Let's take a look at some alternative energy technologies.
Advances have recently been made in solar to bring down the cost to a more reasonable level. Costs for photovoltaics have dropped from $27 per installed peak wattage to $4 per installed peak wattage recently. A company called Nanosolar, funded by the founders of Google, has technology to print solar cells at much lower cost. They claim they will be able to profitably sell them at $1 per installed watt quite soon. This technology could be deployed across large parts of the southwestern United States. This new solar technology combined with better storage and power transport technologies could spur a switch to solar energy.
The price of wind generators has also fallen greatly in the last few decades. Major companies like GE and Siemens as well as dedicated wind generation firms like Vestas. Generator technology is mature technology. However, many improvements have been made in blade design and materials, gearing, and computer controls. Billionaire oilman T. Boone Pickens is currently investing in the world's largest wind farm with over 2,000 turbines. In some areas, prices can rival coal or nuclear. With better storage and grid technologies, wind can provide a large amount of useful energy.
For automobile transport, we'll need either better batteries or some sort of manufactured liquid fuel such as hydrogen. Battery technology is improving quickly, and this means acceptable range and fast charging times with falling prices for batteries. Hydrogen fuel cells for cars do not seem practical in the near future. In addition to a workable battery technology, we need plentiful electricity. For the long-term this will need to be based on a renewable resource such as solar or wind. As for air transport, it's not quite as easy. Batteries do not have anywhere near the power density for air travel. Hydrogen could be manufactured for aircraft use provided there is cheap energy and a way to store it.
Biofuels might solve both the transport and the collection problem. While current technology with corn ethanol is expensive and requires huge inputs of energy, it might be better in the future. There are also a number of other technologies on the horizon. Algae can produce bio diesel and bacteria can produce a very high quality of crude oil. This technology is quite promising in that it would not require a shift in technology by users of energy. We could continue to use our regular automobiles and airplanes while using a renewable feedstock.
While there may be pain in the near term with higher energy prices, new technologies are promising. We must not be tempted to reduce the pain by price controls or subsidies that will only prolong difficulties. High prices more than anything else will make us switch.
Monday, July 28, 2008
Saturday, July 26, 2008
Whack-A-Mole for Economic Fallacies
Alternatives including solar and wind will be adopted soon in large part due to market forces. However many politicians, look at alternative energy as a way to create "green collar" jobs. In their world, there are no costs involved only benefits. All we need to do is provide subsidies or launch a government program for alternative energy, and we will give plenty of jobs to people. This is only a thinly veiled rephrasing of the classic broken window fallacy. The story goes like this: A boy breaks shopkeeper’s window. The townspeople say that this accident makes work for the glazier who will buy bread, and who will in turn buy shoes. They conclude that the boy benefited the town economically. No matter how many times the fallacy is repeated as truth, it is still fundamentally wrong.
Returning to the idea of "green collar" jobs, we must remember that jobs are a cost. Giving someone a "green collar" job takes away resources in a very real way from another industry. For example, engineers, computer scientists, and construction workers among others are needed to create a wind farm. A mechanical engineer might design aircraft engines instead. A computer scientist could work for Google instead. Construction workers could build a road or a bridge. We are likely in a recession now, so the costs of giving someone a job may be lower. Instead of collecting unemployment they could be at least be doing something useful. A recession is only temporary though, and government programs and subsidies long outlive their usefulness. Government will end up picking winners, and the rest will be left behind paying the costs.
Returning to the idea of "green collar" jobs, we must remember that jobs are a cost. Giving someone a "green collar" job takes away resources in a very real way from another industry. For example, engineers, computer scientists, and construction workers among others are needed to create a wind farm. A mechanical engineer might design aircraft engines instead. A computer scientist could work for Google instead. Construction workers could build a road or a bridge. We are likely in a recession now, so the costs of giving someone a job may be lower. Instead of collecting unemployment they could be at least be doing something useful. A recession is only temporary though, and government programs and subsidies long outlive their usefulness. Government will end up picking winners, and the rest will be left behind paying the costs.
Tuesday, July 22, 2008
How should history judge leaders and public figures?
How should history judge leaders and public figures? More specifically, how should motives versus results be weighed in this decision? If we judge a person by what they achieve for mankind, among the greatest benefactors are Bill Gates, John D. Rockefeller, Michael Milken, and JP Morgan. Their organizational talents, entrepreneurial spirit, and new ideas made people better off. Some of these people that did so much are thought of so little. Sometimes they are dismissed as criminals, thieves, and just all around greedy bastards even though they made life better for millions. Politicians will talk about how they have created jobs, but these are the kind of people that create jobs and entire industries. If we looked at motives instead, we might see the most productive among us as greedy or having otherwise impure motives. Many politicians sell themselves as having good motives such as helping the poor. Some policies are apparently well meaning, but further examination shows a different story. The late, great Milton Friedman said,
"Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors -- there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate – the unemployment rate among teenagers in this country -- is over twice as high as the overall unemployment rate. It's no accident that that was not always the case until the 1950's when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market -- they're searching and finding jobs, and it's understandable that on the average they would be unemployed more. But it was nothing like the extraordinary level it has now reached -- it's close to 20%."
