Thursday, April 26, 2012

Solar Incentives

Proponents of solar power just can't wait for the day when solar energy will be competitive.

So they'd like to bring that day forward.  An ideal way to do this is to subsidize solar power.  Or is it?  Like most well-intentioned ideas, solar subsidies have unexpected consequences.  But one of those consequences is the stifling of improvement of solar technology.

People respond to incentives.  This is the great forgotten law of economics.  Solar subidies make people want to buy solar, because it artificially lowers the cost of solar.  But subsidies also harm the creation of new technologies, or improvements on old technologies, by de-incentivizing research and development.

Imagine you have a great idea for an improved solar technology.  If the true current cost of an installed solar watt is $5, then your technology need only cost less than $5 to be an improvement.  If you can hit $4/watt, then you're going to be rich.

But the subsidized cost per watt is $1.  Now, in order to be competitive you have to beat $1.  Of course, your technology is nowhere near that good yet.  And neither is anyone else's.

One might argue that the answer is to also subsidize solar research and development.  And indeed, this is being done.  However, when your goal is to generate additional grant funding rather than to compete in a real marketplace, you're unlikely to actually change the world.  This also places the government in the position of picking winners and losers - and the government has a very poor history as entrepreneur.

It all comes down to price signals.  When something is expensive (and in demand), it creates pressure to lower the price - ideally through innovation.  If you cut off that price signal, you remove the incentive to innovate.  Subsidies are a great way to cast today's technology into stone, making sure that it moves forward much more slowly than it would otherwise.

Saturday, August 13, 2011

In Defense of the Corporation

I've been hearing the Left complain about corporations since the late 90's.  Now there's a movie.  Sigh.  Stop listening to this nonsense, please.

There are two main groups of people complaining about 'corporate personhood'.

The first group are people who haven't spent more than 30 seconds thinking about it.  They either don't understand what corporations are, or just don't care enough to think logically through their own criticisms.

The idea of incorporation dates back to the 17th century.  The main purpose of a corporation is to allow a group of people to act as a single legal entity, and to shield them personally from liability for the actions of the group.  Without corporations modern business and life would not be possible.  For example, if your iPod blows up in your face - who would you sue?  You would have to individually sue every single Apple shareholder.  But you wouldn't be able to do that, since Apple wouldn't exist in such a world.  When someone sues Ford for a defective vehicle, the company doesn't go to a 60 year old retiree in Michigan and take his home away, because his pension benefits included shares of the company.

But it's not just the liability.  Greenpeace, for example would have to exist as a 'club', and you wouldn't be able to give them any money.  I'm not even sure what the Left wants... do they want to ban all forms of organization?  No concerted action by groups of people larger than two?  This comes right to our freedom as individuals to associate as groups - a right guaranteed by the First Amendment.

This first group is offended by a metaphor.  'Corporate Personhood' is a Legal Fiction, something that makes the legal process workable.  Without it, you would have to pick a guy in your 'business club' to pay the rent on your office space.  And he'd have to pay it to that other guy, the one that rents out the space.

Other Legal Fictions are things like Adoption - nobody believes that a piece of paper makes an adopted child suddenly the biological child of his adoptive parents, but pretending so from a legal standpoint simplifies everyone's life.

In the same way, nobody actually believes that the Ford Motor Company is a person.  It's a metaphor that should be stretched only as far as it is useful - and no further (for example, claiming that corporations are 'psychopathic').  Yes, there are companies that behave badly.  But there are real people behind those companies making those bad decisions, and the fact that they are incorporated means you have a way to punish them for it.  If they individually act in a criminal manner they can still be charged as individuals.

The second group complaining about Corporate Personhood are people who don't like capitalism, and think they have found a nice 'hook' for their song about it.  My response:

If a man isn't a Communist at the age of eighteen, there's something wrong with his heart.
If a man is still a Communist at the age of thirty, there's something wrong with his head.

Thursday, July 21, 2011

Mike Honda and Gas Prices

I found this mailer from Rep. Mike Honda (D-CA) in my mailbox today.  Normally I don't bother to read this stuff, but I happened to see this panel on the back side:

"Mike Honda is Fighting to Lower Gas Prices".  Wow.  There's really only one way that a congressman can lower gas prices, and that's to lower the 70 cents per gallon tax burden - California of course having the highest gas taxes in the nation.

But lowering gas taxes was not on his list of solutions:

  1. Repeal Billions of dollars in tax breaks for Big Oil.
  2. Make it a federal crime to sell gas at an excessive price.
  3. Support "Use It or Lose It".

Not a single one of these things will lower gas prices.  In fact the first and third will obviously raise prices.  The second probably will, too.

