Amazon Kindle - Big Brother?

I've recently contemplated buying the Amazon Kindle. E-books are cheaper, easier to store, etc. Amazon's actions today, however, make me very hesitant. From a New York Times blog:

This morning, hundreds of Amazon Kindle owners awoke to discover that books by a certain famous author had mysteriously disappeared from their e-book readers. These were books that they had bought and paid for—thought they owned.

But no, apparently the publisher changed its mind about offering an electronic edition, and apparently Amazon, whose business lives and dies by publisher happiness, caved. It electronically deleted all books by this author from people’s Kindles and credited their accounts for the price.

Wow, I think I'll keep buying hard copies. At least I know where they'll be when I wake up. Plus I can sell them when I'm done or lend them to a friend. The most ironic part of Amazon's move? The books they deleted:

The author who was the victim of this Big Brotherish plot was none other than George Orwell. And the books were “1984” and “Animal Farm.”

Energy Efficiency Paradox

Image via Wikipedia

Whenever I hear government officials tout the benefits of programs that increase energy efficiency (such as better insulation and LED lights), I am reminded of a conversation I had with a city official while I was an undergraduate. The official, a mechanical engineer, came to our class and explained what the city was doing to reduce energy consumption. He claimed that geothermal heat pumps, which provide heating and air conditioning by pumping water to the earth's surface, could reduce energy consumption by 20 percent, since these pumps use 20 percent less electricity than standard climate control units.

At the end of the presentation, I asked whether these pumps would actually reduce energy consumption by 20 percent. After all, I reasoned, if someone installed a heat pump on her home and shortly thereafter noticed a drop in her electricity bill, she might be inclined to use her air conditioning more frequently. The city official quickly dismissed the issue I raised, but I was convinced I was on to something.

I began investigating, and I soon discovered that the point I brought up already had a name: the rebound effect. Estimates of the rebound effect are typically in the range of 10 to 40 percent. This means that if geothermal pumps are 20 percent more efficient, the resulting reduction in energy from using them would be only 12 to 18 percent.

This doesn't imply, of course, that efficiency improvements aren't worth pursuing. On the contrary, smart traffic systems and energy efficient light bulbs seem to be some of the low hanging fruits in the quest to reduce carbon emissions. Nevertheless, it is important for policymakers to account for the rebound effect when making decisions. Otherwise, they will not attain their energy reduction goals.

Interestingly, Stanley Jevons, a famous 20th century economist (pictured above), had contemplated the possibility of a greater than 100 percent rebound. Such a rebound is known as the Jevons paradox, which states that actions that improve energy efficiency may actually increase the amount of energy used. Although it is unlikely that a 100 percent rebound will be observed on a micro level, some economists have hypothesized that it might be observed by taking into account macro level economic growth. This implies that energy efficiency gains cannot lead to resource conservation!

The Moon: Past and Future

Today marks the 40 anniversary of the Apollo 11 launch, which rocketed Armstrong, Aldrin, and Collins to the moon. Ned Potter at ABC News.com has a great article on whether the public then felt and still feels that the flight to the moon was worthwhile:

In a July 1967 Harris poll, two years in advance of the first moon walk, 43 percent of Americans were in favor of the effort, 46 percent opposed -- hardly a rousing endorsement. And in 1970, a year after the landing, 56 percent said it had not been worth its allotted $4 billion a year for nine years.

. . .

Since 1979, the number of people saying the moon landings were worth the cost has risen from 41 percent to 65.

. . .

Polls have consistently shown about 60 percent of the American people support the space program -- though the number always drops into the 40s when people are asked about the cost.

Given my enthusiasm for space exploration, I was surprised by the low levels of support from the public. As the article points out, NASA expenditures are less than 0.5 percent of all government spending. There are worse ways to spend government money. Space exploration is a public good that likely wouldn't exist without government support. It has yielded huge scientific benefits and created jobs. Furthermore, just as Columbus couldn't have known he'd discover a new continent, we don't know what benefits future space exploration might precipitate.

I am thus excited about NASA's Constellation program, which has the goal of sending astronauts to the moon by 2020, and possibly later sending astronauts to Mars. The above video shows a computer-generated conceptualization of how the Constellation program will work. Two rockets will fly into earth's orbit, and parts from both will meet up and fly to the moon. Pretty cool stuff.

Coal vs. Nuclear - Environmental Ironies

Seed Magazine recently posted a discussion on the viability and drawbacks of nuclear and coal power. Some contributors argued that nuclear is the best option, some that we should pursue "clean coal" (is that an oxymoron?), and still others that we should only seriously consider other renewable energy sources while looking for ways to increase energy efficiency.

While I found the discussion interesting, it reminded me of the two biggest environmental policy ironies of the past forty years.

1) Around the time of the Three Mile Island and Chernobyl incidents, environmentalists began arguing that nuclear power was unsafe and should therefore be regulated. Partially because of environmentalists' opposition to nuclear power, a new U.S. nuclear power plant hasn't gone online since 1996. The effect of stringent nuclear power regulations, of course, has been that the U.S. has increasingly relied on coal power plants. Thus, environmentalists urged policies that led to higher greenhouse gas emissions. Ironically, now that they recognize the problem of global warming, many are clamoring for a return to nuclear power.

2) The second irony is a result of the Clean Air Act. The Clean Air Act was seen as a landmark environmental regulation when it first passed. Many coal companies accepted the Clean Air Act because they felt that the E.P.A.'s regulation of coal power would be less stringent than the regulations proposed by many state legislatures. To further encourage coal lobbies to accept the Clean Air Act, Congress grandfathered in the contemporaneous coal power plants, offering lower standards than those faced by newer plants. The thought was that the older power plants would be soon abandoned. The end result, however, was unintended.