We cannot read the motives of politicians and they will always try to sell their motives as pure. So, we should lean towards judging by the results achieved in the actual application of policies and in an overall economic system. Looking at India, we see politicians that said they wanted self-sufficiency or to help the poor. These policies failed and created insurmountable bureaucracy was created that slowed economic growth and kept almost everyone poor. They saw planning as the way to do this, but they failed miserably and they are to blame. Even if we assume their motives were on the whole good, which I doubt, their actions resulted in the unnecessary poverty for millions of people. Planning crowded out the real benefactors of mankind. India did not need another 5-year plan or subsidies for low productivity domestic industries. They needed a Bill Gates, a Rockefeller, a Larry Ellison, but these types of people were crowded out and the entrepreneurial, profit-seeking spirit was strangled and replaced with rent seeking, over planning, and a system that kept India in the past for so long.
"Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors -- there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate – the unemployment rate among teenagers in this country -- is over twice as high as the overall unemployment rate. It's no accident that that was not always the case until the 1950's when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market -- they're searching and finding jobs, and it's understandable that on the average they would be unemployed more. But it was nothing like the extraordinary level it has now reached -- it's close to 20%."
We cannot read the motives of politicians and they will always try to sell their motives as pure. So, we should lean towards judging by the results achieved in the actual application of policies and in an overall economic system. Looking at India, we see politicians that said they wanted self-sufficiency or to help the poor. These policies failed and created insurmountable bureaucracy was created that slowed economic growth and kept almost everyone poor. They saw planning as the way to do this, but they failed miserably and they are to blame. Even if we assume their motives were on the whole good, which I doubt, their actions resulted in the unnecessary poverty for millions of people. Planning crowded out the real benefactors of mankind. India did not need another 5-year plan or subsidies for low productivity domestic industries. They needed a Bill Gates, a Rockefeller, a Larry Ellison, but these types of people were crowded out and the entrepreneurial, profit-seeking spirit was strangled and replaced with rent seeking, over planning, and a system that kept India in the past for so long.
Saturday, July 19, 2008
Hedging the End of the World
I recently saw a chart of the price of a credit default swap on the US Treasury. http://ftalphaville.ft.com/blog/2008/07/16/14538/unmitigated-disaster-in-chart-form/
For those of you that don't know anything about credit default swaps, basically it is a contract that says I will pay you if the underlying creditor defaults. So, I substitute my credit for the underlying.
1. Company or government issues a bond
2. I write you a contract that says I will pay you if that company or government defaults (doesn't pay up)
3. The company or government defaults I pay you the value of the bond. Typically, I would pay the value of the bond minus the recovery amount from selling the firm's assets to satisfy creditors.
The notional value of credit default swaps in the world is huge; it is estimated to be $62 trillion and most people have no idea about credit default swaps. Granted most traders in CDS probably do not have huge exposures, since they are in offsetting position. Let's suppose an investment bank writes a swap on a US Treasury. The idea of this leaves me wondering what event makes the Treasury default and leaves the investment bank(counterparty) able to pay. Since the credit default swap can be seen as a form of insurance, and insurance is only as good as the insurer. We have seen trouble with the municipal bond insurers, "By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely." (Wikipedia) The credible rumor of a default by the US Treasury would damage any counterparty and a default would be the financial equivalent of the end of the world.
If you buy a credit default swap on the US Treasury, it is like you are buying insurance on the end of the world. How do you price this and should you really assume anybody will be around to pay up?
For those of you that don't know anything about credit default swaps, basically it is a contract that says I will pay you if the underlying creditor defaults. So, I substitute my credit for the underlying.
1. Company or government issues a bond
2. I write you a contract that says I will pay you if that company or government defaults (doesn't pay up)
3. The company or government defaults I pay you the value of the bond. Typically, I would pay the value of the bond minus the recovery amount from selling the firm's assets to satisfy creditors.
The notional value of credit default swaps in the world is huge; it is estimated to be $62 trillion and most people have no idea about credit default swaps. Granted most traders in CDS probably do not have huge exposures, since they are in offsetting position. Let's suppose an investment bank writes a swap on a US Treasury. The idea of this leaves me wondering what event makes the Treasury default and leaves the investment bank(counterparty) able to pay. Since the credit default swap can be seen as a form of insurance, and insurance is only as good as the insurer. We have seen trouble with the municipal bond insurers, "By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely." (Wikipedia) The credible rumor of a default by the US Treasury would damage any counterparty and a default would be the financial equivalent of the end of the world.
