Tuesday, June 30, 2009

More on Waxman-Markey

Anonymous, in his/her/its/their comment to the last post makes a good point that I hadn’t considered carefully enough in my argument, which boils down to this: opportunity cost is not everything. I partially agree.

Yes, electricity providers generally pass variable costs through into rates, and Waxman-Markey’s free allowance allocations to utilities are accompanied by structural measures that are intended to make sure those “negative variable costs” get passed through too. So rates should not go up to the extent that permits are freely allocated, whereas if permits were auctioned, we would expect rates to go up.

Anonymous goes from there to make two points. First, the higher the rates, the more frugal the average consumer with his or her electricity usage; higher rates means less electricity consumption. Second, higher electricity bills for coal and natural gas makes renewables (and nuclear, btw) more cost competitive.

Before directly engaging those points, let’s be clear about something: whether you freely allocate or you auction, you have the same fundamental question: What do you do with the allowance value? Either way, there’s a store of value created by the policy – it’s the market price of an allowance times the number of allowances. It’s a transfer from the people who have to pay for the permits to the treasury, and policymakers are immediately faced with the question of what to do with that value. If the permits are auctioned, that value comes in the form of cold hard cash. If you don’t auction the permits, the value stays in the form of the allowances themselves. On a balance sheet, the difference between cash and a liquid commodity is not very different at all.

Here’s a political reality: If you are going to inject a multi-billion-dollar cost into every nook and cranny of the economy, and if taxpayers are going to see their share of it every single month on their electricity bill qua direct mail campaign advertisement against every incumbent congressman, you’d better find a way to ease the pain as best you can. It’s hard to imagine getting a bill through congress wherein most of the allowance value does not flow back to consumers.

With that under our collective belt, we can get to Anonymous’ point. The environmental objective of cap and trade comes from two things: A) the relative price of energy from carbon and carbon-free sources, and B) the overall price of energy. It’s not hard to get A right without raising electricity prices in the aggregate. You simply slap a price on carbon emissions, and then send all of the allowance value back to consumers, either by auctioning allowances and rebating electricity customers based on volume, or by handing out allowances, again based on volume. Waxman-Markey is a partial success in this respect – about half of the allowances that are allocated for this purpose are distributed as a function of volume, and half on the basis of greenhouse gas intensity. To the extent that they are distributed on volume, A is very cleanly achieved, though B is not, and Anonymous’ second point – about renewable – is not correct. But if you allocated purely based on volume, then people whose electricity usage now is especially greenhouse gas intensive get shocked. Hence the 50-50 compromise. For the permits that are distributed based on greenhouse gas intensity, A is still achieved, because the coal generator still has something to gain from reducing emissions and selling permits, but Anonymous’ point about renewables is correct – the policy does not help them. It’s a true giveaway to coal and its consumers. However, per my last post, I think that 50-50 split in the early-going is fair.

As for B, Anonymous, you are right, I was painting with too-broad strokes. Free allocations under cap and trade should keep prices overall lower than if we had 100% auction, so the potential efficiency gains are foregone. Point well taken. I guess I would just say a few things in response to that, in defense of the bill. One, Title 2 is all about energy efficiency. Two, I think objective A is more important than objective B. And three, as evidenced by what a gut-wrenching cave-in to the all powerful agricultural lobby was made to get this thing passed, you can only do what you can do.

This post is too long to respond to Chris’ point (which he artfully hid under the wrong post.) That’s next.

Saturday, June 27, 2009

Waxman-Markey, and in defense of coal and the people who use it

The House passed comprehensive climate change legislation yesterday, and despite the fact that we still have a steep hill to climb before cap and trade becomes law, and despite the fact that it is a far, far cry from what the IPCC says needs to be done to stop global warming before it gets unmanageable, it is a signal moment. In 2007, the judicial branch said EPA had the authority to regulate carbon dioxide, in 2008 we elected an executive who intended to do it, and in 2009, this from the legislative. Even the GOP opposition, during yesterday’s debate, almost all of which I watched, and almost all of which was intolerable, did not dispute the premise that something has to be done. This was, simply a big step in the right direction.

A few things about it, though:

First, 219 votes. It was a squeaker, for sure, but that makes it appear just a bit closer than it actually was. This was a hard vote for lots of congresspeople, and I suspect there were probably 10 or so more votes that the leadership could have had had they been needed. Once they got to 218, I think about 5-10 Democrats with tough races were grateful to be cleared to vote “no.”

