Category Archives: Technology

Rejecting Fossil Fuels at Our Great Peril

18 Wednesday May 2022

Posted by in Central Planning, Energy, Risk, Technology

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The frantic rush to force transition to a zero-carbon future is unnecessary and destructive to both economic well-being and the global environment. I do not subscribe to the view that a zero-carbon goal is an eventual necessity, but even if we stipulate that it is, a rational transition would eschew the immediate abandonment of fossil fuels and adopt a gradual approach relying heavily on market signals rather than a mad dash via coercion.

I’ve written about exaggerated predictions of temperature trends and catastrophes on a number of occasions (and see here for a similar view from a surprising source). What might be less obvious is the waste inherent in forcing the abandonment of mature and economic technologies in favor of, as yet, under-developed and uneconomic technologies. These failures should be obvious when the grid fails, as it does increasingly. It is often better to leave the development and dispersion of new technologies to voluntary decision-making. In time, advances will make alternative, low- or zero-carbon energy sources cost effective and competitive to users. That will include efficient energy storage at scale, new nuclear technologies, geothermal techniques, and further improvements in the carbon efficiency of fossil fuels themselves. These should be chosen by private industry, not government planners.

Boneheads At the Helm

Production of fossil fuels has been severely hampered by the Biden Administration’s policies. The sanctions on Russian oil that only began to take hold in March have caused an additional surge in the price of oil. Primarily, however, we’ve witnessed an artificial market disruption instigated by Biden’s advisors on environmental policy. After all, neither Russian oil imports nor the more recent entreaties to rogue states as Iraq and Venezuela for oil would have been necessary if not for the Administration’s war on fossil fuels. Take a gander at this White House Executive Order issued in January 2021. It reads like a guidebook on how to kill an industry. In a column this weekend, Kevin Williamson quipped about “the Biden administration’s uncanny ability to get everything everywhere wrong all at once.” That was about policy responses to inflation, but it applies to energy in particular.

Scorning the Miracle

Fossil fuels are the source of cheap and reliable energy that have lifted humanity to an unprecedented level of prosperity. Fossil fuels have given a comfortable existence to billions of people, allowing them to rise out of poverty. This prosperity gives us the luxury of time to develop substitutes, not to mention much greater safety against the kind of weather extremes that have always been a fact of life. The world still gets 80% of its energy from fossil fuels. These fuels are truly a miracle, and we should not discard such valuable technologies prematurely. That forces huge long-term investments in inferior technologies that are likely to be superseded in the future by more economic refinements or even energy sources and methods now wholly unimagined. There are investors who will still wish to pursue those new technologies, perhaps with non pecuniary motives, and there are a few consumers who really want alternatives to fossil fuels.

Biden’s apparent hope that his aggressive climate agenda will be a great legacy of his presidency is at the root of his intransigence toward fossil fuels. His actions in this regard have had a profoundly negative psychological effect on the oil and gas industry. Steps such as cancellations of pipeline projects are immediately impactful in that regard, to say nothing of the supplies that would have ultimately flowed through those pipelines. These cancellations reinforce the message Biden’s been sending to the industry and its investors since his campaign: we mean to shut you down! Who wants to invest in new wells under those circumstances? Other actions have followed: no new federal oil and gas leases, methane restrictions, higher drilling fees on federal land, and a variety of climate change initiatives that bode ill for the industry, such as the SEC’s mandate on carbon disclosures and the Federal Reserve’s proposed role in policing climate impacts.

And now, Democrats are contemplating a move that would make gasoline even more scarce: price controls. As Don Boudreaux says in a recent letter to The Hill:

“Progressives incessantly threaten to tax and regulate carbon fuels into oblivion. These threats cannot but reduce investors’ willingness to fund each of the many steps – from exploration through refining to transporting gasoline to market – that are necessary to keep energy prices low. One reality reflected by today’s high prices at the pump is this hostility to carbon fuels generally and to petroleum especially. And gasoline price controls would only make matters worse by further reducing the attractiveness of investing in the petroleum industry: Why invest in bringing products to market if the prices at which you’re allowed to sell are dictated by grandstanding politicians?”

The kicker is that all these policies are futile in terms of their actual impact on global carbon concentrations, let alone their highly tenuous link to global temperatures. The policies are also severely regressive, inflicting disproportionate harm on the poor, who can least afford such an extravagant transition. Biden wants the country to sacrifice its standard of living in pursuit of these questionable goals, while major carbon-emitting nations like China and India essentially ignore the issue.

Half-Baked Substitution

Market intervention always has downsides to balance against the potential gains of “internalizing externalities”. In this case, the presumed negative externalities are imagined harms of catastrophic climate change from the use of fossil fuels; the presumed external benefits are the avoidance of carbon emissions and climate change via renewables and other “zero-carbon” technologies. With those harms and gains in question, it’s especially important to ask who loses. Taxpayers are certainly on that list. Users of energy produced with fossil fuels end up paying higher prices and are forced to conserve or submit to coerced conversion away from fossil fuels. Then there are the wider impediments to economic growth and, as noted above, the distributional consequences.

Users of immature or inferior energy alternatives might also end up as losers, and there are likely to be external costs associated with those technologies as well. It’s not widely appreciated that today’s so-called clean energy alternatives are plagued by their need to obtain certain minerals that are costly to extract in economic and environmental terms, not to mention highly carbon intensive. And when solar and wind facilities fail or reach the end of their useful lives, disposal creates another set of environmental hazards. In short, the loses imposed through forced internalization of highly uncertain externalities are all too real.

Unfortunately, the energy sources favored by the Administration fail to meet base-load power needs on windless and/or cloudy days. The intermittency of these key renewables means that other power sources, primarily fossil-fuel and nuclear capacity, must remain available to meet demand on an ongoing basis. That means the wind and solar cannot strictly replace fossil fuels and nuclear capacity unless we’re willing to tolerate severe outages. Growth in energy demand met by renewables must be matched by growth in backup capacity.

