Tuesday, September 30, 2008

Sugar and Energy Independence

Energy independence is something we've covered, but a new NBER paper (w14362) takes a more detailed look at Brazil's success.
The recent world energy crisis raises serious questions about the extent to which the United States should increase domestic oil production and develop alternative sources of energy. We examine the energy developments in Brazil as an important experiment. Brazil has reduced its share of imported oil more than any other major economy in the world in the last 30 years, from 70 percent in the 1970s to only 10 percent today. Brazil has largely achieved this goal by: (1) increasing domestic oil production and (2) developing one of the world's largest and most competitive sources of renewable energy -- sugarcane ethanol -- that now accounts for 50 percent of Brazil's total gasoline consumption. A counterfactual analysis of economic growth in Brazil from 1980-2008 suggests that GDP is almost 35 percent higher today because of increased domestic oil production and the development of sugarcane ethanol. We also find a notable reduction in business-cycle volatility as a result of Brazil's progression to a more diversified energy program. Nearly three-fourths of the welfare benefits have come from domestic oil drilling, however, as rents have been paid to domestic factors of production during a time of rising oil prices. We discuss the potential implications of Brazil's energy program for the U.S. economy by conducting historical counterfactual exercises on U.S. real GDP growth since the 1970s.
Suffice it to say we cannot really follow either of Brazil's policies. Increasing US production simply isn't good enough and sugar is a nonstarter (See the graph below; I used raw sugar rather than sugarcane, but the point holds.) Ethanol has by any measure been a heavily subsidized failure and we just do not have many good alternatives, save new technology. Perhaps I should have alluded to the forthcoming Chevy Volt in the title of this post.

Update: Tim Kane now has a post on this paper over at Growthology.

Monday, September 29, 2008

Innovation Vs. Poverty

That's the title of a short article in Forbes by Clayton Christensen. Unfortunately it is not yet online, but here is a link with a bit of info about the piece. Here's a snippet anyway:
Entrepreneurship is part of daily life in emerging economies, because often there is little other option. The poor understand that commerce - selling homemade crafts or running a small shop - is the way to improve income levels.
The article then discusses some of the problems with creating disruptive growth companies in emerging markets and how to tackle those problems. Too bad the article is not online since it was interesting.

Wednesday, September 24, 2008

Discussions on the Bailout Plan

George Mason's Russell Roberts discussed the bailout with University of Wisconsin Prof Menzie Chinn on Minnesotta's Public Radio station yesterday (MPR). Here's Roberts on the role Fannie and Freddie played in our current crisis.

Monday, September 22, 2008

Academia 2.0

The Economist has an interesting article about blogging, web 2.0 tools, and peer review.
Earlier this month Seed Media Group, a firm based in New York, launched the latest version of Research Blogging, a website which acts as a hub for scientists to discuss peer-reviewed science. Such discussions, the internet-era equivalent of the journal club, have hitherto been strewn across the web, making them hard to find, navigate and follow. The new portal provides users with tools to label blog posts about particular pieces of research, which are then aggregated, indexed and made available online.


With the technology in place, scientists face a chicken-and-egg conundrum. In order that blogging can become a respected academic medium it needs to be recognised by the upper echelons of the scientific establishment. But leading scientists are unlikely to take it up until it achieves respectability. Efforts are under way to change this. Nature Network, an online science community linked to Nature, a long-established science journal, has announced a competition to encourage blogging among tenured staff. The winner will be whoever gets the most senior faculty member to blog. Their musings will be published in the Open Laboratory, a printed compilation of the best science writing on blogs. As an added incentive, both blogger and persuader will get to visit the Science Foo camp, an annual boffins’ jamboree in Mountain View, California.
The conversation about blogging among tenured staff in the last paragraph is interesting. Another way of saying tenured is simply to say "older" faculty. There are some great examples of old guys blogging, but sadly these great minds don't have much company.

Not surprisingly, Technorati's State of the Blogosphere 2008 found that half of bloggers are between the ages of 18-34. Only 23% are above the ripe old age of 45. From my own perspective, I think there's a lot to be gained by getting senior staff to blog, and it's one reason I was so excited to work with Phil (to be fair, Phil's not that old, and I'm not that young.)

