A post about anything other than Thatcher 3: Limits to Coase

In the course of the day job I was speaking to someone in BA’s senior management. They were lamenting that Heathrow needs another runway, that everyone in the industry knows that Heathrow needs another runway, but that Heathrow was not going to get another runway because local opposition was too fierce.

“Why don’t you just bribe them” I asked, channelling Coase.

“We offer sound proofing of course, but its not enough,” came the despondent response.

“What about actually bribing them, you know, with money?” I asked a little incredulously.

I’d summarise the response as “splutter, gurgle, haha,” but it could have been bluer.

In real life, as loathe as I am to use the phrase, people don’t get bribed and people don’t bargain because doing so is weird.

Coase’s brilliant essay “The Problem of Social Cost” describes how mutually beneficial bargaining can help to eliminate the problems caused by externalities.

Imagine an airport which produces noise pollution. Now imagine that it has been built in a densely populated and wealthy part of the country. Seems fanciful I know, but bear with me. This airport wants to expand, and could expand very profitably, but locals, fearing an increase in noise and disruption don’t want it too.

The airport wants to produce an externality, noise. You can think of other people as owning a right not to be disturbed. To expand, the airport should compensate those who it will disturb. That’s only fair. You could have government tax and redistribute the airports profits but that’s messy and inefficient. There’s a simpler solution: bargain, split the profits, and everyone can be a winner. A cheque in the post every month for everyone in TW6.

In Coase’s world the limiting factor is transaction costs. Transaction costs are the costs of doing business, they include the cost of bargaining, of contracting, of working out who’s involved and many other things. Bargaining occurs when it is profitable so long as it is not too difficult to find the people involved and draft an agreement between all the parties involved. But this has not happened.

What’s interesting is that the failure to bargain has not happened in a way predicted by Coase.

The interested parties are well known and an extensive dialogue has been ongoing for some time. Legal settlements have already been reached. Transaction costs are low. But instead of offering locals a simple bribe, they  have been offered a more complicated solution involved sound proofing and vague promises of employment.

According to Coase this shouldn’t happen. Everyone involved has been working to increase transaction costs and has been moving further away from a settlement. A simple solution is right: there take the damn money! But people are leaving that money on the table.

The Overton Window is a concept which describes the range of ideas which are politically acceptable. Bribery has a long record of being clandestine and immoral and is well towards the unthinkable end of the Overton Window as far as policy is concerned. However, we can also think of a bribe as a payment for a service. In this case a bribe should be offered for the service of not raising legal or political complaints about noise. But people don’t like bribes, and that appears to be the end of that.

The Coase Theorem is a beautiful idea, but a great deal more prevents mutually beneficial exchange than transaction costs. The ideas which are fashionable will shape and distort the way people bargain and the deals people accept. It appears that Britain is a country uniquely adverse to bribery, at least if Tim Worstall can be believed. This might be a good thing overall, but it appears this aversion can also make us all poorer too.

A post about anything other than Thatcher 2: Nuclear power saves lives

It is annoying that one of the things that everyone knows is that nuclear power is unsafe. This it simply isn’t true!

Here’s a graph from a new paper by James Hansen outlining how many lives nuclear power saves in the average year. In total nuclear power is estimated to have saved over 1.8 million lives relative to fossil fuel generation of the same Terrawattage.

es-2012-051197_0005

How does that work? I’m so glad you asked.

There are two ideas it is important you keep in mind when thinking about this. All power generation is going to kill someone. All everything is going to kill something. Every action we take has consequences and some of those consequences involve people dying because that is what everyone does eventually anyway.

The second idea is substitution. If we do one thing we will do less of another, especially when those activities are similar. My advocacy for drug legalisation is in large part informed by my upbringing in provincial towns where alcohol fuelled violence is ubiquitous. Nobody ever got beaten up by someone on MDMA or marijuana, substitution from booze to drugs would make the world safer. But I digress.

Although nuclear has well publicised (and well exaggerated) risks so do all generating technologies, as illustrated by the below graph.

deathTWH

Lets look at a few examples. Coal generation is dirty. Burning it pollutes the air, not just global warming but soot and smoke clog the air and slowly choke people. Digging it up is also dangerous.

A different story can be told about wind power. Its generation is clean, but you have to use a lot of steel and other metals in the construction and because each turbine uses a lot of material relative to the amount of energy produced it contributes to more deaths than you’d expect.

Nuclear on the other hand is fastidious in its safety. Chernobyl, the worst nuclear disaster by far, according to the IAEA, the UN’s nuclear arm, probably caused about 4,000 deaths. The Fukushima nuclear disaster, as opposed to the Fukushima Earthquake and Tsunami has so far killed precisely no one.

Lastly, look at Hydro. Looks pretty safe. But the largest catastrophes are not nuclear ones. The Banqiao Dam collapse in China and killed about 26,000 straight away and about 145,000 more later through famine and general devastation.

Without nuclear people would be using something else to generate their electricity. Much of Europe and the Eastern US would look like Poland and burn loads of coal. The mining and pollution of that coal would kill far more people that nuclear ever has thousands of times over.