Secondly, and more interestingly and importantly, I’ve been getting a lot of questions in the past couple of days, from the left, about whether or not Waxman-Markey was actually good enough to support. A month ago, I wrote that it was, despite the fact that it was loaded up with giveaways to industry. A month ago, it was less loaded up with giveaways than it is now. In fact, the Democratic leadership scheduling it for a floor vote despite the fact that they weren’t sure they had all the votes was like yelling sub-prime mortgage in a pool of hungry derivatives traders. Market price of a vote: a new $50 million taxpayer-funded hurricane center.

A lot of what was horse-traded in the last three days was in a 300-something page amendment that came out about 16 hours before yesterday’s vote, so it will take the next week to put a real figure on the aggregate price of bribes paid to get this deal done. The worst of it as probably the deal that Waxman had to make with Agriculture Chairman Collin Peterson to get a dozen or two aggie Democrats to come along, giving the USDA the lead role in making a determination about whether a farm project to sequester carbon meets the exacting environmental standards to earn offset credits that can be substituted for emissions allowances under the cap. In truth, that deal really does weaken the cap and trade program significantly.

Nevertheless, I continue to support it. The crux of the matter is this: From an environmental standpoint, it doesn’t matter (much) whether you give people emissions allowances for free, or whether you auction them off. Either way, the market price for the right to emit a ton of carbon is about the same (despite the claim to the contrary in today’s NYT, a mistake a find remarkable), and firms will choose to abate when they can do so for less than that price. Same result. I think a lot of the complaints from the left don’t understand that. A lot of people seem to think that by giving away allowances to polluters, you undermine the environmental objective of the bill, and that simply isn’t so. There are things to complain about – things that do undermine the environmental objective, and the fact that the environmental objective really should be stronger – but that isn’t one of them.

The difference between free and auctioned allowances is in who pays, and here again, I think the complaints from my left get it wrong, though more subjectively so. Auctioned allowances are what has come to be called a “polluter pays” system, whereas with free allocations, we all pay; taxpayers pay.

But step back. Generating electricity from coal is not an evil act. Certainly, pollution from coal plants and other sources can be a public health risk, and some of the most pernicious sins of private industry have been and continue to be the protection of private wealth over public health, sometimes by lying and cheating. But carbon dioxide pollution is not that. People who own businesses that emit carbon dioxide have the misfortune of being in the wrong place at the wrong time. Coal is cheap and abundant, and though those who profit from its burning must make a transition, it is wrong to saddle them with too much of the burden of that transition. Especially since Americans who depend on coal-fired electricity are disproportionately poor, it makes sense that we should all pitch in. “Polluter pays” isn’t exactly right when it comes to carbon dioxide.

This is a complex topic. I got an up-close look at the process over the last two weeks, so post a comment if you want to know more about a piece of it, and I’ll do my best.

Wednesday, June 24, 2009

Notes on Humidity

I’m in Washington DC for the summer, and I have to wear a suit to work, which, with the humidity, feels more or less like a stillsuit from Dune. (Emergency on the internet: I’m pretty sure that is a wiki entirely devoted to Dune.) I keep wondering, why is our nation’s capital so god damn humid?

Well, the unsatisfying answer seems to be that the humidity is mostly just due to the closeness of several water sources (the Chesapeake, the Atlantic, the Potomac and Anacostia rivers), and the flatness of the general area. But the more exciting answer that we hear all the time is that Washington was built on a swamp. How deliciously counter-intuitive that our shining capital city would be sited on festering ground. How cynically metaphorical that our seat of government would be the literal home of snakes and lizards.

Alas, it isn’t true, if you believe the esteemed Bob Arnebeck, which I have no reason to do other than that this explanation sounds really really authoritative.

Swamp or no swamp, the place is disgusting, a fact that has been noted by countless internet commentators. Here’s my favorite, of recent vintage. And here’s my second favorite. And, for old time’s sake, here’s Two Live Jews with their 1990 classic off of As Kosher as They Wanna Be, “Oy, It’s so Humid.”

Thursday, June 18, 2009

Fun Is With Us Still

More good fun - this choir covers Toto's "Africa." The simulated storm at the beginning really takes the cake.

