KNOWLEDGE PROBLEM HAS MOVED

Please do come visit me at my new home, www.knowledgeproblem.com, and please spread the word and update your lists. See ya there!

TWO MORE INTERESTING ECONOMICS BITS

1. Public Choice: Politics Without Romance, an article by James Buchanan, the Nobel laureate public choice theorist, in Policy magazine.

2. A very cool post Umair Haque on double moral hazard, risk, and the recording industry. Link courtesy of Carnival of the Capitalists.

OK, now I'm going to go nurse my headache of disappointment with a cup of tea and a little Pride and Prejudice.

OTHER INTERESTING NEW BITS

I am still feeling molto dolorosa, so have not much to say that sparkles with any wit or originality, but want to point out some good content on rent-seeking, a pet topic of mine for many, many reasons (hey, when you work on a regulated industry, rent seeking is a familiar bedfellow).

Sunday's Carnival of the Capitalists includes a link to a post by Robert Prather on rent seeking by the states. He provides a useful definition:

Rent-seeking comes in several forms, as spelled out below, but is generally defined as a private entity seeking favorable treatment from the government. Corporate welfare is a good example; ADM is practically the poster child for rent-seeking at the federal level. Other examples can include requiring a doctor's prescription to get a blood test at a clinic already licensed by the state, requiring licensing as a mortician to sell burial caskets -- that used to be the law in Tennessee -- or even requiring state accreditation to practice as a CPA. Generally, rent-seeking doesn't include legitimate barriers to protect public health, such as requiring a prescription for certain drugs or the licensing of doctors.

This practice is as old as human society itself, as far as I can tell. The medieval guild is a poster child for ruler/government revenue extraction through the sale of monopolies, and modern trade licensing practices followed under the guise of maintaining quality of service are not very far removed from the local shoemaker's guild trying to exclude imported shoes.

And huzzah to Robert for calling it truthfully: Archer Daniels Midland is the poster child for rent seeking at the federal level. In fact, when PBS has an ad saying "this program supported by ADM, supermarket to the world," I've been known to yell one of the following things, depending on what ADM happens to be up to at the time:

"ADM, corn syrup fascists to the world!"
"ADM, price fixers to the world!"
"ADM, ethanol rent seekers to the world!"

I wonder if PBS will ever adopt the appropriate shame for the ADM sponsorship they enjoy.

Steve Verdon also has a good rent-seeking post (something in the water?), including a link to this article by Gordon Tullock on the origins of the rent seeking research and how long it took to persuade the neoclassical mainstream that this was an important phenomenon for us to understand.

The problem worsens sharply once government replaces private individuals in the charitable process. There is no obvious reason why governments driven by a vote motive should stop at the point where the utility of the rich is maximized. Much more likely is the outcome where the median voters coercively transfer, at no cost to themselves, a large part of the wealth of the rich to the poor, or where special interest groups access the political process to transfer the wealth of consumers to their own members.

Note how well this observation dovetails with the overarching conclusion of much of Mancur Olson's work:

Two books by Olson, The Logic of Collective Action and The Rise and Decline of Nations, are considered seminal works in economics and political science. The former book showed that in most cases there is a divergence between what individuals want and what they are able to achieve as a group, while the latter book showed how the operation of interest groups can impede economic progress.

And, as I put it in this post from last Thursday on the energy bill negotiations in the Senate, if a collective decision has concentrated benefits and diffuse costs (or concentrated costs and diffuse benefits), then the concentrated interests have incentives to lobby to achieve outcomes beneficial to them, at large but widespread cost to those harmed. If the total benefits they receive from the lobbying and protection is smaller than the costs imposed on the disparate victims, then the policy is welfare-destroying but will occur anyway.

Sugar, anyone? Ethanol? Steel? Endangered species? Maintaining the status quo electricity regulation? All are examples of rent seeking.

THIS AND THAT

Been putting the final touches on some changes around here, as well as starting to grade midterms, and trying in vain to buy a house for the third time in two years. So today is a very unhappy day. Sorry for the ether silence. Please note also the new email address listed here, which is a prelude to the upcoming unveiling of a new Knowledge Problem website ...

One entertaining thing came my way late last week: this amusing site for understanding British slang.

And this interesting list of the 100 greatest novels of all time contains a lot of books that I've always said I should read but never have, some of which are currently sitting on the bookshelves next to me. Thanks to Greg Ransom for the tip.

WSJ ENERGY BILL ARTICLE

Wednesday's Wall Street Journal had an interesting little article on Congressional progress on the energy bill (subscription required). Not surprisingly, ethanol is playing a large role in the horse trading:

The big winner in last-minute wrangling over the 800-page measure, which is estimated to cost taxpayers about $18 billion in tax incentives, appears to be the ethanol industry. It has pushed in the final hours of negotiating to increase the federal mandate for the largely corn-produced gasoline additive.

