Entries by Skeptic (576)


If only evolution weren't so slow.

This picture came from Paul Krugman's blog



"If you don't believe that [offshoring jobs] changes [lowers] the average wages in America, then you believe in the tooth fairy."

Who said this?  Paul Samuelson.  Yes, that Paul Samuelson, the Nobel Prize winner who wrote the intro economics textbook we all studied, and longtime booster of free trade and globalization.  I found it in this worthy American Prospect article, Offshoring Silicon Valley,  and tracked it down to this New York Times interview.  And here's the link to the 4-year-old Samuelson article (subscription required) which says this in the abstract:

[T]he winds of dynamic comparative advantage cannot be counted on to create in each region new net gains of the gainers assuredly greater than the new net losses of the losers.

So now that Dr. S. has confirmed that it is theoretically possible for us to see what we've been seeing, it's finally OK to believe our own lying eyes. 


The GOP message is even less popular than its brand!

The GOP recently conducted a poll in which they asked Republicans, Democrats, and Independents to indicate their level of approval/disapproval of various GOP and Dem messages on topics like Iraq, the economy, trade, and taxes.  The results are summarized here.  The GOP messages did worse on all issues when people were not told that it was a GOP message than when the GOP brand was attached.  Presumably pollsters are telling GOP candidates that identity politics and the politics of personal destruction are both more effective for them than either brand or message. 


What Obama said at Wesleyan commencement

Ezra Klein's blog posted here this part of Obama's commencement address in which he evokes and even sounds like Jack Kennedy. 


Big energy legislation will produce little change.

The recently-enacted higher corporate average fuel economy ("CAFE") standards for light duty vehicles will improve fuel economy almost enough to offset continuing growth in population, vehicles, and miles driven through 2030, according to a report from the Energy Information Agency ("EIA"). Liquid Highway fuels use is projected to increase from a current level of 20.7 million barrels per day to only 22.8 million barrels per day in 2030.  (Corrected 5/25/08.)

The changes to the renewable fuels standard ("RFS") in the same legislation are projected to force an increase in the use of biofuels to the point that they supply 11 percent of highway fuels by 2030. Thus, EIA forecasts a very slight decrease in the use of petroleum-derived highway fuels over the next 23 years.

By rejecting the higher CAFE standards that were proposed, Congress missed an opportunity to go beyond just stabilizing our dependence on petroleum to decreasing it. The legislation also fails as an anti-global-warming strategy: Since roughly 75-80 percent of the energy content in corn-derived ethanol comes from the fossil fuel inputs and not from the solar inputs, the impact on carbon dioxide emissions from the highway transportation sector will be minimal.  (Corrected 6/1/08.)


More on the commodities price bubble

I wasn't planning to post again on crude oil prices, but I came across this post explaining clearly how futures traders can drive--and probably are driving--up commodity prices.  The post quotes liberally from Congressional testimony of a hedge fund manager who is not currently trading in commodities.  There are some eye-popping charts and real insights in 19 pages of testimony. 


Even Milton Friedman has said mainstream economics does not deal with real economic problems.

What's wrong with "neoclassical" or "mainstream" economics as it is taught, practiced, and widely believed today? Here are the words of six winners of the Bank of Sweden Prize (Nobel Prize) for Economics saying, in essence, that the subject is simply irrelevant to the real world.

[E]conomics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems. Milton Friedman

[Economics as taught] in America's graduate schools . . . bears testimony to a triumph of ideology over science. Joseph Stiglitz

Existing economics is a theoretical [mathematical] system which floats in the air and which bears little relation to what happens in the real world. Ronald Coase

We live in an uncertain and ever-changing world that is continually evolving in new and novel ways. Standard theories are of little help in this context. Attempting to understand economic, political and social change requires a fundamental recasting of the way we think. Douglass North

Page after page of professional economics journals are filled with mathematical formulas. . . . Year after year economic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same sets of data. Wassily Leontief

Today if you ask a mainstream economist a question about almost any aspect of economic life, the response will be: suppose we model that situation and see what happens. . . . Modern mainstream economics consists of little else but examples of this process. Robert Solow

Mainstream economics is under (well-deserved) attack. There are even heterodox economics journals like my favorite, real-world economics review, an exclusively-online journal that was until this year named the post-autistic economics review. (It is the source of the above quotations.) Although it is militantly heterodox, it has attracted submissions from many leading economists including Kenneth Arrow, James Galbraith, Robert Heilbroner, Jeffrey Sachs, and Joseph Stiglitz.