  1. Repealing "tax breaks" for Big Oil means raising their costs, which will have to be passed on to consumers.  Theoretically, this might lower your tax bill, but not your gas bill.
  2. Every president for the past 50 years has gone through this silly exercise.  Never a shred of evidence of collusion on gas prices has been found.  Gas prices are the simple output of supply and demand.  But placing an additional burden - in the form of risk that they will be charged in violation of this law - can only raise their costs, which in turn will be passed on to consumers.
  3. If an oil producer is holding leases to drill oil that they are not using, there are probably solid financial reasons for that.  Drilling there is less profitable than some other activity or location.  If you force them to change their allocation of resources, by definition you will raise their costs.  This will be passed on to the consumer in the form of higher gas prices.
You don't need to be a Nobel-prize-winning economist to understand this stuff.  It's basic grade school economics - supply and demand.  Yet, Honda felt so confident in his three non-solutions to the problem of gas prices that he spent taxpayer money to tell me about them.  Is Honda stupid?  Does he think his constituents are stupid?

Or is the whole thing just a farce, where the goal is to just mumble things that people might like in pieces as long as they don't think about how they combine?  Like, "we must lower cavities in children" and "children need more candy because they like it", or "oil is too expensive" and "let's go to war over it".

Tuesday, April 5, 2011

In defense of inequality

The dark and evil bugbear of income inequality is making the rounds again.

The problem: a tiny sliver of the people own a huge portion of 'the wealth'.  According to Stiglitz, the top 1% of Americans control 40% of the wealth.  If you don't understand economics, (or in Stiglitz' case, you have a political agenda), this is a 'problem'.  The assumption is that these massively wealthy people have taken their filthy riches from the rest of us poor slobs.  They *must* have done something to us, something wrong.  Nobody should be that wealthy - it's disgusting.

The answer from the left is that this money should be taken from the wealthy, and redistributed 'fairly' to the rest of us.

Whether you subscribe to this idea or not, I've got some news for you.  The 'problem' is only going to get worse.  I believe that the factors responsible for the current distribution of wealth will only become more powerful over time.  But I'm here to tell you why it's *not* a problem, and you shouldn't be worried, or angry, or resentful.

First, some remedial economics.  Sorry if this is boring, but it's critical to understanding wealth and its distribution.

Take a CEO - a real fatcat like ING's Jan Hommen.  Why does he earn so much money?  What could he possibly do that would justify a £1m bonus?

CEO's are like any other employee: their wages are subject to the laws of supply and demand.  And the truth is, the supply of people with the business experience, the training, the track record, the sophistication, and the wardrobe necessary to run a bank like ING is limited.  Imagine the consequences if the Dutch were to pass a law limiting his total salary, stock, and benefits of all kinds to £200,00/year.  This lower wage would make the job a lot less attractive.  At that salary, a job as a government clerk, or an airline pilot, or a dentist, might seem a better deal - one with a lot less stress.  ING will be unable to compete in the global marketplace for CEO's.  [How would they respond?  Naturally, they'll have to weasel out of the law somehow, or go out of business due to their inability to hire sufficient talent to run the company.  Has society benefitted?]

Why is his income so high?  Because prices are signals.  And wages are simply the price the company must pay to hire him.  A high wage - in any occupation - is a signal to the market that more supply is needed.  When your mother tried to get you to go to medical school, she was responding to that signal.  If the supply is allowed to grow, the wages will eventually come down, until they reach an equilibrium.

By pressuring ING to take away Jan Hommen's bonus - you hamstring the bank at a critical time.  Think about it.  When times are good, the economy is soaring, and profits are rolling in - do you really need that world-class banking expert as your CEO?  Or do you need them the most when everything is falling apart?  Or during the recovery?

It's currently in fashion to hate bankers, stock brockers, basically anybody that has anything to do with finance.  This is a backlash from the 2008 crisis.  And some of that emnity is deserved.  But spare a few moments while I try to defend these folks.

Look at Larry Page and Sergey Brin.  Almost nobody hates those guys, or resents their wealth.  They clearly deserve it.  They provide services that the entire world uses - Google probably greases the wheels of commerce in ways that we don't even understand yet.  But most people don't actually understand what they did, or what they do.  To most people it's technical gibberish.  But the market understands what they do.  Most of their vast holdings right now are not in a sense a 'reward' for creating Google - but rather a massive bet by the market that they'll continue to innovate and create even more wealth.  This is price signalling at work again.

But those guys in finance that you despise - they also do stuff - stuff that you might not understand - stuff that the markets value highly.  Just because you don't understand it doesn't mean it's not real, or that they don't deserve their income.

So is this really a problem?  Is there some way that Jan Hommen's, or Larry Page's salaries make you worse off?  Did they really take that money from you?  Of course not.  And in fact, in both cases you probably derive some benefit from their existence.  Taking their wealth away wouldn't improve things, and could make things worse.  How many young Stanford computer science students will want to give up the security of a comfortable job at Cisco for the risky life of an entrepreuner - when the only reward is to be vilified by society?