Wednesday, June 17, 2009

What the Green Revolution in Iran Tells Us About Democratic Change

There has been much discussion about how Obama should react to the surprising, and inspiring, events taking place in Iran. He has, per usual, orchestrated a perfectly calibrated, nuanced response to a very complex and delicate situation. He has expressed concern about Iranian government violence against protesters, but he has stopped short of explicitly siding with the opposition, or explicitly calling the election a sham. He has been consistent in saying that what happens over the next few weeks and months “is something for the Iranian people to decide.”

But if the election was indeed rigged, and it almost certainly was, why not call a spade a spade? Why not use this opportunity to throw America’s weight behind a budding revolutionary movement that has an outside shot at ending a repressive and despicable regime? Republicans, most notably John McCain, think Obama should weigh in strongly against Ahmadinejad.

This would be a big mistake, as many pundits on the left have been right to point out. They correctly claim that making a firm statement in support of the protesters would likely backfire and give the Iranian government an opportunity to taint the protesters as “agents of the Great Satan.” This is a strong enough argument to end the debate right there.

But there are a few further points that need to be made.

Obama saying that what happens in Iran “is something for the Iranian people to decide” is not simply a prudent tactical statement that will best serve the protesters on the ground and thereby more effectively undermine the Iranian regime. It also happens to be a powerfully true statement that many people would prefer to gloss over.

As this so-called Green Revolution reminds us, all true revolutions are local. They are begun and fought by those who actually live in the community that desires a new government. Those who so vigorously support democracy promotion from afar—let’s call them “armchair revolutionaries”—often fail to recognize this self-evident point. Iraq recently experienced what could be called a democratic revolution; it was not begun in the streets of Baghdad, but rather in the airspace thousands of feet above those streets, by American fighter planes bringing “shock and awe.” And we know how that revolution ultimately turned out. If the Iranian people want to fight to change their regime, that is ultimately their decision, and their decision only. We should get out of their way and stop fooling ourselves that we are the ones who can, or ought to, deliver them to freedom.

Over-zealous democracy promoters like McCain should take note of Iran’s Green Revolution for another reason, which may seem counter-intuitive: the events in Iran reminder us that oppressive regimes do actually change. They must change. All governments—whether authoritarian or democratic—ultimately serve, to one degree or another, at the will of the people. If there is enough discontent in society, that discontent will out. And if there is no democratic mechanism available to throw out the incompetent bastards, the people will create their own mechanism—and that is revolution. The intensity and breadth of discontent with the Iranian regime, which has been so movingly expressed by the protesters, has come as a surprise to almost everyone—most certainly to the Supreme Leader of Iran. He will have to respond and adapt to that discontent, or face more upheaval in the future.

You can also bet that high officials in Moscow and Beijing have been closely watching--and frowning at--what is happening in the streets of Iran. They know full well that they are only able to stay in power without true democracy, without freedom of speech, and without respect for human rights, because a large portion of their county’s population is relatively content (or at least not extremely discontent) with their leadership. As time goes by, these regimes will have to adapt as well. And indeed, looking at the regime in China, that system has undergone many changes over the last twenty years, ever since they were served notice by the students who gathered at Tiananmen that the government did not have the support of the people.

It is quite possible that this Green Revolution in Iran will fail to bring about a true change in regime. Iran may become an even more repressive place to live. But have no doubt that, whatever happens over the next weeks and months, it will be a victory for democracy. It will bring the Iranian people a good measure closer to the day when they can enjoy a more accountable and more democratic form of government. And their brave actions will have accomplished more than any amount of arm-twisting or pressure that the “armchair revolutionaries” here in America could ever muster on their behalf.

Sunday, June 14, 2009

A Creator's Paradise?

In the halls of the Writers Guild and Screen Actors Guild, and on the streets of Hollywood and everywhere, you're likely to hear that New Media is a complete "game-changer," and some eagerly anticipate that right around the corner is a world in which content makers can cut out the middlemen who currently stand between them and their audiences, a sort of creators' paradise. I'd like to dispel that notion.

The story is that with traditional media, you needed a lot of capital to distribute content - broadcasting equipment, affiliates, whatever - and distribution was the limiting agent, so whoever controlled distribution (studios, networks) called the shots. But now, with the advent of New Media, distribution costs have become negligible. Now content producers can directly reach their audiences and cut out the meddlesome and exploitative middlemen - excitement about this is understandable.

