Tuesday, 30 June 2015

End June Links

Secular Stagnation As Wising Up

Government borrowing and long-term interest rates: a natural experiment

Bitcoin isn’t the future of money — it’s either a Ponzi scheme or a pyramid scheme

What Assumptions Matter for Growth Theory? is the best summary of the "Mathiness" discussion in econ blogs

# Glick & Rose The currency union effect on trade: Redux: it used to be estimated and presumed that currency union had a strong effect on trade, but recent empirical work has found much weaker effects. Basically the data hint that there are positive effects, but the size of any such effect is a strong function of the econometric technique used, and so we cannot say with any confidence that there is much of an effect on trade from CU.

# 2 pieces of great news from the Netherlands:
   - Dutch court’s climate ruling may force other states to cut emissions – or else
   - Dutch city of Utrecht to experiment in citizen’s income

# Not such good news on the effectiveness of energy efficiency when done in reality rather than under ideal conditions: A new study looks at federal energy-efficiency efforts — and the results are grim

Andrew ZP Smith asks, among other things, if wind energy is actually subsidised: "The chief assistance for onshore windfarm operators comes in the form of top-up payments from bill-payers, above what the operators receive from selling their electricity in the wholesale markets. ... An electricity grid tends to rank different generators in order of marginal cost, prioritising the cheapest forms of generation. ... Cheap electricity is brought online first, and the plants with the highest marginal generation cost are saved till last. ... Wind is never the most expensive fuel on the grid, because its fuel is free. The cost of wind power is almost entirely in construction; marginal generation cost is next to nothing. Therefore when the wind blows and power is generated, it knocks out the most expensive generator (and whether that’s coal or gas, depends on their relative prices, the carbon price, and the relative efficiency of the generators) and it lowers prices across the whole market. Previous research in Germany and Spain has found that these cost reductions outweigh the revenue support paid to wind. Wind is not subsidised in those two countries – indeed, quite the reverse, wind lowers total costs for consumers."

# Evidence on the costs of Brexit? Campos, Coricelli, & Moretti conduct econometric exercises on Norway (which was able to join the EU in 1994, but chose not to) and the other 1994 candidate countries (who did join) Sweden, Finland and Austria. They find that the decision not to join the EU has reduced Norway's productivity by 6%.

# It's not often Celtic and Scottish football get a mention on VoxEU! Dominance in football: An application of Sutton’s theory of endogenous sunk costs

# People often say that lefties support Keynesian demand management because they support big government. Nick Rowe makes a good point that this doesn't make sense: "My beliefs about the optimal size of government don't matter for my beliefs about fiscal policy. My belief that the size of government matters and that there is an (interior*) optimum does matter for my beliefs about fiscal policy. It's why I'm against it." i.e. belief in big government should bias you against Keynesian demand management (all else equal).

# This Diane Coyle post is a bit rambling, but the maps are cool, there are some links that I should go back to, and it ends with a point that I entirely agree with about CBA for transport projects: "standard cost-benefit analysis does not do a good job when it comes to big infrastructure projects ... because it is a tool for assessing marginal changes, not ones which might involve large non-linearities – behaviour changes or network effects. ... it isn’t about saving 20 minutes on your journey time to increase the amount of time you can spend in a meeting at the other end."

Friday, 26 June 2015

Is fiscal austerity contractionary under floating exchange rates?

Nick Rowe points to Scott Sumner pointing to research by Mark Sadowski: basically austerity is strongly associated with weaker economic activity in the Eurozone (so country implementing it does not have control over monetary policy with which to offset the fiscal austerity), but not associated with weaker economic activity in countries with their own currency.

Graphs pinched from Scott Sumner's blog:
# Eurozone/no independent monetary policy -
Screen Shot 2015-06-18 at 11.54.06 AM

# Independent monetary policy -
Screen Shot 2015-06-18 at 11.55.00 AM

Scott Sumner uses this result to claim support for the "Market Monetarist" position (that monetary offset is always possible and so there is no reason to use fiscal policy), over the Keynesian position (that monetary policy is exhausted when interest rates reach their ZLB and fiscal policy should be used). The application of this result to the UK might be that the combination of austerity (to eliminate the government's budget deficit) and expansionary monetary policy (to boost the economy) is a perfectly coherent and practical policy choice.

