Category: Economics

Matters of money

True North American free trade

Amazon.com is superior to Amazon.ca in several ways. Firstly, it has a much broader selection. Secondly, it has some special features, like the Amazon Prime subscription that gives you unlimited shipping for $79 a year. The process of ordering things from Amazon.com, having them sent to places in the US, and then having them relayed to me has left me wondering what the effect of a true North American Free Trade Agreement would be.

In the simplest form, it would work like this:

  • Anyone in Canada, the United States, and Mexico can purchase anything sold by any company in any of the three countries.
  • The item can be shipped directly to them, and they will not be charged any customs fees, duties, or other border-related charges.
  • Some simple system is sorted out for sales taxes. It could be (a) you pay the tax of your local jurisdiction, which may send part of the revenue to the sending jurisdiction (b) you pay the tax of the sending jurisdiction or (c) you don’t pay sales tax.

Such an arrangement would obviously be beneficial for consumers. They would be able to buy from whatever physical or web-based store offered them the best arrangement. It’s less clear what the effect on businesses would be. Those that benefit from having consumers who are more likely to buy from a firm in their own country would get hurt, at least temporarily. Those that would be more attractive to outside consumers in the absence of duty fees would likewise benefit in the near-term. In the near term, this alternative approach should produce net economic benefits. While some actors would lose the benefits of a captive market (like drink sellers at concerts), the larger market would be more efficient overall.

In the longer term, there would be effects on firm consolidation, tax revenues, currency values, and macroeconomic conditions. Both from the perspective of what would benefit readers personally and from the perspective of what would be best for society overall, would readers prefer (a) for the current system to continue (b) having the current system replaced with one akin to the one above or (c) getting rid of North American free trade entirely?

Buying, but not using, carbon credits

One attractive element of a cap-and-trade system for reducing greenhouse gas emissions is that it would permit entities other than firms to buy credits, which they could then choose not to actually use. For example, a cap-and-trade system might mandate that emissions in 2020 return to 1990 levels and require that all credits be auctioned, rather than issued for free to past polluters. In Canada, that would mean selling 596 million tonnes worth of emission permits.

Firms wishing to emit greenhouse gasses would then need to buy permits for whatever quantity they choose to emit. Given the cap on the total number of permits to be sold, the price of permits will rise to the point where a sufficient number of emissions are cut. Because of the economic incentive produced to cut out whichever emissions within the economy would be cheapest to eliminate, the overall cost of compliance is minimized.

If, however, groups exist that feel that cuts deeper than 1990 levels by 2020 are required, they could buy permits on the same market. In so doing, they would reduce the supply available and increase the price of those remaining. This would induce firms to eliminate emissions where the cost per tonne is between what the price of permits would be without this independent action and what the price has become along with it.

Conservatism and science

One of the most regrettable things about contemporary conservatism – aside from forgetting Edmund Burke’s notion of humanity as stewards of the natural world – is the unwillingness to acknowledge basic scientific realities. Sometimes, this is because of ideological conflicts; acknowledging the immense danger posed by climate change basically means admitting that government regulation is required. Sometimes, it is because of religious beliefs at odds with the basic knowledge we now have about the universe. It is simply embarrassing that there are still people in developed countries who do not understand evolution, or who believe the Earth to be a few thousand years old.

Also regrettably, it seems that the recent surprise Republican vice presidential choice Sarah Palin is among those who profess doubt about the existence of biological evolution. She is of the ‘teach the controversy’ school of thought, in which schoolchildren should supposedly be presented with multiple theories and charged with choosing for themselves. Thankfully, this approach provides rich opportunities for satire. One site sells ‘Teach the Controversy’ shirts showing Atlantis, the devil burying dinosaur bones, aliens building the Egyptian pyramids, and so forth. Most famously, the whole Flying Spaghetti Monster phenomenon began as a mocking response to this approach:

I think we can all agree that it is important for students to hear multiple viewpoints so they can choose for themselves the theory that makes the most sense to them. I am concerned, however, that students will only hear one theory of Intelligent Design.

Let us remember that there are multiple theories of Intelligent Design. I and many others around the world are of the strong belief that the universe was created by a Flying Spaghetti Monster. It was He who created all that we see and all that we feel. We feel strongly that the overwhelming scientific evidence pointing towards evolutionary processes is nothing but a coincidence, put in place by Him.