A call for “energy pragmatism” by Dan Ervin hinges on the use of coal to provide the “bridge to the energy future”, both because there remains a large amount of coal generating capacity and it can stabilize the grid given the intermittency of wind and solar. Ervin also bases his argument for coal on recent increases in the price of natural gas, though a reversal of the Biden EPA’s attacks on gas and coal, which Ervin acknowledges, would argue strongly in favor of natural gas as a pragmatic way forward.

Vehicle Mandates

The Administration has pushed mandates for electric vehicle (EV) production and sales, including subsidized charging stations. Of course, the power used by EVs is primarily generated by fossil fuels. Furthermore, rapid growth in EVs will put a tremendous additional strain on the electric grid, which renewables will not be able to relieve without additional backup capacity from fossil fuels and nuclear. This severely undermines the supposed environmental benefits of EVs.

Once again, mandates and subsidies are necessary because EV technology is not yet economic for most consumers. Those buyers don’t want to spend what’s necessary to purchase an EV, nor do they wish to suffer the inconveniences that re-charging often brings. This is a case in which policy is outrunning the ability of the underlying infrastructure required to support it. And while adoption of EVs is growing, it is still quite low (and see here).

Wising Up

Substitution into new inputs or technologies happens more rationally when prices accurately reflect true benefits and scarcities. The case for public subsidies and mandates in the push for a zero-carbon economy rests on model predictions of catastrophic global warming and a theoretical link between U.S. emissions and temperatures. Both links are weak and highly uncertain. What is certain is the efficiency of fossil fuels to power gains in human welfare.

This Bartley J. Madden quote sums up a philosophy of progress that is commendable for firms, and probably no less for public policymakers:

“Keep in mind that innovation is the key to sustainable progress that jointly delivers on financial performance and taking care of future generations through environmental improvements.”

Madden genuflects to the “sustainability” crowd, who otherwise don’t understand the importance of trusting markets to guide innovation. If we empower those who wish to crush private earnings from existing technologies, we concede the future to central planners, who are likely to choose poorly with respect to technology and timing. Let’s forego the coercive approach in favor of time, development, and voluntary adoption!

The Digital Erosion of Collecting and Ownership

07 Thursday Oct 2021

Posted by in Digital Revolution, Technology

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Our material possessions aren’t the most important things in the world, but they are often part of our identities as people. Almost anything qualifies, from the big, expensive stuff like a home or a car, to whatever we find worth keeping. Declutter if you must, but the things that remain have a lot to do with our well being, even if they exist simply as part of our surroundings. They reflect our past, present, and hopes for the future, and they embody important aspects of our interests and passions.

I don’t doubt that individuals of high spiritual or metaphysical consciousness are able to transcend the desire for material goods. Very well, though for most of us, certain physical possessions matter. People collect things like matchbook covers or fine art because they are important in one way or another. Great works and quirky novelties all have their place… with someone.

We’ve witnessed an accelerating erosion in the personal art of “collecting” certain kinds of things, however, and that is the main subject of this post. It draws heavily on Kyle Chayka’s excellent piece, “The Digital Death of Collecting”. There are at least two aspects of this decline. One has to do with digital storage, which eliminates physical media and presents a new set of administrative issues. The other strand has to do with a loss of ownership. That’s a distinct phenomenon, but it has probably been driven by digital technology, at least to this point.

Losing Physical Control

Much of the entertainment we experience today is delivered electronically. Historically, we used physical storage media of various kinds: books, vinyl records, CDs, DVDs, books on tape, etc… so it was (and still is) possible to accumulate and possess a physical collection of music, for example. It can be fun to document those collections, like my old bootleg Grateful Dead concert tapes. Now, actually owning a collection of physical music media is an anachronism to many (mostly younger) people. Instead, their favorite music is stored on a device, a server, or “in the Cloud”. Often, without a shred of awareness, this has led to a kind of interference with the individual’s ability to possess and control a whole class of property closely associated with the cultural and intellectual self.

For example, with respect to physical media and storage, we used to shoot photos and, once developed, we’d curate them and put our favorites into photo albums. However, for the better part of the past two decades, phones have allowed us to snap photos and take videos more or less indiscriminately. I periodically transfer my photos to an electronic hard drive, with minimal curation, where they are automatically assigned names with inscrutable combinations of letters and numbers. I’ve been doing it for years now, and it’s a mess. How long will it take me to find a particular photo? Even one photo from a particular event? What if the drive fails?

I need to back them up, of course, but that was the original purpose of the external hard drive! As I updated and transitioned to new computers over the years, I failed to maintain a complete set on the new laptop hard drives. Now, they reside only on the external hard drive. Sadly, in the end, many of us are simply unable or unwilling to implement better record management practices. My “collection” of photos has been neglected. I could try to rename these images descriptively and sort them into folders, but digging into it now seems almost an insurmountable task.

To some extent, the advent of digital players had the same impact on music collections. Some listeners never made the transition and consigned themselves to the use of older media and technologies, despite the increasing difficulty and expense of finding recordings. But they kept their physical collections active, which is a gratifying thing. Those who made the transition grappled with new issues in managing their “collections”, often without the satisfaction of arranging and beholding the physical media. Granted, this isn’t always an either/or proposition, but doing both requires extra effort.

Similar transitions took place with digitized movies and reading material. I have a small movie collection, mostly movie musicals, animated children’s films, and a few cult films and classics. Not all are on DVD, and I haven’t added anything to this little trove in years. I still rent discs from Netflix, but like most people, streaming accounts for a growing share of my viewing. As for books, it’s less common today to see handsome collections of books arranged on shelves, but some doggedly attempt to maintain personal libraries, even if they aren’t all bound hardcovers.

