Entries by Skeptic (576)


Larry Summers stops picking on the girls and insults the global economy.

This Financial Times piece by Larry Summers makes the points that the global economic situation he helped create is a huge mess, that the US is in a strategic bind vis-à-vis oil producing nations (I posted about that here), that other nations such as China and Russia are subordinating the economic well-being of their citizens to geopolitical considerations, that key US and world economic policies are unsustainable, and that the consequences of not sustaining them are pretty much unthinkable. Thanks to Mark Thoma for bringing this to my attention. I consider it quite good news that the Rubinistas are acknowledging the problem and, presumably, thinking about it and getting more flexible about policy directions.


One economist is on the verge of letting real world data trump theory.

Economist Mark Thoma has this post applying textbook theory to spikes in commodities prices.  Most telling is his statement that the theory does not explain coordinated price movements across all or many commodities, leading to the possibility that something other than classic supply/demand fundamentals is driving prices.  Could that something be large influxes of speculative money looking for a new asset class and trying to hedge against a declining dollar, which is what non-economists in these markets have been saying for many months?  He doesn't say, but he does get ahead of the herd of mainstream economists by noticing that the real world data don't fit the mainstream theory. 

I posted this comment on Thoma's blog: 

If coordinated moves among many commodities suggest their prices are not being moved by "fundamentals," that proves that some unknown force(s) other than "fundamentals" can move the price of a commodity, and there would be no reason to believe that "fundamentals" are the most likely force behind, or even relevant to, a particular price move.  Sic transit theory. 


Mexican immigration to USA has increased because NAFTA was bad for them too.

This post reports Mexican government data that 1.7 million Mexican farm workers lost their livelihoods as a result of NAFTA. Initially 700,000 manufacturing jobs were created by shifting work from the US, but more than half of those jobs have since been moved again—to China. (I personally observed several hundred jobs move from USA to Mexico to China.) In addition 20,000 small Mexican businesses were displaced by NAFTA-facilitated trade in just the first 7 years. The Labor Council for Latin American Advancement says these severe dislocations have caused increased immigration to the USA. That put further downward pressure on US wage rates. And the benefits of NAFTA were . . . . ?


Nobody knows nothin’ about crude oil prices.

Today's weekly Bloomberg survey of oil analysts and traders projects that prices will rise during the week of August 25. The story reports that the survey, which has been done weekly since April 2004 has correctly predicted the direction of market movement 49% of the time. It seems Bloomberg could improve the accuracy of its prediction if it just reported each Friday the results of a coin flip. And, since the coin flip would take much less time and money than the survey, maybe Bloomberg could afford to expand its service and give us a daily prediction.


US national security interests require it to make war on high oil prices.

This New York times article highlights the geopolitical peril of continuing high oil prices. The big Western oil companies like Exxon Mobil and BP have the best technology and people for finding and developing petroleum, but continuing nationalization of petroleum gives them few and decreasing opportunities to apply their skills in the places around the world that have the best potential. I have never bought the idea that the world is approaching "peak oil" in a geological sense, but we may be there geopolitically. I note some implications for the geopolitical strategies of the US and our global adversaries and for the business strategies of Western oil companies.

As late as the 1970s, Western corporations controlled well over half of the world's oil production. These companies—Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy—now produce just 13 percent.
Today's 10 largest holders of petroleum reserves are state-owned companies, like Russia's Gazprom and Iran's national oil company.

We should be concerned that national oil companies are not only less able to keep pace with growing demand but also that they may be less willing to do so because they have in mind a much higher world price range for oil than we do. For example, the Russian economy was a basket case until oil prices started to rise and would be a basket case again if oil prices dropped to $30, which is about where they were in real dollars 10 years ago. Clearly, the Russians' strategy for enhancing its geopolitical position depends in large part on maintaining high oil prices. The same is true of Iran and Venezuela, and other OPEC nations may be more willing than they were to see sustained higher oil prices.

