Waiting in Vain

Paul Krugman on energy conservation:

Waiting in Vain :

Remember that guy I had lunch with? He’s a pretty good writer and you can read him here:

BY P*A*U*L K*RU* GMAN
During the California electricity crisis, Dick Cheney sneered at energy conservation, calling it a mere “sign of personal virtue.” But this week Samuel Bodman, the energy secretary – who is widely regarded as Mr. Cheney’s proxy – declared that “the main thing that U.S. citizens can do is conserve.” Is the Bush administration going green?

No, not really. This administration’s idea of encouraging conservation is an ad campaign centered on a cartoon pig. When it comes to substantive energy policy, the administration is still thinking drill-and-burn.

The background to Mr. Bodman’s remarks is growing public anger over high energy prices. Most of the focus right now is on the price of gasoline, but the worst is yet to come: just wait until people see their winter heating bills, especially for natural gas, which has roughly doubled in price since last year.

And the political danger to the administration is obvious: polls suggest that many people blame energy companies for high energy prices, and blame the administration for failing to control price gouging.

Funny, isn’t it? During the California crisis, some of us deduced from economic evidence that electricity shortages were artificial, the result of market manipulation by energy producers and traders. This deduction was later confirmed by the Enron tapes, but at the time we were voices crying in the wilderness.

Now, much of the public believes that corporate evildoers with close ties to the administration are conspiring to drive prices up. But this time they aren’t, at least so far.

Just in case you think I’ve gone soft on the energy industry, let me say that claims that we’re having a crisis because environmentalists wouldn’t let oil companies do their job are equally bogus. When you hear someone talk about how no refineries were built for 25 years, remember that until recently, oil companies weren’t interested in building refineries, because they had excess capacity and profit margins were thin.

In fact, the current crisis is nobody’s fault, except Mother Nature’s. Both Katrina and Rita were stronger hurricanes when they plowed through offshore oil and gas fields than when they made landfall. And because damaged refineries and other energy facilities are competing for a limited number of repair crews, it’s taking a long time to get those facilities back up and running.

What this means is that a lot of “demand destruction” must take place over the next few months. That is, one way or another, people will have to be persuaded to limit their consumption of natural gas, gasoline and heating oil to match the available supply.

In the absence of an effective conservation policy, prices will do all the persuading: the cost of fuel will rise until people drive less and turn down their thermostats. The problem, of course, is that high prices will impose serious hardship on many families.

And that’s why administration officials are sounding vaguely greenish: they hope to limit the price pain by persuading people to curb their energy consumption out of a sense of public duty. Done right, such a campaign really could make a difference. In fact, energy conservation played a significant role in ending California’s crisis four years ago.

But as you might expect, the administration’s conservation push lacks conviction. President Bush has spoken in favor of conservation, but he seems more interested in trying to justify the Iraq war. And the administration’s attempt to promote “Energy Hog,” a cartoon pig in a leather jacket, as a conservation mascot verges on the pathetic.

So it’s going to be a long, cold winter. But what about the longer term?

The long-term case for energy conservation doesn’t have much to do with the current shortages. Instead, it’s about national security, broadly defined – reduced dependence on Middle East oil supplies, reduced emission of greenhouse gases. But one might have hoped that the administration’s new willingness to use the language of conservation would spill over into long-run policy.

No such luck: when it comes to substantive actions, as opposed to public relations, it’s still the same old, same old. Mr. Bush has called for more refineries, but has said nothing about raising mileage requirements and efficiency standards for appliances. And as for a higher gasoline tax, which would be politically possible only with broad bipartisan backing – don’t be silly.

Conservation’s day will come. But it hasn’t happened yet.

Comments

[Susie from Philly]

Uh, Brad, ixnay on the ink-lay. The new blog etiquette on these matters is, print it in full without a link back to the source. Thanks, though...

[Jonathan W. King]

The, uh, re-printed column is by:
>
> P*A*U*L K*RU* GMAN
>

Hmm...does that mean Krugman has really joined some higher pantheon of the unwordly shrill, and is now one of the old ones who cannot be named? :-)

[Stephen Kriz]

The greatest ex-president in American history, Jimmy Carter, was right all along.