Anyway, back to the article. I was particularly impressed by the novel incentives the Nature Network is using to overcome the coordination problem that is keeping senior staff from blogging. Among public policy fields I notice that there are a ton of economist-bloggers but much fewer political science bloggers. Perhaps we can learn from our sister disciplines and find unique ways to bring in more respected minds?

Sunday, September 21, 2008

Innovation Policy for the 21st Century

Robert D. Atkinson and David Audretsch, in a recent paper, write (pdf):
Innovation policy has gotten short shrift in the U.S. political dialogue largely because the three dominant economic policy models – conservative neoclassical, liberal neoclassical and neo-Keynesian economic doctrines– advocated by most economic advisors, and implicitly held by most Washington policymakers, ignore the role of innovation and technology in achieving economic growth in the global, knowledge-based economy of the 21st century. Unfortunately, while the U.S. economy has been transformed by the forces of technology, globalization, and entrepreneurship, the doctrines guiding economic policymakers have not kept pace and continue to be informed by 20th century conceptualizations, models, and theories.

Economic Advisers on the Entrepreneurial Economy

A discussion with Douglas Holtz-Eakin, who knows something about entrepreneurship. Unfortunately Jason Furman could not make it and Kauffman could not get a substitute. Holtz-Eakin does his best to cover both views, just skip ahead to 20 minutes into the video for a funny example. One point I found interesting is that each candidate has mentioned entrepreneurship once, although they talk all the time about small business policy. Holtz-Eakin clarified by explaining that entrepreneurship contains too many syllables for a decent soundbite (HT).

Friday, September 19, 2008


Phil has commented on the fallacy of pursuing energy independence in several posts so I thought I might take a quick look at the relationship between ethanol and corn. Below is a graph of ethanol and corn futures prices.

From August 2007 to August 2008, corn prices increased over 66% to 549 cents per bushel from 330 cents. Prices of both ethanol and corn have moderated recently, but it's clear that corn has been a big driver in rising food costs. At least some of this has to be due to ethanol. I am not suggesting causation, but the next graph makes clear that corn is increasingly being used to produce ethanol.

This graph blew me away when I first saw it. More than 30% of all corn is now being used for ethanol production, which is way up from just a few years ago. The Economic Research Service (ERS) of the Department of Agriculture estimates this figure to increase even more in coming years. Normally we might say that this is perfectly fine and that a good should be put to its highest use. However, ethanol is heavily subsidized as well as being mandated in some places as a replacement to MTBE. Thus, the opportunity cost of using corn for ethanol is higher.

Economists generally have no problem with seeking out alternative energy sources, but using corn for ethanol fails most basic economic tests. For more on corn use see this short and informative article by the ERS (pdf). For the impacts of ethanol expansion see this report (pdf).

Wednesday, September 17, 2008

Flight to Safety

A truly amazing day. Yields for 1 month treasury bills dropped to 0.07% and for 3 month bills the yields fell even farther to 0.03%. Even compared to last week this is an amazing drop and it is even more stark compared to last year, let alone before all of the problems in financial markets. With rates this low the Treasury Department is simply agreeing to give you your money back, with virtually no interest. A bit better than putting the money under the bed, but not much.

Tuesday, September 16, 2008

The Light Shines on Experience and Energy Policy

Good news, despite today's headlines: There is reason in the world after all. At least, there is on the New York Times op-ed page. (OK, limited comfort. But at the moment, we should take what we can get.)

This week produced two exceptionally insightful columns.

The first is by David Brooks, titled "Why Experience Matters." His points parallel those I made in my trio of Palin posts, but does a better job of situating the debate in American political culture. Anyone on the panicked-by-Palin bandwagon (yes, that includes me) had better accept the fact that the arguments being made now in favor of experience and, particularly, standards, are ones that have traditionally been embraced by conservatives in this country. Remember Alan Bloom, and The Closing of the American Mind?

Well, I don't think (as Bloom did) that classical education is to be equated with "standards." But I am of the view that there are standards of inquiry that allow one to make assertions with greater and lesser degrees of confidence, and that understanding and respecting such standards is vital to the functioning of a democracy. The celebration of cultural diversity and the recognition that any question can be approach from multiple points of view becomes a dangerously degenerate epistemological proposition when it is taken to mean absolute egalitarianism in inquiry. If you have any doubt about this, please read with care the speech delivered a year ago at Columbia University by Iranian President Ahmadinejad: post-modern relativism placed into the service of holocaust deniers. Yes, standards of inquiry do exist for a reason.

