It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Wednesday, April 30, 2008

Tom Friedman Gets It This Time

I don't know about Tom Friedman's enthusiasm for globalization. I think recent events in Haiti for instance point to the problems there. And as for his foreign policy, well, I try not to stray that way on this blog, but you might guess I have some, ahem, issues with his approach.

But he sure nails it this time about the gas tax holiday.
It is great to see that we finally have some national unity on energy policy. Unfortunately, the unifying idea is so ridiculous, so unworthy of the people aspiring to lead our nation, it takes your breath away. Hillary Clinton has decided to line up with John McCain in pushing to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for this summer’s travel season. This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks. What a way to build our country.

When the summer is over, we will have increased our debt to China, increased our transfer of wealth to Saudi Arabia and increased our contribution to global warming for our kids to inherit.

and also:
Few Americans know it, but for almost a year now, Congress has been bickering over whether and how to renew the investment tax credit to stimulate investment in solar energy and the production tax credit to encourage investment in wind energy. The bickering has been so poisonous that when Congress passed the 2007 energy bill last December, it failed to extend any stimulus for wind and solar energy production. Oil and gas kept all their credits, but those for wind and solar have been left to expire this December. I am not making this up. At a time when we should be throwing everything into clean power innovation, we are squabbling over pennies.
When a serious columnist adopts Dave Barry's tag line about making things up, it's time to sit up and take notice.


Dano said...

Yes. We haven't learned anything as a society. We have to change as much, as quickly, in societal learning and 'getting along' as we have to change our energy externalities.

Daunting task.



Steven said...

Thomas Friedman is to economics what a stopped clock is to timeliness.

At the few moments that he is accurate, it is tempting to root for him. Unfortunately, he has a very loose grasp on the concepts of economics.

Trade makes people better off, period. "Globalization" is simply trade between more people using better tools. If Ivan and Gregory are better off trading in Tradistan, what changes when the state is broken up into Tradivania and Monistan? A new invisible line on a map does not somehow make both parties worse off for trading.

To paint with a broad brush, you can't get better prices and more supply to the market with any plan better than with free trade. It's kind of tricky, but "free" is right there in the name.

Market clearing price, and quantity is like a marble that rests at the intersection of the supply and demand curves. No market is perfect, no one has perfect information, and no market is static. Thus the marble is more accurately rolling slightly up and down the hills of a river valley- but always tending toward the trough.

Any alterations to the natural market, be it subsidies, taxes, whatever, can only push the marble UP HILL. In other words, any alteration to the free decisions people make when they decide they are better off by trading- makes them worse off. Put another way, you can only screw up free trade, you cannot help it.

Find me a place where free trade "isn't working" and I will show you very nearby, people trying to alter the terms of trade.

Friedman's profound lack of economic understanding comes to fruition in the ridiculous quote: "This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks."

This is an absurd statement, and has no basis in any kind of real world data. It's simply a populist pandering to people who also have no economic clue, but are afraid of China and Saudi Arabia- and feel that somehow we are getting the shaft. (Much like the fear of the Japanese in the 80s and 90s)

Even with subsidy of solar panels, the economic break-even point takes about 58 years. So in your 59th year with solar panels, you've really hit the jackpot! That's leaving out the economic benefit you forego if you had used that investment in some other way- in other words, you loaned the money to yourself for free.

We don't need prizes and tax credits to promote viable energy sources. Exxon and Southern Company don't need someone to trick them into drilling for oil, or adding another generator to one of their nuclear plants. The product sells in the market.

The incentives already exist for energy. Anyone who produces an effective megawatt battery will be rich. Same with effective wind, solar, or other alternative energy sources. If we are going to pay people (a loss of X dollars) to use a less effifient fuel in the process of their normal work (wealth creation), we might as well pay them X dollars directly not to go to work and therefore don't create the amount of wealth that equals the loss of energy efficiency. We would be paying people to be savages. It's more straightforward.

Of course Exxon and others will take advantage of credits as long as they exist. That doesn't make them heros, it makes them rational in the existing context.

No subsidies, no credits, no taxes. Rational and free trade between two parties who each agree they are better off for having traded.

Michael Tobis said...

Externalities. Externalities. Externalities.

The cost of production of fossil fuels is being borne neither by the consumer nor by the producer but by the globe collectively. This means market mechanisms are badly broken.

I understand you don't believe us, but suppose for a minute that you did. That is, suppose Hansen is correct and the planet will become dramatically less suited for human life if all fossil fuels are extracted. Suppose the market failed to factor this in for various reasons. How would you respond?

Steven said...

Great question.

It's worth noting that Hanson has made predictions before, and we have passed the time for his predictions, and he was wrong by 300%

Would you bank your personal wellbeing, financial future, or love life on a 300% miscalculation?