According to those close to the deliberations, which have been among Republican leaders and behind closed doors, the ethanol lobby has won a "conceptually cleared" agreement to raise the starting point of the mandate from 2.6 billion gallons of the additive to nearly three billion, starting in 2005.

The mandate would require oil companies to use five billion gallons by 2012. It is regarded as the "political driver" of the bill because of ethanol's broad appeal to farm state lawmakers, particularly the Senate's Democratic leader, Tom Daschle of South Dakota.

One final sticking point for Republican negotiators is the price. Currently, Congress provides a 5.2 cents a gallon exemption from federal excise taxes for ethanol blends, which costs the Highway Trust Fund about $2 billion a year. Under the agreement being negotiated, the trust fund would be reimbursed by general tax funds, putting the ethanol burden on all taxpayers.

Ethanol would largely replace methyl tertiary butyl ether or MBTE, an additive made from natural gas. Under the final agreement being negotiated, Congress would leave it up to the states to decide whether to ban use of MBTE, which has tainted some drinking water supplies.

Very few people realize that ethanol production is already subsidized, through exemption from federal fuel excise taxes. This bill, as the article notes, would ensure that all taxpayers bear the burden of subsidizing ethanol, even though its energy efficiency and environmental benefits are either negligible or negative, depending on whose scientific results you believe. It's a beautiful, painful lesson in Mancur Olson's Logic of Collective Action -- concentrated benefits and diffuse costs work to the advantage of special interests, who will work hard to gain those benefits.

The other sticking point in the negotiations has been electricity, with Southern representatives firmly adhering to stands that support the intransigent, backward-looking, regulatorily co-dependent interests of a large constituent: Southern Company.

In the bill's most complex section, the electricity section, lobbyists for Southern utilities appear to have won agreement for a measure that would let them decide what outside wholesale generation companies might have to pay to use their transmission lines.

The way that sentence is worded obscures the real issue, which is participant funding of transmission construction. This Dow Jones article from Wednesday (subscription required) at least in part summarizes the issue, but it also illustrates how Trent Lott is trying to wrap rent-seeking regional protectionism in free-market rhetoric.

The dispute over how to share transmission system costs between entrenched utilities that own the high-voltage lines and independent companies that use them to sell competing power has snarled closed-door discussions in Congress over a massive energy bill .

"It's a matter of fairness," said Sen. Trent Lott, R-Miss. "The people that provide the power or get the power should pay the cost."

He said it was wrong for Mississippi electricity users to pay for line improvements "that other people are using and other people are benefiting from."

The issue has held up progress on an energy bill because of Lott's demand that utilities owning the lines be given a greater say over who pays for improvements. He also wanted to curtail the ability of the Federal Energy Regulatory Commission to impose cost-sharing agreements.

Two politically powerful utilities - New Orleans-based Entergy (ETR) and Atlanta-based Southern Co. (SO) - which own thousands of miles of transmission lines across the South, have pushed Congress to impose a cost-sharing system that gives them more control over who pays for transmission upgrades.

Yes, having users face the actual costs of their network use is important for leading to optimal network investment. But giving large, government-protected incumbent monopolies gatekeeper status in a highly prescriptive way is not going to lead to users facing the actual cost of their network use! It is much more likely to result in users facing monopoly prices for network access.

A far more efficient, fair, and market-oriented approach would be to unbundle wires and energy, and remove the incumbent utility's monopoly by allowing entry for competitors to the grid, both from alternate wires and from distributed generation. Another good approach would be to allow co-tenancy, or joint share ownership of the wires, with use rights accruing to owners in proportion to their ownership shares. They can then either use those shares themselves, or sell transmission rights to other energy commodity companies.

Such an approach is more likely to result in optimal network investment. But really, is that what Southern Company and their Congressional representatives truly want? Or do they want the persistence of the status quo in the face of dynamic economic and technological change? If the latter, they are simply delaying the inevitable.

TKP GOES OUT OF TOWN

Will be out of town for a few days, attending the US Association of Energy Economics meetings in Mexico City and giving a paper. Don't know the wireless/hotel situation, so will have to be loosey-goosey about the postings. Back Wednesday.

ENERGY BILL UPDATE

Yesterday was a self-imposed deadline for Republican-led resolution of House-Senate conflicts over the impending energy bill. I'm shocked, shocked to say that they missed the deadline. Note the areas where they claim to have gotten agreement:

The talks have been dominated by Republicans who have the votes to fashion the bill largely to their liking, despite Democratic objections. And on all but a few provisions, compromise agreements have been hammered out including at least $16 billion in tax benefits, mostly to promote greater production and use of coal, natural gas, domestic petroleum resources and nuclear power.

