Renewable Energy

I just came across this video on the state of renewable energy in Germany.
http://www.youtube.com/watch?v=tR8gEMpzos4&feature=player_embedded#!

The Germans have been pushing the sustainability frontier for decades and are actually attempting to put into place a system that relies solely on renewable energy production.  As the video alludes to, much of the problem with renewable energy is in regards to the storage and transmission of the electricity; many of the areas that are great for solar and wind generation are located long distances from metropolitan areas which lack adequate transmission lines.  In addition, storage of the produced energy, especially solar, is difficult as the sun only shines during the day and there are power requirements during the night.  Part of the German's solution is the part about pumping the water up the hill when there is excess and releasing it when there is a need.  While there is some efficiency loss, it appears to be significantly more economical than the production of batteries (not to mention better on the environment).

There is considerable innovative thinking occuring in the renewable energies sector all around the world.  The Germans, however, are implementing these highly innovative technologies.  This is an approach I believe would be in the United States best interests as we as a country have always prided ourselves on being at the technological forefront and clean energy has time and again delivered numerous jobs for both high and low skilled workers.

Federal Reserve Forecasts

This morning, the Federal Reserve released forecasts of interest rates for several years out. This has raised considerable debate on the subject of these forecasts. The Fed has moved in this direction to and claimed that it will increase transparency in the Fed's actions and calm markets. This action is supposed to reduce the uncertainty over how the Fed will set interest rates. The Fed has repeatedly said that they plan on keeping interest rates low for an extended period, but traders continually speculate as to what they will actually do. Where uncertainty as to statements made by any central bank relates to how strong commitment device is; a central banker can make any statement they want and then whenever they feel like it can do the opposite. Without an adequate commitment device, traders in the market discount the actions of the central bank, thereby lessening their effectiveness. While these projections are not as effective a commitment device as pledging to "fall on your sword," they do help as diverging from forecasts leads to credibility issues.

As to John Mason's comment:

"to produce projections of interest rates three years into the future? Come on…"

No, you come on; these projections aren't coming from some investment banker who has to use the market rate, but from the people who actually SET THE RATE. While the actual interest rates are set according to market conditions, they are able to make projections into the future and come up relatively close to those figures; they have also pledged to update these figures as things change. Another of Mason's comments is completely erroneous:

"…uncertainty should surround its goals because this allowed markets to move incrementally due to the fact that market participants had to search for where the Fed was moving."

The only reason a central bank would want uncertainty is to "fool" market participants. This policy of "fooling" only works a couple times and then renders the remaining policies ineffective. The idea that markets incrementally because of uncertainty has no basis in reality. Uncertainty in any market leads to jumps in prices as speculators push prices one way or another. A perfect example is in futures markets (which historically have had the highest levels of swings due to speculation) during World War II where food prices were fixed; the Merc and Chicago Board almost folded because they had nothing to trade. Knowledge of where any commodity, stock, or bond yield is going to be will decrease levels of trading and reduce spreads as volatility WILL decrease. These forecasts lead us closer to "perfect information"," less uncertainty in markets, and more confidence in the central bank's actions.

The arguments against these interest rate projections are a red herring; it appears that the main criticism to these policies is the fact that short and medium term rates are significantly too low and appear to remain there. These are not criticisms on increased transparency, but rather where the rates are actually set. In my "expert" opinion, this is a beneficial movement towards more stable markets and decreasing the amount of speculation and volatility in the market.


 

World GDP Growth

The recent financial crisis and world recession has brought to the forefront research that looks into how deep the recession is relative to how developed the financial markets are. As a simple exposition, Figure 1 displays growth rates of aggregated income quintiles from high to low income. The precipitous drop in late 2006 in GDP growth rates largely displays how much of a drop the world's markets took. The anomaly of these drops is that the poorer the countries are, the less GDP growth dropped with the wealthiest countries actually having negative growth for a period of time. Why might this be? My explanation for this is simply that this world recession was derived from a financial crisis and poor countries do not have highly developed financial markets.