Loss of Ownership

The other strand of our evolving relationship with digitized entertainment has to do with ownership itself. Today, we often purchase what amount to listening, viewing, or other “use rights”. This has sealed Chayka’s “Digital Death of Collecting”. Here’s how he sums it up:

“My lostness comes from the sense that our cultural collections are not wholly our own anymore. In the era of algorithmic feeds, it’s as if the bookshelves have started changing shape on their own in real time, shuffling some material to the front and downplaying the rest like a sleight-of-hand magician trying to make you pick a specific card — even as they let you believe it’s your own choice. And this lack of agency is undermining our connections to the culture that we love.”

Again, books are a case in point. Chayka notes that building a personal library is an expression of one’s intellectual history and interests. Yet today, with electronically delivered reading material sans physical media, you don’t really “own” the books you purchase. This blogger states the case well:

“As I’ve tried to point out before, both publishers and distributors like Amazon have spent the past decade or so removing rights that we used to have when books were physical property, and were something that you actually bought — along with the right to resell and/or lend them to whomever you wished, whenever you wished. Those rights no longer exist, which is why it’s better to think of an ebook purchase as an agreement to rent access under specific terms rather than an actual acquisition of something tangible.”

Free To Rent … and Pay As You Go

Subscriptions are replacing ownership in all sorts of contexts, and the use rights they confer are obviously of limited duration. For example, I was surprised when I realized that I could no longer “purchase” Microsoft Office and then download and install it to my computer. Instead, I have to buy annual subscriptions to continue to use it. Now, I don’t really “collect” software, unless the plethora of apps I’ve downloaded to my phone qualifies. Also, I understand that software becomes obsolete, so my “ownership” of Office was really equivalent to an indefinite but limited rental period. Maybe one-year subscriptions will be a better deal, though I have my doubts.

Renting certainly isn’t new in the “film space”. Blockbuster was a huge success for a time. And again, I get two discs at a time from Netflix to this day. People can still “collect” videos, but I suspect it’s not quite as common today in terms of collecting physical media.

I’ll always argue that renting is an economically rational alternative to homeownership. Same with leasing vs. owning a car, or anything else. And people often take a measure of pride even in things they rent. These own vs. rent choices and their relative values depend on one’s circumstances in life as well as one’s preference for control over the items in question.

Our Carts Runneth Over

A huge upside of all these changes is that we’re enjoying an astonishing array of choices as well as unprecedented convenience. (We can argue about the quality of the art, but that’s for another day.) In fact, the scarcity of new “collectibles” in the categories I’ve mentioned here might not be such bad news to collectors who’ve been at it for a while. After all, their existing collections might gain value. However, some forms of storage media might require technical or mechanical skill on the part of the collector. That’s because they have rigid hardware requirements. Eight-track players? Cassette tapes? VCRs? Who supports them? Yes, you can still buy a phonograph, but finding compatible “content” can be challenging. For the rest of us, streaming digital content frees us from those requirements and their inevitable obsolescence.

Unfortunately, our relationship to so much of our personal entertainment bounty seems more ephemeral than in the past. Streaming music and films is fine, but I’m much less likely to “burn them”, and ownership is an all but forgotten possibility. Like Chayka, I find the loss of owned, physical collections that has accompanied the digital revolution lamentable, not to mention the loss of control. I truly believe that if publishers ever quit printing physical books we’ll be poorer for it. But I’m not a complete technophobe, and I think there’s promise in recent developments in blockchain technology that might restore our ability as consumers to own more encompassing rights to digital assets.

Non-fungible tokens (NFTs) are essentially digital assets of almost any kind, with ownership documented in the blockchain. Some of the most publicized NFTs we’ve seen thus far are notoriously lacking in the actual rights they confer to the buyer. However, advances in standards are enabling the creation of more robust NFTs. There is no reason, in principle, why a consumer could not possess an NFT documenting ownership for a digital copy of a particular film, piece of music, e-book, or any other form one might collect. That might solve the ownership issue if and when crypto assets gain more acceptance. Individuals who are especially proud of their collections of NFTs could produce physical tokens to represent each NFT for display, if only for themselves to gaze upon lovingly. These could be plaques, for example, or the physical tokens could look like DVDs or books! Granted, it’s not the same as a real collection of physical media, but it might serve an emotional purpose.

Knocking Noxious Weeds Down on the Farm

06 Thursday Feb 2020

Posted by in Agriculture, Technology

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Proof continues to mount that the use of glyphosate herbicide in agriculture and landscape weed control poses no danger to humans, the claims of covetous plaintiffs’ attorneys notwithstanding. Glyphosate is the compound in Roundup and Spectrum weed killers. Ag Daily summarizes the EPA’s 10-year review of the empirical evidence in “EPA reaffirms no human health risk from glyphosate has been found“. The article notes that glyphosate has been studied extensively around the globe:

“The bodies supporting these safety findings include the European Food Safety Authority, European Chemicals Agency, German BfR, and Australian, Canadian, Korean, New Zealand and Japanese regulatory authorities, as well as the Joint FAO/WHO Meeting on Pesticide Residues.“

I should make one qualification about the EPAs findings: they apply to registered uses, and not to improper application or exposure to more than the prescribed use of glyphosate. Evidence that excessive exposure is dangerous is not in doubt, yet such findings are routinely presented as if they apply generally. This article in The Scientist makes clear that there are number of pathways along which glyphosate might be harmful to humans and animals (like anything else, really), but the evidence of those effects is mixed, at best, and limited to unrealistic conditions. Glyphosate, the so-called active ingredient, is heavily diluted for application, so it is correctly used in minute quantities. It is always important to follow the manufacturer’s instructions for use, wear appropriate protective gear, and in the kitchen, rinse your produce thoroughly just to be safe.