[A. Zarkov]

So far I haven’t noticed any significant impact on the traffic here in northern Virginia from increased gasoline prices. And the prices are really high, even higher than much of the Bay Area. Virtually everyone in my office commutes long distances (because they can’t afford local housing) and as far as I can tell, no one carpools. I am stunned by how far people are willing to travel in about the worst traffic in America (outside of LA). The guy at the next desk commutes 130 miles RT and spends nearly three hours per day in traffic. So I think Krugman is right. When people really feel the twin pinchers of high gasoline, and home heating costs they will need to make significant and unpleasant changes in their lifestyle. They might actually have to start carpooling to work, which is something I did for over 20 years in the Bay Area.

[J Thomas]

Of course Carter was right. But it didn't do him much good.

What it got him was people 25 years later saying he was right all along.

If we had an education system that actually taught people to think things out for themselves.... In 30 years we might have a majority of voters thinking....

I don't know how to do it though. "You can lead a force to slaughter but you cannot make them think."

[dearieme]

Don't I remember Carter saying (something like) that people heated their offices to 78F in winter and cooled them to 68F in summer and it would save a lot of energy if the numbers were swapped? What happened to that idea: anything?

[piotr]

I think that Krugman is ur-shrill, the Platonic ideal of which lesser shrills are but imperfect reflections.

Administration's energy policy is outright pathetic. Some people grumbled that the only alternative energy source they recognize is nuclear. But what did they do for the nuclear power? Seems like nothing. Original Cheney plan had something mentioned about wind power. However, it was Enron who invested in some wind power outfit and after Enron's demise there was really no point in pushing the idea anymore, was it?

Iraqi war was not supposed to be a war for oil, but on the eve of invasion there was a lot of talk how one can triple Iraqi oil production by investing a mere 50 billion dollars -- there was even an international conference in London devoted to this topic. We spent 200+ billions down there, so the amount to 50 billion now really looks like "mere 50", with no irony. Sadly, no more oil than under the bad boy Saddam.

The feeblest attempt at automobile standards were defeated, and support of hybrid technology was transfered to hydrogen cars, a plan that has a good company with the plan to send humans to Mars, and a plan to have a sky shield defending us from missiles, and the plan to have a friendly and stable democracies in Afghanistan and Iraq. (Intelligence test: what do these plans have in common?)

With semi-decent gasoline saving program we would need 10% gasoline less after 6 years and there would be no shortage. A decent program would do better. Back of the envelope calc: we replace 10% of vehicles each year, make them on average 20% more efficient: different mix of light trucks to sedans, less overpowered engines, and some ultra-efficient hybrids and diesels. Such a program was about as popular as exhibition of a crucifix dunked in urine.

[Eli Rabett]

Brad is channeling Leo Rosten.
http://en.wikipedia.org/wiki/Leo_Rosten

['As you know' Bob]

Sorry to derail the thread, but I can't let that pass:

Keith remarked "we were certainly better off the moment he [Carter] became
an ex-president."

Umm, no. Not if by "we" you mean "the American public". Because, if you recall, the second thing the Reagan administration undertook was to plunge this country into the deepest depression we had seen since the 1930s. "We" very quickly became a lot WORSE off. Prior to the first Reagan administration, unemployment had not been over 10% since before Pearl Harbor. Times have not been that bad SINCE Reagan, either. Some of us remember.

But, to return to the thread: yes, Carter was correct then, and even more correct today.

[coriolis]

Keith:"carter imposed price controls, which incentivized people away from using less.."

Cite please?

[Bruce Moomaw]

"There isn't some 'right amount' to consume that we achieve through some 'conservation.' If the prices reflect underlying marginal cost of the good, then what people then choose to consume is the right amount. In addition, Krugman would point out that the prices rising to force conservation is how things are supposed to work. Any other 'conservation' policy would probably impose worse costs."

A classic oversimplification, since it ignores delayed and indirect effects. To the extent that failure by the government to force conservation increases our dependence on a Mideast oil supply which is extremely vulnerable to a sudden cutoff without warning -- with that dependence also forcing us to continue to prop up regimes which are extremely unpopular among their own people, thereby increasing our risk of getting into a war whic may involve anything up to nuclear terrorism -- then the government's failure to force more conservation that current price levels alone can do is harmful. Ditto for the global warming that future generations will have to put up with as a result of our own generation's unpunished profligacy in fossil-fuel consumption. Keith, in short, is one of those who worships the market as God, the Supreme Arbiter of Morality, which Adam Smith himself most definitely did not do.

[Movie Guy]

"Waiting in Vain"...