Is this a valid conclusion to draw? As Nick Rowe says "It's 6 days now, which is a long time in the blogosphere. I have seen posts about who said what about who said what. What I want to see are posts that interpret those correlations. And other interpretations/explanations are always possible (though econometricians bravely try to minimise the number of plausible interpretations). How would you explain them?"

I would guess that an important explanation here is relative devaluation: Using data from BIS, there is a strong negative correlation between the degree of austerity and the devaluation experienced for the floating rate countries. If devaluation is associated with economic expansion (which seems plausible), but under floating exchange rates devaluation occurs at the same time as fiscal austerity, then austerity could be ceteris paribus contractionary, but we would not see the actual contraction under floating rates - so e.g. in Iceland we see austerity (contractionary) and devaluation (expansionary) and overall not much impact. In Eurozone countries we see only the ceteris paribus contractionary effect of fiscal austerity.

The problem for the policy conclusions that you might draw if this is the explanation is that in times of depression, not everyone can devalue against everyone else - it is by definition a zero sum game. So devaluation worked well for Iceland which was small and could achieve lots of relative price movement against e.g. the US, but it cannot work in general. There's still a need for fiscal policy - especially in relatively large currency zones like UK (which is certainly large relative to the Icelandic Krona).

Technical results:

# Regression for eurozone/fixed rate countries. Note negative and significant coefficient for degree of austerity (capb) upon economic performance (ngdp): point estimate = -2.12, p_value = 0.1%

# Regression for floating rate countries. Insignificant relationship (p_value = 88.4%) between degree of austerity and economic performance.

# Adding trade weighted exchange rate movement over the period (xrchg) changes the picture. The correlation between the capb and xrchg variables is -63%, and the observed variation in the combination of the two variables enhances the observed negative effect of austerity upon economic activity. The austerity variable is still not significant but its 95% confidence interval includes the point estimate for the fixed rate eurozone economies.

Friday, 19 June 2015

I think effort is required to be this technically illiterate!

BBC Scotland reports today on a new hydro scheme: "Plans lodged with Dumfries and Galloway Council said the scheme will generate about 700 megawatts a year." Now obviously a scheme that delivered energy output at a rate that was accelerating by 700 MW per year would be fantastic: if initial output was zero, within a decade it could be generating all the electricity used in Scotland (less than 6GW) - but I knew the BBC must have got this wrong and presumably the plans were either for a big 700MW scheme, or for a small scheme that generated 700MWhrs per year. They helpfully provided a link.

In a moment of prevarication, I clicked through and saw that the plans said neither! They actually said 100kW. So the journalist must have converted 100kW to 100kWhrs per hour, then multiplied by approximately 350 days per year, and by approximately 20hrs per day to get 700MWhrs per year, and then reported it as 700MW "a" year.

This is mind blowing semi-competent incompetence!

Monday, 1 June 2015

End May Links

# Richard Murphy highlights some interesting research which suggests that tax cuts only promote employment growth if they're directed at the lower end of the household income distribution, with no change on employment if directed towards the top of the income distribution. (Of course I'm only linking to this as confirmation bias - it's the sort of thing I'd like to be true!)

# In terms of SNP policy priorities for Westminster, I agree with Mike MacKenzie's True Grid on Bella: gaining a regulatory and subsidy regime that allows a full exploitation of Scotland's renewable energy resources should be the top priority. The news that the SNP has the chairmanship of the Energy and Climate Change select committee is therefore particularly welcome.

# Wow! No idea is this is feasible or not, but the scale of the idea from ScottishScientist is jaw-dropping: World’s biggest-ever pumped-storage hydro-scheme, for Scotland? Euan Mearns provides some criticism.

