil companies fell from 10.25 million b/d in 1996 to 9.45 million b/d in 2005 before rebounding to 9.7 million b/d in 2006. By contrast, for the next 20 U.S. independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006."
"Increasingly, the IOCs have become more like general contractors, coordinating the operation of a number of suppliers who themselves are the ones who undertake seismic work, analyze data, provide drilling rigs and crews and a host of oil field services. The larger IOCs also serve the function of bankers, providing the vast amount of financial resources required to mount greenfield projects in increasingly unfavorable and difficult environments. They also provide the management, organizational skills, and oversight that these large projects require."
"The question is whether NOCs will find this role increasingly useful or whether they believe that such operational planning functions can either be performed by themselves or be farmed out to a service company under a fee-for-service structure. The fact that IOCs have had a poor record in recent years avoiding giant cost overruns on mega projects in Kazakhstan, the Sakhalin Islands, and the Middle East means that NOCs might be skeptical of the benefits being offered by IOCs. Moreover, investors are also questioning whether there is a continued role for the largest firms in a world where the average size of new finds is declining. Smaller E&P firms have lower costs than the large bureaucratic IOCs. They might have an advantage in finding and developing the remaining reserves that are available to private firms. Stock markets reflect these perceptions, with the shares of NOCs and American independents generally performing better than IOC shares."
Tuesday, August 19, 2008
"Let the Games Be Doped"
In his recent (8/12/08) New York TIMES article titled "Let the Games Be Doped," John Tierney argues that we should let athletes take any drugs -- or use any artificial means they want -- in athletic contests. I was going to write a letter to the TIMES, but got lazy and/or busy. Now, in today's "Science" section, there are two particularly anemic letters criticizing Tierney's perspective. So I'm provoked to write.
Of course, there are obvious questions. If all artificial means are OK, why can't Olympic swimmers use flippers? or why not weapons? Take THAT, Michael Phelps!
But that's not my point (see also my Valentine's Day card on EconoSpeak this year at http://econospeak.blogspot.com/2008/02/next-steroids.html). Tierney comes at the issue from a "libertarian" angle, arguing essentially that it's up to the individual to decide on whether or not the costs of steroids (or whatever) outweigh benefits. The problem is (as is often ignored by so-called "libertarians") there are external costs. In this case, athlete A imposes costs on athlete B without the latter's consent.
In plainer prose, if athlete A uses steroids, that gives him a competitive advantage. So, if athlete B wants to win, she has to take them too (or compensate for her disadvantage in some other way). With a bunch of athletes in the same event, it's unlikely that the relative rankings will change a lot due to steroid use. The external costs would push them all to use steroids -- and they'll all end up pretty much where they started. Since steroids have bad side-effects, it's a kind of self-destructive competition.
Robert Frank and Philip Cook call for an "arms control" agreement in this situation. All of the athletes in an event are prevented from using steroids, then we prevent the self-destructive competition. That's what anti-doping rules are all about.
Further, the Olympics involve what Frank and Cook call a "winner-take-all" competition (in their book THE WINNER-TAKE-ALL SOCIETY). That means that if someone wins a gold medal (in a TV-popular event) it means big bucks, along with a lot of non-financial rewards. But if you win "only" a silver or a bronze medal, the rewards are nil. This creates a massive incentive to engage in self-destructive competition.
What to do? We could split athletics into two completely separate "tracks." On the one hand, there would be dope-free track, where athletes must voluntarily participate in drug tests. On the other, there would be the "Tierney track," where all artificial means are allowed. Saturday Night Live had a skit about Tierney's idea a long time ago, back when Dennis Miller was funny (see http://www.hulu.com/watch/4090/saturday-night-live-weekend-update-all-drug-olympics).
My guess is that the drug-free track would have much greater prestige. In terms of "libertarian" notions, I'd bet that it would pass the "market test" with flying colors. The Tierney track would go the way of the late unlamented XFL.
Note that I am not against new technology (cyborgs in athletic events, etc.) Go for it: if you want to abuse your body, it's your right as an American! (Why not heroin?) Nor am I saying that Big Brother should dictate to all athletes. But there should be a minimal-technology or "clean" track in athletics. If people don't want to participate, they don't have to.