But the mainstreamers still control the high academic ground and are fighting fiercely. In 2004, Notre Dame renamed its economics department the Department of Economics and Policy Studies and brought in new professors to create a neoclassical Department of Economics and Econometrics. The recently-ghettoized professors have posted a petition that describes the situation and seeks support for the idea that their group should not be eliminated and that required economics courses not be exclusively neoclassicist orthodoxy. The petition is worth reading because it describes how economics is taught in other major schools, which is, of course, why Notre Dame created the new department.

Also worth reading is the home page of real-world economics review, which features short essays on, inter alia, A Brief History of the Post-Autistic Economics Movement, The Strange History of Economics (about how mainstream economics came to divorce itself from reality), and Policy Implications of Post-Autistic Economics, and links to several books.

Meanwhile millions of us have graduated believing neoclassical economic theory instead of our own lying eyes. How long will this go on? As a junior officer Colin Powell asked a mentor how long the US would stick with a certain weapons system that had some obvious vulnerabilities; the answer was, "Until it fails in war." It seems neoclassical economics will continue to be our conventional wisdom until it suffers a spectacular failure. Are we there yet?


My portrayals of Middle Class decline have been too optimistic?

Bill Gross (chairman and CEO of PIMCO) has again addressed the problem that the consumer price index ("CPI") understates inflation, especially as a result of methodological changes made by the Bureau of Labor Statistics in the last 25 years for the purpose of making inflation seem lower. The CPI is the most widely used index to adjust incomes and costs from one period to another to put them on an equal purchasing power basis. As a result of the understatement, which he thinks is at least 1%, "real" income gains have been overstated, inflation-adjusted returns on the most conservative debt instruments are negative, stock and real estate prices (being essentially the present values of expected real income streams) are overstated by 5-10%, foreign investments are relatively more attractive than US investments, people whose incomes are tied to the CPI (those under adjustable labor contracts, Social Security recipients, etc.) are not keeping up with inflation. To the extent that the CPI has been understated, especially since 1983, then the decline in real incomes of middle class Americans has been worse than portrayed in my blog posts.


Education is doing a lot less for the economy than we all thought it would.

In response to recent articles by David Brooks and David Leonhardt, Ezra Klein put up three good blog posts yesterday on the income benefits of a college education. The first. The second. The third. Here is a summary of key points.

Going back to the 1980s there was a broad consensus of Left and Right that education, and especially expanded higher education, should be the cornerstone of America's future growth and individual economic progress. But "the education-as-panacea argument is being overwhelmed by contradictory evidence."

The income gap between high school graduates and college graduates is not widening because incomes of college graduates have accelerated through the last 2 or 3 decades. To the contrary, average incomes of recent college graduates have risen only modestly and not at all since 2001. The widening gap is because the incomes of high school graduates grew at a much slower pace or not at all.

Median incomes of college graduates have not increased as much as average incomes, meaning that most of the gains are going to some subset of college graduates. "[M]any college graduates are now forced to take jobs requiring only high school education."

Whether the increases are going disproportionately to graduates of elite colleges, those with engineering degrees, those with well-connected parents, or some other subset(s) is not reported.

For the source of the quotes and a longer analysis refuting the conventional wisdom about the value of higher education as the solution to all economic problems, go here. A somewhat older issue brief from Economic Policy Institute (cited by Klein) is here. If we care about the decline and grim prospects of the American Middle Class—and I'm not sure we do—we're going to need policy responses that go way beyond education.


Whatever you say, comrade banker.