So when it is reported that building nuclear power plants is expensive please bear this in mind. They are remarkably safe when you think about it. In fact, if people are serious about tackling climate change we’d probably (subject to a carbon tax’s implementation) see a lot more nuclear generation being built.

DISCLAIMER: as pointed out by Luis Enrique, I should have been clearer that I occasionally help produce events aimed at the nuclear sector. So don’t trust anything I say obviously.

Quick, a post about anything other than Thatcher: Ecuador’s performance is even more impressive that you realise

No preprepared obituary for her Toryness here, no siree, instead something completely irrelevant (or timelessly more relevant) about Ecuador.

So, first things first, I’ve always had a soft spot for Rafael Correa.

Firstly, because he also went to LSE, secondly for actually going ahead and repudiating the odious debt built up by past kleptocracies, thirdly for running a relatively effective industrial policy and finally for this truly brilliant, hollywoodesque sequence during an attempted coup:

President Correa went to the police barracks in Quito where he arrived at 11:00 A.M. (GMT+5); after being ill-received — an honor guard was not assembled — he first tried to have a dialogue with the police and criticized their actions as treason to “the people and the country”, but after hearing hostile police chant “Lucio presidente, Lucio presidente” he screamed “‘If you want to kill the president, here he is. Kill me, if you want to. Kill me if you are brave enough!”

So when I see someone ripping on Ecuador and Rafa, I get a little peeved, especially when the criticism is so bizarrely weak. Timmy highlights this paragraph from a glowing guardian write-up of Ecuador.

By rejecting the neoliberal recipes of privatisation, structural adjustment and curtailed demand, we have grown by 4.3% over the last five years despite the global slowdown. Central to this growth, and to the reduction of unemployment to the lowest rate in the region, has been public investment, which at 14% in 2011 is the highest in Latin America.

He comments:

Dear God. Sub-Saharan Africa is growing by 5.5% a year without much if any public investment in anything.

With 14% of GDP in said public investment Ecuador should be roaring away at a much higher rate than that. They’re boasting about the figures that show what a poor job they’re doing.

This is bizarre on so many levels. Where to begin?

Well first I should not that Ecuador is much wealthier than Sub-Saharan Africa, seven times wealthier! [src src] As countries get wealthier it gets harder to grow rapidly.

Logically it could be no other way, as poor countries get richer amongst other things they have to stop borrowing ideas and technologies and come up with their own. That’s much harder and growth slows.

Africa has had the advantage of being really poor and violent and one of the best ways to grow rapidly is to stop killing people all the damn time.

Ecuador has the much harder task of seeking export led growth. This sort of development is the only really tried and tested model we know of to take a country sized economy from the idiocy of rural poverty to urbanised development.

But there’s a catch. It seems not everyone can get rich this way at the same time. It seems that pockets of development and successful export led growth move about. First the UK, then to continental Europe and North America then to a cluster focussed on Japan (including South Korea and Taiwan) then another focussed around China. The pattern is rock solid, but it’s pretty good.

So, Ecuador is not just trying to pull of this most difficult of feats cut off from much of the world’s financial markets (that debt repudiation thing mention earlier), it also has to compete with China, Destroyer of Worlds. I’ll let Karl explain this one:

China at some points has had investment rates of in excess of 40% of GDP…. For super-geeks this exceeds the Ramsey Rule at a zero discount rate. For non-geeks it means that there is no investment strategy under which this is the profitable thing to do.

Its always hard to tell but on balance I think the Chinese government is aware of this, yet is willing to lose money on its capital investments in order to provide jobs for people moving to the city. This is a smart move if you think cities produce agglomeration effects.

With apologies to the less wonkish, China is using physical capital as a loss leader in order to grow cities that will produce network effects will in turn foster the human capital that really makes a country rich.

Ecuador is competing with this, and is geographically cut off from the major global growth cluster of our time and is still growing at a reasonable pace. I’ll concede a lot of the growth appears to be oil driven, but so what. They are selling their capital stock of oil and investing it in a different sort of capital stock of public services. Sounds like a reasonable plan to me.

Eppur si muove: stagnation and regime chance at the ECB and Bank of Japan

If there are deadly sins of monetary policy, timidity deserves inclusion. Timidity in a monetary authority facilitates hyperinflations and prolongs depressions. It sucks basically. The ECB and the Bank of Japan give as a good case study in what abandoning timidity can achieve.

To recap, in case you’ve had your head under a rock (or you’re Mario Draghi), Europe is a mess, unemployment has risen to 12% and Spain, Greece, Italy, Portugal and Cyprus are in depressions. Inflation ticked down in March for the third month in a row, hitting 1.7% in March, well below the ECB target and well below what would be required to drag Europe out of a depression. Yikes!

Japan’s position is arguable worse. A multi-decade stagnation and demographic catastrophe has resulted in zero nominal growth since the mid 1990s and an lot more retired people than is normal. How do you respond to situations like these?

One is the ECB approach of pussy-footing bordering on a parody of prudence. The Japanese tried this for some time and it didn’t work for them either. They recently elected Shinzo Abe, who is a bit of a nationalist knob-head, but who recently appointed Haruhiko Kuroda to the Bank of Japan, who seems alright and they have promised an end to pussyfooting and a return to growth.