If you buy a credit default swap on the US Treasury, it is like you are buying insurance on the end of the world. How do you price this and should you really assume anybody will be around to pay up?
Thursday, July 17, 2008
Is Healthcare a right?
It is often taken as given that health care is right without much thought at all. Before you regard all health care as a right, think through your position first. Healthcare has been around for less than a 100 years in a form that could do you any good. A wealthy industrialist or his children of 100 years ago could much for an infection for all the money in the world. Healthcare is expensive now because it can actually do something.
First, you need to look at health care as a continuum. The poorest people in the world have zero or very close to zero healthcare. The richest can get the best doctors, procedures, and drugs instantly without any thought of the cost and little or no waiting time. Most Americans rely on employer or government provided health care with some waiting, deductibles, and paper work. Does everyone have the right to the same level of healthcare? If that it is the case, we will probably have to restrict the health care choices of the richest people since a government provided plan would be insolvent if it tried to provide the best of the best healthcare for everyone.
Looking at the high price of health care, we see that a large amount of the expenses are incurred in the last year of life and much of that in the last quarter. This sort of healthcare does not add much value, and there are many patients that would be more comfortable and better off spending their last days at home. Some of this healthcare spending is out of the desire to do something rather than nothing even when it would be better to do nothing at all. Healthcare adds much value in antibiotics for infections, vaccines, treating some traumas, hip replacements, and probably quite a few other areas. With developments in materials, nanotechnology, and biotechnology healthcare, at least in the short run may become more expensive if you want the absolute best money can buy. Like other technologies we may see a decrease in prices at some point even if the system is confounded by the third party payer issue, which I will discuss in a later entry.
Once, I went to the doctor after feeling ill for several days. After the doctor listened to my lungs and ordered a chest x-ray, I was admitted to the hospital for two days and administered IV antibiotics. When I began writing this entry, I was thinking about the different levels of care that could be administered in this case. Unless I was truly destitute, without a cent or credit to my name, I would not have been able to go to the doctor. However, even someone without health insurance in most cases could find the money to go to the doctor to get something checked out. People are generally not in a vacuum; they have access to friends and family, credit, and their own savings to pay for medical expenses. At least they should have the resources to pay for doctor visits and relatively routine medications. They may not have been up for being admitted to the hospital, but they could still knock out the infection with antibiotics. Of course, there are exceptions to this and everyone has heard an anecdote about health care in the United States. However, life expectancy in the United States is not all that bad. It is much publicized that American’s life expectancy is lower than other industrialized countries. However, much of this could be due to habits and demographics rather than an inferior health system. In any case, at least in life expectancy there cannot be too much inequality for the simple fact that there are no people walking around living 200 years or more skewing the average up.
First, you need to look at health care as a continuum. The poorest people in the world have zero or very close to zero healthcare. The richest can get the best doctors, procedures, and drugs instantly without any thought of the cost and little or no waiting time. Most Americans rely on employer or government provided health care with some waiting, deductibles, and paper work. Does everyone have the right to the same level of healthcare? If that it is the case, we will probably have to restrict the health care choices of the richest people since a government provided plan would be insolvent if it tried to provide the best of the best healthcare for everyone.
Looking at the high price of health care, we see that a large amount of the expenses are incurred in the last year of life and much of that in the last quarter. This sort of healthcare does not add much value, and there are many patients that would be more comfortable and better off spending their last days at home. Some of this healthcare spending is out of the desire to do something rather than nothing even when it would be better to do nothing at all. Healthcare adds much value in antibiotics for infections, vaccines, treating some traumas, hip replacements, and probably quite a few other areas. With developments in materials, nanotechnology, and biotechnology healthcare, at least in the short run may become more expensive if you want the absolute best money can buy. Like other technologies we may see a decrease in prices at some point even if the system is confounded by the third party payer issue, which I will discuss in a later entry.
Once, I went to the doctor after feeling ill for several days. After the doctor listened to my lungs and ordered a chest x-ray, I was admitted to the hospital for two days and administered IV antibiotics. When I began writing this entry, I was thinking about the different levels of care that could be administered in this case. Unless I was truly destitute, without a cent or credit to my name, I would not have been able to go to the doctor. However, even someone without health insurance in most cases could find the money to go to the doctor to get something checked out. People are generally not in a vacuum; they have access to friends and family, credit, and their own savings to pay for medical expenses. At least they should have the resources to pay for doctor visits and relatively routine medications. They may not have been up for being admitted to the hospital, but they could still knock out the infection with antibiotics. Of course, there are exceptions to this and everyone has heard an anecdote about health care in the United States. However, life expectancy in the United States is not all that bad. It is much publicized that American’s life expectancy is lower than other industrialized countries. However, much of this could be due to habits and demographics rather than an inferior health system. In any case, at least in life expectancy there cannot be too much inequality for the simple fact that there are no people walking around living 200 years or more skewing the average up.
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