The second exceptional column of the week is by Thomas Friedman, titled "Making America Stupid." I am not always in agreement with Friedman on energy policy. In particular, I get quite aggravated by his lack of clarity on the function of prices. One day high prices are bad because they result in our sending more of our money to unfriendly regimes--in the limit, "funding both sides on the war on terror." The next day high prices are essential because they induce investment in alternatives. From the standpoint of policy, the only way to have it both ways is for the government to commit to a floor on gas (or, more broadly, energy prices) and use the proceeds from the implied tax to direct the U.S. innovation capability around energy technology. Well, that is pretty much the line of argument Friedman is advancing now. This column is a must-read. The McCain camp may or may not be listening, but I certainly hope the Obama camp is paying close attention. Forget the empty rhetoric about ending imports of oil from the Middle East. Focus on what really matters: Making sure that the United States is in the lead in energy innovation, which is sure to develop into one of the two or three core industries of the 21st century.

Monday, September 15, 2008


Lehman Brothers is as venerable an institution as America has ever had. The company was founded in 1850 by a Bavarian immigrant and his brothers. Before trading in fancy derivatives it was originally a dry-goods store. The family firm successfully weathered the Great Depression and many other down periods but could not escape our latest financial crisis. Today the firm, now a publicly traded company, formally acknowledged it would file for bankruptcy. Perhaps no other country has so embraced Schumpeter's creative destruction, but even here it can be hard to accept at major turning points like this.

We are used to seeing companies rise and fall and few tears were shed when Internet startups suddenly went bust in 2000. But there is something different about watching a once mighty institution like Lehman fall. In this environment it is easy to let doubt creep into our thoughts. And the problems we face in our financial markets are but one of many and they are perhaps not even the most challenging. Our infrastructure is crumbling and our bridges are literally falling down. We face deficits in the short term and a massive national debt. Perhaps most depressing of all, approval ratings of Congress are so low that even our current president looks popular by comparison.

Facing a recession, high food and energy prices, and wages that are not keeping up with inflation, it is natural to be pessimistic. But pessimism isn't really our style. We are, if nothing else, a resilient nation. Recent events brought to mind a thought provoking article in Foreign Affairs by Stephen Flynn, entitled America the Resilient (link):

Resilience has historically been one of the United States' great national strengths. It was the quality that helped tame a raw continent and then allowed the country to cope with the extraordinary challenges that occasionally placed the American experiment in peril. From the early settlements in Virginia and Massachusetts to the westward expansion, Americans willingly ventured into the wild to build better lives. During the epic struggles of the American Revolution, the American Civil War, and the two world wars; occasional economic downturns and the Great Depression; and the periodic scourges of earthquakes, epidemics, floods, and hurricanes, Americans have drawn strength from adversity. Each generation bequeathed to the next a sense of confidence and optimism about the future.

But this reservoir of self-sufficiency is being depleted. The United States is becoming a brittle nation.
The article is ultimately optimistic, but sadly our problems won't be solved by just buying lottery tickets (oddly enough I didn't win in last Saturday's drawing.) The author's focus is on security and terrorism, but his policy proposals extend into all areas of policy.

We've now experienced the destructive part of capitalism and while the creative part currently seems elusive, our economy will recover. The fate of Lehman Brothers is unclear, and Merril Lynch, another giant is now gone, but this consolidation will spawn new opportunities and new ventures. But before we get caught up in new dreams we should pause to consider what's happened recently and how we can reform our institutions to better deal with our modern world.

President Palin Pt. 3: "You have to ask yourself one question: 'Do I feel lucky?'"

As entertainment, Sarah Palin's speech at the Republican National Convention was brilliant. Her interviews are a bit lacking, but the speechifying is first rate. If I had half that talent onstage I'd quit economics and try my luck as an off-broadway drag queen performing my very own musical adaptation of "It Can't Happen Here" set in Anchorage to music by Amy Grant and Frank Sinatra.

As one Republican National Committee attendee said of Sarah Palin on the Daily Show: "She makes Americans feel like anyone can be president." Yes indeed, she certainly does that.

Well, dreams do sell. The vicarious pleasure of seeing nobodies become celebrities has made "American Idol" the most watched television program in this country for the past 4 years in a row. Could it propel a McCain-Palin ticket to the White House?...