The grandfather clause gave the old coal power plants a comparative advantage relative to newer power plants. Thus fewer new plants were built, and power companies continued to rely on older plants. Older power plants, of course, are much more pollution intensive. In the end, the Clean Air Act may have actually slowed natural declines in coal-related pollution that would have occurred if new plants were comparatively disadvantaged. (Although, as I pointed out in another post, part of the increase in average life expectancy is attributable to less air pollution.)Environmentalists' support for the Clean Air Act may have led to higher current levels of greenhouse gases.

Environmentalists, then, helped to worsen the problem of global warming by advocating policies that eventually led to higher carbon emissions. This is one of the reasons I am wary of attempts to combat global warming through carbon sequestration (burying carbon emissions deep below the earth's surface) and increasing sulphur dioxide emissions. There could be serious, unintended side-effects.

The Law of Demand

According to a recent University of Michigan transportation study, the average carbon emissions per vehicle decreased 3 percent from October 2007 to April 2009. How did we achieve this emissions reductions? Cap and trade? Command and control regulations? No, the reduction instead occurred as consumers responded rationally to higher gas prices.

As a result of higher gas prices last year, consumers bought vehicles with better fuel efficiency and drover fewer miles. Thus, on average, each driver emitted less carbon. This is exactly how a carbon tax would work. The government levies a Pigovian tax roughly equal to the social costs of pollution and lets the market take care of the rest. As gas prices rise, people drive less and choose fuel efficient cars.

Unfortunately, the current administration seems to think that byzantine fuel economy standards will do the trick. But such standards are much more amenable to rent-seeking behavior. This is clearly demonstrated by the fact that the announced standards are favorable to light trucks, which benefits American producers but hurts the environment.

How Far Should We Take Paternalism?

In a Wall Street Journal article, Todd Zywicki highlights an analogy made by Elizabeth Warren, a Harvard Law professor:

[C]onsumers cannot buy a toaster that has a one-in-five chance of exploding, but they can get a subprime mortgage that has a one-in-five chance of ending in foreclosure.

I see one big problem with this analogy. A toaster would explode because of shoddy manufacturing - unless, of course, you have a child who puts his toys in the toaster. It is the manufacturer's fault when the toaster explodes.

On the other hand, in almost all cases mortgages end in foreclosure because of consumers' mistakes. It is not the bank's fault that the mortgagee lost his or her job (speaking of any single bank), it's not the bank's fault the mortgagee used too many credit cards, it's not the bank's fault the home lost value, and it's not the bank's fault mortgagees bought multiple investment homes. Consumers lived on credit because government tax breaks and low interest rates gave them a strong incentive to live accordingly. A foreclosed mortgage is nothing like an exploding toaster.

To be fair, many mortgage brokers were disingenuous in how they presented loans. I'm thus in favor of behavioral economics-type disclosure regulations. But I don't think the government should, in this case, impede freedom of contract. As Zywicki writes:

Treating all consumers as hapless victims rather than recognizing that many consumers rationally respond to incentives is a recipe for unintended consequences. It can lead to counterproductive regulation that makes loans more expensive and harder to get.

More on Waxman-Markey

Over at the National Review, Stephen Spruiell and Kevin Williamson list their top 50 reasons for voting against the Waxman-Markey climate change bill (tip: Volokh Conspiracy). (I'm on a roll with global warming posts - earlier posts here and here.) I agree with much of what they write, but there's a number of points with which I disagree. Also, their first reason displays a stunning ignorance of economics:

1. The big doozy: Eighty-five percent of the carbon permits will not be sold at auction — they will be given away to utility companies, petroleum interests, refineries, and a coterie of politically connected businesses. If you’re wondering why Big Business supports cap-and-trade, that’s why. Free money for business, but higher energy prices for you.

There are two reasons this is bad economics. First, as the Coase Theorem points out, if there is an externality problem (say, excess pollution) and transaction costs are low, private parties will bargain to an efficient level of the externality. Furthermore, the end result is independent of the initial property right delineation - ignoring income effects. If polluters receive the right to pollute, pollution recipients will pay polluters to reduce their emissions, and if polluters do not have the right to pollute, they will pollution recipients to allow pollution. Either way, according to the Coase Theorem, the same level of pollution will result.

The Coase Theorem cannot solve the climate change problem, however, since transaction costs are too high (transaction costs are the costs of reaching an acceptable agreement). Thus cap-and-trade schemes are a way of lowering transaction costs. The government presumably sets the cap at pollution levels that recipients would bargain to, and, in theory, the scheme enables polluters to reduce emissions at the lowest possible cost.

Anyway, whether the government auctions off the permits or gives them away, the same amount of pollution will be eliminated. The only difference is that auctioning the permits grants the government a windfall revenue increase, and giving them away grants businesses a windfall. Given that we are in a recession, I don't think that granting businesses a windfall is such a bad thing.

The second display of poor economic reasoning is the claim that although Waxman-Markey will be "free money for business," it will lead to "higher energy prices for you." This sentence is not even internally consistent. If businesses actually made money by receiving permits, why would they charger higher energy prices? Businesses typically lower their prices when they are profitable.

Many commentators have said that Waxman-Markey will lead to higher energy prices. This will happen only as the government lowers the cap and forces businesses to buy permits or to implement pollution-reducing technology. And this probably won't happen for a few years. If the government made polluters buy permits, price increases would be more immediate.