Ontario Government Doubles Down on Central Planning for Electricity

After a scathing auditor general report about excessive compensation in the Ontario Power Generation (OPG) company, Wynne’s Liberal government has decided to take steps. She said: “We have a need for the government to have more control over compensation packages and we will be introducing legislation in order to put those controls in place”.

This can literally be understood as follows: under our Economic Central Planning policies, there is now a lot of waste and extravagance in the OPG. In order to eliminate this, we will introduce more Economic Central Planning, and hopefully things get better.

Well, let me go out on a limb and predict that they won’t. Ontario electricity prices will keep rising, compensations will continue to be extravagant, and taxpayers will keep shelling out billions to keep this system afloat. How do I know? Inner voice, I guess.

What’s also interesting here is that the OPG was never meant to be a government’s corporation in the first place. It was created by Progressive Conservatives in 1999 as a first step to privatization of Ontario’s energy market. Then, in 2003, the same Progressive Conservatives have cancelled the sale, because “We need excess (power generating) capacity” to have a real free market. Kind of like the Soviets who were trying to create “Material and Technical base for communism” before they flip the switch on it. Needless to say, neither have found what they were looking for.

And now we’re full speed ahead on centrally-planned, government-owned electricity generation, and when something goes wrong with it, well, that’s probably because it wasn’t centrally planned enough. How many times do we need to step on the same rake before we realize we’re doing something wrong?

Privatization will not solve all the problems, and certainly not immediately. In many ways, it will introduce pains that were not there before. But privatization is not about solving problems immediately. It is about putting feedback mechanisms in place that will solve these problems eventually. And if the problems cannot be solved, propagate the information about them in the form of prices, so people can adjust.

It is every government’s goal to keep voters happy, here and now, no matter what happens afterwards. It is also important to be seen acting, leading, taking charge and addressing issues. That’s what killed the OPG sale in the first place. And that’s what prompts the current government to introduce more and more government control.

Until the voters are educated enough to signal to the government that they would support privatization despite short-term pains, we will be getting more and more central planning – from both Provincial parties.

Tagged with: , , , , , , ,
Posted in Uncategorized

Wind Power Corporations Can Now Kill Birds Legally

Wind turbine power generators in the US have been granted an interesting exemption recently. Now they are no longer responsible for injury or death of bald and golden eagles, otherwise protected by American law. Instead, they have been granted a free hand in the matter – well, at least for the next 30 years. This sets these corporations aside from others, who are still liable for anything that happens to these birds.

The exemption brings up a couple of interesting consequences, maybe unintended by the Administration.

First of all, for a while now, the wind turbine proponents have been trying hard to spin the bird issue as  insignificant. You see, the argument goes, feral cats are a bigger problem for the birds than wind turbines. This is usually followed by the total number of birds killed by each of these factors – notwithstanding the fact that these same people are trying to expand wind power generation way beyond its current scale, thus affecting the impact on the birds.

Notably, oil companies do not get such treatment – every bird that dies by their hand is duly noted and reported – but that is a different story.

But now the “insignificance” argument has been dealt a serious blow: the issue is now significant enough for the President of the United States to notice – and do something about it. It is something very well meaning and well intentioned, but now one can no longer say that the bird issue is a complete invention of the greedy oil industry.

The other consequence is setting a precedent. The green industry has been the lawmaker’s favourite for a number of years. They got tax breaks, reimbursements and subsidies beyond anything any other corporation could dream of. But even though it is a lot of money – it’s still just money.

The current exemption ventures into a new territory. Now we are talking about different rules applied to wind power corporations as opposed to everyone else. If you’re an oil corporation and you kill a protected bird, you will be prosecuted. Buy if you run a wind turbine, I guess this is OK.

In and of itself this seems like a very dangerous precedent – essentially saying that some corporations are more equal than others – but in the context of green energy discussion it has a different implication.

Opponents of green energy have been long arguing that it is not sustainable – that as a business it cannot justify itself. It is not the purpose of this post to take sides in that argument. However I cannot help but notice that these opponents have received an unexpected boost from the Obama administration. It can now be claimed that all the tax breaks and subsidies are not enough to keep the industry afloat: it requires a special treatment in laws and regulations to stay viable.

And of course the irony here would be that this special treatment happens to be in the area of environment protection and preservation of wildlife. I can only imagine what would be the response of the  environmental lobby if this exemption had been granted to an oil sand company.

So, in a single masterful move, the Obama administration has weakened the “green” side and strengthened the “oil” side of the sustainable energy debate.