Who are we kidding?

Have there been big movements across the nation to demand major national energy policy changes? Or local municipal, county, state movements?

Have there been vast efforts to 'economically force' manufacturers to build more energy efficient products?

Has there been a major ground swell among households to reduce the purchase of products requiring electricity? How many computers, televisions, game machines, and a zillion other products are spread across the average household?

Instead, we're listening to another round of dumb and dumber politics. The Republican did this and the Democrats didn't do that... Yak, yak, yak.

It should sink in that a growing number of problems and issues facing the United States and its citizens are becoming so serious that people need to rise above the sword rattling of political shove and pull. Both political parties have failed the American public on some of these issues. Just as citizens have failed to protect their own best interests.

Too many things are broken.

Let's move the discussion up a level.

Waiting in vain? Nonsense. We're not engaged in any major energy saving movements thus far.

Well, except for outsourcing some production of goods.

Households are loaded up with electrical and gas powered products, including lawn blowers, edgers, lawn tractors and mowers (not push mowers, by the way). And plenty of DC power supplies for all those other electric goodies. Plus the computers and monitors that power down to standby still drawing current all night and all day while we are not in our homes.

We're not taking our energy consumption very serious at any level. If you think that you are, call your friends and ask them to turn off just one television, computer, power supply, and two additional lights every day. And throw away the blower and electric hedgers. Buy a rake, push broom, and scissor hedger.

Think they will do any of that?

[snort]

Why is it we don't naturally conserve - or save money for that matter? We do seem as a society to have morphed from careful ants to wastrel grasshoppers. That careful husbandry of resources that came out of the Great Depression was buried, I guess, by the "me" generation. For whatever reason, I inherited some of my father's depression syndrome and use a "rake, push broom, and scissor hedger." Of course, I live in Berkeley which makes it easier, although some of neighbors think my push mower is quaint.

The unfortunate reality is that we will not conserve until we are forced to do so by the government. Descriptions of future doom will not make us stop buying those things that we "deserve." Maybe the coming panic and depression will have some salutary effects.

[christo]

MG above asks why we aren't moving the discussion up a notch. I asked why we're not moving the national health plan discussion up a notch in the Kate Moss Thin post at the Brad Setser site. We had Hillary tried as a witch and convicted in a lot of peoples' minds instead even if her plan looked policy wonk top heavy in the opinion of the 90s era New Republic. Now we have the CEO administration that can't try seeing 5 years ahead, we'll deal with the problem with a series of Chap 11 disasters until enough voters are poor enough to deal with it. We'll have a similar energy policy reaction too, I guess.

As for lawn care, I didn't move beyond the 60s technology overlaid with 90s consumerism. I'll use the gas mower but the other tools are the beautiful things from Smith & Hawkin. Aren't they on 4th Street?

[christo]

Other tools are (liberal not Arny quality) muscle powered, I meant to add.

[ilsm]

To the idea there is some "correct price" that oil should sell for and that conservation is wrong:

Oil is not a demand driven commodity. OPEC, the Saudis in particular, manage the supply of at least half the oil delivered.

Oil is run by a cartel. Sooooo......

You must conserve to beat them. Or, find alternatives, same process take control of the demand side.

There are oil economists but they merely monitor the "management" of supply by the cartel and scream usually too late when it is time for the comsuners to duck.

There were a lot of good conservation and R&D programs in the Carter era. They were killed in the 80's when OPEC/Saudis realized they were losing market share as the demand side got into some level of strength.

The 80's and 90's saw a steady decline of oil prices and thus an economic motive to go back on the binge.

Let the supply side reign!!!

Bush's supporters whoopped the 50 cent a gallon gas tax in the last election, a move to take over the demand side!!

[realist]

people are changing their energy consumption habits. if you don't believe this, try selling your suv (not that anyone on this blog owns an suv). the first heating bill this winter will serve to further modify energy consumption habits. parts of colorado have already received 20" of snow. it could winter cold enough for people to remember next november.

[realist]

that last sentence should have read: it could be a winter cold enough for people to remember next november.

[BroD]

The pig is a pre-emptive smear. Anticipating that it will take a lot of heat (yes, godammit, that's a pun and I'm proud of it) the administration has created the caricature label it will apply to it's critics (with a winking "tsk, tsk.")

It's cunning given the understandable appeal the pig image has for greenies like me who understand that the owners of those mega-Suv's etc are driving up my gas prices.