But what would this New Media world, this creators' paradise, really look like? For one thing, it would be a mess. 7 billion audience members. However many hundreds of millions of "shows." As a consumer, what do you do, wade through every single bit of content on your own? That's not even possible, let alone a pain in the ass. No, the mess wouldn't last long, at least not on a massive scale. You'd go to a portal, or a channel, or a gatekeeper, or whatever you want to call it.

Distribution itself may not cost anything, but these portals have devoted resources to creating a brand and being consumers' first stops once they board the New Media train. And since they will control the flow of audience to content, we can expect them to act like the same old middlemen. Take a look at how self-publishing works at Amazon. You can upload your novel on Amazon and sell it directly to Kindle users, totally bypassing the traditional publishing establishment. Oh, and Amazon takes seventy cents on the dollar.

I don't have a completely apocalyptic view of the New Media world. It would be possible, after all, for creators to buck this new system in a way that they couldn't before - you can start your own portal, and portals are only as good as their content. But building an audience from scratch involves a huge amount of risk. Portals are a hedge against that risk, since they have a built-in audience, and there's no such thing as a free hedge.

Hearteningly, the Amazon self-publication model may not be the world's most applicable example. It's not that it's capital intensive - which it probably isn't, in the grand scheme of things. It's that it's completely proprietary and currently the only (major) way to do it - it's a monopsony not unlike Wal-Mart's, and Wal-Mart-like behavior should come as no surprise.

Thursday, June 11, 2009

Credit Default Swap Market Insanity, Squared

A few months ago I posted about the strange practice of gamblers buying credit default swaps on bonds that they did not own. I wrote how this practice was like buying fire insurance on your neighbor’s house, thereby giving the buying of this insurance the incentive to then burn down said neighbor’s house.

Well, it seems that planet finance has come up with a new, and even more insane, “innovation.” Eric Kraus, who writes colorful commentary on Russian finance at this website (I particularly like what he has to say about the embarrassing state of Western media coverage of Russia), notes that a recent hedge fund bought a bunch of CDS for bonds issued by the Kazakhstan government—that is, bonds that are the equivalent of US Treasury bills, but for Kazakhstan. Ok, sounds good. But there’s a small catch: it turns out that there is no such thing as a Kazakhstan government bond! None have ever been issued. Zero.

It’s one thing to buy insurance on something that you do not own. But it is quite another to buy insurance on something that doesn’t even exist! To return to my fire insurance analogy, it’s as if I bought fire insurance on your house…that you hadn’t even built yet! And I bought that insurance, let’s remember, in the hopes that your house would burn down IMMEDIATELY after construction was completed.

In actuality, the buyer of these phantom CDS do not intend to get paid when Kazakhstan defaults on its non-existent bonds (that is, your un-built house burns down immediately after it is constructed). These gamblers are simply counting on selling their CDS to other gamblers at a profit. They think that the perceived/imaginary risk of default of Kazakh government debt is going to increase in the future because, presumably, the Kazakh economy will go into the tank. They will then be able to sell their CDS contract at a higher price than they bought it for...provided that they can find someone else crazy enough to buy insurance on something that doesn’t exist.

Tuesday, June 9, 2009

More Good Fun

This is from a 1941 movie called Hellzapoppin. I don't know how many takes it took or which one this is.

Thursday, June 4, 2009

My Favorite Part of Obama’s (Great) Speech in Cairo

I know there has been controversy about the promotion of democracy in recent years, and much of this controversy is connected to the war in Iraq. So let me be clear: no system of government can or should be imposed upon one nation by any other.

That does not lessen my commitment, however, to governments that reflect the will of the people. Each nation gives life to this principle in its own way, grounded in the traditions of its own people. America does not presume to know what is best for everyone, just as we would not presume to pick the outcome of a peaceful election. But I do have an unyielding belief that all people yearn for certain things: the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn't steal from the people; the freedom to live as you choose. Those are not just American ideas, they are human rights, and that is why we will support them everywhere. --Barack Obama

The above quote outlines the perfect middle way forward when it comes to democracy promotion. It basically takes coercive democracy promotion techniques off the table, particularly military options. But it does not abandon the cause of human rights. It sets the United States up to lead by example, rather than through force. Just as Obama says, a few sentences later, that individual state governments must “maintain…power through consent, not coercion,” Obama understands well that America must follow that same principle when it relates to other countries in the world. Cooperation to solve international problems is his modus operendi; arm-twisting is anathema. This is a 180-degree turn away from the ways of Bush. And it is also a message to those in the human rights community who hope to harness the power of the American military to bring about the regime change of despotic leaders that he is not on board with that project.

