28 Oct 2009

Culled From the Email Outbox: The EPA’s Estimates of Cap-and-Trade Impacts

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Since I’m so busy lately I have switched to just reproducing things I write for work. Lower overhead means lower costs; I pass the savings on to you.

I was giving someone a quick reaction to the EPA’s analysis of S. 1733, the Senate version (sponsored by Barbara Boxer and John Kerry) of cap-and-trade. (It is companion to the Waxman-Markey bill passed the day Michael Jackson died.)

I just love how I don’t need to go to the Heritage Foundation to make my points; I can comb through the government analyses to show that the impacts are much higher than the media is reporting:

My understanding is that the EPA did not do a separate economic
analysis of S. 1733, because its cap-and-trade provisions are so
similar to H.R. 2454. One important difference is that the Senate bill
would require a bigger cut in emissions by 2020 (20% cut versus 17%
cut in House bill), but from 2030-2050 the emission targets are the
same. So that means the economic impacts from the Senate bill would be
higher in the early stages.

Since the EPA is using the same economic impact estimates, I’ll just
repeat what we have said about the EPA (and CBO) analyses of HR 2454:

* The low dollar amounts per year (“postage stamp per day”) are
reported only for the early years, like 2020, when the emission
cutbacks aren’t too severe. When it comes to the impact in 2050, the
figures usually switch to % losses in “household purchasing power,”
because if they showed the absolute dollar loss, it would sound far
from negligible. For example, in Table 4 (page 17) of the EPA analysis [.pdf]
of S. 1733, they reproduce their cost impact for HR 2454. The
“undiscounted household consumption loss” for the year 2050 is
reported as a range of $2.50 – $3.52 per day. (That’s an expensive
postage stamp.) Taking the midpoint, that works out to almost $1100
per year in forfeited household consumption. But I have never heard
such a figure being reported in the media as the “EPA estimate of the
impact of Waxman-Markey.” They report the yearly figures for the year
2020, when the Waxman-Markey cut is 17%, and don’t report the gross
dollar amount for the year 2050, when the emission cut is 83%.

28 Oct 2009

Like a True Superstar, Bernanke Keeps Breaking His Own Records

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Don’t worry, kids, Big Ben constantly assures us he has all the tools he needs to withdraw any excess liquidity when the time is right. And if you can’t trust the Federal Reserve chairman, who(m) can you trust?

27 Oct 2009

Can Somebody Tell Me What Happened in Ecuador?

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From Krugman, who is quoting from here:

In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.

Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.

I don’t get it. If Ecuador had its own currency with a peg to the USD, then I would understand. But Krugman claims–and my trusty research assistant Google verified–that Ecuador literally uses the USD as its currency.

So what does it mean to say they “had” to impose tariffs to fix a current account deficit? Isn’t the fix automatic, namely that Ecuadorans stop spending as much when they run low on dollar bills?

I’m not being facetious, I really want someone to explain this to me. I’ve asked three economists on email so far, and I’m reminded of a Beatles song.

27 Oct 2009

More Luv From San Diego

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UPDATE below…

In response to this op ed, another love letter:

I have to remind you of a famous quote I will paraphrase for you, “just because you think something you write is a fact, doesn’t make it a fact”. In your column titled “Is the Recession Really Ending?” You do exactly what every right wing hate and failure talker on AM radio and Fox News does to discredit President Obama. You make up things that support your phony conclusions and attribute them to the people you are criticizing.

First your unemployment numbers: Now where and when exactly did the Obama team warn that if the government did nothing unemployment would rise to 9% or if the stimulus passed this would not happen? That’s like quoting anonymous sources and is total BS.

Yes unemployment is close to 10%, but there is real factual evidence that the early stages of the stimulus package just starting to work is creating jobs and most important saving jobs. And the “Obama team” including the President has said many times that the full effect of the stimulus won’t be visible until sometime in 2010. One can only guess what the unemployment rate would be had Tarp and the stimulus not happened, probably nearing the Great Depression numbers of 20 to 25%.

Your words “A simple look at the facts suggests that the interventions have been abject failures…”

The only thing simple in this statement is your analysis of what happened! I guess a global credit crunch, global stock markets dropping up to 40%, financial panic, and potential failures of worldwide and domestic, multi-billion dollar companies such as AIG, Citi bank, and Fannie and Freddie, saved by TARP and Obama’s federal intervention were just figments of the world’s imagination. And your so called free- market approach, which I guess meant stay the course (since you never define it) would have corrected this crisis better then the emergency government interventions around the world that a consensus of economists (many nobel prize winners) agreed
worked and kept us out of a severe depression.