All sides also have agreed on measures that would improve the nation's electric power grid, expand use of corn-based ethanol for gasoline, grant greater access to energy sources on federal land and build a pipeline to get to massive amounts of natural gas on Alaska's North Slope.

Ugh. There's a lot of stuff in those measures that is economically unsound and may even increase net energy use, such as increased ethanol use. But my political science friends tell me that as long as Denny Hastert is speaker of the House and the Iowa caucuses have the power they do in the Presidential election, corn farmers will be able to sock it to us, good and hard.

And ethanol's nose gets in the tent through a renewable fuels mandate, not through the federal fuel oxygenate requirement. Ethanol a renewable fuel? Stop for a second to think about how ethanol is made: till soil, fertilize, plant corn, harvest, process it using lots of fossil fuel energy and creating air, water and soil emissions in the process, transport it in trucks, trains and barges to its consumption location. So there are a few parts in the production process that require fossil fuel use, and consequently result in emissions.

So ethanol's not as clean as the ethanol supporters would have us believe ...

Here's another article on the stalled energy bill, and a Forbes article on removing the offshore oil and gas inventory provisions from the bill.

MARGINAL REVOLUTION

Tyler Cowen has been making some very interesting posts over at Marginal Revolution (Alex Tabarrok has too, but I'm not going to say anything about them here, now!). I particularly thank and curse him for the reference to this normblog greatest jazz albums poll (although with RIAA Radar, I am loathe to buy many of them that I don't already own!) and to AllMusic. Thanks, Tyler, thanks a lot ...

And I often pose the why are rug stores always having sales question to my students, and the two answers he suggests are the top two that I've heard and come up with. It's a fascinating question, and illustrtes the importance of both information and reputation.

The other thing that carpet stores illustrate in economics is the Hotelling model. Put another way, the question is this: why do all of the Persian rug stores locate in such close proximity to each other? You can ask the same question about antique stores, boutiques, etc. It makes for a great industrial organization analysis. Basically the idea is that if you have customers uniformly distributed across a space, it is profit maximizing for the stores to locate as close to the middle of the space as possible (assuming away different product characteristics etc., although the Hotelling model certainly applies to product differentiation), so you get clustering.

ANALYSES OF PROPOSED ENERGY PLANS FOR CALIFORNIA

I have been pretty busy this week, with travel and teaching and writing (and agnozing over the Cubs). Some additional analysis of Governor-elect Schwarzenegger's energy plan for California, following up on this post from last Wednesday, are Ken Silverstein's Utilipoint Issue Alert from Tuesday, and this LA Times story from Monday.

UPDATE: And here's a Sacramento Bee article from Tuesday on the same topic.

HOW FRAGILE IT IS

Boy, it's sure quiet around here today after last night's game ... I don't have much to say, other than fans with front row seats in parks with short outfield walls and a team in the NLCS should learn to keep their hands to themselves.

I think Tony Pierce summed it up with his title "maybe now you understand" and

i was a man who was about to put his head in a pillow and cry over a baseball game

Like Bonne Marie Burns I was knitting a poncho and trying to not pay too much attention, but once the 8-run half inning from Hell started my stomach knotted, and it was time to switch to MI-5 and indulge in denial by watching that cute Matthew McFayden as the aloof yet sensitive spy (kind of reminds me of the Coldplay song every time I watch it).

My husband couldn't even be in the room after about the 5th inning.

And we have opera tix tonight, so we'll have to check the score at intermission. Maybe that's for the best ...

OK, all you folks out there, send your positive vibes, positive energy, brainwaves toward the Cubs so we can put this in the history books!

TRANSMISSION CONSTRUCTION IN THE DELMARVA PENINSULA

PJM reports new transmission construction on the Delmarva Peninsula. Delmarva is a notorious load pocket in Maryland/Virginia on the eastern shore, and has been struggling with increased demands for power and NIMBY concerns about building new generation and transmission. This report suggests that some compromise has been achieved, because there have been both generation and transmission projects in the past two years.

It's also a good sign that the construction of private wires is getting more acceptable to local authorities:

For the first time, the plan's transmission improvements include merchant projects. Merchant transmission facilities are not in a utility's rates. Investors finance the projects and take the full risk of building them.

ENVIROSPIN WATCH

Envirospin Watch is a thoughtful blog by Philip Stott, who is largely looking at how the UK media reports on climate change science and policy. It's quite informative and light on invective and emotion, which is all too prevalent in climate change discussions.

LOWERING TARIFFS IS GOOD. PERIOD, FULL STOP.

