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stay loyal to principles, skeptical of means

Once we’ve acknowledged the potential for regulation to improve the functioning of a market, the next task is to determine the likelihood that regulation will indeed accomplish its stated goal. Just as our market skeptics are right to point out that we need to judge ‘capitalism’ by it’s real-world performance, we must judge government action by the same. And our pluralistic democracy, for all its strengths, does a remarkable job of turning the most noble of causes into dismal and destructive regulation.

The more we break down ‘regulation’ into its specific components, the better we are able to assess the respective likelihood of attaining stated aims and creating additional negative externalities. Only then can we weigh the likely effects of our darling regulation with the likely effects of inaction. Presumably, at the end of such an exercise, support or opposition of ‘regulation’ would be less broad and more tailored to specific types of interventions in specific instances.

For example, the appeal of government subsidies for investment in alternative energy is clear. It’s become a proxy battle for those who support a large commitment to reducing carbon emissions and those who oppose it. Those that support this large commitment, however, should be more circumspect, and allow for the possibility that they might support the principle of carbon abatement, but still oppose subsidies because of what the regulation will look like at the end of the day.

Ezra Klein has said as much:

“One more time: 79 cents of every dollar the federal government invests in renewable energy goes towards corn ethanol, a heavily subsidized boondoggle that is little better than gasoline. Which is why I worry about targeted investment strategies. It’s not impossible to conjure up massive investment strategies that would make a tremendous impact on global warming. Gary Lipow does a nice job of it here. But it’s hard to imagine such an initiative entering the United States Congress and not emerging as pork encrusted in corn. The incentives are too poorly aligned.”

Klein goes on to briefly mention the idea of a cap-and-trade system, before again agreeing with skeptics that “so much will be exempted and rebated and set aside that it will, in practice, be nearly as bad.”

He finally allows that a straightforward carbon tax may indeed be the best option (sidenote: supported by Al Gore and Ralph Nader, among others).

Of course, these aren’t the only carbon abatement programs in place or in consideration. We have CAFE standards, which many want to make more stringent, despite the fact that “the premise of CAFE is a little bizarre—that manufacturers are responsible for the choices of their customers and penalized if car-buyers prefer more fuel-intensive vehicles. Across the political spectrum from left to right, the more direct, logical and efficient alternative of a carbon tax has its advocates, but they remain a persecuted minority,” as the Economist points out.

Unfortunately, the conversation about what to do about carbon has not allowed much room outside a broad-based support or opposition to carbon abatement programs en sum. Opposition to particular programs is seen as a proxy for half-hearted committment to the principle. Yet it’s perfectly possible that Ezra believes more in the destructive power of carbon emissions than John Q, yet supports fewer of the abatement programs.

Subsidies, CAFE standards, cap-and-trade systems, carbon taxes, and gas taxes represent only some of the regulations applicable to a single unpriced externality (carbon emissions). What’s more, I don’t want to dismiss the potential of subsidies, for instance, out-of-hand because of their massive failure in alternative energy. In fact, I would invite those sympathetic to subsidies to refine their argument, perhaps forming a push for (and only for) ‘subsidies for basic research independent of commercial applications.’

I would like to see educated debate move beyond principled support/opposition for more or less government action, and toward a pragmatic analysis of the means. It only takes a look at today’s headlines of proposals for a “car tsar” to underscore the importance of differentiating between the principle (well-functioning auto industry that doesn’t blow up the planet), which is the end, and the proposal itself (see: tsar, drug… tsar, terrorism), which is nothing more than an often shoddy means.

In the mean time, be just as wary of he who supports all efforts to save the world from carbon and auto bankruptcies as you are of those who make the same pledge to protect us from Islamo-fascists (what a term!) If he can’t discriminate between wasteful and ineffective means to serve his principle, he probably is an irrational zealot.

Filed under: Economic Policy, Natural Resources

Gas Prices Fall as Big Oil Reduces Profits

NEW YORK — Consumer advocates are dancing in the streets after successfully lobbying Big Oil to forego the record profit strategy agreed upon by the cartel this past summer in hopes of improving the competitiveness of the American economy (home to the greatest workers in the world) and the strength of the American family.