On top of that, some effort should be made to get rid of the "winner-take-all" element. For example, take the money out of sports. This is less likely to happen. But I think we can all do something as individuals: shun "big league" sports and watch "minor league" or amateurs ones. Here in L.A., forget the Kings and watch the Long Beach Ice Dogs. Even better, instead of watching sports, participate in them. Among other things, it's actually good for one's health. And feel free to use advanced technology, like a Wii.
-- Jim Devine
Of course, there are obvious questions. If all artificial means are OK, why can't Olympic swimmers use flippers? or why not weapons? Take THAT, Michael Phelps!
But that's not my point (see also my Valentine's Day card on EconoSpeak this year at http://econospeak.blogspot.com/2008/02/next-steroids.html). Tierney comes at the issue from a "libertarian" angle, arguing essentially that it's up to the individual to decide on whether or not the costs of steroids (or whatever) outweigh benefits. The problem is (as is often ignored by so-called "libertarians") there are external costs. In this case, athlete A imposes costs on athlete B without the latter's consent.
In plainer prose, if athlete A uses steroids, that gives him a competitive advantage. So, if athlete B wants to win, she has to take them too (or compensate for her disadvantage in some other way). With a bunch of athletes in the same event, it's unlikely that the relative rankings will change a lot due to steroid use. The external costs would push them all to use steroids -- and they'll all end up pretty much where they started. Since steroids have bad side-effects, it's a kind of self-destructive competition.
Robert Frank and Philip Cook call for an "arms control" agreement in this situation. All of the athletes in an event are prevented from using steroids, then we prevent the self-destructive competition. That's what anti-doping rules are all about.
Further, the Olympics involve what Frank and Cook call a "winner-take-all" competition (in their book THE WINNER-TAKE-ALL SOCIETY). That means that if someone wins a gold medal (in a TV-popular event) it means big bucks, along with a lot of non-financial rewards. But if you win "only" a silver or a bronze medal, the rewards are nil. This creates a massive incentive to engage in self-destructive competition.
What to do? We could split athletics into two completely separate "tracks." On the one hand, there would be dope-free track, where athletes must voluntarily participate in drug tests. On the other, there would be the "Tierney track," where all artificial means are allowed. Saturday Night Live had a skit about Tierney's idea a long time ago, back when Dennis Miller was funny (see http://www.hulu.com/watch/4090/saturday-night-live-weekend-update-all-drug-olympics).
My guess is that the drug-free track would have much greater prestige. In terms of "libertarian" notions, I'd bet that it would pass the "market test" with flying colors. The Tierney track would go the way of the late unlamented XFL.
Note that I am not against new technology (cyborgs in athletic events, etc.) Go for it: if you want to abuse your body, it's your right as an American! (Why not heroin?) Nor am I saying that Big Brother should dictate to all athletes. But there should be a minimal-technology or "clean" track in athletics. If people don't want to participate, they don't have to.
On top of that, some effort should be made to get rid of the "winner-take-all" element. For example, take the money out of sports. This is less likely to happen. But I think we can all do something as individuals: shun "big league" sports and watch "minor league" or amateurs ones. Here in L.A., forget the Kings and watch the Long Beach Ice Dogs. Even better, instead of watching sports, participate in them. Among other things, it's actually good for one's health. And feel free to use advanced technology, like a Wii.
-- Jim Devine
Monday, August 18, 2008
Forecasting Crises: MBA Students and Skyscrapers
Economic models are notoriously poor at forecasting severe downturns. Here are some studies that identify the kind of behavior that suggest that a crisis might be around the corner.
Broughton, Philip Delves. 2008. Ahead of the Curve: Two Years at Harvard Business School (New York: Penguin Group).
272-3: "The job statistics for our class showed that 42% went into financial services, ranging from investment banking to private equity, venture capital, and commercial banking. 21% went into consulting. There was then a steep drop to technology and telecommunications, with 6%. Pharmaceuticals, consumer products, retail, and other manufacturing each drew less than 5%. Nonprofit and government accounted for less than 5%, half of whom were part of an HBS program to place students in nonprofit and government jobs and subsidize their salaries to bring them in range of the for-profit sector. 80% of the class took jobs in the United States. The total compensation for my class in its first year out was $138,125. Ray Soifer, a graduate of the class of 1965 and a banking analyst, had been keeping track of the relationship between the condition of the American equity market and the percentage of Harvard MBA graduates choosing careers in financial services. 10% or less was a long-term buy signal. 30% or more was a long-term sell. The choices of the class of 2006 told you the markets were soon to crash."