Well played, indeed.

Tagged with: , , , , , , , ,
Posted in Uncategorized

Gun Control and the Trolley Problem

It seems that the gun control debate is going forever through the same cycle of arguments:

“Gun freedom increases gun crime and gun accidents and costs us lives!” cry the gun control supporters, and they are of course right.

“Guns let victims protect themselves and create deterrence, thus saving lives! Besides, gun crime effect is not obvious!” cry the gun control opponents, and they are of course right, too.

Is it about saving lives? If so, seems like the debate would boil down to solving a mathematical equation. We could list all the terms:

  • A: Lives lost to gun accidents
  • B: Lives lost to increased gun crime
  • C: Lives lost due to “stray bullets” in that increased gun crime
  • X: Lives saved due to victim’s ability to protect themselves
  • Y: Lives saved due to crimes that go uncommitted because of deterrence factor

So it seems that all that is left is to decide whether A + B + C is greater than X + Y or not.

Well, not that simple.

To see why, consider a well-known trolley problem, which is discussed a lot in ethics.

T1: Imagine a train without brakes running down the tracks, towards 5 people tied to the track and unable to move. You did not cause this, and are not the driver of the train. You can throw a lever and divert the train, but it is bound to hit a single person, who is, quite inconveniently, also tied to the tracks.

What do you choose?

The utilitarian view is that you should throw the lever, because, well, 5 is greater than 1. Virtue ethics may disagree – because it is better to be not involved than responsible for the one death. And there are other schools as well.

What makes the trolley problem so important for the gun control debate is that it highlights the relevance (or lack thereof) of this “life math” to guide your decisions. To see how, let’s restate the gun control problem in these terms:

G1: You are a government of a nation N. You can allow your people to have guns, and your main statistician tells you that A+B+C people will die every year. You can confiscate guns from your people, and your main statistician tells you that X+Y people will die every year. Given that A+B+C > X+Y, will you act by collecting the guns, or refrain from action, allowing the guns?

So, it seems like if you know the answer to the trolley problem, you could settle the gun control debate (or at least reduce it to math and stats). Of course, there is no single agreed-upon answer to the trolley problem, but it gets even more complicated.

In the original problem, the choice you have is between an action (throw the lever) and inaction (do nothing). However, it can be claimed that anything that government does (or does not do) is an action. So, the government can be seen as “acting” if it refrains from introducing gun controls – similar to the driver of the train. When we evaluate the actions of the driver, we do not consider whether or not a lever was moved, we just look where the train actually went – provided this was not a genuine mistake.

So, let’s restate the trolley problem:

T2: Imagine a train without brakes running down the tracks, towards 5 people tied to the track and unable to move. You did not cause this, but you ARE the driver of the train. You can throw a lever and divert the train, but it is bound to hit a single person, who is, quite inconveniently, also tied to the tracks.

The two problems (T1 and T2) are not equivalent. Some people (like me) may think they have different solutions. Therefore, it is crucial to decide whether the government is the “driver” – which means, responsible for everything that happens – or an uninvolved party, at least when it comes to preventing gun accidents.

This is another difficult problem, and it has to do with what the proper role of government should be.

But it doesn’t end there.

Additional detail is the problem of political legacy. The government may come into power when gun control is already in place. Is it considered “acting” by cancelling it? Let’s state our trolley problem again:

T3: Going along the tracks, you accidentally kick a lever and it changes position. Just as you think about moving it back to where it was, you see the train coming on without brakes. You also realize that if you move the lever to where it was originally, 5 people will die, whereas if you leave it, one person will die.

Before we continue, my solutions to all these problems are as follows:

T1: do not touch the lever, and watch 5 people die. You are not responsible for their deaths, as you did not bring about that situation. If you throw the lever, you will be responsible for the single person’s death.

T2: throw the lever. You are the driver responsible for where the train goes, and must choose between the lesser of two evils. Your physical action or inaction is irrelevant, any and all choices you make regarding train’s direction are action, so even if you do nothing, you’ll still be responsible for the death of 5 people.

T3: move the lever back and watch 5 people die. If you leave it in place, you will be responsible for killing the one man; however, if you move it back, everything will be left in its “natural” state, as if you had not been involved at all.

As you see, in order to settle the gun control debate, we need to answer not one, but two very difficult philosophical questions. One is the “trolley problem” (in all three versions T1-T3), and the other is whether or not the government is in the “driver” position regarding gun safety. Depending on the answers, we may also need to actually answer the statistical question whether or not A+B+C is greater than X+Y.