Being tolerant of people with religious beliefs does not mean treating those beliefs with special deference, or refraining from mocking the more absurd ones among them. Indeed, it is only through the vigorous consideration of the relative merits and explanatory capabilities of different viewpoints that we can further refine our understanding of the world. The sad thing is that there are some people who never get a fair shot at it because those in power choose to give them a deeply inadequate initiation into the teaching of science.

Climate action withdrawn

The Government of British Columbia has suddenly decided to retract my Climate Action Dividend (discussed here before). Previously, they had decided to issue them to anyone who filed a provincial tax return in 2006 or 2007. Now, they are being retracted from everyone who was not a resident of BC as of December 31st, 2007. This strikes me as rather poor planning on their part. The administrative costs of re-collecting the money will form a deadweight loss, and the government will henceforth have less credibility when issuing credits of this kind.

I suppose I will need to pack up and return my compact fluorescent bulbs, returning the inefficient incandescent ones to the sockets, remove the weather stripping from my doors and windows, switch back to my old and inefficient hot water system, swap out my low-flow showerhead, partially deflate the tires on my vehicle, and rip out my new crawl space insulation… Actually, I probably directed the money towards paying down student loans.

This can be dubbed the “Oh, wait. You are probably not going to vote in the next BC election, are you?” retraction.

A supercomputer on every desk

One product of globalization and technological advance is the amplification of the ‘pygmy and giant’ phenomenon. On measures like wealth or fame, the world is probably more unequal than ever before. There are faces that would probably be recognized by a significant majority of those alive on Earth – probably a situation that has only existed for a few decades at most.

At the same time, technology is sometimes a great equalizer. For instance, the world wide web lets virtually anyone with literacy and moderate wealth speak to a worldwide audience. The range of capabilities is also narrowing in other areas. For example, Wal-Mart supposedly has about 583 terabytes of sales and inventory data stored at its headquarters. That sounds impressive until I remember the 1 terabyte drive sitting on my desk. It cost about three days worth of after-tax pay and serves the major purpose of protecting my data from the failure of the disk in my main computer. At a moderate personal expense, I have 0.17% of Wal-Mart’s storage capacity.

The amount of computing power you can get per dollar (or per watt of electricity), continues to increase dramatically. For the price of a sports car, you can build yourself a supercomputer. It is interesting to speculate upon what the democratization of computing power will lead to. Will it just mean increasingly realistic games and ever-more-bloated word processors, or will some genuinely game-changing applications emerge? The fact that someone can host a webpage like this for under $40 a year suggests the potential importance of this confluence in technology, economics, and innovation.

European Emission Trading Scheme primer

This document – produced by the World Wildlife Fund – provides a good concise overview of the Emissions Trading Scheme being used to reduce greenhouse gas emissions in the European Union.

In addition to outlining the basic design of the system, the document describes some of the errors of implementation that have occurred. The biggest of those were probably the over-allocation of permits and their free distribution, as opposed to auctioning. Together, these sharply reduced the effectiveness of the system during its first phase of operations. Hopefully, lessons learned during this period will help to make future emission trading schemes work more efficiently and equitably.

Barack Obama on oil imports

Compared with his 2004 performance, Barack Obama’s speech at the Democratic National Convention the day before last seemed a bit lackluster. That being said, it was a more specific about the priorities of a potential Obama administration. Energy issues were touched upon a few times – the environment hardly at all – but that is probably not surprising, given that winning the election is the over-riding priority for him now, and talk of effective climate change policies is (sadly) likely to lose more votes than it wins. The speech only mentions climate change once, as one of the “threats of the 21st century” along with “terrorism and nuclear proliferation, poverty and genocide, climate change and disease.” The lack of elaboration demonstrated both the degree to which this speech was aimed at a domestic audience primarily concerned with the state of the US economy and the desire to avoid the mention of polarizing specifics when enumerating challenges – a tactic that was also used in relation to a number of domestic social issues.

One line struck me as ambiguous and potentially problematic:

[F]or the sake of our economy, our security, and the future of our planet, I will set a clear goal as president: In 10 years, we will finally end our dependence on oil from the Middle East.

