Opinion

Felix Salmon

The inverse-floater gasoline tax

Felix Salmon
Jun 15, 2009 14:32 UTC

How to structure a gas tax? You could make it a flat X cents per gallon; alternatively (and this is essentially what a cap-and-trade system does, too) you could make it Y%, with the tax increasing with the price of gasoline.

Today, Jim Surowiecki comes up with a third option, where the tax decreases when the price of gasoline goes up:

Rather than leave so much of our fate to chance, we’d be better off doing what politicians always say they want to do: lessen the U.S. economy’s dependence on oil. One step toward that would be to phase in a gas tax designed to smooth out oil’s spikes and plunges by keeping the price of gasoline fixed (the tax would rise when the price of gas fell, and vice versa).

Surowiecki makes a strong case that consumer behavior, when it comes to reducing gasoline consumption, only really changes when there’s a spike in gas prices. As a result, his proposal would seem designed to have the least possible effect on gasoline consumption, and on our dependence on oil. Sure, it’s a sensible way of raising government revenues and reducing the fiscal deficit.

Either you want to effect consumer behavior and reduce gasoline consumption — in which case you actually welcome price spikes. Or else you want to smooth out price spikes, in which case you slowly boil the frog (to use one of the stupidest metaphors ever) and keep consumption high. But you can’t have it both ways. Which is it to be, Jim?

COMMENT

@ KenG:

I had assumed that Surowiecki didn’t mean “fixed” literally, since it’s so clearly a bad idea for the reasons you mentioned above. Maybe I was wrong. Anyhow, it seems like we agree on substance.

My point still stands about local (or short-term) pressures, though: if the tax is calibrated to an index of gas prices across the country (rather than case-by-case), there would still be downward price pressure on individual suppliers.

Posted by Benquo | Report as abusive

Regulatory shake-up: Right ends, wrong means

Felix Salmon
Jun 15, 2009 13:53 UTC

I’m a bigger fan of this morning’s Geithner/Summers op-ed than Simon Johnson is. As a statement of where we want to be it’s a good one; I especially like the way that, by regulating OTC derivatives trades, Geithner and Summers are taking a rather more sensible route than trying to make all derivatives (or all credit derivatives) exchange-traded. I also like the way in which capital requirements for banks will rise with banks’ size — it’s a good incentive to stay small(er), rather than, Lewis/Weill-style, going on massive acquisition rampages.

I do however share Johnson’s disappointment with respect to the “council of regulators with broader coordinating responsibility across the financial system” — we need a powerful single regulator with teeth, not a council of bickering sub-regulators. And if Johnson is right that Geithner and Summers are backing away from the creation of a consumer-facing financial product safety commission, that’s also a bad sign.

And what about “requir[ing] the originator, sponsor or broker of a securitization to retain a financial interest in its performance”? Johnson is unimpressed:

Reality: It was a big unpleasant shock when everyone realized that Lehman, Bear Stearns, and others had retained a large exposure to dubious financial products, some of which they had issued. We are back to the Greenspan fallacy here – if financial firms have an incentive not to screw up on a massive scale, they won’t.

I think the point here is that although the big banks thought they were selling off their credit exposure, largely by selling synthetic CDOs, in point of fact they weren’t: the unfunded super-senior tranches which remained on the banks’ balance sheets were meant to be risk-free but ended up imploding. By contrast, I read the Geithner/Summers proposal as saying that banks will have to obviously retain risk assets on their balance sheets, and account for them — that never really happened before.

The big question, of course, isn’t about the ends — about which we can broadly agree — but rather about the means. Do Geithner and Summers really believe we can achieve all this by tinkering around the edges of the present regulatory system and keeping most of the present regulators in something approaching their current form? I don’t buy it. But I fear that on Wednesday that’s what they’re going to be selling. And that is going to be the real failure.

COMMENT

Why would anyone believe that a bunch of lawyers, who really don’t understand the financial system, would be able to come up with something worthwhile? They don’t teach economics in law school. What you will end up with are a bunch of well written memos that completely miss the point.