The BoJ pledged to double both its purchases of Japanese government bonds and Japan’s monetary base. It also adopted a two-year target of 2 per cent inflation. Japan’s QE (or KaraokQE as one wag puts it) has also been revamped and repowered.

On the other hand, in Europe “Mario Draghi, president of the European Central Bank, has signalled that an interest-rate cut is rising up the bank’s agenda, saying it stood “ready to act” as economic weakness creeps further into eurozone countries unaffected by the sovereign debt crisis.”

…has signalled… interest-rate cut…moving up the agenda…”ready to act”… if they aren’t acting now, when will they act? Am I losing my mind here or is this economic vandalism on a grand scale? I’d swear but I’m hoping Scott Sumner will quote me one day and I don’t think he likes cursing.

From 2008 until November last year, Japan and the ECB allowed aggregate demand to follow a roughly similar trajectory. The result of this was a steep recession followed by a weak recovery. In November Japan zigged while the ECB didn’t even zag. This is illustrated below in the share price indexes (the Eurofirst300 and the Nikkei 225) I’ve cribbed from the FT. I like to use pictures when words fail me.

Stagnation and regime change

Wait a second…lets just look at the last couple of years and play “spot the regime change.”

Stagnation and regime change - Copy

Oh, oh, oh! I found it!

For those who think central banks cannot achieve reflation, that they are prisoners in a liquidity trap, that all is lost and that only “structural reform” (kicking the poors) or exploding deficits can save us, I say eppur si muove.

Look at that uptick. That is what the beginning of a recovery looks like. That is what regime change looks like. And that, is what Mark Carney will need to provide us with in the UK if we are ever going to get a decent recovery. Japan and the UK have led monetary revolutions before, we can but live in hope.

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PS Of course, my chart underestimates the disaster that is the insane ECB, because the European core economies (read Germany) contain relatively more large companies than the rest and thus the index sharprice index I used underestimates the disaster.

 

*The Selfish Gene* er… I mean *The Selfish Toilet Seat*

world-turned-upside-down2

To resolve an argument there’s nothing quite like Google Scholar. Should toilet seats be left up or down?

First of all a disclaimer. It might be too expensive to move from our current toilet seat norm to a different one. Expensive I mean in terms transition costs, maybe the social anxiety and anti-social behaviour required to move us would be more awful than the small benefits we gain from moving from one norm to the other. Even if that’s true, these are still interesting, and vital, matters to discuss.

What the women are dreading, and the men [1] are hoping for is that I’m going to say toilet seats should be left up, not down. I am not. Lots of people would like to argue that the toilet seat being one way or the other is inherently better, more hygienic or sightly but those arguments are destined to be weak. If Dr. J. Evans Pritchard can’t tell the worth of a poem toilet seats are beyond us all.

There are two things to bear in mind while norm choosing. First is the inconvenience of leaving the toilet seat other than you’d like to find it and the other is the inconvenience of finding the toilet seat other than you’d like to find it. Compared to NGDP growth shortfalls this is all unimportant, but we’re lucky enough to live in an age when we’re allowed to care about the unimportant, embrace it.

I think visually, and the below graph helped clear up my thinking on the subject, taken from the above linked paper by Jay Pil Choi.

Toilet Trouble

If everyone is a woman then seat down is clearly optimal. If everyone is a man then seat up is clearly optimal. That is if we assume the inconvenience of putting up and down a toilet seat is roughly equal. A reasonable assumption, although feel free to register your complaints in the comments.

First of all, a woman having used a toilet is predictive of another woman using that toilet next. Either because the same woman will come back or because the presence of one woman is indicative of there being other women in the vicinity or using that facility in particular.

The more important and logical strand of argument is different though, when society operates under a seat up or seat down rule one set of people  must incur the inconvenience of using the seat on every (for women) or almost every (for men) occasion. The other group incurs no toilet seat related inconvenience.

Because of these two interrelated  the socially optimal arrangement is for you to leave the toilet seat alone. This is what the above graph shows. Only under circumstances of extreme asymmetry in terms of inconvenience does it become important whether the seat is left on way or the other.

This finding is trivial, but also profound.

First of all because it shows that being selfish is good. The world is a better place because of selfishness as selfishness. Adam Smith argued that the selfish interest of the butcher and baker helped provide us with a service, when it comes to toilet seats there are direct positive externalities from selfishness.

Secondly, the results are generalisable. More things in life are like toilet seats than you realise. [3] When sharing a car, leaving it as you want it is superior to always returning it to someone else’s preference, or to somewhere neutral.

A society which is more selfish, and more accepting of bring selfish, does not therefore represent a move towards barbarism, but represents a sort of progress. Thing of that next time you’re on the toilet. In fact, some of you may be there right now reading this on your phone. Take my advice. Leave the seat alone and go and do something you enjoy.

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[1] Yep, just thought, “that’s very cissexist of you”, but sod it, I’m talking about toilet seats. [2]

[2] What do you mean you come here for serious political analysis? You really haven’t been paying attention these last four years.

[3] Can I submit that as one of the best sentences ever?