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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 24 Jul 2012 12:06 AM PDT
Posted: 23 Jul 2012 03:33 PM PDT
Robert Shiller argues that reining in markets is not the answer to bubbles:
Bubbles without Markets, by Robert Shiller, Commentary, Project Syndicate: A speculative bubble is a social epidemic whose contagion is mediated by price movements. News of price increase enriches the early investors, creating word-of-mouth stories about their successes... The excitement then lures more and more people into the market ... in successive feedback loops as the bubble grows. After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.
But, before we conclude that we should now, after the crisis, pursue policies to rein in the markets, we need to consider the alternative. In fact, speculative bubbles are just one example of social epidemics, which can be even worse in the absence of financial markets. In a speculative bubble, the contagion is amplified by people's reaction to price movements, but social epidemics do not need markets or prices to get public attention and spread quickly.
Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay's 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630's. But the book contained other, non-market, examples as well.
MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders. Some of these epidemics had profound economic consequences. The Crusades from the eleventh to the thirteenth century, for example... Between one and three million people died in the Crusades.
There was no way, of course, for anyone either to invest in or to bet against the success of any of the activities promoted by the social epidemics – no professional opinion or outlet for analysts' reports on these activities. So there was nothing to stop these social epidemics from attaining ridiculous proportions. ...
The recent and ongoing world financial crisis pales in comparison with these events. And it is important to appreciate why. Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements. And then, too, there are auditors, lawyers and regulators.
All of these groups have their respective professional associations, which hold regular meetings and establish certification standards that keep the information up-to-date and the practitioners ethical in their work. The full development of these institutions renders really serious economic catastrophes – the kind that dwarf the 2008 crisis – virtually impossible.
Setting aside the extent to which these are really bubbles as commonly understood, nobody is talking about eliminating markets entirely. The push from those of us who want to "rein in the markets" is to regulate them so they function better than they did prior to the crisis. I don't see how these examples of so called non-market bubbles argue against regulating markets to make them work better. Modern economies may have something like the "free markets" Shiller talks about, but unregulated markets do not always function in the public's best interest and regulations that rein them in and make them more competitive, less subject to catastrophic failure, etc. can improve their social value. The question isn't about markets versus non-markets, the question is how to make our existing insitutions perform better and none of the above helps much with that question. How, for example, can we make business analysts, ratings agencies, accountants, lawyers, and regulators that Shiller lauds -- all of whom fell down on the job to some extent prior to the crisis -- do a better job next time?
Finally, I can't help asking: What is his definition of "really serious catastrophe"? How many millions of unemployed does it take? I'd hate to see a crisis that "dwarfs" this one, but this was no walk in the park. Perhaps the crowd Shiller hangs around in didn't think it was all that serious, but for many, many people it was quite catastrophic.
Update: I should have also added that the fact that this recession, while severe, didn't reach the depths of the Great Depression has more to do with improved social insurance, better automatic stabilizers, better policy (though far from perfect), and a higher initial level of wealth than it does the presence of free markets, business analysts, ratings agencies, accountants, auditors, lawyers, and regulators.
Posted: 23 Jul 2012 09:45 AM PDT
Why is the US selling Brazil two million gallons of ethanol at the same time it is importing more ethanol than that from Brazil?:
Running on Empty: U.S. ethanol policies set to reach their illogical conclusion, by Timothy Wise: I'm as cynical as the next policy wonk, but sometimes even I am surprised at the perverse outcomes of some of those policies. Take the bizarre scenario outlined in the new agricultural outlook report from the FAO and the OECD regarding the projected rise in ethanol trade – ethanol traded for ethanol – between the United States and Brazil. That's right, 6.3 billion gallons a year sloshing between the world's pre-eminent ethanol producers by 2021. And all in the name of the environment, without a single drop helping people or the planet.
Why would the United States, which now devotes 40% of its corn crop to the production of ethanol, import more than 4 billion gallons of ethanol from Brazil? And why would Brazil at the same time import a projected 2 billion gallons from the U.S.? Couldn't we just save all those transactions costs and shipping-related greenhouse gas emissions by keeping our ethanol and cutting our projected ethanol imports from Brazil in half?