The entire US transportation system and our military run on oil, and that is true also of all industrialized nations. Temporary supply interruptions like we had twice in the 1970s are, of course, possible, but today the much more likely and more debilitating threat is sustained high oil price levels. Sustained high prices cripple us and our oil-short partners like Europe, Japan and China. Sustained low prices would cripple our most dangerous geopolitical adversaries like Russia and Iran.

We could open up all of the US, onshore and offshore, to oil drilling, and I'm not opposed to that, but that would have zero impact on oil supplies and prices for at least 10 years. Meanwhile, America may be bled dry economically by high oil prices, and our most dangerous adversaries would become more powerful. Our national security requires that we take other actions to put immediate and continuing downward pressure on world oil prices. The best way to do that is to manage our one-quarter share of world oil consumption rapidly downward by mandating dramatic efficiency improvements. If, despite this, oil prices are nonetheless too high, the effect on our economy will be much less if we consume only half as much as we do now. These actions would also reduce the US contribution to greenhouse gas emissions and create good domestic jobs.

This is a strategically difficult time for big Western "oil companies." They are locked out of the best petroleum provinces where they could potentially earn the biggest margins. To the extent they are able to continue exploring and developing petroleum in less attractive places, they are likely to be the highest-cost producers in the world market and, thus, most vulnerable to profit destruction if/when world oil prices are low. Even worse, if my recommendation in the previous paragraph were adopted, there would be a long-term slump in oil prices, and they would be closing refineries. All of the big Western "oil companies" seem to be positioning themselves to participate in the businesses that would grow if there were a public policy mandate to dramatically reduce oil consumption, but if those new businesses are not stimulated by government subsidies or mandates, those efforts are likely to come to naught. Until a policy direction becomes clear they are likely to continue to dis-invest in the energy business by buying back their own stocks.


Not only are we all Georgians but we’re all middle class.

When asked by Rick Warren to define "rich," John McCain said an American family needs an income of $5 million to be "rich." Get a grip, John! Any family that brings in at least $1.6 million is richer than 99.9% of American families. Even Obama's answer stretches the word "middle" beyond recognition. He said a family earning less than $150,000 per year is "middle class" or poor.  Does he know that about 94% of American families earn less than $150,000? Indeed, 80% earn less than $88,000. Ezra Klein has a good post and a nice chart here.


Background on the Georgia crisis

For a very useful analysis of what's going on in Georgia and why, read this piece by Michael Dobbs in the Washington Post. Dobbs reported on the collapse of the Soviet Union and visited South Ossetia shortly after it was first occupied by Georgian troops in 1991. He does not explain why Saakashvili, who leads a nation of only 4.6 million souls and is to all outward appearances sane, would attack Russian troops already in South Ossetia or why the Bush Administration did not make absolutely sure it didn't happen. Was this more Bush Administration incompetence, or did it secretly want a foreign policy crisis to help McCain win the election?


Saakashvili the Black Knight

President Mikhail Saakashvili of Georgia says he will "never, ever surrender" to Russia. I can't stop thinking of the Black Knight in this clip from Monty Python and the Holy Grail.


Death of globalization consensus

This is the headline on an excellent short piece in today's Emirates Business 24/7 by Dani Rodrik, Professor of Political Economy at Harvard's Kennedy School of Government. Rodrik's main point is that it is no longer possible for globalization boosters to dismiss their opponents as "violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth. . . . What makes news nowadays is the growing list of mainstream economists who are questioning globalisation's supposedly unmitigated virtues."

So we have Paul Samuelson, the author of the post-war era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalization has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr. Globalisation", musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.

While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.

Thanks to Brad DeLong's blog for linking to the Rodrik piece.


How Soros would fix the housing finance mess

George Soros says here that the recent Congressional grant of authority to Treasury to bail out Fannie Mae and Freddie Mac is the worst possible solution and persuasively explains why.  He suggests it would be better to institute a system in use in Europe and which Soros implemented in Mexico. 

More college graduates will not cure America’s globalization ills.