After a closed-door meeting this fall, the powerful transnationals agreeing to lower the Big Oil Required Set Price (BORSP) from more than $140 per barrel in June to $55 this November.

“You know, they were right to suspect massive collusion and corruption behind the soaring oil prices,” said Bud Budderson, former head of Collusion & Pricing, and now VP of Smiles & Sunshine at BP. “You know who set the prices? Me. And you know how I did that? I created a formula based on how many new toys I wanted to buy that week.

“I was a bad guy. But I did some thinking, listened to Barack explain the unfairness of our windfall profits, and decided to make a change.”

Along with the rest of Big Oil, BP made the difficult decision to stop selling oil at a price they now admit was completely detached from supply and demand, supported only by backroom dealing sealed with sweaty handshakes, evil cackling, and whale steaks marinated in peasants’ blood.

The price reduction has in turn won over many former critics.

“The fact that Big Oil, in these tough economic times, has chosen to lower prices by nearly 2/3  for the good of America, serves as a beacon of hope for all those who believe in the essential awesomeness of America,” said Tuck Tuckerson, senior analyst at MSNBC, and author of “Speculation, Gouging, and Waterboarding: A Year in Big Oil as a Super-Secret Embedded Reporter.”

“We just grew tired of being so goshdarn evil,” said Exxon CEO Money Monerton. “You can only read headlines like”Record Gas Prices, Record Oil Industry Profits,” for so long without rethinking your decision to put excessive personal profit over the humble dreams of hard-working Americans.

“Sure, the record profit strategy had its benefits, but this time around, we made the right choice, both for our companies, and for America.”

Filed under: Natural Resources

why bet on climate forecasts?

I have long enjoyed Bjorn Lomborg’s critiques of the climate change mitigation plans (e.g., Al Gore’s trillion dollar 10-year plan, T. Boone Pickens’ giveaway), as he has used numbers of the UN’s scientific consensus to show how little sense most (not all) of the plans make.

Funnily enough, when “green” advocates see the small impact (and immense cost) of the Kyoto Protocol spelled out, they become far more amenable to perhaps a more interesting discussion on the viability of the UN’s forecasts.

Furthermore, in the wake of a financial crisis brought on (partly) by a reliance on the financial community’s consensus statistical modeling, it’s not a bad time to question the reliability of these models in the first place.

Both financial and environmental modeling portend to predict the behavior of a complex system, where even small errors can lead to catastrophically wrong predictions thanks to the great number of feedback loops in the system.

And while the financial system saw the failure of the (Nobel winning) Black-Scholes financial model with the collapse of Long-Term Capital Management, environmental forecasters believed we were actually entering a “global cooling” only 30 years ago (quickly forgotten by the environmentalists’ new Nobel-led movement).

In both cases, these massive failures are dismissed with a wave of a hand – ‘oh, we have better models this time. I mean, we’d never make a mistake like that again. We just needed to add variable X that my stupid old partner missed and not pay attention to variable Y, which I always thought was wrong.’

I greatly enjoyed Nassim Taleb’s “The Black Swan” as Taleb took the financial modelers – indeed all forecasters – to task for just this arrogance and failure to admit their projections should not be relied upon.

He states that he wouldn’t trust a projection over five years; for the sake of context, the climate forecasts are 100 years (!) into the future.

I should add that I believe I did read somewhere that Taleb has spoken vaguely in favor of conserving the environment as a natural resource. I won’t disagree with this. I have already written on what I think makes sense for climate change (Obama’s $150 billion for R&D=good, subsidies for inefficient alternative energy applications right now=bad). This post is about the scientific modeling put forth as a consensus by a community with a long history of making drastically wrong forecasts.

Taleb advises, “Learn to read history, get all the knowledge you can, do not frown on the anecdote, but do not draw any causal links, do not try to reverse engineer too much-but if you do, do not make big scientific claims.”

It appears to me that not only are our forecasters drawing causal links based on highly-fragile models, but also making “big scientific claims.”

Some of my few readers are likely chomping at the bit to add the comment/question: ‘Sure, you can criticize the models, or whatever, but Taleb’s book is all about protecting yourself from Black Swans – highly improbable events that carry catastrophic risk – how can you possibly distort his arguments into a critique of climate forecasts: you are missing the forest for the trees!’