I noticed two interesting articles touching on international trade today. The first is Arvind Panagariya's Foreign Policy article coming out this month. He busts a bunch of myths and urban legends about the effects of trade and trade barriers (as well as providing evidence that supports truths):

“Rich Countries Are More Protectionist Than Poor Ones”

Not even close. On average, poor countries have higher tariff barriers than high-income countries. ...

“Freer Trade Increases Poverty in the Third World”

Not true. Historically, countries that have achieved large reductions in poverty are generally those that have experienced rapid economic growth spurred in significant measure by openness to international trade.

My Western Economic History students are learning that one this quarter, through the complementarity of open trade in goods and knowledge with technological change.

“Agricultural Protectionism in Rich Nations Worsens Global Poverty”

Not necessarily. If developed countries eliminate all forms of agricultural protection, including subsidies to domestic producers and quotas on foreign imports, their agricultural production will decline and the worldwide price of agricultural products will increase. Therefore, poor countries that are efficient agricultural producers will benefit from higher prices and access to new export markets. But consider the flip side: Poor countries that import agricultural products will suffer from higher prices. In 1999, as many as 45 of the 49 least developed countries imported more food than they exported. In 2001, for example, Senegal spent as much as $450 million on food imports, equivalent to about 10 percent of its gross domestic product and one third of its annual export earnings. Certainly, if agricultural trade is liberalized and prices rise, some poor countries will become net agricultural exporters, but many will not.

Obviously this is the interesting point given what just happened in Cancun. So the truth is more like "agricultural protectionism in rich nations worsens poverty in poor countries that import agricultural products".

“Poor Countries Should Not Open Their Markets If Rich Countries Maintain High Trade Barriers”

Big mistake. As the late British economist Joan Robinson once remarked, “if your trading partner throws rocks into his harbor, that is no reason to throw rocks into your own.”

Plus ya gotta love someone who quotes Joan Robinson, especially this vivid quote.

Now, skipping to the one nearest and dearest to my heart:

“Free Trade Is Bad For the Environment”

No. Certainly, trade forces can hurt the global environment. For instance, the rapid expansion of coastal shrimp farming in several countries in Asia and Latin America in the 1980s, driven principally by the demand for exports, led to the contamination of water supplies and destruction of surrounding mangrove forests. But trade opening can bring environmental benefits as well. For example, the agricultural liberalization proposed in the WTO’s Doha negotiations would not only bring economic and efficiency benefits by shifting production from high-cost to low-cost producers, but it would also yield environmental benefits by replacing Europe’s pesticide-intensive agriculture with natural manure-intensive agriculture in developing countries.

Activists who decry the environmental impact of trade should realize that trade protectionism often brings environmental costs as well. During the 1980s, the United States imposed quotas on Japanese small-car imports; the policy not only hurt U.S. consumers but also harmed the environment by reducing access to lower-pollution vehicles. More broadly, closed-door policies in pre-1989 Eastern Europe were accompanied by an extremely poor environmental record.

One thing that free trade does is increase the returns to defining and enforcing property rights; protectionism creates incentives to do things like mow down all of the forests in Indonesia (OK, a little hyperbolic, but you get the point). Property rights align long-run yield and profit incentives with environmental sustainability in many ways.

The second article was James Pinkerton's Tech Central Station article today on a Cato Institute forum he attended recently that addressed the post-Cancun foreign trade environment. After he summarizes the comments of the panelists he offers this relevant comparison from an earlier TCS article of his:

Leadership that transforms is always risky; in the history of trade policy, bold leaders have sometimes transformed themselves out of a job, even as they have etched themselves into the pantheon of world-improvers. So I empathize with Padilla's worries, and certainly don't envy his daily drudge. As I noted last month in TCS, the government of Britain's Robert Peel fell after the Tory prime minister unilaterally eliminated the Corn Laws in 1846. So Peel was out of a job, but more British workers were eating well. And yet his vision was vindicated just two years later, in 1848, when radical revolution swept through Europe; amidst all the proto-Marxist convulsing, British workers were not motivated to storm the barricades.

Leadership that transcends short-run political issues is certainly required in dealing with trade.

Along similar lines, I also recommend Don Boudreaux's and Dwight Lee's TCS article today on trade restrictions, with reference to the steel tariffs.

EXPECTATIONS OF NUMBER PORTABILITY ARE STARTING TO HAVE EFFECTS

The FCC issues guidelines on implementing number portabiilty starting November 24:

The commission said companies should complete a phone-number switch between wireless carriers within 2 1/2 hours, a time already set as a goal by most major carriers. The FCC said the time period is not mandatory, but the commission would reconsider that if it received many consumer complaints about delays in switching numbers to new carriers.

The guidelines also say that people can switch numbers to another carrier even if current accounts are not settled. Wireless companies can't refuse a switching request, but they can still enforce billing requirements such as termination fees when a customer ends a contract early.