# Simon Wren-Lewis provides the best election post-mortem on the macro-economic arguments that played out in the media, and Labour's abject failure in this regard.

Thursday, 30 April 2015

A dirty business at Longannet

A Scottish political issue, for which the responsibility lies at Westminster, is electricity network transmission charges. The present arrangements mean that suppliers pay to access the grid, and consumers face fairly uniform prices (across geographical areas) for their electricity. This made perfect sense in a world in which suppliers were indifferent about where they invested their capital (output for a given investment in a coal power station is independent of where the coal plant is). We now however live in a world in which yields on renewable infrastructure at some locations (e.g. windy Scotland) are vastly superior to the yields on the same infrastructure built at other locations. Do we now want to maintain this pricing structure? The polar opposite alternative is for suppliers to face the same grid access fees at each location, and for consumers to differentially pay for their electricity at a rate commensurate with their choice to locate either close to or far away from the fixed renewable resource. Given the current infrastructure, such a change in pricing would leave the average costs for the UK consumer unchanged, but the incentives for the purchasers of energy would be vastly different (which would of course change the infrastructure and hence the average costs after some time).

Differential consumer prices would, at the margin, provide an incentive for population movement from the congested South to the depopulated North. A larger effect is likely to be on industrial users of energy in capital intensive but low labour input facilities. Data centres, super-computers, server farms, aluminium smelters etc which do not currently get built anywhere because investment is preferentially going towards less efficient locations predicated upon patterns of existing demand, could be built specifically to consume the cheap energy produced in locations with great resources but which are far from current population centres.

Despite the relevance of this issue for Scottish voters in a Westminster election, it has not featured highly in the campaign. The SNP manifesto does say "transmission arrangements should work to support, rather than undermine, production of renewable energy in the most favourable locations", but the focus of this issue in the manifesto is to "press for a change to the transmission charging system that is penalising Scottish generators and threatening the future of Longannet power station". The closure of Longannet comes with job losses - so of course it's an emotive election issue.

But Longannet is a coal fired power station (one of Europe's biggest polluters), and by the argument above, it's appropriate for them to be cited on the basis of existing demand. So is the current pricing structure appropriate here, and hence the looming closure of the site? Stations like Longannet supply baseload power to balance out the peaks and troughs of renewable supply. It makes sense, from the point of view of minimising transmission losses, that the supply of baseload power in Scotland should equal the expected demand in Scotland less the expected renewable supply. If the closure of Longannet makes Scotland's supply of baseload electricity lower than the gap between its demand and expected renewable supply, then the current pricing structure is unreasonably discriminating against generators in Scotland. But if not, then a Scottish polity that has agreed to "ambitious commitments to carbon reduction" should be willing to let Longannet go, and focus purely upon gaining "transmission arrangements [that] work to support, rather than undermine, production of renewable energy in the most favourable locations".

End April Links

# Krugman discusses Brad DeLong's additional criteria, other than public good provision, for government expenditure in The hyperbolic case for bigger government. The collective outcome of individual long term choices is not what we might choose, so it's better for public institutions to be designed democratically to offset some of the flaws we make when making intertemporal decisions if the time period these are over is "long". This sounds reasonable to me. I would add that similar reasoning applies to the spatial dimension and there is a rationale for government due to the fact that it may be that democratic allocation of land resources could be more "efficient" (in the sense of maximising ex-post satisfaction with the outcomes) than decentralised private choices. Krugman describes the desirability of public schooling provision by claiming that we might under allocate resources to schooling because we overly discount the benefits that may be received in the very long term. Another rationale for public provision is that left to individual priorities, sufficient schooling may not be provided in my area because of the choices of others. These spatial externalities are a reason why goods like schools cannot be treated like tins of beans and left to the private sector, despite the fact that they are certainly rival (a place taken at a school is a place not available to another) and excludable (you don't have the automatic ability to gain access to schooling just because a school is there if they don't let you in), and so do not fit the definition of public goods.