But then I also understand that the Bush administration has not just tolerated the pigs, it has pampered them as a matter of policy.

I'll concede this is not an impeachable offense but it sure doesn't dampen my enthusiasm for the impeachment project.

[spencer]

Keith -- Nixon imposed energy price controls.
Carter actually started lifting them . No, he
did not cancel them 100% at one time, it was a staged reduction. But by the time he left office most of the controls were lifted. On a percent basis, Carter actually removed more controls than Reagan did.
You can find the data at the DoE.

P.S. -- the gas lines were under Nixon also, not under Carter.

[liberal]

A. Zarkov wrote, "So far I haven’t noticed any significant impact on the traffic here in northern Virginia from increased gasoline prices."

My impression is that the very-short-term elasticity of miles driven could be very small. But the medium term isn't.

[Ron Sturtevant-Stuart]

I still don't understand why natural gas prices are so responsive to the hurricanes. It's not as if anyone has changed the types of heating/generators because of the problems getting oil in, so overall there shouldn't be a giant change in demand. it's not as if the hurricanes have destoryed the natural gas refineries, and I thought the majority of supply came from canada. Is there a claim that production is so close to balanced with demand that slight changes in production is resulting in giant swings in price?

Demand for natural gas has traditionally been highly cyclical. Demand for natural gas depends highly on the time of year, and changes from season to season. In the past, the cyclical nature of natural gas demand has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The primary driver for this primary cycle of natural gas demand is the need for residential and commercial heating.
from http://www.naturalgas.org/business/demand.asp#factorshort
since it's unlikely that people have switched from oil heat to natural gas, What's going on here?

[Alex Tolley]

Re: Carter. Maybe I am wrong, but wasn't it the Carter administration that tried to price oil by source to punish Iran - leading to financier Marc Rich arbitraging that differential until he went into exile to escape jail (And Clinton granting the pardon)?

Re: Conservation. Keith, I think you are misinterpreting Krugman. Conservation is just an approach to use less of a good - Krugman isn't, as a far as I can tell, suggesting some lump target. But you are wrong to believe that markets will correctly price in the effects of global warming, assuming we could know the costs.

[JackNYC]

"If the prices reflect underlying marginal cost of the good, then what people then choose to consume is the right amount."
I guess if we substitute corn syrup as the subject matter we have a major reason for obesity in this country.

"There isn't some 'right amount' to consume that we achieve through some......"

What, dieting?

Can't wait to tell my physician my good health does not depend on loosing 50 pounds.

[kharris]

Ah, the Keith argument. Talk economics, but only the part that fits your views. Price in externalities, and the underlying marginal cost of the good in question goes up a might. Krugman addresses this problem, implicitly, in his mention of an energy tax. He simply concludes that an energy tax is politically impossible right now.

Declaring that conservation efforts would impose worse costs doesn't make it true. This is a 'second-best" situation, in which the flaws of the policy we have seem, at least to some of us, as sufficient to leave lots of room for a better outcome through policy. You give a hand-wave to externalities later on, but limit them to foreign policy. Way too narrow, as the broad consensus among scientists (though not among politicians) regarding global warming shows.

"Carter was wrong, and moronically wrong to boot." Simply declaring that your own views of Carter are right is no better than declaring your own economic views to be right. Nothing you offer here proves your point.

Ignoring the messy business of attributing energy price controls to the wrong guy, Carter's push to conserve was crude and tentative, but it was not limited to preaching. You either missed a lot of what was going on, or you are misrepresenting what Carter did. Either way, it doesn't do much for your argument. The energy price spike, and the drop in supply, were things that politicians at every level were not ready to face. More sense could have been made over time, but Carter did not have that luxury. Now, we are fighting a war that is linked in many ways to oil. We are running a current account deficit that is exacerbated by oil. We are suffering from weather-induced disasters that seem linked to heavy use of carbon-based energy sources. You may not be willing to see a connection between Reagan's and the two Bushs' policies and these problems, but that doesn't mean the connections aren't there. Insisting on having a "price" for each externality? I assume you understand that methods for putting a price on highly uncertain future events is subject to some difficulty, not the least of which is politics? Take a look at the Rubin/Greenspan approach to economic management. What are the risks? If the risks are large, then we can afford to undergo considerable cost to mitigate the risk, without having a "price" for each potential outcome. Energy costs, resource depletion, war and the like do take place outside the classroom, in the real world, after all.