And while this USA Today editorial engages in some hyperbole at the expense of the wireless carriers, it's true that the carriers that adapt their business models and strategies to the new contestability are more likely to succeed:

Nov. 24 is supposed to be the day that cellphone users are freed from captivity by their wireless providers. Starting then, a new federal rule will let consumers keep the same number when they switch carriers. This one mandate could have a big impact, as customers who have been unwilling to endure the hassle of changing numbers are freed to shop around for better service.

But whether that impact ultimately helps or hurts an industry still reeling from excessive expansion in the 1990s depends as much on how carriers respond as how consumers react. So far, the telecommunications industry is in denial about the new world that is approaching.

Among the big carriers, only Verizon Communications is accepting the idea that ''number portability'' will soon be a reality.

Instead of looking for new ways to attract business based on price or service, some companies are devising strategies aimed at keeping customers tied to them.

This approach is not only anti-consumer, it's counterproductive. Any business model that forces dissatisfied customers to stay put only alienates them over time.

Hear that, RIAA? Hear that, electric utilities that think consumers don't want choice?

RECORDING INDUSTRY UPDATE

This Wired article from Wednesday points to an interesting case: a record label that enables sharing, lets you try before you buy, and splits the proceeds of sales 50/50 with artists from the get go. This label, Magnatune, has about 50 signed artists. Also interesting is that the artists retain rights to the songs; they can record them elsewhere, etc. The contractual rights are under a Creative Commons limited-rights license. Interesting business model -- it looks to me like Magnatune's value added to the consumer is in the flexible share/buy model and in serving as some quality screen; this model is apparently appealing to enough artists that Magnatune can be selective:

Magnatune receives submissions from 200 artists a week and signs about 15 a month. Buckman considers this choosiness a selling point -- an assurance that someone is separating the wheat from the chaff.

He is also betting that Magnatune's rebellious attitude will resonate with an audience alienated by the big labels' tactics.

Us, alienated by the big labels? NOOOOOO, you're kidding!

Speaking of being alienated by the big labels, RIAA Radar is an invaluable tool if you want to know in advance whether or not the music label that releases your fave tunes is a member of the Recording Evil Empire. If you search on a particular artist's name, it will list all of the known recordings, the label, and tell you whether or not it's safe to buy. There's even a handy click-box through to Amazon.

Unfortunately the label that puts out most of what I want to buy right now, Blue Note, is a RIAA member. That's too bad, because I've got more Kurt Elling, Stefon Harris, and Patricia Barber all record with Blue Note. Deep sigh ... well, at least I can see Kurt Elling and Patricia Barber live frequently at home (gloat gloat).

Lots of compilations and electronica/techno/trance/ambient stuff is non-RIAA, so that's where I'll get my listening pleasure.

And I was going to ask for Elvis Costello's new album and a bunch of Mozart for Christmas, but Deutsche Grammaphon is a member of the Evil Empire too.

RIAA Radar is a great tool, but it's making me very sad right now.

HOCKEY SEASON BEGINS

So my beloved Pittsburgh Penguins start the hockey season tonight at home against the Los Angeles Kings. Mario Lemieux is on the roster, and it also looks like we're pretty deep with talent both young and experienced at center, so the team's fortunes won't hinge so dramatically on his health. Martin Straka continues, and continues to play well.

It's a young team, but with veterans like Lemieux, Straka and Marc Bergevin there is still leadership. The most striking thing to me is their new coach: fellow Chicagoan [Ed.-hey! Aren't you from Pittsburgh? Yeah, but I claim both as home now.] and former Penguin forward Eddie Olczyk. His skill, his energy, his experience, and his combined Pittsburgh/Chicago connection commend him to me, and I really, really hope that he and the Penguins succeed.

You can imagine what tonight will be like chez Kiesling: if I'm in luck and the Penguins game is on ESPN, it's flippin' between baseball and hockey.

Go Cubs! Go Pens!

GOVERNOR-ELECT SCHWAREZENEGGER'S ENERGY PLATFORM

There are some planks in this platform that, if he can follow through and lead people with him, will unleash an amazing amount of creative energy and dynamism. From the Governor-Elect's website, all points follow the statement "as Governor I will":

Encourage cost-effective conservation by increasing demand response to changing electricity markets. One of Governor Davis's great errors was his delay in permitting retail prices of electricity to move with wholesale costs. This failure prevented conservation of power during peak hours. These actions cost the state billions of dollars. No market can function without proper prices. Commercial, industrial, and government consumers should be given the right to opt out of these reserve charges if they allow the state to remotely turn off their power when supply is tight. These specific consumers must use hourly meters that permit remote dispatch. This interruptible load can be included as reserve power.

