Is Wall Street’s Thirst for Water Really a Dire Threat? Nonsense, Says David Zetland

Journalist Frederick Kaufman made a few waves last week with an article on water markets in Nature and a related interview in Wired. His cautionary story envisions a global water derivatives market that would allow speculators to rake in billions while poor farmers, priced out of the market, would be unable to irrigate their crops. Some typical passages:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded—a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere (Nature)

The implications are dire: the destruction of aquatic ecosystems, the extinction of innumerable species and the risk of regional and international conflicts—the much-dreaded  ’water wars’  of the twenty-first century.

Does any of this make sense? Not much, says water economist David Zetland. He explains how little foundation there is for Kaufman’s dire vision. . . >>> Read more

US Q3 GDP: Good News in the Headline but Bad News in the Details

We all breathed a sigh of relief when yesterday’s advance estimate of U.S. Q3 GDP showed the economy growing at an annual rate of 2 percent. In normal times, 2 percent would be a disappointment; it is a sign of how far we are from normal that we can only think how much worse it could have been.

In fact, it could yet be worse. The advance estimate of real GDP is notoriously subject to revision. The BEA tells us that the average revision, without regard to sign, is 1.3 percentage points from the advance to the latest estimate. A downward revision of no more than average size would put us at 0.7 percent growth, well below the anemic 1.3 percent reported in the third estimate for Q2. Of course, an upward revision is, statistically, equally likely, so let’s hope for the best.

Even as we accept 2 percent growth with relief, there are some discouraging details deeper in the tables that the BEA attaches to its press release. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest GDP data

Is China Still a Currency Manipulator?

“On day one, I will label them a currency manipulator.” So spoke Mitt Romney during Tuesday’s Presidential debate, threatening, as he has innumerable times, to hit China with new tariffs if it doesn’t stop using a cheap yuan to steal U.S. jobs. But does the label still fit?

We all know the story by heart. Without intervention by China's central bank, market forces would push the value of the yuan higher, making it easier for U.S. producers to compete with Chinese goods. Instead, the People’s Bank of China (PBoC) manipulates the exchange rate by making massive purchases of U.S. dollars for its foreign exchange reserves. The result: huge current account surpluses that enrich China’s politically powerful exporters at the expense of American workers. If we just had a president with the courage to tell them to stop, we could get America moving again.
Unfortunately, although it still sounds great in a stump speech, the story may be out of date. Let’s look at it piece by piece. >>>Read more

Why do we Need Government to Tell Business to be Energy Efficient?

In response to my interview "The Myth of Affordable Energy," my friend and fellow blogger Gary Alexander asks a question that is so good that I would like to take a separate post to answer it.

Gary asks:

Ed, I need your clarification on a comment you made in the opening section, in which you said that the increase in energy efficiency in the U.S. is "pretty remarkable, considering that we haven’t really had a policy environment that is supportive of efficiency. Think what we could do if we did."

My question: Isn't efficiency (getting more done with the same or less) a constant goal of most businesses? Why would these businesses need an official federal government policy to direct this efficiency from afar? Nearly every technology has increased efficiency and/or lowered cost over time, in the natural course of conducting business in a cost-conscious manner. Or am I missing something?

Excellent question.

The goal of businesses is to make a profit. Part of their strategy for doing that is to adjust their input mix to minimize the total cost of producing their product. I that sense, yes, they are constantly pursuing the goal of efficiency and the government does not need to nudge them to do so.

However, businesses have no inherent goal to economize on any one input. For example, if market prices signal that plastic is cheap and steel is expensive, an automaker will substitute plastic bumpers, door handles, and so on for steel. Vice-versa if plastic is expensive. An automaker has no inherent goal of reducing its use of steel, just reducing costs.

What we need, then, are not government policies that tell businesses to act efficiency in response to market prices. What we need are policies that safeguard the integrity of the price system itself. That is why we need policies that are consistent with the principle of full-cost pricing.


As I discussed in the interview, that means doing two things.

First, it means stopping government subsidies that make the prices of some inputs artificially low. For example, without subsidies to corn farmers and ethanol blenders, we would use less corn ethanol in our automotive fuel. According to most studies I have seen, less ethanol would mean a more efficient fuel mix.

Second, it means fixing government policies that allow businesses to take resources without paying for them. Promarket economists like my early mentor Murray Rothbard have long argued that pollution is a form of "taking" via uncompensated harm to other people and their property. That means harm to people and property owners who live downstream or downwind from a specific factory or power plant, and in the case of some pollutants, it means harms that are felt even more widely, even globally.