China now "churns out more than 4 million university graduates yearly, but only 1.6 million new college level jobs," according to this article in Psychology Today. These statistics have at least two grim implications for the nostrum that Americans will prosper despite globalization because we have the best colleges and universities.

One, putting a higher proportion of American students through college won't mean there will be appropriate jobs for them when they graduate. It is reported here that we already have a shockingly large number of B.A. holders working in jobs for which no college is required, including one-quarter of travel agents and retail sales supervisors, one-third of flight attendants, and one-half of aerobics instructors.

Two, there are lots of Chinese college graduates competing with Americans. Perhaps that is why real wages for American college graduates are declining along with the real wages of all groups with less education. And now even MBA jobs are being outsourced to India; think that won't impact the wage levels for these entry-level elites?


Global opinion about free trade divides along class lines.

Trade liberalization is often portrayed as a moral imperative because it is claimed to be good for the masses of impoverished people in the Third World. This summary post at Eyes on Trade, linking to this long, fact-filled analysis at Fairness and Accuracy in Reporting, reveals that the elites of the Third World are as much at cross purposes with what their populations want as are US elites like Fareed Zakaria, whose claim to speak for the global poor is refuted in detail. For example, polls show that populations in the Third World believe their governments should include higher labor and environmental standards in trade agreements, but standards are opposed by their own governments and elites, as well as by ours. Governments must choose between promoting trade and globalization and promoting democracy.


MIT’s press office saves humankind.

This lurid and misleading MIT press release claims a recent energy technology discovery is "revolutionary," has "enormous implications for the future prosperity of humankind," and is "nirvana." The New York Times and Los Angeles Times ignored the hype but gave the story so little space it was impossible to figure out what was discovered or why it might be useful. The MIT spin remained intact in several prominent blogs, with comments showing many were misled into thinking hydrogen will now be abundant and cheap. Here is my reporting with the context and probably more enthusiasm than the MIT discovery deserves.

Scientists at MIT have discovered an electrode and catalyst system with potential to reduce the cost and increase the efficiency of "electrolysis," the process in which hydrogen is generated from water by electricity. This discovery, first reported in Science on July 31, 2008, is being welcomed enthusiastically by proponents of a "hydrogen economy" to displace the "petroleum economy."

"Electrolysis" of water into hydrogen and oxygen has been practiced since about 1800 and is a common laboratory exercise in high school chemistry. When a direct current of sufficient voltage is applied to electrodes in water containing an electrolyte such as sodium sulfate, hydrogen gas forms bubbles and evolves from the cathode, and oxygen bubbles evolve from the anode. The choice of electrodes is quite important to the efficiency of the process and has been the focus of much research. Platinum makes a highly-efficient cathode, but all anode materials have been quite inefficient. As a result, only 50-80% of the electricity input is typically converted to potential energy in the produced hydrogen, the balance being wasted as heat. Wikipedia, Electrolysis of Water, downloaded 6 August 2008.

The MIT group has found that efficiency at the anode can be significantly improved by using an indium tin oxide electrode in a solution containing cobalt and phosphate ions, according to the online abstract in Science. This discovery has the potential to allow the design of electrolyzer equipment that wastes less of the electricity input than do currently available electrolyzers, and also to make the equipment itself less costly because cheaper indium and tin can be used in the anodes instead of platinum, which is the current default choice.

Developing a "hydrogen economy" is of interest to producers of electricity, especially the nuclear power industry and proponents of electricity from photovoltaics and concentrated solar thermal energy. If the electricity can be converted to hydrogen and stored with only minor losses, these sources of electrical power would be more versatile and/or more economical. Nuclear power plants could generate hydrogen at night when grid demand is low, and solar-generated electricity could be converted to hydrogen in the daytime and used at night. For example, the MIT press release suggests that the discovery makes it feasible for a single home or other isolated facility to supply all of its electricity needs around the clock without a connection to the grid.