It’s also important to note that in terms of toxicity, glyphosate is benign relative to the herbicides it replaced, a process that accelerated in the 1990s. Michelle Miller describes a basic relation that is critical to understanding the real dangers posed by any natural or manufactured substance: Risk = Hazard + Exposure. So-called “natural” herbicides used on organic farms are often applied heavily due to their relative inefficacy, so heavier exposure to those herbicides may well offset the presumed health advantages of organic foods.

Glyphosate has additional advantages: it minimizes tillage of fields, which reduces the energy-intensity of farming and avoids unnecessary microbial disturbance, thereby reducing emissions of methane, nitrous oxide, and CO2. It also improves farm yields, helping farms prosper and enhancing the world’s food supplies.

 

Don’t Cry for the Former Taxi Monopoly

23 Friday Mar 2018

Posted by in competition, monopoly, Technology, Uncategorized

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It would be odd to argue that innovation is not unequivocally positive, that its costs will exceed its benefits. Certainly there are downsides: human capital invested in the methods and technologies supplanted by an innovation is devalued, jobs may be lost, retraining becomes necessary, and even consumers must get used to new ways of doing things, which is not costless. But most of these costs are temporary. And when an innovation eliminates an incumbent’s monopoly, the former monopolist’s profit ends up back in the pockets of consumers.

People do seem to focus excessively on the downside of innovation without carefully tallying the benefits. For example, this article focuses on the loss of New York City taxi pickups since ride sharing services like Uber and Lyft began to have an impact in 2014. Mark Perry reproduces a chart from that article, which is featured above. The number of monthly taxi rides in NYC has fallen by about one-third since then, from an average of 13+ million to about 9 million in 2017. In fact, Perry reports that the market for taxi medallions has tanked since then as well, with plunging medallion prices and many medallions sold out of bankruptcy and foreclosure. But don’t be too quick to shed tears for a monopoly lost.

The same chart shows the massive upside to ride sharing, as discussed here by Warren Meyer. The size of the total market has nearly doubled, from about 13 million per month to roughly 24 million (adding the two lines together). And it was a quick transition! That’s what happens when real competition is introduced to a market: prices fall and quantity increases, with an attendant increase in the welfare of consumers. That increase always exceeds the loss suffered by the former monopolist or cartel (as the case may be), which was earning excessive profits at the expense of consumers before the innovation had a market impact. And many former taxi drivers have made the switch to ride sharing providers, and they seem to prefer it for the flexibility and autonomy it offers. Yes, the best innovations benefit workers as well as consumers.

Competition can bloom when government opens markets to competitors or when an innovation creates new alternatives for consumers. In the case of ride sharing, both were necessary. For many years, NYC restricted the supply of taxi medallions, which kept taxi fares artificially high. The formal approval of ride sharing services in the city was not uncontested. But once it was approved, consumers took advantage of superior dispatching and payment technologies enabled by their smart phones, as well as security features and rating systems, not to mention lower fares. Again, these developments have contributed massively to consumer well-being, which is ultimately the point of all economic activity. Traditional taxis have to try to keep up. The ride sharing industry has inflicted the kind of creative destruction for which consumers are quite grateful.

Rural Broadband and Federal Intrusion

06 Tuesday Feb 2018

Posted by in infrastructure, Technology

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Rural telecommunications service is often inferior in speed and quality to what is available in urban areas. This is one basis of the so-called “digital divide” in the U.S., the gaps that exist between various groups in terms of access to broadband telecom service. The urban rural “divide” is actually much smaller than the gaps that exist within urban areas, but much of the attention in public policy debates seems to focus on rural broadband availability. Telecom infrastructure is far more expensive to provide in the hinterlands due to the distances and occasional natural barriers that must be traversed. This was true before the revolution in wireless technology and still is, though wireless has reduced the severity of the tradeoff. Given the cost differential, it strikes me as unreasonable for rural users to expect the same levels of service at the same cost as urbanites. They can either pay the higher cost of provision to receive high-end service, make do with service levels that can be delivered at rates they are willing to pay, or go without. Or, if a high level of service is critical and the user is unwilling to pay the cost, they can move to a place at which it is available at lower cost.

For many years, however, public policy has been premised on the notion that rural telecom users deserve subsidies from the general user population, or from taxpayers, in order to promote equal access to basic telephony and, more recently, broadband access. The Universal Service Fund, to which telecom users pay a fee on their bills every month, is based on this premise. Its extension to broadband is a classic example of first-world luxury made necessity, now asserted to be an obligation owed by society to every individual. It is the philosophical underpinning for a huge allocation of federal funds for rural telecom spending that is now expected as part of President Trump’s infrastructure plan. 

Broadband Availability

The quality of telecom service includes speed and other factors (such as latency, which refers to data delays). Here, I’ll confine the discussion to the speed at which data can be downloaded (upload speeds are always a bit slower). Minimum speeds of 5 – 8 Mbps are required to stream HD video, according to the FCC. Higher speeds are necessary for heavy users with several devices or “running more than one high-demand application at the same time.”

Broadband speeds vary tremendously across the U.S., but it’s important to remember that speeds are increasing dramatically over time. Small towns are undoubtedly concentrated at the lower end of the distribution of speed availability at any point in time. Today, the gap between the availability of speeds in urban and rural areas is minimal up to about 10 Mbps, but it widens above that level. In fact, the speeds available via certain wireline technologies can vary significantly even within one small town (to say nothing of the significant variation within urban areas). Away from town, the availability of wireline broadband is much more limited. Fixed wireless broadband service (point-to-point) can often be deployed at speeds comparable to wireline service, and those speeds and their availability will increase with the rollout of new (5G) wireless technology. Still, that might not be an option in many isolated communities and remote locales without additional facilities like relay stations. Satellite service is often available at speeds up to 25 Mbps, in-town or out, but like wireless, it has some reliability issues.