Maybe so – only Taleb knows, as he has been uncharacteristically reserved about commenting on climate change from what I’ve seen – but I do not believe I am misrepresenting his logic.

Taleb writes: “Many of the prediction failures come from hedgehogs who are mentally married to a single big Black Swan event, a big bet that is not likely to play out. The hedgehog is someone focusing on a single, improbable, and consequential event, failing for the narrative fallacy [“creating a story post-hoc so that an event will seem to have an identifiable cause”] that makes us so blinded by one single outcome that we cannot imagine others. Hedgehogs, because of the narrative fallacy, are easier for us to understand- their ideas work in sound bites.”

Taleb emphasizes that Black Swans are Black Swans because they are indeed unknowable — uncertainty is just that. His advice is to “to focus on the consequences (which you can know) rather than the probability (which you can’t know)… Likewise, do not try to predict precise Black Swans- it tends to make you more vulnerable to the ones you did not predict. … These thinkers advocate the opposite: invest in preparedness, not in prediction.”

Does this sound familiar? It should, because Bjorn Lomborg has advocated investing in preparedness that will pay dividends regardless of climate change (e.g., “malnutrition policies, immunization and agricultural research and development”). These proposals stand in stark contrast to the energy-exclusive solutions of people like Gore and Pickens, which will make us indeed more vulnerable to the Black Swans we don’t predict.

To wrap up, I’ll return to Taleb: “I do not forbid myself from using the word cause, but the causes I discuss are either bold speculations (presented as such) or the result of experiments, not stories.”

Environmental forecasters have treated us to bold speculations presented as scientific fact as part of a grand narrative that ends in apocalypse — a Mad Max end of humanity unless if not for drastic, expensive, collective action (but secretly great for our economy!) to reduce our carbon footprints — and thereby meaningfully mitigate climate change in an environment that has undergone catastrophic changes without the help of mankind for millions of years.

Whew. Maybe that is right on target, but I hope that even believers will admit that it just oozes all mankind’s cognitive biases and failings that are now well documented in behavioral economics, psychology, and indeed Taleb’s work.

The ceremonial rain dance is also well documented. People observed climate change. They created a narrative whereby they were responsible for it. They used their scarce resources to participate in ceremonies that would theoretically change the environment. Even after doing it for a period of time, they were able to explain away the many failures of their efforts to preserve the narrative. At least these ceremonies didn’t cost trillions of dollars.

The late Michael Crichton said, Nobody believes a weather prediction twelve hours ahead. Now we’re asked to believe a prediction that goes out 100 years into the future? And make financial investments based on that prediction? Has everybody lost their minds?

I’ll end with some more wisdom from Taleb. We should not play the role of hedgehog, but that doesn’t necessarily mean we slump on the couch and wait or a new wild theory to take root. We should take the advice of Lomborg and Taleb in maximizing our exposure to positive Black Swans by expanding R&D and allowing for the trial-and-error process necessary to innovate, while also investing in multi-use preparedness, e.g., malnutrition, disease prevention, poverty alleviation efforts, etc.

And lastly, a disclaimer: there are lots of good reasons to reduce our impact on the earth, to use resources more efficiently and expend less energy doing the business necessary to provide humans with a healthy and fulfilling life. This post is specifically criticizing the forecasts that have been coopted and the narrative they support.

Filed under: Natural Resources

What to do about Climate Change…

The ‘natural resources‘ tag encompasses everything from oil to water to the earth itself. This is a large area to canvas, and I’ll focus specifically on international and national proposals to “green” our development. Once again I’ve taken much of the language in this digest from the sources linked to at the bottom of the piece, and while this post is quite long, I wanted a comprehensive take. I will note that I left out the many legitimate criticisms of environmental modeling and forecasting in the first place. There are many reasons to be suspicious of all of the forecasts that essentially “predict” the weather in a hundred years. This post will ignore these concerns, however, and concentrate on the data that is put forth by the UN and the UN’s Intergovernmental Panel on Climate Change (IPCC).