Not if your goal is to game the U.S. biofuel mandate.
The U.S. Renewable Fuel Standard, passed in 2007 and known as RFS2, includes a mandate for 36 billion gallons of renewable fuel use by 2022, with a nested set of mandates for different types of biofuels. Conventional or first-generation biofuels, such as ethanol from corn, have limited environmental benefits, with supposed reductions in greenhouse gas (GHG) emissions of about 20%. Congress wisely set the mandate such that the majority of the 36 billion-gallon mandate should be met by "advanced biofuels" with a GHG score of 50% or better in terms of reductions.
Well, advanced biofuel production in the United States isn't going so well. ... At this point, all we produce is a whole lot of corn ethanol, and we are already nearing the technical limit of 15 billion gallons for non-advanced biofuels.
Fortunately for Brazilian ethanol producers..., the renewable fuel mandate can be met to a significant extent by the use of "other" advanced biofuels. Even though Congress was sold the RFS on the promise of energy independence, those "other biofuels" do not have to be produced in the United States. (In fact, mandating U.S. sourcing could have been subject to a WTO challenge.) Brazil's sugarcane-based ethanol is considered advanced, with a GHG-reduction score of 50% despite widespread concerns about a range of other social and environmental impacts. ...
Under the FAO-OECD's baseline scenario, Brazil would import 2 billion gallons of corn ethanol from the United States. Why, if it's a major ethanol exporter and it produces more environmentally sustainable ethanol? To make up for the domestic shortfall created by its exports to the U.S., and to meet its own rising demand from its expanding fleet of flex-fuel cars. They'll take our low-grade corn ethanol if they can get a higher price for their sugar-based equivalent.
Talk about perverse. It's bad enough that we meet our environmental goals not through good old American know-how but by buying it from someone else. Then we turn around and sell them an environmentally inferior equivalent at a cheaper price.
In the process, another round in the food-fuel fight will be won by the fuels, with ethanol demand continuing to put upward pressure on corn prices globally. The FAO-OECD report contains strong warnings on biofuels' impacts on food prices, and it went to press even before drought parched the U.S. corn belt. They projected stable or slightly declining prices in 2012 and forward. Instead, corn and soybean prices are hitting historic highs and the world is staring down the loaded barrels of the third major spike in commodities prices in the last five years.
Unfortunately, the powers that be seem to have learned nothing from the first two. They certainly haven't learned that it's still a bad idea to put food in our cars.
For more, see Wise's coauthored report, "Resolving the Food Crisis," and his report for ActionAid, "Biofueling Hunger."
And beyond the "perverse" influence of the powers behind biofuels, Paul Krugman notes the corrupting influence of Big Oil and Big Coal:
VSPs of Energy: David Roberts has an interesting post about how the "experts" massively underestimated the potential for growth in renewable energy: wind and solar have grown enormously faster than the Very Serious People, energy sector, predicted circa 2000. He links this to the somewhat related tendency of the alleged experts to predict huge costs from efforts at energy conservation, huge costs that keep on not materializing.
Roberts suggests that it's because conventionally-minded experts aren't in touch with the potential of technologies that are (a) new and (b) distributed, representing choices by millions of players as opposed to a few big corporations.
Maybe. But I'd place more emphasis on a more cynical view: capture, both crude and subtle, by existing fossil-fuel interests (with nuclear power, another big business venture, somewhat similar).
It should be obvious that Big Oil and Big Coal have a stake in having the public believe that there is no alternative to ever more drilling, digging, and burning. And who employs, funds, and generally shapes the careers of mainstream energy "experts"? Who actually has a seat at the table when international organizations are putting together their scenarios?
It doesn't have to be raw corruption, although there's that too. It can instead be a matter of creating a mindset. And a lot of that mindset involves the sense that serious, hard-headed men think in terms of big extractive projects, that solar, wind, and conservation are hippie stuff — a sense that persists even in the teeth of contrary evidence.
The VSPs strike again.

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