Manufacturing a Food Crisis: How "free trade" is destroying Third World agriculture—and who's fighting back is an excellent article on the impact of three decades of developed world trade policy on agriculture in the developing world. Both in "trade" agreements like NAFTA and WTO and in "structural adjustment programs" imposed by the World Bank and IMF, developing nations have been forced to discontinue the subsidies, price stabilization programs, and other preferences to domestic agriculture and accept imports of highly-subsidized agricultural products. "Since the late 1990s subsidies have accounted for 40% of the value of agricultural production in the European Union and 25% in the United States." The unfairness—and the indefensibility under economic theory—are obvious, but one has to read the article to appreciate how much like the blundering and arrogant central planners of a soviet state the World Bank and IMF became as they crammed down "the Washington Consensus." The law of unintended consequences ruled.

When Ferdinand Marcos fled the Philippines in 1986, the World Bank and IMF stepped in and forced the government to stop subsidizing agriculture and to use the funds to repay foreign debt. The experts said Filipino farmers should switch from rice to growing "high-value-added" export crops like cut flowers, asparagus and broccoli. The Philippines went from being self-sufficient in food to being a big importer of rice from China, Vietnam, and Thailand, where rice farming is heavily supported by the governments. The cut flowers, asparagus, and broccoli? Don't ask. Instead of increasing by 500,000 as projected, agricultural employment dropped by 400,000.

In Africa, the World Bank encouraged its clients to grow export crops to generate foreign exchange in order to service their foreign debt. Its "experts" thought it would be a good idea for Ghana (and several other African nations) to focus on cocoa and for Ethiopia to concentrate on coffee. Results: the world prices for cocoa and coffee both collapsed. The World Bank's chief economist for Africa said, "We did not think that the human costs of these programs could be so great, and the economic gains would be so slow in coming." An economist who never heard of supply and demand?

In 1999 the government of Malawi started subsidizing agriculture with free seed and fertilizer, a big surplus of corn resulted. The World Bank forced Malawi to stop the subsidy, because there were "more productive ways" for the Malawi government to use its resources, and to sell off the accumulated surplus to pay foreign debt. By 2001-02, the surplus was gone and the nation was in famine. The new government defied the World Bank by resuming the subsidies in 2005. Now Malawi feeds itself and exports corn to South Africa. Oh, 1500 Malawians starved to death.

By tradition, the US appoints the head of the World Bank, now Robert Zoellick and before that Paul Wolfowitz. Did they not get the email saying the United States is opposed to having governments pick economic winners and losers? Or are they just bankers behaving like bankers?


Preventing the next sub-prime mess

I questioned here whether "financial innovation" is a good thing and implied that it's just rhetorical deception in the service of autonomy for players in the financial economy (as distinguished from the "real economy"). Paul McCulley, Managing Director of PIMCO (one the world's largest fixed income securities management companies) doesn't go that far, but here is one of several newsletters and speeches in which he fervently urges regulation of "the shadow banking system" including investment banks.  After giving a useful explanation of what's been going on and why it's dangerous, he says this:

Minsky’s insight that financial capitalism is inherently and endogenously given to bubbles and busts is not just right, but spectacularly right. And when the financial regulators are not only asleep but actively cheerleading financial innovation outside their direct purview, a disaster is in the making, as the last year has taught us. We have much to learn and relearn from the great man as we collectively restore prudential common sense to bank regulation—both for conventional banks and shadow banks.


Lots of crude oil hoarding a year ago, and still some now

Paul Krugman says current high crude oil prices can't be a mere speculative bubble because he can't see any evidence of hoarding. While I don't think there necessarily has to be hoarding for speculators to drive up prices, it turns out there was a lot of hoarding a year ago and still some today.

The National Petroleum Council assessed in December 2004 that the "lower operational inventory" of crude oil in the US needed to avoid refinery disruptions as 260 to 270 million barrels. At II-5. Any domestic crude inventories above this level are "discretionary."

