Category: Economics

Matters of money

The coming auto bailout

North America’s auto manufacturers seem to be next on the list for a big government bailout. As with other bailouts of private sector firms, there are legitimate worries about the public at large bearing the cost of losses, while gains had accrued to private individuals. In the case of the auto industry, there is the further risk that a bailout will permit North American firms to continue with their existing mode of operations, which had clearly failed before the credit crunch made the situation acute.

That being said, a case can be made that a bailout is the least problematic option. It can also be pragmatically recognized that governments are likely to provide the cash, rather than allow one of more of the firms to fall into bankruptcy.

Perhaps the best way this situation can be turned somewhat positive is to mandate tougher efficiency standards for vehicles, as partial public recompense for the funds. The biggest gains can be made in improving the least fuel efficient vehicles. According to calculations posted on Gristmill, improving the fuel efficiency of dire vehicles like the Hummer H3 (15 mpg), Yukon Denali (14 mpg), and Chevy Trailblazer (13 mpg) is a more promising initial strategy than trying to push the efficiency of cars like Honda Civics (29 mpg) upward.

This strategy is likely to be politically problematic. For one thing, it impinges on the flawed notion that people have a right to drive whatever they want and can afford. For another, the production of highly inefficient, high-margin vehicles is concentrated in North America. Nonetheless, if this is to be a one-off rehabilitation, rather than a temporary reprieve from systemic problems, the North American auto industry needs to shed much of its past philosophy and approach. It is remarkable that no automobile assembled in North America meets China’s fuel-efficiency standard. Along with the structural financial problems in the industry, that is a situation that will need to change.

Ethanol and energy independence

Writing in Slate, Robert Bryce has produced a rebuttal of the idea that ethanol is part of the road to energy independence. Essentially, this is because it can only displace a portion of the demand for petroleum products in general:

The corn ethanol scam cannot, has not, and will not significantly reduce overall oil use or significantly cut oil imports because it only replaces one segment of the crude-oil barrel. Furthermore, all the talk about “cellulosic ethanol,” a substance that, in theory, can be profitably produced in commercial quantities from grass, wood chips, or other biomass, is largely misplaced because, like corn ethanol, it will only supplant gasoline.

If this analysis is correct, yet another problem can be lain at the feet of ethanol, alongside the low energy return on investment and dubious climate change benefits.

New developments in spam

Remarkably, it seems that 70% of the world’s spam emails were originating from an American firm called McColo. On November 11th, two American internet service providers cut them off from the web, leading to the huge drop in the global volume of spam. It is estimated that 90% of spam messages are actually sent by computers that have been compromised by viruses, which makes it a bit surprising that such a drop could be generated by disconnecting one firm. Clearly, it is a network that needed central direction to operate. Those that emerge as successors will probably be more robust, located in more unpoliced jurisdictions, or both.

While the respite is likely to be temporary, the situation may reveal some useful information on the practice and economics of spam. This unrelated paper (PDF) examines the latter. The researchers infiltrated a segment of the Storm Botnet and monitored its activity and performance. On the basis of what they observed and estimates of the rest, they concluded that the botnet earned about 3.5 million dollars a year by selling pharmaceuticals. While that isn’t an inconsiderable sum, I suspect it is less than is being spent by companies combatting the flood of spam messages themselves.

Failures in fish identification

Making an ethical decision about what kind of seafood to eat is very challenging. Considerations include environmental sustainability, the problems with different forms of fishing gear, and the maintenance of ecosystems and viable fish stocks. As this Vancouver Sun article points out, actually making good choices may be impossible for consumers in many cases because they are being lied to about what sort of fish they are buying.

In some cases, the guidelines for what you can call a fish are so loose as to be almost meaningless. In other cases, people simply lie. According to a study cited in the article, DNA tests of 91 seafood samples purchased in Toronto and New York revealed that 23 (25%) were mislabelled. In other cases, fish from depleted waters are labelled as originating in fisheries that are being more sustainably managed.

All this poses a big problem to the school of thought that suggests that educating consumers to make their own ethical choices is the best way forward. Even for those willing to put in the effort to investigate the state of various fisheries, as well as willing to pay more in time and money to find ethical fish, the failure to properly label products may make their efforts fruitless or counterproductive.

As with many other problems in food integrity, the solution may be a shorter chain from source to consumer, coupled with more stringent regulations and enforcement.

The article, along with several others in its series, was linked and discussed on Jennifer Jacquet’s blog.

Gore’s five point climate plan

Al Gore has an op-ed in The New York Times in which he argues that energy security and climate change can both be addressed through the same bold set of policies. He highlights five key areas for action:

  1. Incentives for concentrating solar in the Southwest, wind farms from Texas to the Dakotas, and new geothermal capacity.
  2. A national smart grid, including high voltage direct current transmission.
  3. Plug-in hybrids, capable of acting as an energy storage system for the grid.
  4. More efficiently heated, cooled, and lit buildings.
  5. A price on carbon, and an international agreement to succeed Kyoto.