Nevertheless, to one degree or another, broadband service is often available in rural areas, or can be available if customers are open to a range of alternative technologies (and again, available speeds are increasing). Obviously, some technologies are better suited to reaching particular areas, depending on distances and terrain. Many rural communities are finding affordable solutions that combine technologies that best leverage existing infrastructure and the natural features of the landscape.

Alms or Unfettered Choice

A reality of life in a hard-to-serve location is that broadband service will be costly… for someone. Enter the interventionists, who view “rurals” with paternalistic sympathy. Rural customers, and certain solutions for broadband delivery discussed above, are already subsidized by the federal government in some instances. And again, the Trump Administration is ready to throw more federal money at rural telecom infrastructure. These subsidies are questionable from a public finance perspective because they presume that rural areas are “underserved” on a cost-benefit basis, a case that is often dubious.

The biggest rub is that most people who live in rural areas do so by choice, a point recently articulated by Nick Gillespie. He recounts the experiences of his ancestors, who came from poor European villages to America to seek a better life. By comparison, today’s American rural population is highly privileged. Few are mired in circumstances beyond their control, contrary to the popular view. Gillespie notes that rural median income is only about 3.5% less than urban income (including suburbs), while rural homeownership rates are higher and poverty rates are lower than in urban areas. Indeed, it’s no secret that many urban elites purchase rural property to escape congested city life. Those are some of the would-be recipients of federally-funded rural broadband infrastructure.

In the end, Americans tend to live where they do by choice. Alternatives not acted upon generally reveal a preference for staying put. Some people prefer the amenities of small town or country life for any number of reasons, including a generally low cost of living. They accept the disadvantages of a rural life such as the lack of proximity to advanced emergency treatment facilities and, at least historically, less connectedness to media. Obviously, city dwellers tend to prefer urban amenities and accept the disadvantages of city or suburban life, like congestion. Those who wish to move from country to city, or vice versa, are free to do so, but they must pay the cost of the move. Likewise, it’s reasonable to expect that those desiring to transform the amenities of a place to their liking should pay the cost. Bringing almost any form of broadband infrastructure to areas with low population density is a costly proposition, but today’s rural consumers have more choices than ever before, and the speed and quality of broadband will continue to improve there without federal intervention.

Rural vs. Urban Adoption Gaps

The rural population is older on average, and it is less educated on average, so rural adoption rates are always likely to be lower. This point has been emphasized by Brian Whitacre, who has stated that the urban-rural “digital divide” might always exist to some extent. But this phenomenon is not unique to rural areas. Adoption rates within urban areas are highly variable, and the intra-urban broadband gaps by race, age, and income dwarf the urban-rural gap. That too is unlikely to change any time soon.

Federal Cash for Cronies & Conferees 

Last year, FCC Commissioner Michael O’Reilly warned of the dangers of direct federal involvement in broadband infrastructure investment. These include the market distortions caused by picking winners and losers among providers based on non-market assessments, the graft that such a process invites, discrimination in favor of high-cost fiber technology, poor coordination across government bureaucracies, and insufficient oversight leading to chronic overpayments. Sadly, however, even Ajit Pai, Chairman of the FCC and a man whose opposition to network neutrality I have applauded, has proposed more federal spending on rural telecom infrastructure. The big telecom recipients of the buildout funds don’t mind the subsidies, of course. The rural recipients of new services at artificially low cost can’t mind too much. But federal taxpayers and broadband ratepayers should question this activity. I’m hopeful that there will be a silver lining: it is likely to be private infrastructure.

Electric Cars: EPA Serves Up Green Kool-Aid To Pair With Subsidies

03 Tuesday Oct 2017

Posted by in Environment, Subsidies, Technology

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Electric cars don’t save much energy over gas-burners if at all, at least for now. Warren Meyer’s recent Coyote Blog post on this topic is aptly titled “Why Is It So Hard To Get Even Smart People To Think Clearly On Electric Vehicle Efficiency“. Meyer begins by quoting the following tweet from Google smarty Eric Schmidt, which typifies the general level of public awareness regarding the supposed energy savings from electric cars produced by Tesla and many others:

“Electric motors are the unsung hero of clean energy – the latest are 97% efficient, vs. 45% for internal combustion.“

Meyer emphasizes these major points:

  1. the efficiency with which source fuels are converted to physical work via electric and gas-burning cars is more comparable than Schmidt’s tweet suggests;
  2. differences in energy density weigh heavily in favor of fuel-burning vehicles.
  3. the so-called miles-per-gallon equivalent (MPGe) calculated by the U.S. Environmental Protection Agency (EPA) is a sham.

First, Schmidt’s tweet is accurate only if the discussion is confined to simple conversion of energy to physical work performed by the respective engines. The tweet ignores energy losses that occur prior to that conversion: electricity must be generated with far less than 100% efficiency, mainly by burning coal and natural gas. In an earlier Forbes article, Meyer compares this situation to a distorted comparison of two refrigerator installers:

“In both cases the customer lives in a fourth floor walkup. The first installer finds the refrigerator has been left on the street. He has to … haul the appliance up four flights of stairs. After that, relatively speaking, the installation is a breeze. The second installer finds his refrigerator has thoughtfully been delivered right to the customer’s door on the fourth floor. He quickly brings the unit inside and completes the installation. So who is a better installer?“

The fact is that both gas-burning and electric vehicles rely heavily on fossil fuels. And, in addition to losses in the generation process, there are other losses of energy attributable to electric cars: transmission of power involves a significant energy loss, as does charging batteries and storage itself. Meyer considers only the extra losses from production and transmission of electricity in the following comparison:

“We take 97% times 90% transmission efficiency times 50% electricity production efficiency equals 43.6%.  This is actually less than his 45% figure.  By his own numbers, the electric motor is worse….“

Meyer qualifies this comparison, as some of his assumptions are of the “best outcome” variety, but contrary to Schmidt’s assertion, gasoline and electric engines are reasonably comparable in terms of energy efficiency.