Look at that: no market can function without proper prices, prices that reflect both supply and demand in the transactions. This language is also redolent with references to interruptible load contracts, an easy-to-implement way to activate retail demand, particularly for large customers.

Last fall I summarized the benefits of demand response in this Reason commentary.

Affirm the commitment to private power by dismantling the California Power Authority (CPA) and transferring to other agencies those functions (if any) determined to support a sustainable energy policy. Its current mission to build and operate publicly owned power plants is in direct competition with private industry and serves only to divert private investment in electricity generation and transmission away from the state.

He and his advisors clearly understand crowding out!

Create a working wholesale power market based on the lessons learned from other states and the FERC standard market design. California is one of several states that adopted electricity restructuring. However, only California's restructuring caused severe price hikes and energy shortages. It is time to learn from other successful restructurings enacted by Texas, the New England states, and the Mid-Atlantic states of Pennsylvania, New Jersey and Maryland. In addition, California should also look to the standard market design created by FERC.

Learn from other states? Gee, I think I've seen someone advocate that before! Apologies for the shameless self-promotion, although I'm certainly not the only person who has said that in the past three years.

Restructure the wholesale market. Merge the functions of the CAISO and former PX (transmission operations, generation dispatch, and wholesale trading) into a single entity.

Now, I'm not so crazy about this idea. Yes, the bifurcated pool structure between the PX and the ISO created a lot of pernicious incentives for both utility buyers and generator sellers. But the ISO should house the grid operations and dispatch functions, not wholesale trading (except for a real time spot market for last minute balancing). There are plenty of financial intermediaries that would be happy to help buyers and sellers broker bilateral trades, and requiring parties to trade through the state's wholesale faux market was one of the causes of California's problems in 2000-2001. Not having a mandatory pool is one of the lessons that Texas learned from California, and Texas wholesale markets are a lot more healthy, liquid and robust than California's were.

If the ISO is to have a wholesale trading pool, it must not be mandatory, but instead a spot market for parties who find themselves short or long and looking for a partner.

All in all, quite promising for dynamism, creativity, value creation, and the well-being of California's residents and businesses.

TYLER COWEN ON ENGEL AND GRANGER RECEIVING THE NOBEL

Yeah, what he said. Co-integration, Granger causality, ARCH and GARCH models for estimation, all are things that I have used regularly. Congratulations to them both!

MULTIPLE USE NETWORK INFRASTRUCTURE AND RIGHTS OF WAY

Kudos to Craig Newmark for picking up on a story that I think is really, really important: running fiber optic cable through natural gas pipelines.

The cable can be inserted into a tube placed inside existing underground gas lines serving homes and businesses by cutting "small incisions in the streets," Peevey said.

Think about it: most of the industries on which we spend much of our regulatory attention are network industries: electricity transmission, telephone wires, cable wires, natural gas pipelines. An important way to make these industries more contestable, and ultimately competitive, is to enable other firms to enter and compete with the regulated utility. Allowing companies that own rights of way and other networks to carry network infrastructure of other industries is an important step in making these network industries contestable.

Because, as I quoted Al Lowi as saying yesterday, natural monopoly is a myth.

A NEW JOB, A NEW APPLIED ENERGY PROGRAM

As of last Wednesday, I am now working with Nobel Prize winner Vernon Smith's Interdisciplinary Center for Economic Science at George Mason University.

I will be the Director of a new Applied Energy Research Program at ICES. Through this program we plan to expand the use of experimental economic research in the establishment and implementation of regulatory policy, particularly electricity policy, at both the state and federal levels. Our efforts will focus on the value provided through double-sided markets in which both supply and demand can participate actively. We will engage in policy-oriented research and in direct engagement with policymakers to achieve these goals.

In conjunction with the new position I will continue to teach in the Economics Department at Northwestern University, but have resigned my position at Reason (although I remain a Senior Fellow).

[Now you see why posting's been a little light in the past week ... been busy!]

ARNOLD KLING TO PAUL KRUGMAN

While you are at TCS, do also read Arnold Kling's open letter to Paul Krugman. I find his distinction between consequence-based arguments and motive-based arguments very important and persuasive. I have always found motive-based arguments to be cheap, shoddy and unpersuasive, and as usual Arnold hits the nail on the head.

What's also interesting is that his analysis helps explain my reaction to hearing Paul Krugman interviewed on a show on my local NPR station last week. I didn't know it was him until about 3 minutes in because I missed the intro, but I thought he was making really good points about our foreign trade policy over the last decade, the WTO, negotiations, etc. Now I can figure out why it was such a good interview -- in addition to making sound analyses based on his extensive academic work, Krugman was making consequence-based arguments and not motive-based arguments.

Interesting ... yet again, like he did with the elastic economy idea, Arnold helps me to frame out the conceptual world.