Look at it this way: A business owner is like a dog owner. Just as the burden of cleaning up the dog's poop is the owner's responsibility, and becomes part of the cost of owning a dog, the harm that pollution does to downwind residents and property owners is a both a moral and an economic responsibility of the businesses.

In an ideal world, the market would capture pollution costs and impose them back upon the polluter. Downwind property owners and individuals would sue under the tort concepts of nuisance and trespass. The court costs and damages would give the needed price signal to the polluter to cut back on the use of inputs that cause heavy damage in favor of cleaner ones.

But that is in an ideal world, one where streets were privately owned, one where street owners would write anti-poop clauses into the contracts they entered with dog walkers and go to court to recover damages from dog walkers who did not respect those contracts. For better or worse, we do not live in that kind of Heinleinian anarcho-capitalist utopia.

Instead, we have government streets and government imposed fines on irresponsible dog walkers. In my mind that is better than just absolving the dog owners of their responsibilities and leaving the rest of us to step in the poop.

Similarly, to safeguard the integrity of energy pricing, we can use government fines, or pollution charges, or taxes, or whatever you want to call them. So much per ton of SO2, so much per ton of carbon, whatever. Yes, in some philosophical sense, that is a second best, a less elegant solution than one that internalizes all pollution costs through voluntary contracts and the enforcement of property rights. Yes, it is hard to get the prices just right. But it is the best hope we have for making our planet cleaner, healthier, more sustainable and--importantly--more efficient.

Interview: The Myth of Affordable Energy

The following interview was conducted by James Stafford and originally published on Oilprice.com. It is reproduced here with permission.

Oilprice.com: Access to cheap energy is vital to economic growth. What do you see happening with the economy over the coming years as the time of cheap oil comes to an end?

Ed Dolan: In my view it is a myth that cheap energy--“affordable energy” as many people like to say--is vital to growth. The idea that there is a lockstep relationship between growth of GDP and use of energy is widespread, but the data simply does not bear it out. Instead, what they show is that the world’s best-performing economies have become dramatically more energy efficient over time.
The World Bank uses constant-dollar GDP per kg of oil equivalent as an energy efficiency metric. From 1980 to 2010, the high-income countries in the OECD have increased their average energy efficiency by 55 percent. The United States has done a little better than that, increasing its energy efficiency by 81 percent over that period. That’s pretty remarkable, considering that we haven’t really had a policy environment that is supportive of efficiency.

Think what we could do if we did.


Even after the efficiency gains in efficiency we have made, we still have a long way to go. The US economy is still 15 percent less energy efficient than the average for high-income OECD countries, giving it plenty of room to improve. Switzerland is almost twice as energy-efficient as the US, and the UK is 68 percent more efficient.

Some people say that the only reason the United States has been able to grow while using less energy is the deindustrialization of its economy, outsourcing heavy industry to China. However, compare the US with Germany. Germany is an export powerhouse and Europe’s best-performing economy, yet its energy efficiency has increased at almost the same rate over the last 30 years as the United States, an 80 percent gain in efficiency compared to 81 percent. Furthermore, despite being proportionately more industrialized than the US and a major exporter, Germany squeezes out 41 percent more GDP from each kg of oil equivalent.

In short, we don’t have to hypothesize about the possibility of someday breaking the lockstep relationship of growth and energy use—we and most of the rest of the advanced world are already doing it.

Oilprice.com: What effect can you see America’s Oil & Gas boom having on foreign policy?

Ed Dolan: On the whole, I see it as beneficial. Energy dependence has led us to buy a lot of oil from countries that are unstable and/or unfriendly to us. Anything we can do to reduce that dependence gives our foreign policy more room to maneuver. The beneficial effects reach beyond our actual imports and exports. The US gas revolution is having repercussions all the way to Russia, where Gazprom is seeing its market power undermined, and Russia, as a result, is losing some of the geopolitical leverage its pipeline network has given it.

Oilprice.com: From Siberia and Poland to China and Qatar – the shale revolution has politicians salivating at the thought of a cheap and abundant source of energy. But can the results seen in the U.S. be easily replicated in other parts of the world?

Ed Dolan: I think you’re going to have to ask someone with more engineering background for the technical details, but from what I read, the answer is that it won’t always be easy. It is my understanding that some countries where shale seemed just recently to have great promise have already encountered disappointments in practical exploratory work. Poland I think is an example. Furthermore, the environmentalist opposition to fracking seems even stronger in many European countries than in the United States.