Companies may manage their individual level of discretionary inventories based on their assessment of future market conditions. There may also be incentives based on the futures market that influence the level of discretionary inventories. For example, if futures prices for delivery in coming months are higher than the price today, an incentive may exist to build inventory because it may be worth sufficiently more later to cover the carrying cost and financial risks. Under this scenario, the market is said to be in contango. Conversely, if the futures prices for delivery in coming months are lower than the price today, companies may have an incentive to draw discretionary stocks and keep them low while maximizing sales. Under this scenario, the market is said to be backwardated.

At II-3. In Figure II-2 (at II-7), the NPC compares its lower operational inventory assessment with the same Energy Information Agency inventory data plotted here, making clear that NPC, EIA, and my earlier post all use the same definition of "inventory."

Using the NPC assessment as a floor, it turns out that inventories have been well into the discretionary zone, reaching 355 millions barrels in June 2007 and then dropping sharply to 286 million barrels at the end of December. The sharp drop of 69 million barrels suggests that the herd was liquidating physical inventory in anticipation that wet barrels would not be significantly more costly or valuable in the coming months, and might be worth less. It seems the herd was wrong. In January and February there were modest additions to discretionary inventories, which then stood about 35 million barrels above "lower operational inventory," suggesting some sentiment that prices were more likely to go up than down.

It is possible that 355 million barrels in June 2007 was close to the maximum available crude oil storage capacity in the US. "Working storage capacity at operable refineries" in the US has been tracked by EIA as of January 1 each year since 1982. This storage at refineries has shrunk from 181 million barrels in 1982 to 158 million barrels in 2007 mostly, it seems, because of the closure of about 120 small refineries between 1981 and 1986, and continuing closures since. (Whereas there were once over 300 refineries, there are now fewer than 150.) NPC at I-7. I have not been able to find data on crude storage capacity at port and pipeline terminals and other upstream storage vessels and, therefore, can't say if the reduced refinery storage capacity has been offset by increases upstream. But I have compared the amounts by which total domestic inventories exceeded refinery storage capacity at three times when inventories peaked, and at the end of February 2008:


April 1981       

June 1990

       June 2007       

Feb. 2008






Refinery tankage










If upstream storage capacity has not increased, domestic crude oil inventories were nearly as close to peak storage capacity in June 2007 as they were in April 1981.

Whether crude oil prices are or not a speculative bubble is currently a hot topic on Krugman's blog


More data on how to improve automobile fuel efficiency

Paul Krugman's blog today discussed a recent study showing that through 2006 increasing gasoline prices were not inducing Americans to buy more fuel-efficient vehicles. The same study shows that in Europe and Japan, where the increase in fuel prices were proportionately much smaller than here, voluntary agreements with auto companies were yielding increased average fuel economy in new vehicles. Here's how I responded to PK.

In 2002 the National Research Council in Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards published these conclusions (at 15):

"Figure 2.2 suggests that the CAFE standards were not generally a constraint for imported vehicles, at least until 1995, if then. Domestic manufacturers, on the other hand, made substantial fuel economy gains in line with what was required by the CAFE standards. The fuel economy numbers for new domestic passenger cars and light trucks over the past 25 years closely follow the standards. For foreign manufacturers, the standards appear to have served more as a floor toward which their fuel economy descended in the 1990s."

When in 1980-81 inflation-adjusted motor fuel prices were in the same high range they are now, new domestic vehicles purchased were on average more fuel efficient--even getting ahead of the CAFE standards by about a year. Then gasoline prices went down about as fast as they went up, and by early 1986, real pump prices were below where they had been in 1978. We continued to have ever cheaper gas for 17 years until 2003, and new vehicle fuel economy hugged the CAFE floor.

We had the fuel economy gain without the price pain. Furthermore, the recent pain has not been very effective in causing Americans to buy more fuel efficient cars. The Schipper paper you cited says this at 14:

"Yet comparing both new vehicle fuel economy and changes in the stock among the US, EU and Japan since 2002 [through 2006] show that [sic] improvements in the latter two but not in the first. This occurred even though the relative price changes in the US were larger since the price of crude and refining represents a much larger share to consumers than in Japan and Europe, where taxes are 2-3 times higher. From this comparison it is difficult not to conclude that the Voluntary agreements in both regions affected new vehicle fuel economy."