Figure 1: World GDP Growth. Source: World Bank and Chase DeHan

There is significant research on the "finance-growth nexus" where higher levels of financial development are directly correlated to a higher GDP per capita. However, this research is somewhat misleading as a country may get rich before developing their financial markets, rather than developing financial markets for increased growth (for a detailed survey of the literature see Ang 2008). What can be seen from the recent financial crisis is that growth rates were in the same range for rich and poor countries until they began to diverge in the early 2000s, but when large financial crises emerge, those without large amounts of exposure to those markets will fare the storm better. Well-functioning financial markets can be beneficial to growth, but there exists a point where financial markets exceed their societal benefits. While this is a simplistic examination of the subject, it is interesting to note that countries with less developed financial markets did not suffer as deep of a recession.

Energy Use to GDP

It is widely acknowledged in the economics literature that in order for developing countries to "catch up" to the West that they must develop industry and manufacturing of some sort. In order to do this there must be sufficient energy available at an affordable cost. However, the fact that there is less innovation in the developing world makes it more difficult to innovate within the energy sector to produce cheaper energy.

Figure 1: GDP per unit of energy use.
Source: World Bank and Chase DeHan

Figure 1 depicts the GDP to energy cost ratio ($PPP) on the vertical axis, with year on the horizontal axis for each income quintile. What is immediately obvious is that the wealthier a country is, the more income (GDP) they are able to generate for each dollar of energy. It is also interesting to note that the income groups in the middle (lower-middle, middle, and upper-middle) are roughly close to each other while high income countries are significantly higher, while low income countries are significantly lower; all income groups are showing increased efficiencies as shown by the increasing trend over time. My interpretation of this is that the wealthy countries have been able to invest in the newer, more energy efficient technologies, those below are still using yesterday's technologies, while the poorest are relying on severely outdated, inefficient energy sources. This "trickling" of innovations is typical of many other industries where the highest level innovations are occurring in the high income countries while everyone else has to wait for the technology to be proven.

The part that is personally troubling to me is that the poorest countries have the highest cost of energy use, which is what they need in order to develop. It is unfortunate that we, as Americans, are unable to assist the developing countries to get, in the word of Jeffrey Sachs, "their foot on the first rung of the development ladder" to allow for successful development. These countries need cheap energy in order to become competitive on the world market; without it, there is no way to take advantage of the low-cost labor as there are plenty of other countries with cheap energy and cheap labor. This energy issue is one of the most important in bringing the least developed countries (LDC) out of extreme poverty where there is a struggle for daily subsistence. Bringing cheap energy to the LDCs may not bring prosperity, but should alleviate pain.

Casinos in NY

Governor Cuomo of New York, along with legislators Dean Skelos and Sheldon Silver, have decided that bringing casinos to New York would be beneficial to the state.  This appears to be a back room deal with the casino lobby as casinos have been time and again shown to not contribute to economic growth.  As with any lobbying group, their public front is that whatever they are lobbying for will contribute to growth and create jobs.  However, that is often not the case with some legislators able to see through the murk.

With specific regard to casinos, the net gain to society is minimal.  Casinos do not contribute anything economically to areas; sure they create jobs, but the income generated comes at the expense of other activities.  Nothing of value is created with casino activities as there is merely a transfer of wealth from one person to another, with the casino acting as a middleman skimming off the top.  The only way that casinos generate any impact on the local economy is through the multiplier. The way the multiplier works is that a building is constructed, giving a construction worker a job, who then goes out and buys a new car, the dealer buys a steak dinner, etc.  If money is put into working peoples hands, higher demand is created as they have the funds to spend as those multiply through the economy.

While it is said that there is a minimal societal benefit to a casino, they can be beneficial to local areas such as: Las Vegas and Atlantic City.  Where these differ from the above scenario is that there is a large influx of people from outside the local area who spend their money in the area.  When there are sufficient visitors from out of the area, the benefit is large at the expense of wherever the people are coming from.  So, the net benefit is still zero, but there is transfer from everywhere else to Vegas.  If creating a casino will bring tourists to the area and not be a drain on locals, it may be a beneficial policy.  But, cities be warned, most areas that have allowed casinos have seen transfers from local businesses to the casinos as it is nearly impossible to take business from Vegas and AC.

This is the article that tipped me off; appears to be a case of crony capitalism.
http://www.timesunion.com/opinion/article/More-casinos-Think-again-2437628.php