Still, I am hoping that the shale revolution will pan out in at least some countries. Think how much difference it would make, say, to Ukraine’s foreign policy if they were able to break their dependence on Russian gas.

Related Article: Forget Renewables, We Need Cheap Oil - An Interview with Gail Tverberg
Oilprice.com: Gail Tverberg has written a recent article suggesting the world is suffering from high-priced fuel syndrome, which has the following symptoms:

•         Slow economic growth, or contraction
•         People in discretionary industries laid off from work
•         High unemployment rates
•         Debt defaults (or huge government intervention to prevent debt defaults)
•         Governments in increasingly poor financial condition
•         Declining home and business property values
•         Rising food prices
•         Lower tolerance for immigrants
•         Huge difficulty in funding retirement programs, programs for disabled, and regular pension plans
•         Rising international tensions related to energy supply

Do you think this is too convenient and an oversimplification of the problems facing world economies at the moment? What would you blame for the plethora of economic woes being experienced at the moment?

Ed Dolan: I don’t buy the argument at all. Yes, when countries are hit by unexpected upward shocks in fuel prices, we do see short-run results like slower growth and layoffs, but those are short-term problems. When the proper structural adjustments are made, countries with high fuel prices manage to achieve strong growth and full employment.

Where are fuel prices lowest? If you look up the data and rank countries by retail fuel prices, you find the low-price end of the rankings crowded with countries like Egypt, Cambodia, Iran, Pakistan—not exactly economies we would like to emulate.

We’ve got big economic problems, but a lot of them don’t have much to do with energy.
What about a healthcare system that delivers mediocre results at the world’s highest cost? Health care isn’t all that much energy driven.

What about our steady move down the international rankings in education—are you going to blame that on the high cost of heating classrooms? Hardly.

Oilprice.com: Oil prices have been near to the $100 a barrel mark for some time now, and don’t look likely to drop back to previous low levels. What effect could this increased price have on oil importing economies compared to oil exporting economies?

Ed Dolan: Clearly, any oil price increase has the short-term effect of transferring wealth from using countries to producing countries. However, the long-run effects are what matter.

In the long run, high prices just accelerate the trend for using countries to become more efficient and less dependent. Meanwhile, the producing countries often don’t manage their oil riches well. They fall victim to the “curse of riches.” The curse takes the form partly of a loss of competitiveness in their non-energy sectors (the so-called “Dutch disease”). Partly it takes the form of corruption of their political systems. Russia is a poster child for both aspects of the curse of riches.

Related Article: Which Biofuels Hold the Most Promise for the Future - Interview with Jim Lane

Oilprice.com: Renewable energy is more expensive than fossil fuels, so how can people be persuaded to choose the less economical option of renewables over the likes of coal and natural gas?

Ed Dolan: There is only one right way to promote renewables, and that is to introduce full-cost pricing of all forms of energy. Full-cost pricing is a two-part program.

First, it means pricing that covers the full production costs for every form of fuel. No subsidies for anyone—not for oil, not for ethanol, not for wind or solar.

The second half of full-cost pricing is to include all of the nonmarket costs, what economists call the “external costs” or “externalities.” The most publicized of these are pollution costs, whether those take the form of local smog, oil spills, climate change, or bird kills. Some people, I am one of them, would like to count in something for the national security costs of dependence on unfriendly and unstable foreign sources of energy supply.

Full-cost pricing accomplishes two things. First, it levels the playing field so that each form of energy competes on its economic merits, not whether corn-growing states have early primaries or oil companies have big SuperPacs. Second, by raising prices to consumers to a realistic level, it accelerates the trend toward energy efficiency that is already underway.

Subsidies for renewables are just plain wrong, even if you look at them from a hard-core environmentalist point of view. With a subsidy, on the one hand, you say, “produce more green energy” and other the other hand, you turn around and tell the consumer, “waste more green energy.” We don’t want to waste energy from wind or solar any more than we want to waste oil and gas. We shouldn’t forget that even the greenest renewables can have significant environmental impacts.
The whole “affordable energy” idea is based on the myth that if we don’t include those external costs in the price—the pollution costs, the national security costs—they just go away. They don’t. Keeping prices artificially low just transfers those costs to someone else, someone unlucky enough to live downwind, someone who owns beachfront property that gets eroded away as the sea level rises, someone who has to go off to fight a war to keep the shipping routes open. There are two things wrong that. First, it’s immoral. If we believe in the market economy, the rule of law, and all that, we have to respect people’s property rights and their human rights. Second, it’s inefficient. It doesn’t strengthen our economy, it weakens it. If there’s one thing we can’t afford, it’s “affordable energy.”