This resentment of other people's wealth stems from a broken world-view.  Subscribers to this view imagine that wealth is an island - an island that everyone has to share.  If Bill Gates owns 10% of that island, and you live in a tiny closet, then clearly something is unfair.  But this metaphor is completely wrong.  Wealth is created - rather than picturing an island, think of the Netherlands.  Over the past several hundred years, the Dutch have carved their land from the North Sea by filling it in.  This is what entrepreneurs do - they create wealth that wasn't there before.  And believe it or not, they don't keep all of the wealth they create - they share it with the rest of us.  This newly-created land then provides a place for the growing of a 'crop' of future wealth.

Now, think about that 'top 1% controlling 40% of the wealth' problem again.  Rather than seeing a wealthy man or woman that has stolen land from you - you should now see a bold entrepreneur - someone who risked their capital and their time to create new land for everyone to share.  It shouldn't be surprising that the people who are the most adept at creating new land should be sitting on big portions of that new land.

Now I don't mean for this to be an apologia for every 'filthy rich crook' in America.  In reality, there are quite a few people who are undeservedly wealthy - people who actually *have* taken land from others rather than creating new land.  Often, these are people who take advantage of government or monopoly power to fleece either their customers or the taxpayers.  We all know who the 'crooks' are - even if they don't break a law (perhaps because they lobbied for a loophole?).  I'm not defending those guys.  What I'm saying is that you shouldn't automatically assume that all billionaires are crooks.  Or even that most of them are.

Ok, now for the bad news.  I think the 'problem' is only going to get worse.  Twenty years ago, the canonical 'filthy rich guy' was an Oil Baron or a Saudi Sheik.  Today, the names that come to mind are of young technocrats, instant rock stars like Page & Brin, or Mark Zuckerberg.  Their meteroic rise in fame and wealth are hints of the world to come.  Our society is speeding up.  Information and capital move at a blinding speed - a speed that will seem glacially slow only a few years from now.  Technology is making possible huge leaps in productivity - and productivity is the main engine of society's wealth creation.

So I see over the next few decades an ever-widening distribution of wealth.  Using our 'land-creation' metaphor, the North Sea will be filled faster and faster as time goes by.  If the broken 'island' metaphor takes hold, then resentment and anger will rise, too.  But if we can get people to understand what's really going on, maybe we can avoid a foolish class war.

Monday, March 21, 2011

Debate: How to Protect Yourself

How to ensure that debate takes the form of pointless posturing, and avoid the risk of actual communication:
  1. Deliberately misrepresent the other side: choose their most outrageous 'representative' and/or focus on any verbal missteps or outtakes - pretend that this is the crux of their position.  Ignore moderates or moderate positions.
  2. Make an impassioned, perfectly reasonable response to *that* position.  Slather on the self-righteousness, with plenty of smarm for added points.  Bask in the glow from your choir.
  3. When confronted by a reasonable person and/or reasonable argument, tar this person and/or argument using the brush from step 1.
  4. Radicalize!  Take an even more extreme position than the one you actually believe in!  This makes it easier for the other side to do their part!

Friday, March 18, 2011

The Government has No Business being in the News Business

  1. The vast majority of NPR's budget comes from donations, both from individuals and corporations.
  2. Those donors should be unhappy about any attempt to influence the content produced.  It's your station - much more so than Fox News or CNN.
  3. Since a small sliver of funding comes from the taxpayer, the government has repeatedly pressured CPB/NPR about its content, and has arguably succeeded in biasing that content over the years.
  4. The current debate is a clear sign of exactly that influence.
  5. The best way to eliminate that influence is to get rid of all government subsidies.  Cut the strings, cut the influence.  If you listen to NPR, you can afford to make this problem go away for good.

Tuesday, March 15, 2011

How is Nuclear Power like Alcohol and Cigarettes?

Because of the idea that recreational drugs are 'bad', we've had almost no advancement in the 'science' of recreational drugs.  A few new substances have slipped through the cracks.  Much of the interesting work has been done by a lone chemist, Alexander Shulgin.  But every new drug, if at all effective in being 'recreational', is made illegal.  The result?  Rather than banning all recreational drugs, we insist that people stick to the two well-known drugs that cause by far the most damage to society: alcohol and tobacco.

The same thing has happened with nuclear power.  Since Three Mile Island, no new reactors have come online in the United States.  Opponents of nuclear power have succeeded in stopping all improvements in safety, cost, and efficiency.  The result?  40+ year old plants are continually relicensed even though there are much safer designs available.  Fears of proliferation have stopped fuel reprocessing, creating the problem of where to store spent fuel.  NIMBY activism has stopped the use of the Yucca Mountain storage facility, forcing on-site storage of spent fuel.

We should be building modern, passive-safe plants.  We should be investigating inherently-safe alternatives like thorium-fueled molten salt reactors.  The best way to get rid of these old power stations is to make them obsolete.

Of course the anti-nuclear activists don't want the old plants to continue to run.  They want them shut down, forcing society to retreat to even older and more toxic drugs: coal and oil.