This only means one thing – the gun control debate will never be settled.

Tagged with: , , , , , , ,
Posted in Uncategorized

How Scientific Is Modern Economics?

It was May 1919. An expedition led by Arthur Eddington had reached the remote island of Príncipe in order to confirm the theory of general relativity put forth by Albert Einstein. The observation of the Hyades star cluster during the solar eclipse has shown that the light is deflected by the gravitational field exactly the way Einstein predicted it. Overnight, the relativity has moved from being an unproven theory to a confirmed one.

This was perhaps one of the most dramatic examples of the scientific method: the process of observing a phenomenon, formulating a hypothesis, making a falsifiable prediction based on the hypothesis, and finally verifying that prediction either through experiment or observation.

The scientific method as we know it today has been gradually developed over the course of last few centuries. Prior to that, scientists were using Aristotelian scholastics – a process largely dogmatic and detached from reality, and therefore unable to handle any but the simplest of subjects reliably.

So here is the question about economics: is it a science in the full sense of the word, or is it a philosophy where the number of valid opinions may equal (or exceed!) the number of practitioners in the field?

We are repeatedly pushed towards the opinion that it is in fact a science. Macroeconomic data is constantly used to prove or disprove economic claims about efficiency of this or another policy. At the same time, we see little or no reference to the validity of the underlying model, without which no meaningful use of the data can happen.

In other words, it is useless to say that (to quote Douglas Adams) “whenever I go click, all I get is hum” if you do not have an established theory that clearly states the rules according to which the clicks and the hums behave.

Many authors object to the notion that Economics uses scientific method on purely philosophical grounds: you cannot have a controlled experiment in economics, and an economy is created by human behaviour that is hard or impossible to predict. These objections may be valid, but they too are philosophical arguments. We can debate these points endlessly, and in fact we do.

But what if we apply the same method to economics as a science, that the economics itself is claiming to apply so successfully to the economic phenomena that it studies? In other words, we can establish objective criteria which would identify a “true” science, calibrate them against an established science such as physics, and then try to apply them to economics.

The criteria are easy to come by. I’d suggest two:

  1. A true natural science will have little or no different, warring schools of thought. If the science is based on an objective scientific method, there should be little room for disagreements and interpretations.
  2. A true natural science would be able to predict significant phenomena in the domain it studies, and the same predictions would be made by all of its practitioners. It’s not enough that some physicists predict gravitational lensing: once the theory is established, all physicists must be able to predict it.

We can clearly see how physics passes these tests by a wide margin. While there are always people who claim that the Earth is flat, there can be no disagreements among physicists today as far as established theories like Relativity or Quantum Mechanics.

Similarly, physicists are able to accurately predict major phenomena, and the fact it’s only thanks to these abilities that we can have reliably functioning technologies such as computers or GPS.

With economics, it’s a different story. There are so many schools of thought that they had to be further subdivided into Supply-side and Demand-side. Classical, Keynsian, Neo-Classical, Neo-Keynsian, Monetarist, Austrian… all these are schools that have many followers today, and even though only some of these call themselves “mainstream”, they are not as prevalent as Relativity is in physics.

Similar situation exists with predicting economic phenomena. Any astronomer could predict a Solar eclipse based on physics, however, only some economists were able to predict economic booms and depressions, and most of those who did, did not do that reliably.

And here again, the important point is not that some economists were able to predict (or even identify) booms and depressions. What is important is that there are many recognized and distinguished economists that didn’t – including the Chairman of the Federal Reserve. The number of these economists is so vast that one can hardly attribute this failure to individual incompetence. A failure on this scale can only happen in the domain of philosophy, not science.

One objection that could be raised is that economic environment is similar to weather – it is impossible to forecast its future developments. This objection is not valid: we are not demanding to predict temperatures to a fraction of a degree, or the weather next year. Identifying imminent market crash or depression is more equivalent to identifying a cold front or a hurricane developing – tasks easily accomplished by today’s meteorologists. In fact, meteorologists do their job so well that many people from sailors to pilots rely on this information in situations where their very lives could depend on its accuracy.

Another objection is that it’s only the “most difficult” questions that generate so much controversy. Whenever we’re breaking new grounds or discussing global macro-economic policies, we may have disagreements. But it seems that the disagreement is on such basic questions that it can hardly be explained away. Should we raise or lower taxes? Should spending be higher or lower? How about interest rate? Unemployment benefits? If we do not know the answers to these, what is the point of trying to answer anything else?