And if a Palin celebrity bubble is enough to bring about a Republican Presidential win in November (what else would? Senator McCain's natural charisma?), what is the likelihood of an ensuing Palin Presidency? Historically, of 46 U. S. Vice Presidents to date, fourteen have become President. Five were elected in their own right; four inherited the office through the natural death of the incumbent, four following an assassination, and one by resignation. That comes out to a 30% chance of a Palin Presidency--not controlling for such factors as age or physical health of the President upon assuming office.

The McCain candidacy has thus degenerated into a dare. In the immortal words of Clint Eastwood, here posed to the American public by the designers of the McCain-Palin ticket (whoever they might be, since McCain apparently wanted Lieberman): "You've got to ask yourself one question, 'Do I feel lucky?' Well, do ya, punk?"

What will be the response of the American public to this dare? In these challenging economic times, with no end in sight to a war of historic duration and century-old financial institutions crumbling before our eyes, will people become more cautious?

A report in Saturday's New York Times on the sales of lottery tickets provides some indication. It turns out that, as the economy slows, lottery ticket sales have accelerated to record-breaking levels. "With companies tightening and not giving cost-of-living increases, you have to try to make money elsewhere," one lottery ticket purchaser is quoted as saying.

Such belief in the ability of an individual to overcome the odds and succeed when the deck is stacked against them is the stuff that dreams are made of. Well, actually, nightmares in this particular case, if you deepen your poverty by sinking your money into an activity that my callous fellow-economists sometimes refer to as "a tax on the stupid."

The thing is, there is no reason whatsoever to conclude that lottery ticket buyers are "stupid" simply because lose systematically. The lottery customer mentioned above actually admits to the New York Times an awareness that her logic "might be convoluted." Well, from a statistical standpoint, it is convoluted. Her logic is, in fact, mistaken. But the ticket may be worth buying in the short term because it makes her fell better. So she's not stupid. She just wants to feel better. In that, she has plenty of company. And if a lottery ticket, which costs money, is worth the expense for the temporary thrill it gives, why not a vote in November for Sarah Palin and her running mate?

Indeed, why not!? Let other people be reasonable. I'm for the underdog. Let other people clean up wars and financial collapses. I'm for the beauty queen. Let all the losers and cry-babies moan about the need to invest to repair crumbling infrastructure and sustain leadership in science and technology. I'm going to celebrate. I'm going to drill holes and pump oil--American oil. I'm going to spend. And I'm going to party--not tomorrow, but right now!

Wanna know why?

Because I feel lucky.

Sunday, September 14, 2008

President Palin, Pt 2: Why Volvos?

Since this is the age of confessional biography, here's mine.

I was born and raised in Washington, DC. (No, not the Maryland or Virginia suburbs, but the actual District of Columbia.) My father worked for the government; my mother taught philosophy at at French school. My parents owned a Volvo. I went to Sidwell Friends (yes, that's Chelsea Clinton's alma mater) for junior high and high school, and then to Yale. My sister went to Harvard. After getting a PhD in economics I was for a time a lecturer at Harvard's Kennedy School. While I was there my wife and I owned a Volvo. Now I'm on the payroll of the Commonwealth of Virginia, teaching at a School of Public Policy. I live, again in Washington, DC. My sister is a doctor and lives in San Francisco.

So, any surprise that I'm not a fan of Governor Sarah Palin of Alaska?

Do pigs wear lipstick?

Oh, maybe I got that one wrong. Too much book learning, I guess. (I did spend a summer in 1984 working on fishing boats in Alaska. I wonder, does that qualify me to be Mayor of Wasilla?)

I digress. This post is really about Volvos.

Now my parents owned a Volvo. My wife and I owned a Volvo. Therefore, the political culture of the day indicates that I am a "liberal". That is because, as everyone knows, "liberals" drive Volvos.

Let's leave aside what "liberal" and "conservative" mean for the time being. In another post I'll argue that both terms are meaningless and that there are only three categories of successful politician: The rational, the inciting, and the corrupt.

For now, let's focus on the Volvo. What is the Volvo's defining characteristic? Is it that it is exciting? No that's the Porsche. Is it imposing? No, that's the Bentley. Is it patriotic? No. Just, no.