By the way, getting prices right isn't "the goal" any more than conservation is. Human welfare is the goal. Conservation and getting prices right are both just means to that goal. You seem to miss that subtlety, in the same way you missed the subtlety of which president imposed price controls. "…if Carter removed price controls"…? Huh? Ya got the history wrong (and have flopped from "Carter was a moron" to "better tha Nixon" in one easy lesson). Hadn't you ought to consider that ya might be getting the economics wrong?

[euzoius]

Our country has built its entire society and economy around cheap oil and natural gas, which are finite, irreplaceable sources of energy. They are both depleting at very measurable rates, and we know where all the remaining supplies are to be found----and we won't find any more.

We needed to carefully conserve these precious fuels for our future----now they have been hopelessly squandered, with no replacements in sight. As a result, our country and economy are going to experience cataclysmic difficulties in the next generation, and there will be no solution, no abiltity to "go back" to the days of the perfect fossil fuels we ridiculously wasted.

[anne]

KHarris

"By the way, getting prices right isn't "the goal" any more than conservation is. Human welfare is the goal. Conservation and getting prices right are both just means to that goal."

Nicely done :)

[tjallen]

The view that current prices already include every sort of risk, delayed effect, indirect effect, etc. might be true if we were always rational buyers/sellers armed with perfect market information. Since we aren't, prices don't.

[Jonathan W. King]

Zarkov writes;
>
> So far I haven’t noticed any significant impact on the traffic here in northern
> Virginia from increased gasoline prices. And the prices are really high, even
> higher than much of the Bay Area. Virtually everyone in my office commutes
> long distances (because they can’t afford local housing) and as far as I can tell,
> no one carpools.

So now I'm not sure why you are surprised. The only ways there could be an impact on traffic is if people could (quickly) change where they live in a way that reduced their total costs (can't happen in DC), or if car-pooling were effective in the DC sprawl region. In the short term, car-pooling is going to be really tough, too, since the traffic around DC is so bad in so many places that you pretty much would have to be taking people from the same subdivision to the same place of employment. A carpool taking people from 4 random suburbs to one employer would be really slow, and a carpool from one subdivision to 4 employers would be pretty much unthinkable. In the olden days of slightly more compact development, I think it was much easier to plan carpools. These days, I think it's doable, but in a place like DC it might require some fairly intricate calculation, and probably gas prices that are more like $5 per gallon. Cheap gas has really enabled some truly bizarre development patterns that the costs of congestion are only just beginning to reduce.

Now, a trend that could occur (just maybe) is increased ridership of public transportation. Basically, ridership could hardly be lower in most places, and taking the bus or the Metro presumably require less coordination between random individuals. I live in Columbia, MO and commute via bicycle in fair weather. In the winter, I can take the bus on non-bikable days and I'm continually amazed at how underutilized our bus system is. The pick-up points are right on campus, the bus now runs on time and drops me a block from my house. At $.50 each way the cost completely dominates the cost of driving plus parking, and yet...nobody much has figured this out. A whole city full of presumably liberal college professors, and less than 1% ridership on a system that is economically sensible. Weird.

[Marcus Sitz]

Re hurricanes and natural gas prices

There are two super-basins in the North-American gas market: one centered around the Gulf of Mexico and the other around the Rocky Mountains, of which Canadian gas is an important part. I don't have numbers to hand, but the Gulf market is the dominant market, with futures contracts and much else settled at the Henry Hub, which is a collection of pumping stations south of New Orleans. Henry is fed by a dense network of pipes from both undersea and near-shore wells. There are also (I think but am not sure) LNG facilities that feed imported gas into the network there. A number of major pipelines then head north, northeast, and east, to supply gas consumers from Chicago on around to Florida.

Hurricanes tearing up the input facilities are a significant shock to this system.

Gas is used not only for heating, but also for electricity production. While a significant chunk of Eastern electricity demand is met by base-loaded coal generation, much of the "cycling" demand (the bit of demand that increases through the day then falls at night) is met by gas-burning combined-cycle and simple cycle units. Since loads in the north and northeast are winter-peaking, the use of this generation amplifies the winter-peaking behavior of total gas demand.

HTH

[liberal]

Jonathan W. King wrote, "Cheap gas has really enabled some truly bizarre development patterns that the costs of congestion are only just beginning to reduce."