It’s interesting that you never even mention the rebound of the US stock market to over 10,000 last week. Had the government done nothing to restore confidence and prop up the banks, and did as you suggest let the market run free ( which got us into the mess, a de-regulated market that is), we’d be looking at a Dow Jones average of around 2k or 3k, unemployment of about 25% and breadlines.

I think you owe the Union Tribune, and it’s readers a column either apologizing for your short memory of the crisis and Monday morning quarterbacking, or a better attempt defending and most important of all DEFINING a free-market approach and how that would have saved the economy.

I’ll be looking for it. regards, [Bob Murphy fan] san diego

I first sent a response saying that I couldn’t find the original paper, but sent a link to the graph from somebody’s website. Then I managed to dig it up and sent this email to my fan:

Found it, bottom of page 4:


I realize there are plenty of people on talk radio etc. who would be upset if Obama rescued a kitten from a burning building. (“That’s something Karl Marx would have done! He liked cats too!”) But if I may be so bold, you are overreacting yourself. You confidently accused me of making up things when I wasn’t.

Bob Murphy

UPDATE: Here is the guy’s full response to my email above. (Then he sent me another email asking me about other things I had refused to answer.) It’s good to see that I am changing minds.

It said without the stimulus unemployment would be 8.8% in Q4 2010! That does not support your accusations in your attack piece.

What about “abject failure” and defining somewhere a free market solution? Sorry, but you write from the Glen Beck school of journalism. regards, [name]

27 Oct 2009

CBO Testimony Misleads on Cost of Cap-and-Trade

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A team effort but I had a lot to do with this new IER blog post, regarding CBO Director Elmendorf’s recent testimony on the economic impacts of carbon dioxide legislation.

Some of the points will be familiar to long-time readers, but one new thing I verified–after emailing with a CBO economist–is that the distinction between “household purchasing power” and “GDP” is very slippery:

After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:

In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.

This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.

Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”

Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.

27 Oct 2009

Alan King Not Familiar With the Pronunciation of "Mises"

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Stephan Kinsella passes along this incredibly unexpected video. In the midst of a pretty funny clip, Alan King reads from the obituary of Ludwig von Mises (around 3:00).

Of course, King is committing a basic fallacy in trying to prove that women live longer than men, but I think he probably knows this.

26 Oct 2009

If I Lived in England I Might Buy a TV Again

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This is a neat game show clip I picked up from Scott Sumner. I will post my commentary (from Scott’s thread) as the first comment here. You should watch the clip first.

26 Oct 2009

Former Fed Official Calls for Audit

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William Barnett–who’s not the Fed-watching William Barnett of Loyola College, I checked–calls for an audit of the Fed in the NY Times (HT2 Jeff Hummel). Barnett made me feel less of an idiot when he wrote:

Consider the data the Fed presented last year on nonborrowed reserves. Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves. Clearly, the money borrowed cannot exceed the total reserves, so nonborrowed reserves should not be negative. Yet for a few months last year, the Fed reported banks’ nonborrowed reserves at billions of dollars below zero. In its calculations of nonborrowed reserves, the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves. Such incompetent accounting would not survive an unconstrained, fully informed audit.

Phew! That screwed with some of your heads’ too, right? I mean, even if the Fed held 100% borrowed reserves, then “nonborrowed reserves” should have been zero, not negative. Here’s the chart:

What I don’t know is if the rapid “improvement” was due merely to injections of new reserves, or if the Fed changed its bookkeeping too.

Another interesting point:

The information the Fed releases on bank deposits is similarly biased and contaminates data on the money supply and thereby on the liquidity of the economy produced by Federal Reserve policy. In order to evade reserve requirements, which mandate that a certain fraction of deposits be held in reserve and not lent out, many banks sweep much of their checking account deposits into shadow money-market-deposit savings accounts before reporting those deposits to the Fed. Since such accounts have no reserve requirements, this allows the banks to decrease the amount of total reserves they’re required to have. But the liquidity provided to the economy from checking accounts is the pre-sweeps amount, not the reported post-sweeps amount.

This was something we had to deal with at Laffer Investments; i.e. we would report to clients on the “sweep-adjusted” M1.

In normal times, I wouldn’t think it was that big a deal, if you were just interested in rates of growth. But these aren’t normal times. If banks are now less (more) willing to sweep checking deposits into money market accounts, then that means the reported growth in M1 is higher (lower) than it actually appears. I’m not saying banks are less willing to do so, but they might be, in which case the stagnant monetary aggregates are actually concealing a shrinking money stock held by the public. It is entirely possible that looking at FRED for the M1 and M2 updates isn’t a great way to understand what’s really happening with the money supply.

Like I’ve said in the past, any of you sugar daddies who want to pony up the $$ for me to take a month and get to the bottom of all this, please feel free to email me.