Some contend, however, that power losses in electricity transmission are much larger than the 10% Meyer assumes (see the comments on his post). Battery charging involves a loss of perhaps 20%. And a replacement for a Tesla battery, post 8-year warranty, is $8,000 – $12,000, an additional storage “cost” that is virtually non-existent for gas-powered vehicles. Beyond a certain point in its life, that cost will have an impact on a Tesla’s resale value. Moreover, some contend that the production of electric vehicles is more energy-intensive, putting them in an energy efficiency hole right from the get-go.

Meyer then takes up the notion of storage density as an explanation for why early experiments with electric cars were essentially abandoned:

“15 gallons of gasoline weighs 90 pounds and takes up 2 cubic feet. This will carry a 40 mpg car 600 miles. The Tesla Model S 85kwh battery pack weighs 1200 pounds and will carry the car 265 miles (from this article the cells themselves occupy about 4 cubic feet if packed perfectly but in this video the whole pack looks much larger). We can see that even with what Musk claims is twice the energy density of other batteries, the Tesla gets  0.22 miles per pound of fuel/battery while the regular car can get 6.7. More than an order of magnitude, that is simply an enormous difference…“

Meyer notes in the Forbes article that the EPA calculates its MPG conversion factor for electric vehicles by dividing BTU’s in a gallon of gas by the BTUs in a kilowatt hour: 33.7 KwH per gallon. Thus, the EPA multiplies an electric car’s miles per KwH by 33.7 to arrive at the so-called MPG equivalent: MPGe. But as we’ve seen above, the conversion factor ignores the generation and transmission of electricity required at the front end, and the associated energy losses that occur before a single KwH is released by a Tesla battery.

Despite what we hear from the EPA, Tesla, and other interests today, electric cars have not really overcome these disadvantages, at least not yet. The EPA’s MPGe estimates are vastly inflated. Perhaps if they were accurate, these vehicles would not have to rely so heavily on taxpayer subsidies to be competitive. By extension, the presumed environmental benefits of electric cars are nonexistent at this stage of development. I’m certain that Eric Schmidt and many other smart people are capable of understanding these nuances, but they might be too busy tripping over their politics to bother.

Initial Coin Offerings: Bits of Capital For Little Guys

27 Wednesday Sep 2017

Posted by in Capital Markets, Technology, Transaction Costs

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It’s possible for relatively small ventures to raise significant sums of capital without meeting onerous government filing requirements or venture capitalist demands and controls. This is enabled by a sort of hybrid between an initial public stock offering (IPO) and the issuance of private crypto-currency (like Bitcoin). It’s called an initial coin offering (ICO), and it is growing in importance as a funding source, primarily (but not exclusively) for applications leveraging blockchain technology. ICOs themselves are enabled by blockchain, through which a system of virtual, shared accounts is maintained in the cloud, essentially a ledger of who owns (and owes) what claims on whom (and to whom). Like stock or a venture capital investment, its value is tied to the success of the venture or project:

“When a cryptocurrency startup firm wants to raise money through an [ICO], it usually creates a plan on a white paper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction.“

Scanning though a list of ICOs or “token sales” just might make your eyes glaze over. The descriptions of some of the ventures sound impossibly intangible (or ethereal… a major blockchain application platform is called Ethereum). A few relatively accessible examples: augmented reality platforms; crypto-payment mechanisms; gaming community services; software platforms for dentists and “gig” economy providers; “tokenized” real estate investment; and peer-to-peer property rental.

Crypto-currencies like Bitcoin are viewed as highly speculative by many investors; likewise, ICO tokens are very risky. In fact, the ICO “space” has been fertile ground for fraudulent activity, pyramid schemes, and “exit scams”. Investor due diligence is often no better than guesswork, unless there is already an established product or service related to the project. The last link quotes a Bitcoin expert name Andreas Antonopoulos:

“The best way to learn which ICOs are worth it is to lose money. Waiting for the wash-out. When these people promise great riches, they usually mean for themselves. If you have a viable product… build it first and they will come. I do not treat these technologies as investments but learning opportunities.“

Very comforting! Some guidance and a framework for ICO due diligence are offered here and here, respectively. More guidance is here. And here is an actual due diligence report on an ICO. Suffice it to say that ICOs are not a perfect match for my risk-return preferences!

Nevertheless, there is a lot to like about ICOs. Jeffrey Tucker writes enthusiastically about their disruptive and innovative nature. The heavily regulated world of investment banking tends to deny smaller firms access to capital, and venture capitalists have their own, frequently costly demands on start-ups. ICOs open a new, low-cost channel through which funds can be raised from investors with a greater appetite for risk. Here is Tucker:

“Why is this strategy for raising money for new ventures working so well? There is the most obvious consideration of low barriers to entry. Anyone can float them and anyone can buy them–from and to anyone in the world regardless of geography. There is a larger pool of investors that can bypass the impossiblycostly and complex national regulatory machines that have gummed up capital-raising methods in conventional finance.