Posted by Peter | Report as abusive

The Success of Development

Felix Salmon
Jun 15, 2009 04:06 UTC

I’ve been glued to my Kindle all day, reading Charles Kenny’s compelling and important new book, The Success of Development: Innovation, Ideas and the Global Standard of Living. Kenny is a great writer, and his book is a true pleasure to read; it’s also a crucial addition to a development literature which has gotten bogged down in debates which will never be satisfactorily resolved.

The Success of Development acts like a sword through many of the Gordian knots plaguing the development community, especially those surrounding the rate of economic growth in many developing countries. Put that question to one side, says Kenny, and suddenly a lot of much more interesting questions, about issues like education and healthcare and clean water and human rights, come into a lot more focus. And if you use those metrics, rather than GDP growth, to judge the success or failure of developing countries, then things look rather more optimistic than you might think.

Wonderfully, Kenny has made The Success of Development available as a free download from his website, so you have no excuse not to read it — or at least the short 5,600-word introductory chapter which lays out substantially all of the themes of the book. Here’s a taster:

Thousands of papers and articles attempting to divine the causes of long term economic growth around the world, testing hundreds of possible determinants, have produced results that are contradictory and inconclusive. Perhaps this isn‘t surprising given the heterogeneity of countries that have seen fast growth. Between 1929 and 1988, eight countries in the world managed to more than quadruple their per capita GDP: Japan, Taiwan, South Korea, Italy, Norway, Finland, Bulgaria and the USSR. It might be hard to come up with a single policy explanation which could account for rapid growth in all of these very different economic regimes…   

Related to this, looking at almost any measure of the quality of life except for income suggests ubiquitous improvement. The general picture is of rapid, historically unprecedented progress in quality of life –progress that has been faster in the developing world than the developed. This is true for measures covering health, education, civil and political rights, access to infrastructure and even beer production. Since 1960, global average infant mortality has more than halved, for example. Nine million children born in 2006 celebrated their first birthday who would have died before then if mortality rates had remained at their 1960 level. And the vast majority of those children lived in developing countries…

the proportion of the population of Sub-Saharan Africa affected by famine over the 1990-2005 period averaged less that three tenths of a percent. The proportion who were refugees in 2005 was five tenths of a percent. The number who died in wars 1965-2001 was one one-hundredth of a percent. These figures add up to stories of despair for many millions in Africa –but they remain stories of the small minority. For the rest, progress has been considerable. Take literacy, for example –the percentage of Sub-Saharan Africans who could read and write doubled over the period 1970-1999, from less than one in three to two thirds of the adult population… Between 1962 and 2002, life expectancy in the Middle East and North Africa increased from around 48 years to 69 years.

The biggest success of development has been in making the things that really matter – things like health and education—cheaper and more widely available… We do not appear that knowledgeable on the subject of increasing the speed of income growth, as we have seen. In contrast, we appear considerably better at improving the broader quality of life for everyone, at whatever income. A greater focus on proven approaches to more rapid improvement in health and education may have a significantly greater impact on the quality of life of poor people in poor countries than yet another quest for the grail of GDP growth.   

Kenny is soliciting feedback from anybody who downloads and reads the book; I very much hope that among that feedback will be an email from a literary agent who hopes to be able to place this book with a major publishing house who will put some serious effort into promoting it. Given the success of simplistic books on development by the likes of Jeffrey Sachs and Dambisa Moyo, this more subtle, more realistic, and much more readable book should by rights do really well commercially. And when it does, you can be one of those smug people saying that you read it back when it was a free download from blogs.com.

COMMENT

ummm, where do you think all the health and education came from? Someone figured out how to plant a health and education tree in each village? These things cost MONEY which is why economists care about growth in incomes. Not because they are cash-fetishists, but because money can on occasional be useful for paying for nice stuff like medicine and school books.