High Cost

Three examples of these environmental proposals are the Kyoto Protocol, Al Gore’s plan, and T. Boone Pickens’ plan. All three are costly. Pickens plans to generate 20% of America’s power through wind, and he estimates it would cost $1 trillion to build that capacity and another $200 billion to update our electrical grid. Gore wants the US to “produce every kilowatt of electricity through wind, sun, and other Earth-friendly energy sources within 10 years. This goal is achievable, affordable, and transformative.”

Environmental economist William Nordhaus ran the numbers on Gore’s idea to reduce carbon emissions by 90% by 2050. He found that such a plan would reduce the maximum increase in global temperatures to between 1.3 and 1.6 degrees Celsius, and it did so at very high cost of between $17 trillion and $22 trillion over the long term. Even at a very, very low estimate, Gore’s plan would cost about $300 billion per year for the next ten years.

Meanwhile, the Kyoto Protocol is estimated to cost around $165 billion annually.

The costs of these plans are large (and I ask that you compare them to the costs of different types of interventions I will raise later), and I will contend they are not worth it, and that lower-cost R&D and “focused adaptation” plans would be far more sensible.

But how do the proponents of these plans justify these massive interventions?

Super Ultra Emergency?

Thomas Friedman justifies massive green spending by explaining that humans are an “endangered species” and none of us “are going to make it” as we experience disasters “of a biblical scale.” Friedman trumps Gore five-fold, coming to claim that sea levels might rise a hundred feet, whereas the UN expects between six inches and two feet this century. Friedman says that in 22 years the evening news will feature ‘weather, other news and sports’ – in that time sea levels will have risen fewer than three inches.

If you buy in to the rhetoric of humans being “an endangered species” with disasters of “biblical scale,” then we should start shutting down power plants and confiscating cars tomorrow. We have no good evidence that such a disaster scenario is imminent, but nobody can conceivably prove it to be impossible. Once you get past the table-pounding, any rationale for rapid emissions abatement is really a restatement of the precautionary principle: downside possibilities are so bad that we should pay almost any price to avoid almost any chance of their occurrence. Of course, this same principle would justify spending trillions on countless other “possibilities.”

I disagree with those who view global warming as a super-ultra emergency, and agree with those view warming as a problem, one that must be managed via greenhouse-gas restrictions and a weaning away from fossil fuels.

Putting the Benefits of Mitigating Climate Change in Context

Most scientists warn that a temperature rise of 2 degrees Celsius (3.6 degrees Fahrenheit) could have serious consequences. How serious? Well, according to the UN IPCC a 4C increase – twice this amount – would reduce global economic output by 1% – 5%. That’s in the world of the 22nd century which is expected to have per capita consumption of something like $40,000 per year versus our current consumption of about $6,600 per year. So we are condemning future generations to be only 5.7 times richer than us.

But global warming isn’t just about wealth reduction — it’s about the death and disease that would hit already at-risk populations. But even using the IPCC’s warmest scenario – increased global temperature of 4°C between 1990-2085, climate change will contribute ~10% of the death toll from hunger, malaria — a surrogate for vector-borne diseases in general — and flooding. Thus, eliminating climate change completely would reduce annual mortality by 2 million to 6 million in 2085, depending on the IPCC scenario employed.

That’s the potential upside of completely stopping climate change. Of course, the initiatives we are talking about don’t even pretend to make such claims. The Kyoto Protocol would reduce climate change by less than 10% in 2085-2100, while costing $165 billion annually.

I mentioned initially the idea of “focused adaptation,” which amounts to dealing with the symptoms of potential climate change, such as hunger, malaria, and coastal flooding. For instance, by 2015, malaria could be reduced by 75% for $3 billion per year, hunger by 50 percent for $12-15 billion per year. Please take a look above again to see how small these costs are in comparison to the efforts to mitigate climate change. Climate change will contribute ~10% of the death toll from these causes and look at the amount of spending it will take to even reduce 10% of climate change. Meanwhile, we can reduce 75% of Malaria for $3 billion per year.

My beef with the Environmental Movement

The environmental movement has welcomed a flurry of, at best, benign and wasteful, and, at worst, destructive movements and legislation – all in the name of “green.” For instance, Al Gore, among others, pimped ethanol hard, and the government policies that followed made it harder for people to eat — accounting for as much as 75% of the global increase in food prices since 2002.