Hydrogen is also being promoted as a replacement for petroleum products in highway transportation. Hydrogen presently has an advantage over battery-powered vehicles because hydrogen can be more quickly pumped into a vehicle's tanks at a filling station than a vehicle's batteries can be recharged with electricity. Hydrogen can be converted back to electricity in on-board fuel cells. However, in addition to the need to put in place a completely new distribution system, one of the main disadvantages of the hydrogen fuel cycle is that it wastes more of the original electrical energy and, therefore, is likely to be more expensive to operate than a battery-powered vehicle. The recent MIT announcement addresses one of the inefficiencies in the hydrogen fuel cycle, but there are others including the inefficiency of fuel cell electrodes in reconverting oxygen to water.

PS:  This story doesn't change my view that hydrogen vehicles can't catch battery-powered vehicles


The American public is turning hard against globalization.

In 1997, nearly twice as many college graduates thought globalization was good for America as thought globalization was bad. In March 2008, attitudes of college graduates had flipped—1.4 times as many thought globalization was bad as thought it was good. Respondents with only high school educations thought globalization was bad in 1997 and were more strongly of that opinion in March 2008. The polls were conducted by NBC News and the Wall Street Journal and reported by WSJ here.

That a college education is less well compensated now than in 1997 is undeniable. For example, graphs attached to the WSJ post show that inflation-adjusted incomes of all educational groups with bachelor's degrees or less have declined from 2001 (the bottom of a recession) to 2007 (the growth cycle top). Only groups with Ph.D. or professional degrees had increases during this expansionary period.

The question is whether the people polled accurately attributed their pain to globalization. So far, the only contrary argument presented by globalization boosters is that "we have faith that globalization is good, so if something bad is happening globalization can't be the cause." Evidently, the victims of globalization are choosing to believe their own lying eyes instead.


Food insecurity in the developing world killed the Doha round of trade talks today.

After 3 decades of pressure from trade negotiators, the World Bank, and the IMF to sacrifice local agriculture and accept imports of subsidized agricultural products from the developed world, and after repeated occurrences of food crises in developing nations that agreed, developing nations today killed the Doha Round of WTO negotiations over this issue.  The story  from Center for Economic and Policy Research ("CEPR") is here.  I provided some lurid background anecdotes in this earlier post

According to the CEPR release, the US industries that hoped to gain the most from the Doha round were pharmaceuticals, agriculture, telecommunications, and financial services.  Except for agriculture, it appears to me that "exports" from none of these industries would create or support substantial employment in the US.  Making the negotiations problematic from the US side were the facts that the President's Congressional authority to negotiate expired in June 2007 and the US was proposing reductions in US agricultural subsidies that were incompatible with the farm bill recently passed over Bush's veto. 


Any major reduction in US greenhouse gas emissions must come from electricity generation, transportation, and industry.

In May, the Senate debated for 30 hours and rejected the Boxer-Warner-Lieberman bill that would have, maybe, reduced US emissions of CO2-equivalent gases enough to bring them back down to 2008 levels by 2025 after letting them rise in the near term. In order to avoid a runaway atmospheric greenhouse effect, the Union of Concerned Scientists has estimated (as have others) that the United States and other industrialized nations must reduce by 2050 their emissions by 80 percent versus 2000 levels. The International Energy Agency has suggested that a 50 percent reduction below 2005 levels might be sufficient to avoid that calamity.

I am posting here the EPA's 2006 inventory (at ES-16) of CO2-equivalent gases to show which industries and activities would need to be most dramatically affected if substantial reductions are to occur.

Electricity generation (mostly coal)    34%

Transportation (mostly oil)                  28%

Industrial                                              19%

Agriculture                                             8%

Commercial                                            6%

Residential                                              5%


A primer on 2 prominent approaches to healthcare reform

Here is a good article by Ezra Klein on two general schemes for healthcare reform.  It describes the plan of Jacob Hacker, who wrote the book The Road To Nowhere about the failed Clinton administration initiative, explains how it proposes to rein in costs while covering everybody and why it might not  work.  Obama's plan, and the plans of the other recent Democratic Presidential candidates, are based on this.  It similarly discusses the Wyden-Bennett plan, which has 6 Democrat and 6 Republican co-sponsors in the Senate.  Without some background like this article, the candidates' talking points and the press reports are incomprehensible--to me at least. 