But the best one is by Paul Krugman: he says that it’s some economists that are not scientists, while there is nothing wrong with economics. Conveniently, the only people that receive his dubious honour are those that disagree with Krugman himself.

Science is all the rage today, and rightly so. Applying scientific method and looking at objective data has given us the tremendous progress and improvement in the quality of life that we have seen in the last few centuries. It is understandable that we want to apply this method and this thinking – that has proven itself so successful elsewhere – to everything that we do. Mentioning something scientific, or appearing to be based or science will give you upper hand in any argument.

However, we also need to be able to recognize our limitations, and make sure the methods are applied where they are appropriate. It seems – empirically! – that applying scientific methods to economics did not produce the results we were hoping for.

Tagged with: , , ,
Posted in Uncategorized

Tom Mulcair, Mark Carney and Getting Money “out of the economy”

NDP leader Tom Mulcair is in the headlines today for declaring he wants to raise corporate tax rate. As part of the justification for the move, he mentions the famous $800 billion of “dead money” on corporate balance sheets. The expression “dead money” was attributed to Finance Minister Jim Flaherty, but in fact it was Mark Carney who coined it. Carney was heading Bank of Canada at the time.

I do not have much to add to the renewed debate of whether or not it’s worthwhile to raise corporate tax rates, and what kind of effect, if any, it will have on jobs, business, and economy in general. The wide spectrum of opinions is well represented.

One thing is worth commenting on though, and that is the very concept of “getting money out of” or “returning money into” the economy. People on both sides of this argument (or “all” sides – as there are probably more than two) frequently note that “returning the money to the economy” will be good. From that point, some go on to argue – let’s go ahead and do it already, by taxing the corporations and spending the money (by the government). Others proceed to claim that there are good reasons behind these cash stashes, and we should probably just let the companies be.

I’d like to try and understand what that “getting money out of” economy even means. To examine that, let’s go to the basics.

And the basics are that there we, as the economy or the society, own, produce, consume, import and export all sorts of things. These things are our labour and skills, roads and farmlands, cars  and houses, factories and computers, food and office supplies. This is our wealth.

And there is another thing that helps us allocate the limited wealth that we have between our virtually unlimited wants and needs, by assigning values to most everything. That is money.

Money is not wealth. Money helps move wealth around and run production, to produce more wealth. But in itself, it has no value beyond numbers printed on paper. In a world where everyone is absolutely honest, “monopoly money” would do just as fine as dollars or gold, as long as everyone promises not to produce more of it.

So first thing to note about this “getting out of economy” thing is that even if the corporations take all their cash and set it on fire, no wealth will be destroyed. Sure, “money is taken out” of circulation, but the wealth it moves around remains. There is the same amount of cars, the same amount of roads. The corporations become poorer, because they can now purchase less things they might need. But everybody else becomes a little bit richer because the remaining money would become just a little bit more valuable.

Same argument applies if the businesses stash their cash into a mattress. Taken out of circulation, the cash is as good as gone. Since this money was not gifted to the corporations by anyone, but rather received in exchange for some product or service, this pretty much means that the corporations lend their product to the public in exchange for pieces of paper. These pieces of paper will be redeemed at a later stage to get something in return.

But companies would not usually do that. At the very least, the cash will be kept in a checking account of a bank. The bank will take the money, and lend it to the public or otherwise invest it. The money will enter circulation – or “return to the economy”. Again, no wealth increase there, but hey, if we are so concerned with more pieces of paper changing hands, here we go.

In other cases, companies will maintain some kind of conservative portfolios to earn slightly better return on their cash. The portfolios will contain some investment instruments like bonds or mutual find shares. Anything contained in an investment portfolio can be broken down and the money traced back “to the economy”. For example, if the company buys a bond, it lends money to the issuer of the bond to be invested in whatever it is the issuer is after.

So as we see, there is no easy way to “take money out of the economy”, besides stashing cash in a mattress or burning it. And even then, what is taken out of the economy are pieces of paper, and not real wealth.

Tagged with: , , , , , ,
Posted in Uncategorized

Toronto May Need Subways, But Not the Way Rob Ford Wants To Build Them

When Rob Ford ran for Mayor, he positioned himself as a penny-pinching conservative. His election slogan was “Respect for taxpayers”. He should have added – except when it comes to subways.

When it comes to subways, taxpayers’ money is less important: not only will the government build and subsidize subways on the taxpayer’s dime; but the Mayor is using all his influence to convince other levels of government to chip in on the project.