Not only have higher prices induced only very modest increases in fuel efficiency but we cannot count on gasoline prices to stay high or go higher. Remember we were said to be running out of oil in 1980-81 too. That's why we need CAFE standards--and tougher ones at that—if not to drive the change then at least to prevent backsliding.

Finally, I don't think you can compare the US to Europe and Japan. Figure 10 in the Schipper paper shows that GDP per capita is significantly lower there. I suggest the reason people with lower incomes buy smaller cars is not so much that they get better gas mileage but that smaller cars have smaller purchase prices.


Why crude oil prices are so high

Crude oil prices have been driven up by demand, but is it demand for wet barrels or demand for futures contracts? If those are the only two choices, it must be speculative demand because there doesn't appear to be any shortage of wet barrels—either now or for delivery in the next year.

When President Bush went to Saudi Arabia in January 2008 to beg for higher crude oil production rates, they said, "No, there is no shortage of oil." They said they knew that because worldwide inventories were in a normal range. The logic of their position is that when consumption exceeds production, the difference can only be made up by drawing down existing inventories. The Saudis said that if they were to increase production, the incremental oil would just push up inventories and risk creating a price-crashing glut (which is, of course, what Bush really wanted).

It seems the Saudis are correct about inventories. Here is a plot of US crude oil inventories (excluding the Strategic Petroleum Reserve) from 1973 through February 2008 and the 12-month moving average. Nothing about recent inventory levels looks unusual. Data are from US Energy Information Agency.

Indeed, if one looks at inventories over shorter time periods, it seems that inventories have gone up during periods of higher prices (before the First Gulf War and since 2003). That suggests that prices have been driving inventory decisions rather than vice versa. In other words, prices didn't rise because inventories were shrinking; inventories increased because buyers expected the barrels would be priced higher later.

This morning I went looking for an expert analysis of the crude oil futures markets, how they may have changed in the last 5 years, and how such changes might affect prices. I found this piece by F. William Engdahl, whom I don't know and who may be, according to information at the end of the piece, someone with inordinate confidence in his own ability to see around corners. With that caveat, I recommend his piece for the insights it gives into the opaque world of crude oil futures and the argument that we are in a speculative bubble. He suggests that 60% of current prices (i.e., everything over about $45/bbl) results from demand for paper barrels, not wet barrels.

The contrary argument is that worldwide demand for oil has risen so far so rapidly, especially in China, that producers will soon be unable to keep up. Supporting this are one private communication and several press reports that the costs of increasing production in places like the San Joaquin Valley have risen so far so fast that it is not an attractive investment even at today's prices. However, Engdahl cites a recent Energy Information Agency report, which I have not looked at myself, saying that worldwide production capacity is continuing to grow and that by 2010 there will be 3-5 million barrels per day of production capability in excess of actual production.

If we aren't actually about to run short of oil, why do so many people say that? It is certainly possible that some of the talk is disinformation meant to make trading strategies pay off. There are also surely pundits who did straight-line extrapolations 2 years ago and haven't recalibrated their opinions to the recession and declining demand for gasoline in 2008. There are clearly those who know nothing about crude oil but are using the "peak oil" rhetoric to get government action for alternative energy sources, for drilling in ANWR, against global warming, etc., etc. And there are many, many bandwagoners who just repeat what they take to be the conventional wisdom.

In the end, I'm buying the speculative bubble hypothesis. I predict oil will trade below $100 before the end of 2008 and below $70 before the end of 2009. Meanwhile, the price could climb to $150 or more. Or it could fall off the cliff this afternoon and destroy another company like Enron before Memorial Day. Extreme volatility is the dark side of extreme liquidity.