GLENN REYNOLDS AND NEAL STEPHENSON

Some time last week my husband came home from work with a gleeful grin, and with a flourish he whipped out Neal Stephenson's new book Quicksilver. I had known it was out for a week or so before (because I read Intapundit), and figured I'd get it for him for his birthday. Oh well ... I am also looking forward to reading the whole trilogy, because while I am not particularly a sci fi fan, I am a fan of historical fiction, and this sort of genre-bending endeavor intrigues me greatly. Plus at some point a friend of mine and I want to do a small conference centered on reading In the Beginning Was the Command Line in conjunction with related economic history and new institutional economics literature.

Glenn Reynolds' interview with Neal Stephenson in Tech Central Station today increased my intrigue, particularly this comment:

It started with the personal stories of Newton and Leibniz. Then I started to learn about Hooke, and the other members of the Royal Society, and it kind of snowballed. There were so many things going on back then with ramifications and consequences that we feel today that I just got sucked in.

What I found interesting on a political level was that the Cromwell types were pushing a bunch of ideas that struck people as nuts at the time, but that are bedrock principles of modern society -- things like free enterprise and separation of church and state and limited government that took years to actually achieve.

Many of the people called Puritans were small businessmen and independent traders. They had a real bent toward free enterprise, and they developed a real resentment of government and taxes -- as a result, they were free traders. It's like what we see with a lot of pro-business people today.

For further discussion, I recommend Glenn's TCS column last week about how many modern ideas have origins in the 17th century, and the parallels between then and now. In fact, in my Western economic history class next week (or the week after) we will discuss the ramifications of the Glorious Revolution of 1688 for dynamism and innovation. Hint: transparency and controls on the fiscal power of the monarch.

LOWI AND CREWS ON ELECTRICITY

I am thrilled, absolutely thrilled, to find out from Tyler Cowen this morning that Al Lowi's and Clyde Wayne Crews's chapter on electricity is available online (and many thanks to Dan Klein for doing so). I recommend it to you all.

This chapter is from Dan Klein's and Fred Foldvary's book, The Half-Life of Policy Rationales, which I recommend to you all as a good set of arguments for how technological change and dynamism makes government intervention irrelevant or even destructive.

Unlike Tyler, I am happy to evaluate the claims in this chapter; I emailed some with Al while he was working on it. The chapter is full of good, thorough information about distributed generation technologies, and I cannot second his claim on p. 181 strongly enough:

Natural monopoly is a myth.

Hear hear! There is a lot of information and new research that corroborates the claims in this chapter, which I'll post links to later when I have time.

It is also consistent with the argument that Adrian Moore and I made in our recent Reason study called Movin' Juice: Making Electricity Transmission More Competitive. Distributed generation is a core development that makes transmission contestable, and will ultimately make it competitive.

Now we just have to convince the regulators and legislators that natural monopoly is a myth.

CS MONITOR ON NATURAL GAS

This Christian Science Monitor editorial from Thursday lays out the natural gas supply issues in the US very clearly. Note that it mentions that a new liquefied natural gas (LNG) terminal in San Francisco has been voted down. Such votes will lead to the persistence of high, and volatile, natural gas prices into the future.

ECONOMICS OF CLASSICAL MUSIC

Tyler Cowen has a nice post on the economics of classical music. I think he's right, and that the success of classical music rests on philanthropist attention and on satellite radio. I also think that popular, charismatic, virtuoso performers will contribute to classical music's fate, by their presence or absence. Wynton Marsalis and Yo-Yo Ma are the type of attractive headliners that keep people coming to concerts.

Mentioning Wynton Marsalis makes me think of another important economic aspect: product differentiation and sensitivity to the preferences of your audience. The Chicago Symphony is outstanding and well-attended. But Chicago is also a jazz town, and the Chicago Symphony puts on a very good jazz concert series (sponsored by Ameritech/SBC); in fact, Wynton Marsalis is an artist-in-residence right now, I think. Some of your jazz audience will be interested in a cross-sell to classical, and vice versa.

CUBS ARE GOIN' FISHIN'

How exciting is this? Notwithstanding Eric Zorn's cranky bile saying that we should chill, the Cubs winning the NLDS is wonderful. This article gives some indication of how exhilirating the win is for fans old and young. Eric's wrong because this is the first time since 1945 that we have won a playoff series. The fact that the divisional seres did not exist until 1995 is irrelevant, and his invocation of that fact is pedantic in the extreme. What a buzz-kill he can be; who needs it?

We watched the game with friends who live due west of Wrigley, on the main drag, and the line of honkin', hootin' and hollerin' traffic headed there to celebrate was very long, and showed no signs of abating as we walked home with TV helicopters holding overhead. The party went on for hours!