Michael Lewis seemed to have stumbled on the model earlier.
Lewis, Michael. 1989. Liar's Poker: Rising Through the Wreckage on Wall Street (NY: W.W. Norton).
24: "Forty percent of the thirteen hundred members of Yale's graduating class of 1986 applied to one investment bank, First Boston."
Poor, Meredith. 1998. "Twin Towers: Letter to the Editor." Scientific American (April).
The skyscrapers of the 1930s (the Chrysler Building and the Empire State Building) were built just as the Great Depression took hold of the U.S. economy. The World Trade Center and Sears Tower were also leading indicators of the economic malaise of the 1970s. And just as Malaysia completes its showpiece, the Petronas Twin Towers ["The World's Tallest Buildings," by Cesar Pelli, Charles Thornton and Leonard Joseph, December 1997], the economy of the region dives into disaster. In retrospect, this should be no surprise; during these periods, symbolism took great precedence over substance.
Soon picked up by Business Week
Koretz, Gene. 1999. "Do Towers Rise Before a Crash?" Business Week (17 May): p. 26.
Andrew Lawrence of Dresdner Kleinwort Bensen in Hong Kong found a close relationship between the construction of grandiose high rise buildings (reflecting excessive optimism) and subsequent crashes.
Broughton, Philip Delves. 2008. Ahead of the Curve: Two Years at Harvard Business School (New York: Penguin Group).
272-3: "The job statistics for our class showed that 42% went into financial services, ranging from investment banking to private equity, venture capital, and commercial banking. 21% went into consulting. There was then a steep drop to technology and telecommunications, with 6%. Pharmaceuticals, consumer products, retail, and other manufacturing each drew less than 5%. Nonprofit and government accounted for less than 5%, half of whom were part of an HBS program to place students in nonprofit and government jobs and subsidize their salaries to bring them in range of the for-profit sector. 80% of the class took jobs in the United States. The total compensation for my class in its first year out was $138,125. Ray Soifer, a graduate of the class of 1965 and a banking analyst, had been keeping track of the relationship between the condition of the American equity market and the percentage of Harvard MBA graduates choosing careers in financial services. 10% or less was a long-term buy signal. 30% or more was a long-term sell. The choices of the class of 2006 told you the markets were soon to crash."
Michael Lewis seemed to have stumbled on the model earlier.
Lewis, Michael. 1989. Liar's Poker: Rising Through the Wreckage on Wall Street (NY: W.W. Norton).
24: "Forty percent of the thirteen hundred members of Yale's graduating class of 1986 applied to one investment bank, First Boston."
Poor, Meredith. 1998. "Twin Towers: Letter to the Editor." Scientific American (April).
The skyscrapers of the 1930s (the Chrysler Building and the Empire State Building) were built just as the Great Depression took hold of the U.S. economy. The World Trade Center and Sears Tower were also leading indicators of the economic malaise of the 1970s. And just as Malaysia completes its showpiece, the Petronas Twin Towers ["The World's Tallest Buildings," by Cesar Pelli, Charles Thornton and Leonard Joseph, December 1997], the economy of the region dives into disaster. In retrospect, this should be no surprise; during these periods, symbolism took great precedence over substance.
Soon picked up by Business Week
Koretz, Gene. 1999. "Do Towers Rise Before a Crash?" Business Week (17 May): p. 26.
Andrew Lawrence of Dresdner Kleinwort Bensen in Hong Kong found a close relationship between the construction of grandiose high rise buildings (reflecting excessive optimism) and subsequent crashes.
A Speech for Obama on Energy Prices
My fellow Americans,
In the last year the price of energy, and especially gas at the pump, has gone way up. While it has come down a little in recent weeks, it is still much higher than before, and it is squeezing the budgets of families all across the country. This expense is all the more difficult to bear at a time when the economy is sputtering and paychecks are stagnating. People are looking for answers.
What I am going to say today will surprise you – but I will get to that later. First, I want to clear up the issue that everyone is talking about right now, offshore oil drilling. What’s my position on that?