Paul Erlich made a bet that a group of 5 precious metals that he got to pick would inextricably go up in price over a ten year period. He lost. He could not foresee that alternate materials would replace, products using those materials would decline, new sources would be found, and the increase in price would cause new incentive to bring materials to market.

So, on one point I'm saying some scientists have a poor record of predicting the almost magical nature of human progress.

The claim here, is that we are throwing plastic bottles over a hill. We cannot see them accumulating, and therefore they will all collapse back on us before we are able to detect the problem sufficiently. Will that work as an analogy?

I think first we have to stop the accusation that some people don't give a damn, or even want a world crushed by empty bottles. So, we're piling up externalities that are not in a tightly constrained loop... or so goes the claim.

My initial answer is that I don't have to invent the internet, the MRI, sanitation, the hydrogen engine, etc. to know that these will happen. It's not blind faith or hoping the problem will go away. It's a keen awareness of history, and the knowledge that millions of people are working on solutions as we speak. We are not, strictly speaking, "doing nothing".

What I would most advise would be to internalize those costs. But this would involve *evidence* which can mete a specific amount of damage to a specific amount of production. I'm not convinced we've done that.

Secondly, I would make all efforts to ensure that solutions remain as flexible as possible. Similar ventures in the past have simply turned into horn-swaggle deals by people like Senator Byrd and the coal issue with West Virginia. Cap-and-trade, carbon taxes, reduction goals all impose costs. Any green proponent who believes in AGW theory *must* admit that and proffer solutions instead of merely saying "HA! now we're the smart ones and you've got to pay".

I don't know how much you believe in Lomborgs information, so you may disagree with this: The chief point I get from him is that any of the proposed plans can be measured as to their amount of good (and I think he's being overly generous there) and the amount of good vastly outweighs the trade-off costs.

It seems unlikely to me that the mass of humanity is going to be willing to live in an iron-age for the sake of "having a clean planet". The result then will be miserable living conditions and a continued ability to have them. What would be the point there?

Mmmm... getting astray. Trying to return to the point, if AGW proponants want to be heard, they can't simply be Christians ratcheting up the consequences of hell until the convince people that it's not worth taking the chance. Becoming accurate predictors would be a good start- and I think the record so far is poor. Third, obviously if prediction begins to show a winning rack record, people will want to capture the externalities. That process though should not be top-down and forced, or you end up with Lysenkoism. Multiple solutions in an iterative process must be allowed.

Michael Tobis said...

" worth noting that Hanson [sic] has made predictions before, and we have passed the time for his predictions, and he was wrong by 300%"

It's worth noting that lies to that effect have been promulgated. Unless you are referring to a different event about which I know nothing, I am forced to doubt your information. Can you substantiate it?

I'll return to your other points later.

Michael Tobis said...

Trade makes people better off, period. "Globalization" is simply trade between more people using better tools.

Trade means that food can be traded for fuel. In the economic model, that means that a rich person with gas in the tank and ten poor people without dinner is worth more than the opposite if the former bids higher on cereal than the latter. In economic terms, it's not even a theory, it's axiomatic, tautological.

I would say that if the hungry people are "better off" you must be using some sense of the word "better" with which I am unfamiliar.

Otherwise, this base assumption of economics is obviously, fundamentally wrong. It's impossible to address this problem within the frame of Milton Friedman economics. It's a consequence of the theoretical structure that is morally unsupportable.

People who think economics subsumes everything simply assume away anything that contradicts their beliefs. This is a case in point.

I believe that this dynamic is newly realistic as resource and environmental commons limits kick in. Ehrlich was a bit too pessimistic as to the date but that doesn't invalidate the whole argument.

Read my Grist article for more.

tidal said...

Michael says: "Tom Friedman Gets It This Time"... and meanwhile, elsewhere... Bill O'"Lie"lly totally whiffs again! 'an enlightening window into the extent of populist outrage at Big Oil' Greedy sheiks and Chavez! Lol.

With guys like this leading the populist parade, no wonder we are stuck in neutral on action on emissions and energy transitions... Love the allusion from the interviewee in the final paragraph: Before we discuss calculus, can we at least get 2+2 down first?

Steven said...

I completely disagree with your first paragraph, and from my perspective reveals a fundamental missunderstanding of economic theory.

[I find myself increasingly feeling the need to state that I can only represent what I know and believe. It becomes difficult to know what all you mentally group as "economics" and how much of that I want to claim. Even among other Austrian / Chicago / Free market economists, I have some specific disagreements. My best resource to give you as a competent and articulate economic school of thought would be the Cafe Hayek blog by Russ Roberts , Mike Munger, Tyler Cowne, and Don Boudreaux. The EconTalk podcast is in my estimation a great free way to get an understanding of economic thought. I listen to them in the gym, and driving around. You could certainly listen riding the train or your bike]

There is nothing special today about restrictions to resources. One of the fundamental concepts in economics is that wants are essentially limitless, and resources are finite. Whenever you say things like that, you sound like a buggy whip maker to me.

