Welcome to my blog!
This blog is primarily devoted to discussions on various aspects of public policy, chiefly economic, business, energy, and environmental policy. It also contains—and its archives are chock full of—photo essays and trip reports from various adventures in the out-of-doors of Montana and New Hampshire. For more information about me, click here.
Catherine Rampell, writing for The New York Time’s Economix blog on January 28, ably describes how the “Great Recession” will affect the employment situation for millions of Americans. Basically, many of the jobs lost will be lost for good:
Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions. …
Over all, the share of unemployed workers whose previous job has been permanently lost tends to rise during recessions, and the share of the unemployed who are just on temporary layoff falls.
This is shown in a Bureau of Labor Statistics chart (displayed in Rampell’s post), showing that most of the gains in unemployment over the past two years is not due to increases in temporary layoffs, which initially may thought to be the primary cause within a recession:
Source: Bureau of Labor Statistics and New York Times
This trend is much more pronounced in this recession than in past recessions. A recent Congresional Budget Office report states:
Third, the movement of unemployed workers into new jobs will probably be more difficult in this recovery than in past ones. Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, espe- cially those in declining industries and sectors. Thus, the share of unemployed workers whose previous job is per- manently lost tends to rise during recessions; the rise has been especially pronounced during the past two years. At the same time, workers on temporary layoff represent a smaller percentage of the unemployed than they did in past recessions.
As a result, gains in employment after this recession will probably rely more than usual on the creation of new jobs, possibly in new firms that are located in different places and require workers with different skills than those needed in the jobs that have disappeared. For workers who have lost jobs because of a permanent layoff, the pro- cess of acquiring new skills can take time. (In contrast, it is easier for workers who have been laid off temporarily to return to their jobs because the employers already know the workers and the workers already have the right skills and are familiar with the work practices at the job.) For workers who need to move to different geographic regions to find new jobs, the sharp declines in home prices during this recession, combined with the high loan-to-value ratios on many mortgages before the down- turn, will hinder relocation. With a significant share of homeowners now owing more on their mortgages than their homes are worth, many people may not be able to sell their house for enough money to enable them to buy one in a new area.
What should we make out of all of this? If we look to the past, it is obvious that we have gone through major economic transitions before. While they are no doubt difficult in the short run, in the long run they facilitate a much stronger economy with greater opportunities for economic growth. For example, the United States has experienced a long and steady decline in rural employment, especially on farms. Even within the past 30 years, much has changed. Rural poverty rates remain higher than urban poverty rates, and the majority of farmers do not farm as their primary occupation. The percent of Americans living in rural areas decreased from 20-percent in 1980 to 16-percent today.
Despite this drastic change in what appeared to be the fundamental fabric of America, life continued. The world did not come crashing down and the middle class continued to expand. According to the U.S. Census Bureau, in 1970, the mean household for the middle fifth of households was $42,996 (2008 Dollars). In 2008, it was $50,132. Similarly, the average individual income in 1970 was $15,721 (2008 Dollars). In 2008, it was $26,964. Despite what seemed like a disaster at the time, economic growth continued to occur for all types of people throughout the United States. The same will continue into the future. No doubt policies will be different, types of jobs will change, and greater demands will be placed on workers, but life will go on, and for the better.
Note: This post is mirrored in the Chicago Policy Review blog, for whom I also write.
One of the greatest hurdles to implementing widespread renewable energy installations is storing the power for when it is actually usable. For example, wind normally blows the most at night. I read a rather interesting article today in the EU Energy Policy Blog about an innovative (and rock solid) way of solve this, which is already being used across Europe:
The pump-storage technology allows the transformation of low-altitude water into high-altitude water using off-peak electricity, and then the production of electricity at peak periods releasing water through turbines like in any hydroelectric plant. Because of large energy losses in the transformation of electricity into water and then of water into electricity (the cycle efficiency is of the order of 80%), this process is not generically good at saving energy but it can be profitable on economic grounds, both by decreasing production costs and by increasing consumers’ surplus.
The article goes into much greater depth, and is a great read overall. The only problem is finding sites suitable for such storage. Wind farms are often cited on vast fields with relatively little variability in terrain, thus little room to build the reservoires necessary. But with high capacity lines delivering the power elsewhere, it seems like this is a promising option. As long as you keep enough cold water in the river to keep plenty of trout in the river of course. I’d rather not have to give up my fly fishing.
Businesses need motivation to invest. Usually there is a simple profit motive. Oftentimes, especially on progressive issues, something more needs to be present. Such is the case with many areas of green tech. Governments need to offer incentives in order for nascent industries to mature, as I have blogged about before. A Financial Times article came out yesterday detailing the situation further (hat tip WSJ excellent Environmental Capital):
Lars Josefsson, chairman of Combat Climate Change, a group including BP, General Electric, Unilever and more than 60 other large companies, said business was ready to act but would not do so without a clear regulatory framework.
“The necessary investments will only be made when you have a binding treaty and legislation,” he said in an interview.
“Of the money required to implement a deal, the vast majority – about 80 per cent – will come from the private sector. That can only come when there is a stable legal framework.”