Tom Friedman says it’s all our fault but we’re about to commit to fixing it

Tom Friedman says "[1] We are not as powerful as we used to be because [2] over the past three decades, the Asian values of our parent's generation—work hard, study, save, invest, live within your means—have given way to subprime values: 'You can have the American dream—a house—with no money down and no payments for two years'," and [3] Americans want to do nation-building—in America. Is he right? Yes, no, and maybe.

Less Powerful for Sure

There is growing consensus that America has a less dominant place in the world today.  In the past, we were unrivaled economically and supported growth elsewhere with American capital.  Now we are losing ground to several rising economic powers and borrowing money from them to progress and even for current consumption. We have demonstrated, to others if not to ourselves, that our vast and unrivaled military power is nevertheless insufficient to impose our will on Iraq, a nation having 20% more people than Texas in 37% less land area, and that Gulliver is surprisingly vulnerable to a multitude of Lilliputians.

When we try to lead the world, other nations are much less likely to follow than they were. The loss of influence stems in part from making huge geopolitical blunders, squandering international respect and affection, adopting policies that weakened our economy, and exposing our military weaknesses. But there are other reasons also. What followed the bi-polar world of the Soviet era will not be an enduring uni-polar world that many expected and thought was our due. It is becoming a non-polar world, well described by Richard Haass, president of the Council on Foreign Relations in the current issue of Foreign Affairs, The Age of Nonpolarity—What Will Follow U.S. Dominance.

To blame this on ordinary Americans for abandoning the "Asian" values of hard work, studying, etc. is a slander that must be refuted.

Americans today work harder than their parents. For example, families with 2 parents age 25-54 with children worked 18.1% more hours in 2004 than they did in 1979. The State of Working America 2006/2007, Table 1-24. (About 89% of the additional hours were worked by wives, confirming what we know intuitively—many more families have 2 earners than was the case in 1979.) And Americans today spend more time commuting to work because they have to live farther away and endure transportation facilities that are not keeping up with rising population. For this additional reason, Americans have less time than their parents to enjoy the American Dream, assuming it were still accessible to them at all, which it isn't.

Where's the evidence that American students today study less hard than their parents? Haven't we been reading about how pathologically competitive high schools became after we graduated, and then middle school and primary school, and now pre-school? What is clear is that increasingly foreign students are crowding American students out of elite American universities and, as Mr. Friedman reports, the foreign students are less likely now than in the past to stay and apply their training in America "because they have significant options elsewhere."

To blame Middle Class Americans also for not saving more and "living within their means" adds further insults to the injuries inflicted on them by flawed policies urged on government by Mr. Friedman and other pundits. Americans would like nothing better than to be able to live within their means, but the real incomes of the bottom two-thirds of families have been declining for 8 years. These are not reckless young sailors blowing their entire paychecks in a single shore leave—they're families just trying to hang on until better times--which they've been assured are here or just around the corner. Their borrowings offset the actual savings of those at the top of the income pyramid so that in the aggregate the US savings rate has dropped to zero. Now that the possibilities for more borrowing are drying up, Mr. Friedman is about to get his higher savings rate and he won't like it. Since consumer spending makes up 70 percent of GDP, the increased savings has knocked us into a recession that may be severe and prolonged.

It's not even clear that America's zero savings rate has any adverse effect. There have been times in our past, including perhaps the period when our policy makers and pundits were studying economics, that growth was restrained, and inflation fueled, by a shortage of investment. That may be true again someday, but it hasn't been true in recent years. In fact, the world has been awash in cash. Unfortunately a lot more of it now is controlled by oil exporters, sovereign wealth funds, and hedge fund managers willing to take crazy risks with other people's money.

It's doubtful that rebuilding the nation is imminent

The powerful (which includes billionaire-by-marriage Tom Friedman) would be personally disadvantaged by change, and those who would most directly benefit from a rebuilding can't comprehend what happened or what is possible.


An even worse way to power mobile sources with electricity

Two scientists at Los Alamos National Laboratory are working on a process to extract carbon dioxide from the air and turn it into gasoline, according to this NYT piece.  In a previous post, I show how plug-in electric vehicles and hydrogen fuel cell vehicles are competing processes to deliver electricity from the grid to on-board electric motors--and suggested that hydrogen is likely to be the loser in that competition.  Here I put what the promoters call the "Green Freedom" car into the same energy efficiency context and find it much less plausible than hydrogen. 