Excising the cheapest options

Felix Salmon
Jun 13, 2009 20:10 UTC

Alex Tabarrok wonders why no stores stock cheap (as opposed to expensive) HDMI cables, and Kevin Drum — who used to manage a Radio Shack — recounts his own tale of looking for a simple patch cable:

Last year I made the rounds of every retail store in the area after I got annoyed at the price of a simple Cat-5 network cable, and there wasn’t a single place that sold them for a reasonable price. Not one. It was almost like there was a cartel or something. (And the cartel worked! I didn’t feel like waiting the few days it would take to order online, so I went ahead and bought an expensive one. Their fiendish strategy turned out to be remarkably effective.)

I think there are two very simple explanations of what’s going on here. Kevin hints at the first: if you need an HDMI cable or an ethernet cable or a USB cable, you generally want it now, and you don’t want to faff around with ordering it on the internet and wondering when it might arrive. (Note that Alex’s example of HDMI cables being sold for “virtually nothing” turns out to be one of those examples where next-day shipping — still decidedly less convenient than just walking home with the cable in your bag — costs $30.)

But more to the point, your local retail outlet will quite rationally try to maximize the profit it makes on its HDMI cables. Alex I think is wrong here:

Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.

I think what we’re seeing here has almost nothing to do with anchored expectations. Instead, consider this: most remotely educated consumers will simply buy the cheapest cable on sale, and so there’s a very strong incentive to ensure that item is as expensive as possible.

Why would we expect competition to push prices down? Well, let’s say you’re managing a Radio Shack down the street from a Best Buy. You could, if you were so inclined, start selling HDMI cables at a fraction of the cost of the cheapest cables available at Best Buy. Would that be a good idea? Well, it would get you the business of the kind of people who shop around different stores for the cheapest HDMI cable, and it would improve your reputation as a store which doesn’t needlessly rip people off. On the other hand, people would pretty much stop buying expensive cable from you overnight, and all the associated profits would simply evaporate.

I’ve recently been shopping around for a folding bike — one which (fingers crossed) the security guards at 3 Times Square will let me bring in to the office. There’s a sweet little folding-bike shop in my neighborhood, stocking a pretty wide range of different brands, although they do tend to push Bromptons over everything else. And they don’t stock the cheapest brands. Could it be that the cheaper bikes are simply not very good? Maybe. Or maybe it’s just that if their customers have the option of buying a cheap folding bike for a few hundred bucks, they’ll be much less inclined to drop $1,000 on something else, and the store’s total profits will go down.

I suspect you’ll see the same thing at say kitchen stores: while there might be a big range of pots or knives, most shops selling the high-end stuff will be reluctant to stock very cheap stuff alongside it. Doing so just makes it far too easy for the consumer to decide that the extra cost isn’t worth it.

COMMENT

This theory makes pretty good sense, but it still seems like “the power of small” would kick in at some point and someone would offer the cheaper cables to undercut the bigger competition that is only offering the pricier ones. Sort of like how collusion supposedly can’t work because someone will take advantage of the price gouging by pricing below the colluded price. If these cheaper cables exist, someone must sell them, right?

Posted by Rhys | Report as abusive

Friday links have a few surprises

Felix Salmon
Jun 12, 2009 21:12 UTC

Nafta infoporn

Pie charts: Pretty boring things. But add some white dots and some black dots, and they become videogametastic!   

Foreign holdings of US debt are staying high

Finally: “We should stop using the metaphor about the war on drugs,” says the drugs czar. Next up: the “czar” metaphor

Current TV censors its own employees

The NYT Article Skimmer is better than ever, make sure to play around with the Settings. I love it!

GM CDS auction looks to settle around 11 cents on the dollar

Citi’s bond traders’ salaries should be capped at whatever traders at Freddie Mac are making, it’s all you need to pay

A cute counterintuitive empirical analysis of the effect of new tennis balls

Is Murdoch selling the Weekly Standard to ensure that Wendi doesn’t get the opportunity to kill it when he dies?

Basic anatomy baffles Britons. Would USAians do any better?

The official Ecuador success rate on its bond exchange was 91%. Lower than I expected, but still a win.   