Oh, it's much more than just cheap gas. I live in Bethesda, MD, right outside DC, and I read the _Wash Post_ series on how most counties around here do their best to keep the housing market tight and at the same time attract businesses. (They get taxes from bizzes and don't have to pay for schooling that way.)

Add to that the usual craziness about restricted zoning---there's a bit of building in Bethesda, but it's all luxury townhouses, instead of the (far more efficient) large apartment buildings.

Not to mention the idiotic cap on property taxes...just another handout to landowners.

[wkwillis]

Ron
theoildrum.com mentioned that the Gulf processing plant of offshore gas also processed onshore gas and that it had lost power for several weeks, shutting in production of some onshore gas.
I don't know if that was H2S removal or C2 removal.
Keith
Israel is only responsible for about twenty billion dollars a year of subsidies, if even that much. Half of that is welfare from the EEC. Some of that is in the form of getting the benefits of EEC tariff walls without having to pay the costs of the EEC agricultural subsidies. Some is a commission on Arab labor from Palestine being used in products for exports to Europe. We prop them up because they have the best intelligence networks in the Arab countries by far, since they started setting it up long ago with their citizens that were ethnically cleansed from the Arab countries leaving contacts behind. We absoilutely need them.

[Ralph]

Without more evidence, I can believe that "Nixon imposed energy price controls. Carter actually started lifting them." Carter also started the deregulation trend that Reagan gets most of the credit for. Carter's economics czar Alfred E. Kahn (remember him) deregulated the airlines industry and started deregulation of financial and credit controls that has had such an impact in the nineties.

[Lee A. Arnold]

Keith, How does conservation destroy human welfare more than getting prices right?

And how do you always get prices right, in regard to complex systems with circular chains of causation, emergent properties, and increasing probabilities of catastrophic shifts after additional forcing?

[J Thomas]

Keith, it's often pleasant to hear from a market true-believer.

I'm concerned about the effects of uncertainty. Like, if we knew just what to expect we could conserve the right amount, and if we knew what to expect we could get the right prices. But we don't know what to expect and that causes a fundamental flaw in both approaches.

When there's important information that's only available to some people, why would you expect those people not to use their secrets to manipulate prices for their own benefit? That's unlikely to aid the general welfare, isn't it? And when those in-the-know benefit by making prices more unstable, who else benefits?

In general markets are wildly inefficient, so that each active market winds up with a market-maker who regulates prices. Then the efficiency of the market depends critically on the knowledge and competence of that market-maker. Doesn't this assertion conflict with your most cherished assumptions? How do you deal with that?

[wkwillis]

Keith
Israel is not just supported by the US, it is also supported by the EEC. They can export oranges into the subsidized European agricultural market and then import wheat from outside the subsidized European agricultural market, arbitraging the difference.
The cost of the war in Iraq is a few cents a gallon on a world wide basis. The cost of the US army, navy, and air force is several dollars a gallon and essentially all tied to oil.
Last I heard the Cuban navy was rather small. I doubt that they are going to invade us any time soon.

[Lee A. Arnold]

Keith your response to my questions rasies many concerns, and I have to be brief because I have to get to real work, so I will try to answer one of your final questions: "what you think is the best policy in the light of circular chains of causation, emergent properties, and increasing probabilities of catastrophic shifts after additional forcing?"

I think the policy has to reflect the failure of prices to reflect all information at these critical points. The information becomes unwieldy, or unavailable, or does not exist determinatively.

Before getting to that, it should be pointed out that the idea or belief that prices reflect all relevant information has been refuted by the various forms of Market Failure: (1) monopoly and imperfect competition, (2) externalities, (3) provision of public goods vs. free-riders, (4) asymmetric information, adverse selection, and moral hazard, (5) the unequal distribution of income, and (6) business fluctuations. This list can be made larger or smaller; and some might be incorporated into others. Each one has its own lengthy study and historical discussion. Some of these failures are amenable to market-based solutions, and some are not. Some of the market-based solutions do not really solve the problem, they merely transfer the costs, by increasing the transactions costs (search, decision, enforcement,) but since these are often non-monetized, this is ignored. (A recent example of this is the Medicare prescription package, and the attempted Social Security reform, creating enormous extra understand-search-and-decide costs for recipients -- see “Social Security: The Real Connections” at http://ecolanguage.net.) Other market-based solutions appear to transfer the problem into another form of market failure. For example, pollution emission permit trading (to efficiently reduce an externality) is causing pockets or bubbles of high pollution over some low-income areas (i.e. exascerbating the unequal distribution of income.)