And this is how we arrive at the situation when Rob “Respect for taxpayer” Ford is advocating for residents of Victoria, BC to subsidize subways in Toronto via Federal subsidy. People in Thunder Bay, ON get shafted twice: they will subsidize Toronto subways through both Federal and Provincial grants. Torontonians will pay the most – all three levels of taxes – but at least they get to ride it once in a while.

Except for those that don’t live by the subway, but who cares about them anyway.

If the respect for taxpayers is a real one, then Ford should change his approach.

Firstly, we must do away with the notion that people who don’t use the subway subsidize people who do. I’m pretty sure they have other uses for their money.

And second, we should be honest with ourselves and admit that we don’t really know whether or not Toronto even needs subways.

No amount of debate, no amount of studies, no amount of media coverage, can ever, ever settle this question. There simply is no correct answer.

Toronto does not need subways anymore than it needs 5 additional IKEA stores. We do not know if it does or does not, or how you even define “need” when applied to a city. This is not they way our system works.

Building subways requires resources – heavy machinery, fuel, electricity, concrete, steel, electronics, rolling stock. It requires a lot of people to spend their time working on it, instead of doing something else. In return, it provides benefit: reduces transit times, eliminates the need to use a car (and for some people, even the need to own a car), makes our roads less busy and travel less troublesome.

How do you determine whether or not the benefits justify the costs?

In all other areas of our economy, you open a business and see if it makes a profit. If it does, then chances are the resource allocation was worthwhile, and the entrepreneur gets rich. If it doesn’t, then chances are the resource allocation was not worthwhile, and the entrepreneur loses his investment.

So if the taxpayer is to be respected, we must apply the same line of reasoning to subways. Someone needs to build subways for profit, without any subsidies, and we can see if they are profitable or not.

If Rob Ford wants to show real respect for taxpayers, this is what he should do.

Tagged with: , , , , , ,
Posted in Uncategorized

Can you ‘spark’ a crisis?

As the US Administration and Congress grapple with the budget and debt ceiling impasse, repeated claims are made that further brinkmanship will “spark a global financial crisis”, especially if the US is forced to default on some of its obligations – even briefly. While enough has been said on the US budget process, it’s interesting to see what “sparking a crisis” actually means.

So let’s take this hypothetical event – the US stops paying its bills for a brief period – and first ask ourselves: is it really a “spark” – in itself an inconsequential event, but one which triggers a destructive sequence – or a real, objective catastrophe? And once we know that, what does it teach us about the global financial system and its current state?

I would claim that those who talked about “sparking a crisis” have unwittingly used a correct metaphor – a brief US default is really a spark, and not a catastrophe.

To see it clearly, it helps to abstract ourselves from the complexities of today’s financial system, with its markets, securities, bonds, derivatives, interests, treasuries, liquidity and other financial terms. Important as these things are, they only exist with one, and only one purpose: to help us move real, physical resources around, in a more efficient way. If at any point, some process cannot be understood or evaluated except in complicated financial terms, we must be doing something wrong.

For example, you can say there was a “liquidity crisis” in certain country at some point in time. You can also say, “it was very hard to get a loan” instead. But even more basically, you can say, “there was not enough resources to start new projects, so resources had to be pulled from existing ones”. This will describe the situation just as well, and will be true even if there were no money at all and people used barter economy.

So first thing to note about this potential US default is that no physical wealth is destroyed. Some people indeed do not get paid, and this is bad, but it does not destroy wealth in general, it just transfers it – in this case, from people who should have been paid to those who should have paid them.

Wealth is generally hard to destroy – whatever you may hear from a TV screen every time the market crashes. Wealth is the things we have – cars, roads, buildings, technology, land, resources. An example of wealth being destroyed is the Fukushima disaster in Japan. It took a tsunami to do this scale of damage, and even from that the country and the world have recovered.

There is no way that changes to distribution of green pieces of paper or numbers inside really big computers can (or should) result in “wealth destruction”, or “cost the economy billions” or other such things. They can ruin many people financially, while making some other people rich. They can create huge injustices and imbalances. They can draw resources from one sector to another, and make resource use less efficient. But they cannot magically “break” the economy.

Unless, of course, that economy is already broken, and the changes in question are just… a spark.

This distinction is crucial. Whether we see the US default as a spark or a real problem will dictate what we do about it. If it is a real problem, we should avoid it at all costs. If it is just a spark, we should deal with the powder keg it can potentially set off. Because even if we deal with this potential “spark”, there will be another spark, and another, until it finally blows up.

Tagged with: , , ,
Posted in Uncategorized