“The Bloodcopy blog has attracted more than 11m page views” — Can this possibly be true?

COMMENT

I’m just about finished with the second draft of my vampire novel. Is all this publicity about vampires going to help me sell my book or hurt me? It’s hellish being a novelist, but I’ve yet to find a way to make money posting comments on blogs. In fact, I’ve yet to find a way to get positive feedback about my posting on blogs. Of course, I’ve yet to find a way to make money writing novels. I’ve written an enormous amount of text for no fee, and seem unable to stop.

Good work on that anatomy headline. I had to read the story to see if Brits couldn’t tell their heads from their…Well, I think you’re correct. We in the US wouldn’t do much better on that test.

Is it just me, or did other readers laugh uncontrollably at those drawings with the choices? Of course, I’ve had ten kidney stones. I wonder how the ovaries percentage broke down between the sexes? It’s hard to believe that more men know where their ovaries are than their lungs. Or did I read that graph wrong?

How could people not find their heart and lungs and stomach? That defies belief. Couldn’t they jog in place, hear and feel their heart and lungs. Then eat a candy bar, and try to determine where it’s heading?

Chart of the week: Roubini and the VIX

Felix Salmon
Jun 12, 2009 19:15 UTC

I always knew that Nouriel Roubini was quite volatile. I just never thought to chart it.

RoubiniandtheVIX061109.gif

COMMENT

This is because, Felix, when Times Get Volatile, People Dial “Roubini”.

“Hmm. That economy over there is looking pretty fragile, Abner!”

“Yeah, sure is, honey. D’you think ..?”
“Yeah, sweetheart I think you better get on that phone and call Professor Roubini”

Like that.

Posted by chaingangcharlie | Report as abusive

Housing chart of the day

Felix Salmon
Jun 12, 2009 19:09 UTC

There’s yet another great housing chart from wcw today:

Rassets.png

If this line reverts to the long-term mean, the extra evaporation of housing equity would be utterly devastating. But is there any reason to believe that it won’t?

COMMENT

If you draw a straight line to approximate the (slowly rising) mean, aren’t we now pretty close to it?

Posted by thorsteinveblen | Report as abusive

Whither cap-and-trade? An IM exchange

Felix Salmon
Jun 12, 2009 18:52 UTC

One of the great things about working for Reuters is that I get to pester journalists who actually know what they’re talking about. So after reading Timothy Gardner’s story on the cap-and-trade bill today, I got him on IM, and learned a lot — not least that Waxman-Markey is being considered more of an all-encompassing energy bill, as opposed to simply a way of creating a cap-and-trade scheme. Which on the one hand means that it can be loaded up with enough pork to make it pass, but on the other hand makes everything much more complicated:

Felix Salmon: Your headline says that a cap-and-trade bill is “more likely” in 2010 than in 2009, is that right? And is this a new development?

Timothy Gardner: Well I think a lot of people who are watching Congress closely believe the stars are aligned like never before for action from the U.S. on climate. The EPA has proposed that greenhouse gases are a danger to human health, Obama has set new CAFE standards for vehicles and he also supports a cap and trade market.

TG: But I think too that NGOs, and carbon market developers like the International Emissions Trading Assocation, are beginning to realize that in a lot of ways the compromises have just begun. It’s not new that many people think the bill wont be completed unitl sometime next year. But the complexity of the many of the issues including what to do about nuclear, which is not addressed very much in the bill, and reframing the costs of putting a price on carbon during the recession, are new. The head of the IETA office in Washington, who worked on the Hill for 9 years on climate, said today “there’s not a snowball’s chance in hell” that the bill will pass this year.

FS: Yikes.

TG: There’s still a lot of optimism out there especially because now the White House supports forming a carbon market.

FS: But that was the other thing I wanted to ask you about — this nuclear thing

FS: Obvs nuclear energy has zero carbon emissions, right? So it will benefit from any cap-and-trade bill?

FS: But your story seems to imply that there might be something in the bill to scale back nuclear energy?