The concept of the Green Freedom car is that it will run on synthetic gasoline made by absorbing carbon dioxide from the air and chemically "recycling" it into more synthetic gasoline.  Prima facie, it sounds "carbon neutral." But this "virtuous" scheme is not a closed cycle--a huge amount of energy must be applied from the outside to "push" the carbon in CO2 up the potential energy slope to elemental carbon and then to hydrocarbons.  Furthermore, the energy inputs are used with large inefficiencies that release waste heat into the biosphere, and there is an unavoidable increase in entropy (Second law of Thermodynamics). 

The authors assume all of the required energy inputs will be from a nuclear power plant.  Green Freedom, A Concept for Producing Carbon-Neutral Synthetic Fuels and Chemicals at 4.  On that assumption, they have a Rube Goldberg scheme for using nuclear reactors to produce electricity which is converted and stored in the form of liquids suitable for running cars and airplanes.  On the other hand, if they admit that in our real world electric power comes predominantly from burning coal and natural gas, then their scheme is far less carbon-friendly than using petroleum and natural gas for transportation fuels. 

Who pays for dreaming up stuff like this? You guessed it. "Los Alamos National Laboratory requests that the publisher identify this article as work performed under the auspices of the U.S. Department of Energy."


Professional education, the curse of the political class

In poll after poll and in primary election results, it is consistently reported that less educated voters are more likely to favor Senator Clinton and that more educated voters are more likely to favor Senator Obama. David Brooks today suggests it's because the two groups live different lives, and shared experiences like Walter Cronkite and public schools are gone. I suggest a different reason for the division. Essentially all high school education and much of college education is so different from the professional education of doctors, lawyers, engineers, MBAs, etc. that the two groups have incompatible approaches to decision-making and accountability.

The non-professionals are likely to make decisions on the basis of learned conventional wisdom that is assumed to be "true" and on behavioral norms, with little effort to identify alternatives and estimate outcomes before deciding. They feel accountable for acting honorably and "doing what's right" as defined in their community. They are likely to assign accountability for bad outcomes to someone else, or to fate, if they believe their behaviors were proper.

In contrast, professionals are taught that there are multiple alternative courses of action in complex situations and to try to achieve optimum outcomes without undue risk using intellectual models that are known to be inexact and perhaps contradictory. Professional education in the United States is now largely in the case method, and you probably cannot get through these schools if you cannot effectively select the relevant principles and tools and apply them effectively to a unique factual situation. They are taught to internalize responsibility for outcomes and they typically do so in their professional lives.

Why Senator Obama recognizes important and complex problems as such and analyzes them and the options in great detail in order to find the optimum solution—and for him to speak clearly about that—hardly needs explanation. He would not have done well at the Harvard Law School, let alone become president of the Law Review, if he had not demonstrated great skill at precisely that. Then he apprenticed at a large business law firm, where he undoubtedly did more of the same. His current style is the natural style for a highly-trained professional.

The interesting question is why Senator Clinton does not talk that way and why, based on her voting and rhetorical record, she seems to think less in that "professional" style. I suggest that she has had the "elitist" professional style beaten out of her in her longer and tougher political career. Senator Clinton is quite capable of professional thinking and communication at a very high level, and in fact practiced it as she designed a new national health plan early in the first Clinton Administration. She seems to have decided, perhaps in part subconsciously, that her "professional" problem-solving and communication style wasn't working for her career.

There are at least four forces tending to beat a professional style out of politicians. First, because the large majority of their constituents don't understand them when they talk in professional problem-solving terms (it may sound "elitist," "wishy-washy," and "wonkish"), there is pressure to express policy positions simply and in terms of behavioral norms and conventional wisdom. Second, legislators may not get much chance to practice a professional style with colleagues for whom the most important question is usually, "Who's for this, and who's against it?" Third, it's hard to advance a career in politics if one carries the baggage of accountability for bad outcomes. Fourth, because compromise is so often required, legislators are seldom able to vote for what any of them would regard as an optimum decision for which they would be willing to be held personally accountable.