Germany is imperiling the world economy by refusing to accept free money: "fixing the problem requires absolutely zero sacrifice on Germany's part. What the world needs from Berlin is for Germany to buy itself a bunch of nice shiny new transportation and energy infrastructure, or else for Germany to give itself a huge tax cut. Not only would shiny new projects and lower taxes be fun, but the message of the negative interest rates story is that by borrowing more money today Germany will improve its long-term fiscal situation." Not sure it's logically certain that it would improve Germany's long term fiscal position - but any positive return project makes economic sense if you can borrow at negative rates, and it's certainly possible that long term fiscal position is improved relative to the case with continued depressed demand and negative rates, where tax revenues likely to be lower than they otherwise would be because of general depressed environment.

# John Cochrane & JW Mason are exactly right when they say that while Greece needs to default, this is (or should be) entirely unrelated to whether is stays, or should stay, in the Euro.

# Roger Farmer says There is No Evidence that the Economy is Self-Correcting, showing that the unemployment rate seems to exhibit a unit root. As Krugman and Cochrane both say, this is ridiculous (it would have to go above 100% or below 0% eventually if that was actually the case). But I think Cochrane pretty much makes the point that Farmer trying to approximate with his model: "unemployment like other stationary ratios in macro (consumption/GDP, hours/day, etc.)  have important and frequently overlooked low-frequency movements".

# I'm in the Herald: Why the consequences of inequality really are severe

# Interfluidity's Tangles of pathology proposes that Liberalism, Inequality, and the "Nonpathology" of the lowest section of society into an despised underclass, form a trilemma: a society can exhibit 2 of these but not all 3. So the Nordic economies avoid pathology, but cannot offer a large spread in economic rewards; the US does offer such unequal rewards, but its losers are treated as an underclass.

The Swiss Have Eliminated The Zero Lower Bound!

Tuesday, 31 March 2015

End March Links

# The New Scientist says To save the rainforest, let the locals take control - I think there's a general principle involved with this local control issue

The Silk Road might have started as a libertarian experiment, but it was doomed to end as a fiefdom run by pirate kings

# My gut feel is that The Negative Way to Growth? by Nouriel Roubin [lowering rates should boost demand and hence inflation if run into supply constraints] is "more correct" than Doctrines Overturned by John Cochrane [given long run stability, low rates must be associated with low inflation, so perhaps central banks should be raising rates to get inflation away from zero]. Not saying Cochrane's made any sort of mistake in analysing the model, but I suspect the model is not a good map to the real world.

# Krugman learns something about reality from introspection in How negative can rates go?: we don't have to take the convenience values of cash or bank deposits into account once interest rates hit zero because at this point the marginal holder of cash or bank deposits is using them as a store of value rather than for their liquidity.

# I wanted to read this, I really did: The Paradox of Oil: The Cheaper it is, the More it Costs. But in the introduction it said: "it becomes clear that oil is a commodity that defies reductive analysis and which cannot be understood unless one looks through a multi-dimensional, interdisciplinary lens", and I gave up. To understand anything we need to reduce its description to its important features ("reductive analysis") - it's the only way to do it (other than simulating the real world over and over again to see how the full complex system behaves, i.e. conduct experiments, but this is often not possible). Obviously different people (especially from different disciplines) can disagree about which are the important features to consider. But this wishy-washy "we must think holistically and multi-dimensionally" pish is just an excuse for a non-rigorous verbal model (which is equally reductionist, but just not very good) to obscure more than it reveals.

# Climate change economics too often simply calculates the "social cost of carbon" and proclaims this to be the appropriate rate for a carbon tax. The impacts on incentives for replacement zero carbon infrastructure are rarely considered. So Adam Ozimek's thoughts in Dirty Energy Taxes And Clean Energy Innovation are important. However, I think the economies of scale and learning by doing points that he makes at the end are likely important enough to mean that his main point is not crucial though.

# The myth of Europe's little ice age

# Dr Jim Cuthbert on behalf of the Reid Foundation has the same concerns as me about the lack of tax hypothecation between whole UK and rUK/England following implementation of Smith proposals on further devolution to Scotland.