It has been a long time since the financial markets have been free. That the market is mostly deregulated and decentralized, and thereby more active and effective, is itself interesting. No sector is more replete with the myths of ‘consumer protection’ than this one. …

And the solution is absolutely ingenious. It relies on decentralized markets that live on the Internet, combined with the invention of new tokens that have all the qualities of traditional money, depending entirely on supply and demand for their value, and also serve as asset titles to the protocol of the company itself.“

Unfortunately, governments and large private players do not always wish to promote decentralized markets. Quite the contrary, and in the case of ICOs, governments and regulators are already “chomping at the bit”, so to speak, to impose regulation. Warnings of ICO risks have been formally issued by the SEC, and China has placed a freeze on ICO activity pending inspections of exchanges, reports and the likely issuance of regulatory measures. Given this scrutiny, Tucker might be a bit too optimistic about the ongoing development of the ICO market. It will depend in large part on the success of efforts by participants at self-governance. That’s something financial markets have traditionally done well, despite shrill claims to the contrary. Let the investor beware!

ICOs will tend to encourage the development of competitive forces in the broader economy. And while investment banks might view the funding objectives of many ICOs as table scraps, ICOs will create more competition for those banks if the volume and breadth of “coin” funding continues to grow. ICO’s won’t find their way into my portfolio any time soon, but they show great promise as an economic development.

The Comparative Human Advantage

10 Thursday Aug 2017

Posted by in Automation, Technology, Tradeoffs

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There are so many talented individuals in this world, people who can do many things well. In fact, they can probably do everything better than most other people in an absolute sense. In other words, they can produce more of everything at a given cost than most others. Yet amazingly, they still find it advantageous to trade with others. How can that be?

It is due to the law of comparative advantage, one of the most important lessons in economics. It’s why we specialize and trade with others for almost all of ours needs and wants, even if we are capable of doing all things better than them. Here’s a simple numerical example… don’t bail out on me (!):

  • Let’s say that you can produce either 1,000 bushels of barley or 500 bushels of hops in a year, or any combination of the two in those proportions. Each extra bushel of hops you produce involves the sacrifice of two bushels of barley.
  • Suppose that I can produce only 500 bushels of barley and 400 bushels of hops in a year, or any combination in those proportions. It costs me only 1.25 bushels of barley to produce an extra bushel of hops.
  • You can produce more hops than I can, but hops are costlier for you at the margin: 2 bushels of barley to get an extra bushel of hops, more than the 1.25 bushels it costs me.
  • That means you can probably obtain a better combination (for you) of barley and hops by specializing in barley and trading some of it to me for hops. You don’t have to do everything yourself. It’s just not in your self-interest even if you have an absolute advantage over me in everything!

This is not a coincidental outcome. Exploiting opportunities for trade with those who face lower marginal costs effectively increases our real income. In production, we tend to specialize — to do what we do — because we have a comparative advantage. We specialize because our costs are lower at the margin in those activities. And that’s also what motivates trade with others. That’s why nations should trade with others. And, as I mentioned about one week ago here, that’s why we have less to fear from automation than many assume.

Certain tasks will be automated as increasingly productive “robots” (or their equivalents) justify the costs of the resources required to produce and deploy them. This process will be accelerated to the extent that government makes it appear as if robots have a comparative advantage over humans via minimum wage laws and other labor market regulations. As a general rule, employment will be less vulnerable to automation if wages are flexible. 

What if one day, as Elon Musk has asserted, robots can do everything better than us? Will humans have anywhere to work? Yes, if human labor is less costly at the margin. Once deployed, a robot in any application has other potential uses, and even a robot has just 24 hours in a day. Diverting a robot into another line of production involves the sacrifice of its original purpose. There will always be uses in which human labor is less costly at the margin, even with lower absolute productivity, than repurposing a robot or the resources needed to produce a new robot. That’s comparative advantage! That will be true for many of the familiar roles we have today, to say nothing of the unimagined new roles for humans that more advanced technology will bring.

Some have convinced themselves that a fully-automated economy will bring an end to scarcity itself. Were that to occur, there would be no tradeoffs except one kind: how you use your time (barring immortality). Superabundance would cause the prices of goods and services to fall to zero; real incomes would approach infinity. In fact, income as a concept would become meaningless. Of course, you will still be free to perform whatever “work” you enjoy, physical or mental, as long as you assign it a greater value than leisure at the margin.

Do I believe that superabundance is realistic? Not at all. To appreciate the contradictions inherent in the last paragraph, think only of the scarcity of talented human performers and their creativity. Perhaps people will actually enjoy watching other humans “perform” work. They always have! If the worker’s time has any other value (and it is scarce to them), what can they collect in return for their “performance”? Adulation and pure enjoyment of their “work”? Some other form of payment? Not everything can be free, even in an age of superabundance.

Scarcity will always exist to one extent or another as long as our wants are insatiable and our time is limited. As technology solves essential problems, we turn our attention to higher-order needs and desires, including various forms of risk reduction. These pursuits are likely to be increasingly resource intensive. For example, interplanetary or interstellar travel will be massively expensive, but they are viewed as desirable pursuits precisely because resources are, and will be, scarce. Discussions of the transition of civilizations across the Kardashev scale, from “Type 0” (today’s Earth) up to “Type III” civilizations, capable of harnessing the energy equivalent of the luminosity of its home galaxy, are fundamentally based on presumed efforts to overcome scarcity. Type III is a long way off, at best. The upshot of ongoing scarcity is that opportunity costs of lines of employment will remain positive for both robots and humans, and humans will often have a comparative advantage.

Mr. Musk Often Goes To Washington

31 Monday Jul 2017

Posted by in Automation, Labor Markets, Technology

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Elon Musk says we should be very scared of artificial intelligence (AI). He believes it poses an “existential risk” to humanity and  calls for “proactive regulation” of AI to limit its destructive potential. His argument encompasses “killer robots”: “A.I. & The Art of Machine War” is a good read and is consistent with Musk’s message. Military applications already involve autonomous machine decisions to terminate human life, but the Pentagon is weighing whether decisions to kill should be made only by humans. Musk also focuses on more subtle threats from machine intelligence: It could be used to disrupt power and communication systems, to manipulate human opinion in dangerous ways, and even to sow panic via cascades of “fake robot news”, leading to a breakdown in civil order. Musk has also expressed a fear that AI could have disastrous consequences in commercial applications with runaway competition for resources. He sounds like a businessmen who really dislikes competition! After all, market competition is self-regulating and self-limiting. The most “destructive” effects occur only when competitors come crying to the state for relief!