Be all that as it may, I want to propose an additional market failure: (7) The impossibility of determinative predictions about complex systems.

Historically, this hasn't made much difference, until now. Markets could proceed AS IF they had all the information, because the underlying biosphere has been relatively stable and fecund, and its adversities have happened slowly enough to be managed by creativity (eg. input substitution and/or new technology) facilitated through the price system, working by itself.

But markets do not merely “lack” information about complex systems, information which can be regained by cost-benefit analyses and contingent valuation to “get the prices right,” or by concommitant expert trading in the futures markets to filter through the price structure. Markets may have NO access to information, until it is too late.

A month before Katrina struck, what was the probability of the damage it caused?

Some of the determinative information is unavailable to anyone. But we do know some things about the general tendencies of complex systems, from Millsian induction. We see it happen in gravitation, wildlife food webs, disease immune systems, computer software, etc. etc: it always appears that the probability of catastrophe increases along with system stress. The typing and timing is unknowable beforehand, --and not only that, but even after things happen, there may be no agreement on the cause.

So the answer to "what you think is the best policy in the light of circular chains of causation, emergent properties, and increasing probabilities of catastrophic shifts after additional forcing?" may be: sometimes, a simple political decision by a democratic government, acknowledging the precautionary principle because information is unavailable, and acknowledging that a policy may change if new information becomes available.

The idea that it is not economically efficient seems specious and laughable, given that we can never cost-benefit all the highways and byways of causation.

It is important that the policy always be simple: otherwise costs are “lowered” only by displacing them to transactions costs.

Simple can often mean total: ban some pollutants outright, for example. The creativity of capitalism will find a new way for growth.

Simple does not mean lack of variety: you might seed several different initiatives, for fuel conservation, fuel mileage efficiency, public transport, etc. This might preserve the most freedom under the circumstances.

[Lee A. Arnold]

Keith, if you need to learn how to relate specific policies to certain circumstances in addition to the case of adverse selection in health insurance, there are lots of places to study it. If you need to learn about inductive inferences despite deterministic nonpredictability in complex systems, there are lots of different systems to study, although it takes lots of time (I've only studied about three of them but I'm working on a fourth,) but luckily there is also a lot of general systems material available for inspection. If you need people to answer your questions, you may sometimes find that in fact they have done so. And if you need to belittle and insult people, you can belittle and insult me.

[J Thomas]

Keith, you gave the following reasoning:

If we require that everybody get health insurance, then if there is significant adverse selection then insurance prices will go down, while otherwise prices will go up. So we can use that method to tell whether there is adverse selection.

This seems to me to completely ignore reality. Insurance prices go up. We can have philosophical discussions about why they go up, but still this is a fact. Insurance prices go up. Arguing that if we do some specific thing under some specific circumstance it would make insurance prices go down is silly. It's like arguing that since we can never have more than a thousand angels dancing on the head of a pin, all we'd have to do would be to get that thousand and first angel to dance there and then they'd each owe us three wishes.

However, I'm willing to be convinced. Do you have an example where a bunch of people who correctly believed they didn't need insurance were forced to get insurance anyway, and rates then went down?

[J Thomas]

""It's like arguing that since we can never have more than a thousand angels dancing on the head of a pin, all we'd have to do would be to get that thousand and first angel to dance there and then they'd each owe us three wishes.""

"You're just babbling, now. Do you believe adverse selection is a significant drive of health insurance? If so, then this is what follows. You can't even tell the difference between a falsifiable hypothesis and angels on the head of a pin? J, that's simply pathetic."

Keith, my example is precisely as falsifiable as yours. Just put the thousand and first angel on the pin and see what happens.

[Lee A. Arnold]

It is also a falsifiable hypothesis that complex systems cannot be deterministically predicted, and that the probabilities for some catastrophic events are virtually meaningless, but this went unobserved, or rather led to the false conclusion that there is therefore no basis for "rational" policymaking. It may be however that some people calculate the probability of being run over by a car, so they don't have to look both ways before crossing the street.

[Doug Wellens]

This is a site that is showing up on all the Blogs. Getting lots of attention because it actually has a plan to get something done about gas prices. www.OneAmericanVoice.org