This boils down to the too-often-used yet still-quite-useful game theory example of the prisoner’s dilemma. The original game itself involves two accomplices, in separate isolated holding cells, being questioned by the police. They can either confess to their crime or hold out. If both of them hold out, they both get only one year in prison. However, if one holds out and the other confesses, the one who confesses gets set free and the one who holds out gets 10 years. If both confess, they both get 4 years in prison. Clearly, both prisoners are overall better off holding out together, but because they are rational actors, they both inevitably decide to confess (lots of analysis to prove this, but trust me, it’s true).
This theoretical model is useful in understanding the incentives that the private sector faces in choosing to invest in green technologies other other such “green jobs” initiatives. Right now there is immense regulatory uncertainty and no clear long-term incentives. Because of this, when taking into account companies’ duties to their shareholders, they will often take the route that maximizes profits with as little risk as possible. They are incentivised to “confess,” even though society as a whole would be better off if they invested in green tech (“hold out”). In order to make the socially optimal (and potentially lucrative) option of “holding out” (aka making less carbon intense investments) possibility, there needs to be a binding regulatory framework to eliminate uncertainty. While many businesses, such as Exxon Mobil, support a carbon tax as the best way to do this, in many ways frameworks created by Waxman-Markey or similar legislation is better than none.
I’m somewhat intrigued by the concept of a cap-and-dividend scheme from a microeconomic point of view. Principally, the question exists: how would the consumer’s utility be compared to before the scheme was put in place? Also, if the person received a dividend, would she still be incentivized to consume less energy? In order to answer these questions (in a vague and theoretical way), I decided to construct a simplified model of the situation. In order to keep things simple, I designed a Cobb-Douglas utility function of the consumer, with her two goods being energy and all other goods. Energy (E) has a coefficient of 0.2, and all other goods (G) has a coefficient of 0.8.
I decided that the consumer should have $50,000, and the price of each good should be $1. Thus the budget constraint is:
$50,000 = E + G
Plotting the budget constraint, and then setting all of the optimal conditions yields the following graph, with Energy on the X axis and all other goods on the Y axis.
Budget constraint and Cobb-Douglas Utility Function, with optimal point
Now let’s say that the price of energy goes from $1 to $2, due to a cap-and-dividend system. That would cause the consumer to consume less energy, and of course be worse off as a result.
After 2x rise in energy prices: Budget constraint and Cobb-Douglas Utility Function, with optimal point
However, what would happen if we took the amount of money collected from the consumer, $5000, and gave it back to her in the form of a dividend. The person’s budget constraint would move outward, and their consumption would shift accordingly, as the following graph shows:
After 2x rise in energy prices with dividend: Budget constraint and Cobb-Douglas Utility Function, with optimal point
This shows that the person is better off than if the dividend did not happen. Furthermore, even though the person is being compensated for the increased energy prices, she still consumes much less energy overall. Thus, contrary to some opinions, just because a person receives a dividend under a cap-and-dividend program does not mean that the person will not have an overall decrease in energy demand.
This basic model does rest upon many assumptions, the chief of which is that the consumer’s utility for energy and all other goods can be modeled with a basic Cobb-Douglas utility function. Chances are this is not the case, and no doubt energy is somewhat inelastic. However, many aspects of this analysis still hold true — and would perhaps hold even more so under an inelastic model.
Lately there has been a fair bit of discussion about whether money from the US stimulus package should go to fund alternative energy projects that, while increasing the country’s renewable energy supplies, go to foreign companies and create foreign jobs. What I find interesting is not necessarily the politics or the macro-economics of the situation (or even the jobs aspect — we live in a globalized world), but rather the policy aspects of why so few US firms are able to compete, so that only foreign companies can carry out these large-scale projects.
A recent report by the American University’s Investigative Reporting Workshop outlines the situation quite nicely:
The reliance on foreign companies for development of wind energy appears to be at least partially tied to the U.S. government’s resistance to subsidize a home-grown wind energy industry until now. With so few U.S. companies in the business, the door was open for foreign companies to walk away with the bulk of the grants. European companies, in particular, are well positioned to collect stimulus benefits for clean energy.
…
While the U.S. has dithered with temporary tax incentives for producers, European governments have awarded permanent tax breaks and large subsidies to wind energy companies and poured vast sums into research and technology.
Even as billions in stimulus dollars for clean energy are starting to flow, Congress is still hammering out an agreement to mandate that up to 20 percent of the nation’s energy come from renewable sources by 2020 (a Senate proposal currently calls for 15 percent.) Denmark, by comparison, has already achieved that goal – and in the process became the most dominant wind turbine manufacturer in the world.
This is an interesting dilemma. On the one hand, we want the most efficient allocation of resource, and trust (for the most part) the market to allocate capital to the firms and technologies that have the greatest possible potential. On the other hand, we face world-wide competition within the renewable energy industry, with domestic firms up against foreign firms supported by governments with far greater involvement in the renewable energy market than ours. Economically, our approach is more efficient. However, it has not been effective at spurring growth akin to what Europe has seen within the alternative energy sector.
Facing the realities of a globalized energy industry, where almost every governments offers subsidies, tariffs, or energy standards that distort the market, we cannot pretend that our domestic firms are able to compete on the same scale without government support. An optimal solution? No. But perhaps necessary? Yes.
Master of Public Policy candidate at the 