Gore also highlights the importance that those who are now young will play in bringing this about: “The average age of the systems engineers cheering on Apollo 11 from the Houston control room that day was 26, which means that their average age when President Kennedy announced the challenge was 18.” While comparisons to Apollo can be misleading, the exhortation is a convincing one.

Hopefully, Obama realizes the seriousness of this problem and has the political skill to start the rapid transition to a low-carbon economy, and help lead the rest of the world along that path.

Debt and the credit crunch

If there is one thing the ongoing financial crisis demonstrates, it is the need for fiscal discipline. The causes of the crisis call attention to the more problematic characteristics of debt. At the same time, the prospect of bank failures and the curtailing of lending highlight the degree to which debt has a legitimate and important financial role to play. In short, debt incurred to finance investment is often justifiable; debt used to finance consumption is unsustainable.

Perhaps a healthy cultural outcome of the crisis would be the re-stigmatization of debt as a means of accelerating consumption. By all means, it is important for people to be able to access financing in order to fund education and other forms of investment. What is worrisome is the tendency towards low or even negative net savings, as well as taking on debt of an especially pernicious sort: on credit cards. Taking responsibility and making informed choices remains necessary, even if governments choose to regulate financial markets more closely.

People with a clean credit history who are paying credit card interest really ought to look into alternative financing options. Credit card interest rates are often around 20% per year, and minimum monthly payment amounts are just 2% of the outstanding total. That means your debt is growing by 1.67% per month, and you are paying it down by just 2%. The amount of principal being paid off each month is tiny.

Someone who put $1000 on a card with 20% interest, then proceeded to make minimum payments only, would have the debt down to $500 after 210 months (17.5 years), having paid $3043. Sticking to minimum payments, there is still $40 left after 1000 months (83 years), by which time the person would have paid $5838. The credit card company would be delighted for them to keep paying forever. Just by paying off 10% of the balance each month, instead of 2%, the time taken to reduce the debt to $50 becomes 36 months (3 years), at a total cost of $1148.

Both borrowing and lending are activities that need to be undertaken with wisdom and restraint. Hopefully, that will be the message that governments and individuals draw from the world’s present economic woes.

Town and country: liberal and conservative

One feature of political geography seems to leap out whenever I look at a map of election results: the more closely together people live, the more liberal they tend to be. Big cities vote Liberal or NDP in Canada, Democratic in the United States. By contrast, small towns and rural areas tend to be more conservative. Two hypotheses occur to me immediately:

  1. Liberal people choose to live in cities.
  2. Living in cities encourages people to be liberal.

To some extent, I think both are plausible.

The first trend is self-reinforcing. Because cities are mostly full of liberals, they attract liberals from conservative areas. Just think of the stereotype of the young gay person who moves to the big city to find a more tolerant community. While it is a stereotype, it does have the ring of truth to it. Similarly, one might expect clustering even within urban areas: with some predominantly liberal areas continuing to attract new liberals, while other relatively conservative areas do likewise.

The second hypothesis is more interesting. I can think of a few reasons for which it might be true. Mostly, they have to do with being exposed to large numbers of other people. Spending time in the company of people of differing races, classes, sexual orientations, and so forth may well reduce your chances of fearing them. I think it is likely that working with and befriending people with cultures and experiences different from your own is generally likely to make you more empathetic, tolerant, and socially progressive. It may also be the case that people in cities tend to get exposed to new ideas more rapidly and often, putting them ahead of the curve in terms of incorporating them into their own philosophies and lives.

At the same time, just spending time in close proximity to a lot of people reinforces the fact that we are all dependent upon one another, and we cannot live our lives in ways that do not affect those around us. In short, people in cities are constantly exposed to economic externalities: both in the positive form, as with public transit, and in the negative form, as with noisy neighbours or automobile exhaust.

Those in sparsely populated regions may be better able to sustain the myth of self-sufficiency, despite how virtually all rural lifestyles in rich states are just as mutually interdependent as urban lifestyles. Arguably, the lack of contact with both different forms of people and with large numbers of densely-packed people contributes to important elements of political conservatism. I realize that two of the underlying arguments above are likely to bother conservative people: essentially, that social conservatism is the product of isolation and fear and that self-reliance is largely a myth. Feel free to debate those positions, as well as the general question of why people of different political inclinations cluster the way they do.

The oil sands in the Obama era

With the election of Barack Obama, Canadian politicians seem to be taking the initiative in raising the issue of future climate change policy in North America. The situation is a complicated one, particularly given tensions between climate change mitigation objectives and aspirations for energy security. A further complication arises because of overlapping jurisdictions. US states, Canadian provinces, and regional initiatives are all working on climate change mitigation. To some extent, this federal government-to-government bid seems designed to supplant that. Foreign Affairs Minister Lawrence Cannon has expressed the hope that a Canada-US deal could “provide uniformity and supplant the patchwork of plans that are being implemented in various states and provinces.” While uniformly good policies would certainly be a step forward, there is the distinct danger that more innovative and committed jurisdictions will be forced down towards mediocrity, and that time will be wasted as reorganization occurs.