Economics does encompass everything, because everything we do involves making decisions.

Having just read your Tetris / bathtub analogy, I think I'm getting a better idea of how you think and what your economic views are at the moment.

I get the impression you see GDP as wothless tokens, like plastic poker chips in a friendly poker game. This contributes to the common belief that economics is about money. It is not.

GDP is a measure of money, but then what is money a measure of?

That GDP is the rice, it is the fuel, it is the car, the bike, the train, the breakfast sausage, the green chiles, the computer, the software.

None of those things would exist without someone having invested the effort to bring them to market in more or less efficient ways. Money (GDP) is almost a measure of those things, but not exactly.

Money is a measure of all the others things you value, at a quantum unit, versus the particular thing you are pricing. If a great new bike is in the $400-$600 price range depending on where you shop, and you bargain with the seller for a $500 price- what is that $500?

It represents the value ($500) of all other goods you are foregoing in order to commit them to the value the bike gives you in return.

Economics (as mentioned in the other thread) is much more like biology than physics. It describes emergent behavior, of human action but not of human design. And just like biology, the outcomes are sometimes hard to predict.

To put trade, and in the increase in trade in a different perspective, let me start a new blurb: coming next...

Michael Tobis said...

"Economics does encompass everything, because everything we do involves making decisions."

I'm familiar with the claim. I consider it fatuous.

If economics encompasses all decisions it does so very badly in practice. Indeed it does it so badly that any claims that all consequential decisions need to be made exclusively in an economic framework strike me as quite insane.

My opinion is that if economists have anything to offer at all (and I suspect they do) it is applicable only on short time scales. On decisions having impact longer than about ten years the underlying approximations become so weak that the resulting advice is essentially free of information.

In geophysical fluid dynamics, we have various systems of approximation with various regimes of validity. Equations which are very good approximations over a year are very bad approximations over a day, and vice versa.

There's so much more.

Economists seem completely oblivious of the possibility of regime boundaries (in the dynamical sense), dimensionless system parameters, etc. Their immense pride at grasping first year calculus, their obsession with equilibria in an obviously non-equilibrium problem, their assumption that money is commensurable across the centuries, their presumption that mean behavior is rational, their complete lack of recognition of integral constraints, their inability to understand the physical constraints on technological advance, their wasting of vast computational resources on totally unrealistic and grossly computationally wasteful linear programming problems, it all seems so clueless, so detached from any progress in quantitative science.

We need a completely new theory, where resources, environmental impacts, demographics and energy are the core concepts. We have the computational tools now (agent models) that might get us there. We have some crude beginnings. I'm not sure that the intellectual structure can be pulled together in time. It is a very hard problem, much harder than most economists seem to think. I can see arguments that it may actually not be feasible at all to make a meaningful economic model on a century time scale.

Steven said...

I've been enjoying the intellectual stimulation and the mostly pleasant climate on your blog until now.

I find your second to last paragraph insulting in several ways. All of which I will not detail, two of which I will:

1. You simply pulled out the shotgun. I will confess I don't know several of the issues and terms you brought up. I don't think I should have to in order to reasonably discuss this. I think you retreated to what you feel comfortable with, exactly like a bully does.

2. You lump all economic thought together. Similarly, one could broadly define all political systems that have ever been tried, or all science (phlogiston theory, lysenkoism, right next to thermodynaics and DNA) and make broad claims based on the errors of a few.

You attribute many things to economics, many of which I do not claim, and would not defend. Some of them we have agreement on, but that doesn't invalidate and collapse the whole thing.

It would seem I was mistaken about your open forum. Since you retreat to bullying I assume you don't actually want to continue this productively.

Suffice it to say: I think you are judging economics from not really understanding it at all. You may know some of the claims, and much of the lingo, but I don't get any impression that you grasp it.

S Molnar said...

"When a serious columnist adopts Dave Barry's tag line about making things up, it's time to sit up and take notice."

What serious columnist would that be, then?

Michael Tobis said...

I freely admit to not getting great swaths of economics. I still don't trust it, and the parts I understand make no sense.

Simon Donner said...

The issue here is politics, not economics. Even if there was an economic argument in support of suspending your gas tax, it wouldn't matter. This was a political decision by Clinton and by McCain. How either can reconcile the policy with combating climate change and putting a price on carbon, I don't know.

Dano said...

If I may, I see Steven as never having taken a natural sciences class (or a 100-level requisite without BIOL or BOT) to get thru his business coursework. Seen it many times, the writing pattern is indicative. trotting out of the Ehrlich bet is another tell. And the lack of scalar understanding of predictions (temporal may be off by a generation or two, does that make an entire discipline completely wrong?!?).

Lad, you don't play poker, do you? Methinks Texas hold'em with 'Texan' mt might be a bit painful. And I'd like to get you at the table as well.