UPDATE: David Brooks takes issue with my favorite part of the speech. He doesn't like that Obama's idealism seems like a facade, whereas his realism seems to be what actually drives his foreign policy decisions. (I happen to like this arrangement, because I think it works best for achieving even highly idealistic goals like democracy promotion). Specifically, Brooks takes issue with how Obama seems to be giving Egypt a free pass on its lack of democracy. Two points on that: first, I don't remember ANY President in recent memory giving Egypt (or Saudi Arabia) a hard time about democracy. Not even the most idealistic of all our recent Presidents--George W. Bush--did so in a major speech. Iran and Syria consistently get bashed with the "you-are-authoritarian" stick, but never our friends Egypt and Saudi Arabia. There are good reasons for this, which Brooks is foolish to ignore. Furthermore, visits to Egypt usually feature U.S. Presidents heaping PRAISE upon Hosni Mubarak. Obama did not even mention his name once. This will be interpreted by Egyptian elites as a snub of Mubarak, and a far cry from a free pass. Brooks also seems to have missed the last 10 minutes of Obama's speech in which he talked extensively about women's rights, a highly idealism-driven issue that countries like Egypt would very much prefer Obama would ignore.

Tuesday, June 2, 2009

Pinko Pantywaists

Obama has just nominated Congressman John McHugh to be Secretary of the Army. The letters that come after McHugh's name are R-NY.

Between this, the Dems completely rolling over on the Guantanamo issue (as Peter and I have been freaking out about), and Gates, a Republican, being the Secretary of Defense, it really seems the Democrats aren't interested in combating the notion that they're national security weaklings and that a non-chest-beating security policy is a weak one. Hey, sounds like great ground to concede to a Republican Party in shambles.

Terrorists In Our Backyards!

Anonymous comments on Peter's last post that Cheney's opposition to prosecuting "enemy combatants" here in the United States isn't about the ability of prisons to contain them, but rather about their fate here were they to be exonerated.

I think this is a fair characterization (although I am not sure this is true of Congressional Republicans, reprehensibly spineless Congressional Democrats, and huge chunks of the public, and Cheney has clearly crafted his message to garner the support of these misguided people). But Peter's larger point stands.

Let’s draw a clearer picture of the kind of person that would be “freed” by US legal proceedings. First off, practically speaking, I don’t believe we’d let any of these guys, even if they were exonerated, out onto the streets. As the only brown people we hate more than illegal immigrants, I have trouble believing they’d get better treatment. We'd at least try to extradite them, and if their nations of origin refuse them, then that’s something to be sorted out. And that might resemble what we’re doing to them now – locking them up and throwing away the key - but the resemblance would be only superficial. They would have determinate status, with a clear way out.

But let’s say they are suddenly walking the streets of Philadelphia, having been exonerated because of flawed, insufficient, or nonexistent evidence. Cheney and Anonymous worry that they’ve expressed a determination to attack Americans, and that they now will. First, and this ties in to the hysteria Peter referenced in his post, the popular depiction of terrorists endows them with powers verging on comic-booky. Clearly, pulling off a terrorist attack is no simple matter. Ostensibly there are lots of people trying, but it’s logistically challenging and we have been able to interdict them. And that lead to the second point - it's not preemptive prison or nothing. We can still police them. Seems like we’d have probable cause in spades.

Harder, yes, and riskier, yes, although not to the extent Cheney would have us believe. But rule of law, which always costs effort and risk, would be intact, and to me that’s worth it. Sure, there are times to throw away this crowning achievement of human civilization, but those times are when society is completely dysfunctional – not what’s happening here – and then for only as long as you have to. Supposing, however, you don’t believe there is a moral dimension/metaphysical good to upholding the rule of law, I’d submit that tossing it out in this case is, practically speaking, bad decision making. It elevates and legitimizes hysteria as a rationale (oxymoronically), and it promotes it to the top of our values scale, and we'd be sure to make bigger, stupider decisions down the road.