Now I hope that we beat the Marlins, that the Red Sox advance and beat the Yankees (sorry Megan), and then we see whether Babe Ruth's curse or the goat's curse is stronger.

WHILE WE'RE DISCUSSING IRAQI OIL ...

This interesting Baltimore Sun commentary by David Quayat highlights some of the economic and social problems seen in history in countries that rely on oil for their economic strength. Given what we've seen, especially in Saudi Arabia and Venezuela, his cautions are worth serious consideration.

MORE NEWSWEEK SPECIAL ON EXPERIMENTAL ECONOMICS

Here's a more extensive set of links to the articles I mentioned below.

An Experimental Mind

Having shaken the ivory tower and reshaped big government, Vernon Smith's
ideas are revolutionizing business

By Rana Foroohar

Give All Iraqis a Share

Auctions of state wealth go back to Rome, but no one has ever done it
fairly. Now there's a chance to get it right in Iraq

By Vernon L. Smith

A New 'Wind Tunnel' for Companies

By Rana Foroohar

I particularly like the lead-in (as well as the rest!) of Vernon's editorial on assigning full property rights in Iraqi oil assets to Iraqis

No country has ever given its citizens full rights to share in the wealth generated by the sale of nationalized resources and industries. These rights have been recognized in privatization schemes from Great Britain to Alaska to Eastern Europe, but never in full. Now is the time to consider doing so, starting in Iraq. The objective would be to auction government property, including exploration and development rights, to ensure Iraq realizes the vast potential of its oil resources, and that all Iraqis benefit.

This recommendation is consistent with ones that I (and others) made this spring, including this post from March analyzing a Wall Street Journal commentary by M.A. Adelman, and this post on Michael Barone's commentary on the matter from April.

BLAST!

Didn't get tickets ... grrr. Oh well. But I wish there were some way that those of us who live in the neighborhood could have gotten first dibs.

SENATOR DASCHLE AND ETHANOL

This Blogcritics post from Monday raises some very important points about the political dynamics behind the ethanol mandate that is included in both the House and Senate versions of the energy bill. The ethanol mandate makes little environmental or economic sense, unless of course you are a corn farmer.

I'll have more to say on this point soon ...

CUBS TICKETS

Am waiting in the virtual waiting room for playoff tickets ...

NEUROECONOMICS, AN ARTICLE AND A BLOG

Neuroeconomics is a growing field, and is starting to get some attention outside of academia. See, for example, this Financial Times article from Tuesday on neuroeconomics research. They start by discussing trust games, and why researchers want to dig more deeply into some of the results that have come from laboratory experiments.

Prof [Vernon] Smith suggests that many people have formed a habit of making reciprocal exchanges: "People come in off the street and they are accustomed to trading favours. If they unconsciously pick up on the fact that they've been done a favour, the implicit question is: Are you going to return the favour or screw me over?"

The idea is plausible, but it is not easy to test. So during the games, Prof Smith's team scanned players' brains using functional magnetic resonance imaging. The FMRI scan showed that players who co-operated were using parts of their brain called Brodman's areas 8 and 10. These areas had previously been associated with thinking about the mental activities and the motivations of others, and of delaying gratification to receive higher rewards later. Non-cooperative players did not use these parts of the brain, and neither did those who knew they were playing against computers instead of human opponents.

This, argues Prof Smith, is consistent with the reciprocity explanation: players are thinking about the likely responses of other players and deciding to trust them.

One of the pioneers of neuroeconomic research, particularly into trust relationships, is Kevin McCabe, professor of economics and law at George Mason University and the Interdisciplinary Center for Economic Science. One of my favorite findings of Kevin's is that when we compete, different neurological pathways are active depending on whether or not we are competing against another human or against a computer. This finding is totally consistent with my playing Cribbage on my Palm -- I don't pay as much attention to the hands that my opponent has, or to other details of the game that I do pay attention to when playing against a human. Kevin tells me that this distinction is common.

Kevin has also started a Neuroeconomics weblog, and his first few posts give a good background to what this line of research is about and its potential. Do go visit him!

Another researcher whose research is profiled in the FT article is Paul Zak at Claremont Graduate University. Paul's research looks at hormonal connections to exchange behavior, including trust.

Professor Paul Zak of Claremont University has run trust games similar to those used by Vernon Smith. But Prof Zak has been testing hormone levels, looking for evidence of a "trust hormone", levels of which vary according to how far the experimental subjects decide to co-operate with their counterparties. He has found one candidate: levels of the hormone oxytocin rise in players who receive and return money. Oxytocin is primarily a reproductive hormone responsible for, among other things, lactation. But it can be stimulated by eating, massage, sex and, says Prof Zak, by social signals such as being trusted.

Thanks to Tyler Cowen for the pointer.