If you listen to the energy experts, they all agree that drilling for more oil off our coasts will have little effect on the prices we pay for gasoline and other energy products. First, it will take many years before exploration uncovers productive oil fields, and more years to build the platforms and transportation systems to bring this oil to the market. So no matter what we do about this issue today, it will not have an effect on today’s prices. But the experts also say that the potential output of these fields, compared with global supply and demand, is simply not enough to move prices more than one or two percent. If we had another Saudi Arabia lying off our coast it would make a big difference, but we don’t. So, while I wish there were a simple decision we could take that would bring immediate and substantial relief to families struggling with energy costs, I don’t think offshore drilling is the answer.
But the issue won’t go away. This is an election year, and the polling companies are working overtime to tell us what the public thinks about every topic. And if we can believe their numbers, a large majority of Americans think that we should give offshore drilling a try anyway, on the principle that if you have a problem you should do everything you can.
We live in a democracy. If a substantial majority favors a policy, and if the policy does no harm, we should respect the will of the people. So, even though I’m not optimistic about what more drilling can do, I’m willing to reverse the ban we’ve had in recent decades.
Democrats in the House and Senate are preparing legislation along these lines. To keep to the requirement of “do no harm”, this legislation will see to it that any offshore oil production adheres to strict environmental standards, so that we don’t have oil spills fouling our beaches — the problem that led to the ban in the first place. We will also have controls on the ability of big oil companies to reap windfall profits from these finds: their oversized profits are part of the problem and cannot be part of the solution. Together, these stipulations will guarantee that a change in policy on offshore drilling, whatever its benefits, will not impose significant costs. If Republicans agree to a careful, responsible shift in regulation we can move forward quickly.
But as I said, whether we drill a little more or a little less will not have much impact on sky-high energy costs. If we are serious about addressing this issue, we must move beyond the debate over drilling and address the underlying causes. That is my real purpose today.
We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.
But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.
Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.
For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?
Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.
But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.
The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.
Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.
This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.
Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back.
In the last year the price of energy, and especially gas at the pump, has gone way up. While it has come down a little in recent weeks, it is still much higher than before, and it is squeezing the budgets of families all across the country. This expense is all the more difficult to bear at a time when the economy is sputtering and paychecks are stagnating. People are looking for answers.
What I am going to say today will surprise you – but I will get to that later. First, I want to clear up the issue that everyone is talking about right now, offshore oil drilling. What’s my position on that?
If you listen to the energy experts, they all agree that drilling for more oil off our coasts will have little effect on the prices we pay for gasoline and other energy products. First, it will take many years before exploration uncovers productive oil fields, and more years to build the platforms and transportation systems to bring this oil to the market. So no matter what we do about this issue today, it will not have an effect on today’s prices. But the experts also say that the potential output of these fields, compared with global supply and demand, is simply not enough to move prices more than one or two percent. If we had another Saudi Arabia lying off our coast it would make a big difference, but we don’t. So, while I wish there were a simple decision we could take that would bring immediate and substantial relief to families struggling with energy costs, I don’t think offshore drilling is the answer.
But the issue won’t go away. This is an election year, and the polling companies are working overtime to tell us what the public thinks about every topic. And if we can believe their numbers, a large majority of Americans think that we should give offshore drilling a try anyway, on the principle that if you have a problem you should do everything you can.
We live in a democracy. If a substantial majority favors a policy, and if the policy does no harm, we should respect the will of the people. So, even though I’m not optimistic about what more drilling can do, I’m willing to reverse the ban we’ve had in recent decades.
Democrats in the House and Senate are preparing legislation along these lines. To keep to the requirement of “do no harm”, this legislation will see to it that any offshore oil production adheres to strict environmental standards, so that we don’t have oil spills fouling our beaches — the problem that led to the ban in the first place. We will also have controls on the ability of big oil companies to reap windfall profits from these finds: their oversized profits are part of the problem and cannot be part of the solution. Together, these stipulations will guarantee that a change in policy on offshore drilling, whatever its benefits, will not impose significant costs. If Republicans agree to a careful, responsible shift in regulation we can move forward quickly.
But as I said, whether we drill a little more or a little less will not have much impact on sky-high energy costs. If we are serious about addressing this issue, we must move beyond the debate over drilling and address the underlying causes. That is my real purpose today.
We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.
But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.
Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.
For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?
Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.
But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.
The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.
Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.
This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.
Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back.
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