There is one defining characteristic of the Volvo: It is safe. The cars my parents and I owned were Volvo 240 series. A very safe car. At the time I traded in our 240 six years ago, do you know how many fatalitites on American roads had involved that model of vehicle: zero. None.

Such remarkable safety performance does raise a question: Is it the cars that are safe, or the drivers? Sure, the Volvo 240 was well built car. But maybe it was the drivers, as much as the vehicles, who contributed to the vehicle's outstanding record of safety. Maybe the car selected for owners who were unlikely to take risks.

Risks like driving drunk on the Beltway.

Risks like leaning out the window to shoot at stop signs.

Risks like voting for George W. Bush.

And what, pray tell was risky about George W. Bush? Let us hope that the punch line here is that voting for George Bush was risky just because, unlike the author of this blog post, George W. didn't have the benefit of a Yale education. That unlike the unrepentant Washington elitist before you, W. wasn't privy to the corrupt and sordid world inside the Beltway.

Oh, sorry. Lost myself again. Forgot that W. did go to Yale. Forgot that W. was the son of a President of the United States.

So, what made W. risky, if he had the fancy degree and the blue-blood connections? And what, ulitimately, made W. a failure?

What made W. risky, and what has made him a failure, is his absolute convinction. Convinction without reflection. Conviction without reason. Conviction without question. Conviction without blinking. Conviction without thinking.

The charicature of a bio that my parents sacrificed greatly to allow me to develop has provided me with enough exposure to educational elites and political elites to know neither has much to do with intellectual elites.

In my own, personal view, fitnees to govern is not a function of impressive brand names on a resume. It is not a function of political experience or connections.

It is a function of thoughtfulness. It is a function of openness to other viewpoints. It is a function, above all, of humility.

And if you're wondering what this all has to do with potential President Palin, here's the answer:

GIBSON: Governor, let me start by asking you a question that I asked John McCain about you, and it is really the central question. Can you look the country in the eye and say "I have the experience and I have the ability to be not just vice president, but perhaps president of
the United States of America?"

PALIN: I do, Charlie, and on January 20, when John McCain and I are sworn in, if we are so privileged to be elected to serve this country, will be ready. I'm ready.

GIBSON: And you didn't say to yourself, "Am I experienced enough? Am I ready? Do I know enough about international affairs? Do I -- will I feel comfortable enough on the national stage to do this?"

PALIN: I didn't hesitate, no.

GIBSON: Didn't that take some hubris?

PALIN: I -- I answered him yes because I have the confidence in that readiness and knowing that you can't blink, you have to be wired in a way of being so committed to the mission, the mission that we're on, reform of this country and victory in the war, you can't blink. So I didn't blink then even when asked to run as his running mate.

(Full text here.)

A friend of mine writes to me. "I think the Dems are making a mistake by focusing so much attention on Palin. No matter how horrible a pick she may turn out to be, this election should be focused on Obama vs. McCain... In the end, Palin is going to be only a footnote."

I hope he's right. I'm not so sure.

(By the way, I traded in the Volvo for a Mercedes. More on that in another future post.)

Saturday, September 13, 2008

President Palin, Pt 1: "The Revolt of the Masses"

Until watching Governor Sarah Palin's speech at the Republican National Convention, I always felt the need to apologize for the title of one of my favorite books. The book is by the Spanish philosopher and contemporary of Schumpeter's, José Ortega y Gasset. It was published in 1930 in Spain with the title "La Rebelion de las Masas." For those whose high school Spanish is a bit rusty, that's "The Revolt of the Masses."

Now, if you haven't read this book, the title makes it sound hopelessly outdated--either embarrassingly revolutionary or alarmingly reactionary. In fact, I think it is just about the most incisive analysis around of the state of our political world today, up to and including the presidential campaign of 2008.

What was this "revolt" to which Ortega y Gasset was referring? The revolt of the masses was not a political revolt, or an economic one. It was the revolt of barbarism over culture.