If this just means shifting American imports from Middle Eastern states to those elsewhere in the world, this won’t be much of a solution for either climate change or energy security. Let’s say the US buys all of its oil from outside the Middle East. Even so, the world price of oil will largely be set by developments there: particularly expectations about output in volatile areas, as well as confidence in the ability of Saudi Arabia to moderate oil price shocks through reserve capacity. Since the price of Alaskan or Albertan oil moves along with developments in Kuwait and Iran as much as oil
anywhere else, the source of the imports isn’t hugely important when it comes to price or security of supply. If the non-Middle Eastern producers selling to the US can get a better price in Europe or Japan, the oil will follow the money.

A more ambitious and effective plan would focus on ending dependence on oil altogether, regardless of source. That can begin in areas where oil can be easily replaced at present – such as powering urban vehicles – and can progressively move into areas where fewer alternatives now exist. The pledge in the speech to devote $150 billion to developing alternative energy sources hints at an appreciation of the importance of a renewable energy economy. Achieving that requires altering the mechanisms through which energy is generated, transmitted, and used – not just changing the flags on incoming supertankers.

Export industries, shipping, and the price of oil

The high price of oil and uncertainty about future supplies may have broad macroeconomic impact in the near future. One major area where that could prove true is in terms of where in the world manufacturing takes place. While shipping is generally a small fraction of total costs, the profit margins of some producers – especially in Asia – are small enough that further increases in shipping prices may eliminate their competitive advantage over producers closer to rich markets, such as those in Central America and Eastern Europe:

The cost of shipping a standard 40-foot container from Shanghai to America’s east coast, for example, has jumped from $3,000 in 2000 to about $8,000 today. The extra cost of transporting goods halfway around the world, Messrs Rubin and Tal wrote, is wiping out the often slim margins of Chinese exporters. What is more, if oil and shipping prices stay high, many Western companies that now outsource their manufacturing to China might decide that it makes more sense to shift production closer to their customers at home.

Of course, much will depend on near-term developments in energy prices. Continued economic malaise in Europe and North America could help to keep oil prices moderated (though it is hardly good for exporters, either). A return to a world where economic growth is strong in both developing and developed states, at the same time as hydrocarbon supplies are constrained, may well produce a partial reversal of the globalization trend. The same market forces that made low wages and economies of scale the dominant consideration for placing production may shift towards favouring reduction of energy and transport expenses instead.

Listeria and the food system

The ongoing listeriosis outbreak in Canada is evidence of how broken out primary food system is, particularly insofar as meat is concerned. Producing billions of clones in packed conditions is dangerous enough, particularly if you simultaneously marinate them in growth hormones and antibiotics. Marrying that with a food system where every step of the production chain is concealed from consumers increases the risk.

What is most astonishing to me is the result of a poll conducted by The Globe and Mail on their website. Asked: “Has the listeriosis outbreak damaged your opinion of Maple Leaf products?” 38% of respondents said “no.” Perhaps this demonstrates the degree to which we are not aware of the shortfalls of our food system and food regulation, to the point where we accept this kind of occurrence as an inevitable consequence of food production.

More people should read Michael Pollan’s The Omnivore’s Dilemma. A safer, healthier food system is entirely possible. It will not, however, emerge while people are still happy to accept a dozen Canadian deaths (and counting) as part of the cost of having “pre-packaged meat products” available for purchase.

Stories of this kind sometimes makes me wonder whether personal vegetarianism is actually a selfish choice. Opting out of the system can be seen as an inferior alternative to agitating for change. After all, it was basically consumer demand that produced the emergence of organic and local food options. It is only when a mass market demand exists for healthy, safe, natural, and sustainable meat and seafood that systemic change could become possible.

More on food, health, and the environment:

Emily also wrote a post on this previously.

Quick poll on future communications

Between now and the demise of the human race (when the universe ends, if not before), will there ever be a time when there is no system with the following characteristics:

  1. Capability to transmit data to most parts of the world with significant human populations.
  2. Affordability for almost anyone with a moderate income in a moderately rich state.
  3. Accessible by most members of relatively free societies.

Basically, it should allow someone in a major populated area of North America to communicate in real time with someone in Asia, as well as transmit data.

Personally, I think something akin to the internet will exist from now on. Even in a future with harshly constrained resources or radically shifted geopolitics, it seems like the kind of thing that is too valuable to give up, especially given the relatively modest costs associated with maintaining it.