Oilprice.com: Obama has made clear his desires to cut the $4 billion a year tax breaks given to oil companies. What affect do you believe this would this have on the US economy and the US oil industry?

Ed Dolan: If it is done as part of a comprehensive move toward full-cost pricing, it could only strengthen the US economy. The oil industry would whine, but if we cut subsidies and tax breaks for competing energy sources at the same time, oil will remain a competitive part of the energy mix for many years to come.

Oilprice.com: The oil industry has enjoyed decades of subsidies and grants, so do you think it is unreasonable to already start cutting the subsidies to renewable energies and expect them to survive on their own?

Ed Dolan: As I explained above, the answer is yes, provided it is done as part of a package that reforms our energy policy as a whole in the direction of full-cost pricing.

Oilprice.com: Economic growth is generally dependent on the access to energy. As the supply of energy grows, so too does the economy (more or less). Global oil supplies are pretty much stagnant, so do you predict that only nations that successfully convert to a renewable energy mix with an abundant supply of cheap energy will be able to experience continued economic growth at a similar level experienced by the developed countries of recent years?

Ed Dolan: Again, I just don’t buy the doctrine that growth is dependent on ever-increasing energy use. For sure, those countries that pursue sound policies, like full-cost pricing to rationalize their energy mix and promote efficiency, are the ones that are going to keep growing.

Related Article: Can Syria's Rebels Overthrow Assad? An Interview with Jellyfish Operations
Oilprice.com: As the arctic ice melts at a rapid pace the world’s superpowers are jockeying for position to exploit the region’s vast oil & gas & mineral deposits. Environmental groups are rightly concerned, but is this a resource that we cannot afford to ignore?

Ed Dolan: Arctic oil, like any other source of energy, should pay full freight for any environmental impacts it has. If it can bear those costs and still be competitive, I think it should be in the mix. I am worried about Russia, though. It has a dangerous combination of an environment-be-damned attitude and low technical competence that could lead to headline-grabbing disaster worse than the Gulf blowout or Exxon Valdez.

Oilprice.com: What effect do you see the shale revolution having on investments in renewable energy?

Ed Dolan: If I were trying to make money by generating electricity with wind or solar, I’d be worried about gas. I don’t have all the relevant numbers at my disposal, but my gut feeling is that even if you price in full environmental costs for wind, solar, and gas—including environmental costs associated with fracking—gas is still going to be pretty competitive.

Oilprice.com: What are your views on Ben Bernanke’s QE3?

Ed Dolan: I’ve written repeatedly about QE over at Economonitor, so I am on record as saying we should try it. The trouble is, QE is not a magic bullet. Properly executed and properly communicated, it can help support the recovery, but it can’t do it alone.

That is one point where I agree 110 percent with Ben Bernanke. Here is what he said in a speech at the Fed’s Jackson Hole conference at the end of the summer:

It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. . . Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve.

Oilprice.com: How do you see the EU solving its debt crisis?

Ed Dolan: I’m afraid I’m a euro pessimist. The US debt situation is hard enough to resolve, but Europe’s is worse. At the same time, whatever you say about gridlock in Washington, our political decision making is a model of streamlined efficiency compared with the EU.

Oilprice.com: Do you think the EU was doomed to fail from the start with the format that it has? Could more success be seen in a split EU, with the northern/richer nations using one currency, and the southern/poorer nations using a different currency?

Ed Dolan: Doomed, I don’t know, but flawed, certainly. Just recently, I was looking back at what economists were writing about the prospects for the euro back in the early 1990s, when it was still just a project. They were telling us, for one thing, that Europe is too diverse to be ideal for a currency union—and that was when there were only 15 EU countries. Second, they said that you can’t run a monetary union without a central government, a fiscal union, and a banking union. You still don’t have any of those.

I am not sold on the idea of a northern euro and a southern euro. If the currency union doesn’t work, it doesn’t work. Break it up. Sure, some countries will find it works for their special circumstances to tie their currencies to a large, stable neighbor. I could see the Danes or the Latvians keeping a link to the German currency, for example, and I’m sure the Vatican will continue to use whatever currency Italy uses. But a formal, north-south divide doesn’t make much sense to me.