Ok, barbarism? At least a 50% chance you've stopped reading. If not, here's more of what Ortega y Gasset had in mind:
"Under the the species of Syndacalism [a.k.a. Communism] and Fascism there appears for the first time in Europe a type of man who does not want to give reasons or to be right, but simply shows himself resolved to impose his opinions."
The conditions for barbarism he gives as follows:
"There is no culture where there are no standards to which our fellow men can have recourse. There is not culture where there are no principles of legality to which to appeal. There is no culture where there is no acceptance of certain final intellectual positions to which a dispute may be referred... When all these things are lacking there is no culture; there is in the strictest sense of the word, barbarism... Barbarism is the absence of standards to which appeal can be made."
One last bit, relevant to Governor Palin:
"To have an idea means believing one is in possession of the reasons for having it, and consequently means there is such a thing as reason, a world of intelligible truths. To have ideas, to form opinions, is identical with appealing to such authority, submitting oneself to it, accepting its code and decisions, and therefore believing that the highest form of intercommunication is the dialogue in which the reason for our ideas is discussed."
To assert the existence, and necessity, of standards of discourse to which ideas must be subject is a line of argument that is likely to be least as unpopular with campus deconstructionalists as it is with Alaska fundamentalists. Ortega was not, in a manner of speaking, seeking the good opinion of either. He was, quite simply, describing the world as he saw it. It was a world that, as early as 1930, was making way for an array of demagogues whose primary claim to power was their ability to mobilize collective indignation. We know who such demagogues turned out to be in Europe of the 1930s and 1940s. This country had the likes of Huey Long and, later, Joseph McCarthy.

All in the past? Can we think of a failed President of the moment who scorns inquiry, refuses to submit to standards of legality or discourse, and seeks legitimacy to rule in incitement of fear and insult to intellect?

And now, the next step in the devolution of democracy: Governor Sarah Palin. In the renaissance René Descartes reduced the scope of certainty to the phrase "I think, therefore I am." From there, inquiry began. As Ortega y Gasset anticipated, the reaction to the complexities of modernity has been a rejection of inquiry, and a reversion to the raw unfettered power of pronouncement. The motto for the new age: "I think therefore I know."

Or, in the case of the possible President Palin, "I think, therefore I am ready to be President of the United States."

Wednesday, September 10, 2008

Doing Business

The 2009 World Bank Doing Business indicators were released today. They are available here. Here is a bibliography of studies that use these data. (HT) I'll write lots more about these data, but I like this bit from the PSD blog:
Six months after Egypt reformed its property registry, title registration increased and revenue rose by nearly 40%.
People respond to incentives and it is nice to see that some countries are reducing and modernizing their regulatory requirements.

Friday, September 5, 2008

China's Fall

Following up on Phil's great post below, this quote from Nicholas Kristoff caught my eye a few weeks ago: “China’s per-capita income was actually lower, adjusted for inflation, in the 1950s than it had been at the end of the Song Dynasty in the 1270s.” (NYT). The rest of the article eloquently lays out the case that we need not fear China’s rise.

Wednesday, September 3, 2008

Entrepreneurship in the Classroom

Peter G. Klein, a professor at the University of Missouri and blogger at Organizations and Markets (recommended) posted his syllabus for a PhD seminar on entrepreneurship. It is an interesting mix of classics and newer readings. So you get current work from Zoltan Acs and Scott Shane and true classics, like the underrated work of Richard Cantillon. Perhaps it is trying to cover too much though? Entrepreneurship should really be treated as its own field, like industrial organization, and covered in two semesters over the year. Luckily for us, that is how it is treated at Mason (PUBP 834, 835.)

Declaring Independence from Oil Fears

Here are two facts I have difficulty keeping in my head at the same time:
(1) Barack Obama is advised on energy policy by some of the ablest minds in that business; and
(2) In accepting the Democratic nomination as candidate for President last week, Barack Obama actually uttered (or more accurately, exclaimed) the words : "And for the sake of our economy, our security, and the future of our planet, I will set a clear goal as President: in ten years, we will finally end our dependence on oil from the Middle East."

As I have previously tried to argue here, here, here, and here, there is possibly no more empty notion in American political discourse than the goal of "ending dependence" on Middle East oil. Over the past 3o years the share of imports has dramatically increased in virtually every sector of the U.S. economy--from clothing to computers to cantaloupe. The process is called globalization. It is not going away. Oil exporters in the Middle East are far more dependent revenue from us than we are on oil from them. The top two suppliers of oil to the United States are (know the answer?), not Saudi Arabia and Iran, but Canada and Mexico. And on and on. For more, see the above links, as well as a great book by Robert Bryce.

But the idea of enhancing national security and boosting the future prospects of the planet by ending dependence on oil from the Middle East isn't just analytically empty (and it is analytically empty.) It is also terrible politics.