Medicare can't be fixed until the whole healthcare system is fixed.

This short Paul Krugman post putting the Medicare and healthcare crises into perspective is worth reading. Medicare is underfunded, and conservatives propose to fix that by reducing benefits and putting retirees partially or entirely back into the private healthcare system. Medicare was created because those folks generally can’t get or afford private insurance, especially if they seem likely to need medical care. Without insurance, they have to pay 2-3 times as much for each service as the rates negotiated by Medicare and insurance companies. (I estimate that a serious illness would bankrupt more than 90% of American retirees without insurance.) We can’t fix Medicare unless we fix the larger healthcare system that costs more and has poorer outcomes than most other developed nations.


GOP consultant praises Obama's messaging.

Here a GOP campaign consultant compares ads he got when he Googled "obama healthcare" and "mccain healthcare."  The consultant is clearly dismayed at how poorly McCain's give-me-money message compares to Obama's join-our-movement message.  I had commented here on how Obama's stump speech, inviting audiences to join in a movement, compares with Clinton's stump speech, telling audiences what she was going to do for them.  Is Obama's messaging just his, or is it the start of a paradigm shift?  (Second link added 7/20/08.)

19 pithy comments on airlines from those who know

Thanks to Larry Vodra, retired airline pilot and secretary of my undergraduate class, for sending this selection of observations about airlines and airline travel. I don't know why 100% of the profanity comes from American Airlines executives.

Once you get hooked on the airline business, it's worse than dope. –Ed Acker, while Chairman of Air Florida

These days no one can make money on the goddamn airline business. The economics represent sheer hell. –C. R. Smith, President of American Airlines.

A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you've lost your trousers - you're in the airline business. –Sir Adam Thomson

If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs. –Herb Kelleher, Southwest Airlines, USA Today, 8 June 1994.

This is a nasty, rotten business. –Robert L. Crandall, CEO & President of American Airlines.

The thing I miss about Air Force One is they don't lose my luggage. –President George Bush Sr.

You fucking academic eggheads! You don't know shit. You can't deregulate this industry. You're going to wreck it. You don't know a goddamn thing! –Robert L. Crandall, CEO American Airlines, addressing a Senate lawyer prior to airline deregulation, 1977.

No one expects Braniff to go broke. No major U.S. carrier ever has. –The Wall Street Journal, 30 July 1980.

If we went into the funeral business, people would stop dying. –Martin R. Shugrue, Vice-chairman Pan Am.

Ladies and gentleman, this is your captain speaking. We have a small problem. All four engines have stopped. We are doing our damnedest to get them going again. I trust you are not in too much distress. –Captain Eric Moody, British Airways, passenger PA after flying through volcanic ash in a B-747.

The greatest sin of airline management of the last 22 years is to say, "Its all labors fault." –Donald Carty, Chairman and CEO American Airlines, 12 August 2002.

If the pilots were in charge, Columbus would still be in port. They believe the assertion that the world is flat. –Robert L. Crandall, 1993.

Think and act big and grow smaller, or think and act small and grow bigger. –Herb Kelleher

That place runs on Herb Kelleher's bullshit. –Robert W. Baker, VP American Airlines, regards Southwest Airlines.

There are only two reasons to sit in the back row of an airplane: Either you have diarrhea, or you're anxious to meet people who do. –Henry Kissinger

There are only two emotions in a plane: boredom and terror. –Orson Welles, interview to celebrate his 70th birthday, The Times, 6 May 1985.

To me, an airplane is a great place to diet. –Wolfgang Puck

Airplane travel is nature's way of making you look like your passport photo. –Vice President Albert Gore.

I mean, they get paid an awful lot of money. The only good thing about them is they can't work after they're 60. –Judge Prudence Carter Beatty, New York Southern District Bankruptcy Court, regarding Delta Air Lines pilots, reported in The Wall Street Journal, 18 November 2005.