These same folks want us to commit enormous amounts of resources to ideas like the Kyoto Protocol, Gore’s Plan, and Pickens’ plan, as they attempt to win support for these ideas with exaggerated doomsday scenarios and refusing to acknowledge the immense opportunity costs of their plans.

Environmentalists such as Friedman respond that we should still help the poor, for instance, but instead of giving them diesel, we should give them solar panels to power their lives.

That’s a nice thought, but not relevant to the question of opportunity costs. If the investment cost for solar power is 14 times more expensive than diesel, the money spent on helping the poor will simply not go as far — instead of 14 kids getting power you help just one. The large-scale emissions abatement central to Gore and Friedman’s strategies would carry astronomical costs, and they would carry real tradeoffs that its proponents should acknowledge.

It’s time to quit endorsing every lame-brained environmental strategy lobbyists dream up.

Ideas I’ll get behind

Contrary to popular belief, many of us who are ‘skeptics’ of the environmental movement’s claims don’t believe in doing nothing at all. The harshest critics of Gore’s plan still believe that global warming is real and poses a serious risk, and agree that an R&D program is a component of a solution. We also support adaptation to weather problems (disease, hunger, flooding mitigation), and believe ongoing efforts to analyze physical and economic trade-offs involved in various proposals through the IPCC and similar bodies are valuable and should be supported.

The government has no business picking winners in the alternative-energy competition (sorry, Illinois constituents and T. Boone Pickens), but augmenting basic research spending (as it is does in medicine) makes sense. And, again, taking steps to deal with hunger, disease, and flooding will do much more to help poor people, whether the climate change predictions come true or not.

Conclusion

Thomas Friedman sums up the environmental position when he equates spending trillions of dollars on greening with “training for the Olympic triathlon. If you make the Olympics and you run the race and do the whole triathlon, you may win. But if you don’t, even if you come in second or third, you’ll still be so much fitter, so much stronger, so much healthier, so much more respected, so much more secure. Which part of this sentence don’t you understand? Why would we not want to run this race?”

To continue with his analogy, my response is that while in 100 years you are much more toned and fit, your wife has left you, and your kid dropped out of school to sell drugs. But hey! You are in TERRIFIC shape. No denying that. The point of the analogy is that our resources are not unlimited, and that you concentrate them on one area (climate change mitigation) to the detriment of other areas (UN’s Millenium Development Goals).

Attempting to be an Olympic gold medal winner in “greening” isn’t the smartest use of our limited resources. As I’ve argued above, we can do much more to help both ourselves and the poorest people in the world by using some of the resources (that would otherwise be sucked up by the cost of olympic training) on other things we care about.

We live in a world abundant with poverty, disease, dictatorships, terrorism, nuclear proliferation, lack of girls’ education, and more than 1 billion people without cleaning drinking water or electricity.

These people would likely be better served if Daddy ditched the Olympic medal delusion, and started acting like a rational adult. That doesn’t mean he shouldn’t stay fit; but maybe instead of buying muscle milk he gives the kids some clean drinking water.

Filed under: Natural Resources

Technology to save the world

A recent Salon article claims that concentrated solar power could be the solution to our energy woes.

The key attribute of CSP is that it generates primary energy in the form of heat, which can be stored 20 to 100 times more cheaply than electricity — and with far greater efficiency.

CSP costs have already begun to decline as production increases. According to a 2008 Sandia National Laboratory presentation, costs are projected to drop to 8 to 10 cents per kilowatt hour when capacity exceeds 3,000 MW. The world will probably have double that capacity by 2013.

Solar thermal plants covering the equivalent of a 92-by-92-mile square grid in the Southwest could generate electricity for the entire United States. Mexico has an equally enormous solar resource. China, India, southern Europe, North Africa, the Middle East and Australia also have huge resources.

Sounds great, but I’m a little skeptical. Still, relative to the politically-tenable options, CSP sounds waaaaay better than ethanol (hat tip, pete). I will be on the look out for corroborating research papers and articles in support of CSP. Who knows, maybe CSP cities in the Southwest will be the new coal towns…

Filed under: Natural Resources