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September 3, 2009

Economist's View - 4 new articles

"What is the Future of Coal?"

Robert Stavins says there are considerable uncertainties regarding the future of coal:

What is the Future of U.S. Coal?, by Robert Stavins: ...At the center of much political attention in the United States is "the future of coal"... CO2 emissions from coal consumption accounted for 30 percent of U.S. greenhouse gas emissions in 2005, and nearly all resulted from coal's use in generating electricity. According to EIA forecasts, the vast majority of coal demand over the coming decades will be from existing power plants, with currently existing plants still accounting for two-thirds of total demand in 2030. Therefore, while much attention has been given to how climate policy and technological advances may affect new power plants, over the next two decades a policy that affects both existing and new coal-fired power plants would have far greater impacts than a policy that affects only new plants.
Potential climate policies can be grouped into four major categories: standards, subsidies or credit-based programs, carbon taxes, and cap-and-trade (like Waxman-Markey). The cost of retrofitting existing plants to meet CO2 emission standards would likely be so high that standards could be imposed only on new plants..., standards would be unlikely to affect operations of existing plants. In fact, by increasing the cost of new plants, such standards can encourage generators to extend the life of existing plants. Hence, new source standards hold little promise in this domain.
Likewise, while subsidies or credit-based programs ... may displace some new coal-fired generation with other types of generation, they will have little, if any, effect on the operation of existing coal-fired power plants. And carbon taxes are opposed by the regulated community because of the additional costs they would place on private industry, and are opposed by environmentalists because of the political challenges.
This leaves cap-and-trade. Such a system would cover both new and existing emission sources, and could have a more pervasive effect on coal use than standards, subsidies, or credit-based programs. For this and other reasons, most policy attention in the United States has been focused on potential cap-and-trade systems.
Coal combustion generates the most CO2 emissions per unit of energy. As a result, a cap-and-trade system's effect on the cost of coal use would be significantly greater than its effect on the cost of gasoline or natural gas consumption. For example, a $100 per ton of CO2 allowance price would increase the average cost of electricity generation from coal-fired power plants by about 400%, the average cost of electricity generation from natural gas plants by about 100%, and gasoline prices by about $1.00 per gallon.
The competitiveness of conventional coal-fired electricity generation relative to other technologies diminishes as the stringency of an emissions cap increases. Therefore, much attention is being given to opportunities to employ carbon-capture-and-storage (or CCS) technologies, which would separate carbon dioxide from other stack gases, liquify it, and store it underground for long periods of time.
Three important caveats about CCS should be considered. First, it is likely that CCS will be economically practical only for new plants, and only when CO2 allowance prices exceed $100 per ton of CO2 for early adopters (cost estimates have increased over the past few years, as technological and institutional challenges have become clearer). Second, there is significant uncertainty about the cost of CCS, because it has not yet been commercially demonstrated. And third, CCS significantly reduces, but does not eliminate, CO2 emissions from coal-fired generation.
In light of the growing momentum toward a mandatory U.S. climate policy, the anticipated impacts of such policies on coal use are an important issue. But the remaining uncertainties are great. Impacts of a climate policy on coal use will depend upon the type of climate policy employed, the stringency of the policy, the future price of natural gas, the future cost and penetration of nuclear and renewable technologies, and the cost of coal-fired generation with carbon capture and storage technologies. ...

Rogoff: Is a Debt Crisis Next?

Ken Rogoff says the debt crisis he has been warning about for many years is still a risk:

From Financial Crisis to Debt Crisis?, by Kenneth Rogoff, Commentary, Project Syndicate: ...How can policymakers be so certain that financial catastrophe won't soon recur when they seemed to have no idea that such a crisis would happen in the first place?
The answer is not very reassuring. Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis.
For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system. At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero.
But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless.
And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable. ...
We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the U.S., for example, significantly inflated down its debt in the 1970s, and debased the gold value of the dollar from $20 per ounce to $34 in the 1930s. ...
The ... rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years. Most worrisome is America's huge dependence on foreign borrowing, particularly from China... The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening. ...

How Paul Krugman might respond:

So is there anything to worry about? Yes, but the dangers are political, not economic. ... Over the really long term,... the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.
That shouldn't be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.
But that won't happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to "pull the plug on grandma."
So don't fret about this year's deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it's not because the economy can't handle the extra debt. Instead, it's the politics, stupid.

Note also that the bond price data do not show any signs of worry over inflation, default, or crowding out.

One more note. This is Rogoff in June 2008. He argues that there should be no stimulus, the risk posed by deficits is too large, and that interest rates should be raised to prevent inflation:

[P]olicymakers must refrain from excessively expansionary macroeconomic policy ... and accept the slowdown... For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies. In policymaker's zealous attempts to avoid a plain vanilla supply shock recession, they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn.

My own view is that "significantly increasing interest rates" in June 2008 would have been a disaster, and that deficit spending was needed to prevent conditions from deteriorating even further. Opposition to deficit spending from people like Rogoff only served to delay putting this policy in place. (Also: This was prior to Lehman, inflation was being driven by commodity price increases, i.e. by relative price changes which do not pose long-run inflation risks, and had the Fed followed this advice and raised rates, it would have likely reversed course after Lehman further undermining its credibility at a time when credibility was needed the most.)


[I may do more with this later, but since Rogoff's opening line is about economists missing the crisis, note also Paul Krugman's How Did Economists Get it So Wrong? Update: See also Where Does Macroeconomics Go From Here? and Which Economists Got it So Wrong?, both by Brad DeLong.]

Does Curing Health Care Require That Consumers Feel the Pain?

Jonathan Gruber says controlling health care costs requires that consumers face the consequences of their health insurance choices:

[F]undamental cost control can only come from the supply side. ... But ... effective supply-side control will involve restricting consumers in some way ... Unless consumers face a financial penalty from their choices that drive health care upward, supply-side reforms will fail.

Update: Robert Fogel:

There is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.

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