Oilprice.com: In terms of tackling the current economic situation in the US, of the two main presidential candidates, who do you suggest is the best man, and why?

Ed Dolan: I do not think we can tackle the current economic situation without a thorough-going fiscal policy reform that includes three key elements: Spending cuts, revenue increases, and a rewrite of the whole tax system to eliminate loopholes and cut marginal rates. Furthermore, the package can’t be heavily front-loaded like George Osborne’s austerity program in the UK, which has sent their economy back into recession. Ours should be back-loaded, with an element of stimulus now and an ironclad commitment to move the budget toward surplus as the economy improves. It’s a lot to ask for.

We are not going to get good budget policy out of the GOP unless members of that party make a clean break with mantra that they will not accept a dime of new revenue, not even if it comes from eliminating the most loathsome tax loopholes. Personally, I am never going to vote for a candidate for President, the Senate, the House, or any office who has signed that nonsensical Grover Norquist tax pledge.

At the same time, I have been very disappointed at the lukewarm support Obama has given to the kind of program I would like to see. During the first debate, Romney said that when Obama didn’t “grab” Simpson-Bowles—that was his word, and a good one—it was a failure of leadership. That was one point where I agreed with Mitt.

Then, you also have to take into account the vote for Congress. I’m afraid there is going to be continued gridlock as long as the GOP controls the House. In the Senate, there are at least a few people in both parties who are willing to meet behind the scenes and talk compromise, but not in the House, not right now, anyway. Maybe what we need in the White House is someone who is a real politician, a negotiator and dealmaker in the mold of a Clinton or an LBJ. Instead, we have the choice between a manager and a law professor. I’m not optimistic that either of them will be able to do what needs to be done.

Forward guidance: Does Bernanke Talk Too Much about How Good his Exit Strategy is?

In an October 1 speech to the Economics Club of Indiana, Chairman Ben Bernanke addressed the risk that the Fed’s latest round of quantitative easing (QE) could lead to inflation. Here is his resolutely reassuring answer, as quoted by Dave Altig on the Atlanta Fed’s Macroblog:

I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. …
Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to ‘take away the punch bowl’ is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.

I wonder, though, if there is such a thing as being too reassuring. This conclusion, although a bit unconventional, comes from combining two ideas about monetary policy that are increasingly mainstream.>>>Read More

By One Key Budget Indicator, the Structural Primary Balance, Even Greece is Doing Better than the United States. Why that should Worry us.

We in the United States know that we have a deficit problem, but when we hear news of the ongoing crisis in Europe, we feel a little better. At least we’re in better shape than Greece, Italy, and the other Eurozone basket cases. Aren’t we?

Think again. By one key measure of fiscal health, the structural primary balance (SPB), we are in worse shape than any EU country. In fact, among the members of the OECD, only Japan is deeper in deficit as the following chart shows.

Not just Greece and Italy, but even the Portugal, Ireland, and Spain, the other derisively styled “PIIGS,” score better better than the United States on this chart. That does not mean that their economies are in better shape overall. They have a lot of problems that we do not, which we will come back to later. What their structural primary balances do show is how far they have come in making the fiscal adjustments needed to make their budgets sustainable in the long run . The United States has barely started those adjustments, and Japan has not even thought about them. Let’s look more closely. >>>Read the full post here

September Jobs Report is the Strongest in Months; Unemployment Falls to 7.8 Percent

After a spring and summer when the monthly jobs reports have brought nothing but gloom, the September data are strong across the board. The headline numbers—114,000 new payroll jobs and an unemployment rate of 7.8 percent—are themselves encouraging enough. In many respects, the details behind them look even better.

Let’s begin with the payroll jobs numbers. As shown in the following chart, the September gain of 114,000 nonfarm payroll jobs is respectable, although unspectacular, especially compared with the 202,000 new jobs created in the same month a year ago. But the best news lies not in the figure for September, but in the revisions for July and August. Recall that July payroll jobs were originally reported at 163,000, then revised down to 141,000. That number is now revised up to 181,000. The August job gain, originally reported at just 96,000, is revised up to 142,000. If we add the September preliminary number to the upward revisions, it would be accurate to say that the economy has a full 200,000 more jobs than we thought it had a month ago. >>>Read more

Follow this link to view or download a brief classroom-ready slideshow with charts of the latest BLS jobs data