OK, I'm an economist. What do I know about politics? Maybe not much. But there is no way to deliver on this empty promise. There is no way to even talk sensibly about delivering on such a promise. (How is the accounting going to work? Will there be enforcement mechanisms? What about oil futures?...) What is worse, much worse, is that even uttering this empty phrase provides credence to some of the most deeply ingrained and dangerous tendencies in U.S. politics--which also happen some of the most deeply ingrained and dangerous tendencies in politics elsewhere in the world: namely, the tendencies for politicians to pander to (or simply appropriate) rent-generating industries involved in resource extraction. (For attempts to address this governance "curse" endemic to resource-rich countries, see this and this).

For shorthand in the U.S., let's just say that making the Middle East directed variant of "energy independence" a goal plays right into the hands of the already-powerful-enough oil and coal lobbies. "Energy independence" is the preferred slogan used in support of the three least palatable items on this country's energy policy menu: drilling our way to a better future; turning coal into oil; and running the cars of tomorrow on corn juice. (You might know these three policies by their other names, "giving assets in the public trust away to the most profitable companies on earth without changing much of anything else that matters," "going in the wrong direction on climate change while subsidizing environmental devastation," and "distorting world food markets so that the members of the human family who have the least are burdened the most." )

As for our presumptive nominee on the Republican side, indications of serious thought on energy policy are pretty much non-existent. One has a difficult time determining which of the energy policy proposals most recently advanced by Senator McCain is more absolutely pathetic and misguided: the "drill now" refrain of the last couple of months or the abortive "gas tax holiday" proposal from the start of the summer. When reason is absent, what reason is there to criticize?

(An uplifting postscript: I can barely contain my amusement at the marketing of Sarah Palin as a bold reformer who took on established interests in Alaska. In having taken on big oil to ensure that the people of Alaska would get their just share of revenues from resources extracted from her great state she resembles no one more that than that other GOP hero, Hugo Chavez! As we watch the presumptive Republican Vice Presidential nominee tout her reformer's credentials tonight, should we be laughing, crying, or waving Venezuelan flags and chanting "viva la Revolution"?)

Tuesday, September 2, 2008

China's Comeback

During the first week of the Beijing Olympics an op-ed of mine regarding China's 21st century resurgence was published in the Boston Globe, International Herald Tribune, and Straits Times (Singapore) . I was on vacation by then. When I got back, I found in my inbox a skeptical response from a reader to my claim that the Opium Wars set into motion China's decline:
"Most historians are of the opinion that China started to go downhill when admiral Cheng Ho disappeared into obscurity and with the death of emperor Yongle in 1424, Ming vitality ended. It became a capital offense to build a seagoing junk with more than 2 masts.The last of the Ming emperors were to quote a learned Chinese scholar flaccid incompetents. So they guaranteed the isolation of the Middle Kingdom, Peking was physically and mentally landlocked."

Interesting observations. I'll leave aside the bit about Ming emperors being flaccid incompetents (a bit ironic in the context of this comment since the lionized admiral Cheng Ho was a eunuch.) But the notion that Ming emperors may have been innovators in misguided regulations with disastrous and unintended consequences is an interesting one.

(The same reader also questions the claim in the op-ed that China comprised 30%+ of world economic output as late as 1830. The source for that claim is Angus Maddison's seminal study for the OECD of the world economy during the last millennium. A fascinating read.)

A really interesting follow-up line of inquiry goes as follows: "So what if China accounted for about a third of world GDP for the last century. They also accounted for more or less a third of world population. But in the networked, winner-take-all economy of the 21st century, population is not ultimately going to be the determinant of economic performance."

Along these lines, endogenous growth theorists spent the second half of the 1990s trying to adjust the dominant lines of theory so they wouldn't suggest that bigger economies would grow faster. (See update on this debate here.) Now, of course, the rate of growth of GDP is not the same as its level. But the endogenous growth debates of the end of the last century point to an interesting question for the start of this one: Will the 2100 "steady state" for China's share of the world economy be
(1) back at its historical level of ~30% (up from a bit more than 5% today);
(2) down to the 1% that it was in 1979 (better get good odds on that one); or
(3) closer to today's level than to the historical norm for the last millennium?

Assuming no bans on seagoing junks with more than 2 masts or their modern equivalent (big assumption), I'd go with (1).