TG: Well, it’s close to zero emissions because you would have to build new plants and mine the uranium and dispose the waste. But yes it could benefit from a cap and trade bill but so far it has mostly left out of the process.

TG: I didn’t mean to imply that it would be scaled back. It’s just that any benefit it would get from cap and trade would have to be balanced with a program on what to do with the waste since storing it at Yucca Mountain has run into so many problems.

FS: I’m confused about this. Surely questions about what to do with nuclear waste are questions about what to do with nuclear waste whether or not there’s a cap-and-trade scheme, right? Why should those questions be addressed in a cap-and-trade bill?

TG: Nuclear doesnt necessarily have to be addressed in the Waxman bill, it could be addressed in another bill in parallell, but that could take time

TG: But the bill is first and foremost an energy bill, not just a cap and trade bill. So from what I’m hearing some Senators are looking for funds and loan guarantees to build new nuclear plants. If they get that there would probably have to be some kind of deal or plan on what to do with nuclear waste as well.

TG: It costs $3 to $5 billion to build a nuclear plant, so to build one will take time

FS: Hobbling carbon-derived energy isn’t enough for these guys? They need extra pork for nuclear energy on top?

TG: If the Senate wants to gain a few votes to get to the required 60, particularly if Al Franken doesn’t make it in. There are still more than 20 iffy Democrat Senators and quite a few Republicans that could go either way

FS: Wow, sounds like this is going to end up with more pork than David Chang festival. Thanks for your time!

COMMENT

California CalEPA Secretary Linda Adams, signed a MOU with the UN in China on earth day. China gets about 50% of the world carbon tax and the China government gets a 50% tax of the credits.

** China goods and services may increase

** We pay the carbon tax and Pew Business Environmental Leadership Council (BELC) Member Companies: ABB, Air Products, Alcoa Inc., American Electric Power, Bank of America, BASF, Baxter International Inc., The Boeing Company, BP, California Portland Cement, CH2M HILL, Citi, Cummins Inc., Deere & Company, Deutsche Telekom, The Dow Chemical Company, DTE Energy, Duke Energy, DuPont, Entergy, Exelon, GE, Hewlett-Packard Company, Holcim (US) Inc., IBM, Intel, Interface Inc., Johnson Controls, Inc., Lockheed Martin, Marsh, Inc., Novartis, Ontario Power Generation, PG&E Corporation, PNM Resources, Rio Tinto, Rohm and Haas, Royal Dutch/Shell, SC Johnson, Toyota, TransAlta, United Technologies, Weyerhaeuser, Whirlpool Corporation, Wisconsin Energy Corporation and friends may all share in the public/private partnership of corporate and NGO welfare

Posted by Charlie Peters | Report as abusive

Why effective regulatory overhaul is hard

Felix Salmon
Jun 12, 2009 17:26 UTC

Tyler Cowen has a good post on why it might not be such a bad thing after all that the coming regulatory overhaul isn’t going to be nearly as big or comprehensive as many of us originally hoped.

Tyler’s best points, I think, are that (a) the Department of Homeland Security is living proof that regulatory consolidation is not necessarily going to be a great success; that (b) “box reshuffling” can be a distraction from “substantive goals of mission”; and that (c) a lot of the real obstacles to effective regulation are actually Congressional, rather than being endemic to the current structure.

Still, the current regulators have clearly failed at their jobs, there’s no reason for entities like the OCC and the OTS to continue to exist, and it’s worth remembering at all times that the number of large American financial-services companies with intelligent and sophisticated and effective regulation is, currently, zero.

There’s actually a case to be made that the biggest weakness of the Gramm-Leach-Bliley act was not that it allowed commercial banks to buy investment banks, but that it created no regulatory oversight commensurate with the systemic importance of the beasts that it spawned. It’s high time that oversight was rectified — with extreme prejudice.

COMMENT

If the OTS and/or the OCC are abolished, one might wonder what would happen to the thousands of employees and examiners that work for those agencies, would they be transferred to other agencies or simply gifted back to the job market.

Posted by Brian Martin | Report as abusive
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