In the end, the oil sands are both a huge financial temptation and a hugely sensitive regional issue. How they end up being treated will have a lot to do with the extent to which national governments are willing to consider overall societal welfare, as opposed to the more volatile interests of specific groups, as well as the degree to which either government is willing to bear political risks in order to achieve their existing mitigation targets. I don’t think it can be realistically argued that current oil sands policy is anything other than selfish and reckless. That is on account of both the near-term ecological damage arising from oil sands extraction and refining, as well as the long-term climatic threats associated with using such dirty fuels.

One element of the Globe and Mail reporting is rather misleading. It says that “the oil sands are comparable to conventional sources of oil, if the companies implement so-called carbon-capture-and-storage technology.” It is a bit laughable to say that two things are comparable, provided an entirely untested technology is instantly deployed in a widespread fashion. Particularly given the falling price of oil, the possibility that oil sands extraction with carbon capture and storage has the potential to be a low-carbon and economically attractive source of energy seems very dubious.

The durability of Etymotic ER6i headphones

Recently, my second pair of Etymotic ER6i headphones failed. Once again, it seems that a wire broke in the connector, causing sound to be cut off in one ear. The first time it happened, the headphones were still under their one-year warranty and Etymotic cheerfully replaced them. This time, it is a question of buying a third set or switching to another style or brand that seems likely to be more durable.

The headphones are excellent in terms of sound quality, but somewhat lacking in terms of toughness. In fairness, they only weigh a couple of grams and I did use them virtually every day, including sometimes while cycling. There were a fair number of cases when the wire got caught on something and yanked rather violently. The headphones are a pricy US$149.00 if you buy them directly from Etymotic, but a far more reasonable $80.48 on Amazon.com (of course, buying them from Amazon requires paying customs duties or the song-and-dance of having them sent to a US address and then shipped to Canada). $7 or so per month actually strikes me as a tolerable price for excellent headphones, though I rather dislike the notion of treating them like a disposable commodity. I would be willing to spend more money on headphones that are more likely to last, or those with a three-year rather than a one-year warranty.

The competition in terms of high quality earbuds seems to be the Shure E2C or SE110s. Does anyone have experience with those, or recommendations for other brands to consider?

[Update: 27 December 2008] I am now on to my third pair of ER6i headphones. In the end, they sound great, but cannot be expected to be durable. My advice to potential buyers is this: expect them to last for between one or two years. If that length of high quality, highly portable sound is worth their price to you, go ahead and buy them.

[Update: 23 June 2010] That third pair of ERis suffered the same fate as those before – a wire failed, causing them to cut out in one ear. Despite having had them since December 2008, I called Etymotic and they told me to send them in. Much to my pleasure, Etymotic then replaced them, despite the warranty being over. As such, I now have my fourth pair of ER6is.

Hard Choices

Edited by Harold Coward and Andrew Weaver, Hard Choices: Climate Change in Canada is a mixed bag. The chapters vary considerably in their usefulness, as well as their contemporary relevance. Clearly, a lot has changed since the book was published in 2004. Topics covered include climatic science, projected impacts in Canada, carbon sinks, technology, economics, adaptation, legal issues, the Kyoto Protocol, and the ethics of climate change. Of those, the science section has probably held up best.

The most problematic chapters are those on technology and economics. The technology chapter criticizes renewables, boosts nuclear, and promotes the ‘hydrogen economy’ without a great deal of strong analysis or argumentation. For instance, it argues that the costs of nuclear power are almost fully internalized: a very strange position to take given the hundreds of millions of dollars worth of subsidies, loan guarantees, and liability restrictions granted to nuclear operators around the world. The chapter also singularly fails to address the many problems with hydrogen as a fuel. Finally, the assertion that crippling the world economy would be “as deadly as any climate change scenario” underscores the degree to which this volume fails in general to consider the real but unknown probability of a catastrophic outcome that threatens civilization itself.

The economics chapter basically asserts that since the Kyoto Protocol would cost money and not stop climate change in and of itself, we should simply focus on adaptation. It ignores both the fact that international action on problems like climate change (ozone, acid raid, etc) needs to be built up progressively, starting with instruments not capable of single-handedly addressing the problem. Having the international community jump instantly from no legal constraints on greenhouse gas emissions to a regime that controls all emissions in an effective way is asking far too much. The chapter also fails to take seriously the possibility of catastrophic outcomes from unchecked warming. Not all levels of change can be adapted to.

The chapter on ethics is very strange. After a brief secular portion focused on which entities are owed moral duties, it becomes a survey of world religions, arguing that each one sees selfishness as wrong. From this, it is concluded that Hinduism, Islam, Christianity, etc all yield an ethical obligation to fight climate change. A more practical and serious consideration of who owes what to who on account of climate change would have been a lot more useful. Even in terms of comparative religion, the chapter feels rather sloppy. Just because you can point to a few statements about selflessness in the doctrine of many different faiths does not mean they would all come to the same moral position on climate change. All kinds of real moral questions persist: from how much risk it is allowable to impose on future generations, to who should pay the costs of adapting to the additional warming already locked into the climatic system. The chapter fails to shed light on issues of this type.

In the end, I don’t think there is anything in Hard Choices that isn’t said in a better or more up-to-date way somewhere else. For those seeking to educate themselves on climate change, this book is not a good investment of time.