Bill Clinton and Jimmy Carter were derided for being wonkish and spending too much time trying to get their policy details right. Their biggest blunders were political. George W. Bush is famously "incurious" about policy and bases his decisions on what he calls his "gut" (what I would call the behavioral norms he has internalized and the conventional wisdom of the few whose advice he receives). Although he was awarded an MBA, apparently it did not affect his approach to life, and his biggest blunders have been on the policy side.

To the extent any of this analysis works in the real world, I would think Senator McCain will have an edge over Senator Obama with nonprofessional voters. I see in him no taint of professionalism.


China's powerful weakness

I found Francis Fukuyama's column today with this title fascinating.  China's decentralization seems to have contributed greatly to economic development and also to human rights abuses because neither is effectively controlled by any central authority.  He draws parallels with the development of the centrally imposed Common Law in England (successful) with the French revolution against tyrannical local justice (unsuccessful).  On the economic side, China's decentralization seems to have worked better for it than centralized oligarchy in Putinstan, where everything seemed stagnant until oil and gas prices rose. 


Ya gotta believe!

Thanks to Harry for sending me his 1984 paper, On the inevitable return of higher oil prices, in response to my post on CAFE standards. In that post I presented a graph based on the same data set as this one, but without the trend line:

Because I was talking about the post-1974 period, I had not noticed that the graph shows a persistent and substantial price decline from about $2.80 per gallon in 1919 to about $1.70 in 2007, based on the trend line.  After 88 years of steady real-world price decline, my faith in the theory might begin to weaken.  Hang in there, Harry. 


CAFE standards are much better than high gasoline prices.

The question came up at lunch two weeks ago and again today in Paul Krugman's blog. Has the increase in average fuel economy of automobiles and light trucks been driven by higher fuel prices or the federal CAFE (Corporate Average Fuel Economy) standards?  Here's the answer and the evidence. 

In 2002 the National Research Council in Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards published these conclusions (at 15):

Figure 2.2 suggests that the CAFE standards were not generally a constraint for imported vehicles, at least until 1995, if then. Domestic manufacturers, on the other hand, made substantial fuel economy gains in line with what was required by the CAFE standards. The fuel economy numbers for new domestic passenger cars and light trucks over the past 25 years closely follow the standards. For foreign manufacturers, the standards appear to have served more as a floor toward which their fuel economy descended in the 1990s.

When in 1980-81 inflation-adjusted motor fuel prices were in the same high range they are now, new vehicles purchased were on average more fuel efficient--even getting ahead of the CAFE standards by about a year.  (Sorry I can't reproduce Figure 2.2 here; please follow the link.)  [Image of Figure 2-2 inserted 2 Feb. 2009.]  Then gasoline prices went down about as fast as they went up, and by early 1986, real pump prices were below where they had been in 1978.  We continued to have cheap gas for 17 years until 2003. 

From Energy Information Agency

Yet new domestic vehicle fleet economy did not go down because the CAFE standards were providing a floor. 

I agree that at some high level fuel prices will drive people to buying more efficient vehicles, but we don't know what price level is required to achieve which level of fuel demand reduction.  And, as we saw in 1980-81--and are seeing again now--prices high enough to have a substantial effect on new car preferences also have a ruinous effect on businesses and people's lives by crowding other goods and services out of people's budgets.  This is why I cringe when I hear it said that high petroleum product prices are the only way to decrease our use of petroleum, or even that manipulating prices is the best way to achieve that goal. 

For at least 20 years, we consumed much less petroleum than we would have without the CAFE standards, and we did it without ruinously high prices and giant transfers of American wealth to oil-producing nations.  We can have less consumption and low prices at the same time.  We've done it already.  CAFE standards were a brilliantly successful energy policy.  We should do more energy demand regulation like this and stop throwing federal cash and tax incentives at the supply side.