Several prominent tech leaders and AI experts have disputed Musk’s pessimistic view of AI, including Mark Zuckerberg of Facebook and Eric Schmidt, chairman of Google’s parent company, Alphabet, Inc. Schmidt says:

“My question to you is: don’t you think the humans would notice this, and start turning off the computers? We’d have a race between humans turning off computers, and the AI relocating itself to other computers, in this mad race to the last computer, and we can’t turn it off, and that’s a movie. It’s a movie. The state of the earth currently does not support any of these scenarios.“

Along those lines, Google’s AI lab known as “DeepMind” has developed an AI off-switch, otherwise known as the “big red button“. Obviously, this is based on human supervision of AI processes and on ensuring the interruptibility of AI processes.

Another obvious point is that AI, ideally, would operate under an explicit objective function(s). This is the machine’s “reward system”, as it were. Could that reward system always be linked to human intent? To a highly likely non-negative human assessment of outcomes? Improved well-being? That’s not straightforward in a world of uncertainty, but it is at least clear that a relatively high probability of harm to humans should impose a large negative effect on any intelligent machine’s objective function.

Those kinds of steps can be regarded as regulatory recommendations, which is what Musk has advocated. Musk has outlined a role for regulators as gatekeepers who would review and ensure the safety of any new AI application. Ronald Bailey reveals the big problem with this approach:

“This may sound reasonable. But Musk is, perhaps unknowingly, recommending that AI researchers be saddled with the precautionary principle. According to one definition, that’s ‘the precept that an action should not be taken if the consequences are uncertain and potentially dangerous.’ Or as I have summarized it: ‘Never do anything for the first time.’“

Regulation is the enemy of innovation, and there are many ways in which current and future AI applications can improve human welfare. Musk knows this. He is the consummate innovator and big thinker, but he is also skilled at leveraging the power of government to bring his ideas to fruition. All of his major initiatives, from Tesla to SpaceX, to Hyperloop, battery technology and solar roofing material, have gained viability via subsidies.

But another hallmark of crony capitalists is a willingness to use regulation to their advantage. Could proposed regulation be part of a hidden agenda for Musk? For example, what does Musk mean when he says, “There’s only one AI company that worries me” in the context of dangerous AI? His own company(ies)? Or another? One he does not own?

Musk’s startup OpenAI is a non-profit engaged in developing open-source AI technology. Musk and his partners in this venture argue that widespread, free availability of AI code and applications would prevent malicious use of AI. Musk knows that his companies can use AI to good effect as well as anyone. And he also knows that open-source AI can neutralize potential advantages for competitors like Google and Facebook. Perhaps he hopes that his first-mover advantage in many new industries will lead to entrenched market positions just in time for the AI regulatory agenda to stifle competitive innovation within his business space, providing him with ongoing rents. Well played, cronyman!

Any threat that AI will have catastrophic consequences for humanity is way down the road, if ever. In the meantime, there are multiple efforts underway within the machine learning community (which is not large) to prevent or at least mitigate potential dangers from AI. This is taking place independent of any government action, and so it should remain. That will help to maximize the potential for beneficial innovation.

Musk also asserts that robots will someday be able to do “everything better than us”, thus threatening the ability of the private sector to provide income to individuals across a broad range of society. This is not at all realistic. There are many detailed and nuanced tasks to which robots will not be able to attend without human collaboration. Creativity and the “human touch” will always have value and will always compete in input markets. Even if robots can do everything better than humans someday, an absolute advantage is not determinative. Those who use robot-intensive production process will still find it advantageous to use labor, or to trade with those utilizing more labor-intensive production processes. Such are the proven outcomes of the law of comparative advantage.

The Tyranny of the Job Saviors

17 Monday Jul 2017

Posted by in Automation, Free markets, Technology

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Many jobs have been lost to technology over the last few centuries, yet more people are employed today than ever before. Despite this favorable experience, politicians can’t help the temptation to cast aspersions at certain production technologies, constantly advocating intervention in markets to “save jobs”. Today, some serious anti-tech policy proposals and legislative efforts are underway: regional bans on autonomous vehicles, “robot taxes” (advocated by Bill Gates!!), and even continuing legal resistance to technology-enabled services such as ride sharing and home sharing. At the link above, James Pethokoukas expresses trepidation about one legislative proposal taking shape, sponsored by Senator Maria Cantwell (D-WA), to create a federal review board with the potential to throttle innovation and the deployment of technology, particularly artificial intelligence.

Last week I mentioned the popular anxiety regarding automation and artificial intelligence in my post on the Universal Basic Income. This anxiety is based on an incomplete accounting of the “seen” and “unseen” effects of technological advance, to borrow the words of Frederic Bastiat, and of course it is unsupported by historical precedent. Dierdre McCloskey reviews the history of technological innovations and its positive impact on dynamic labor markets:

“In 1910, one out of 20 of the American workforce was on the railways. In the late 1940s, 350,000 manual telephone operators worked for AT&T alone. In the 1950s, elevator operators by the hundreds of thousands lost their jobs to passengers pushing buttons. Typists have vanished from offices. But if blacksmiths unemployed by cars or TV repairmen unemployed by printed circuits never got another job, unemployment would not be 5 percent, or 10 percent in a bad year. It would be 50 percent and climbing.

Each month in the United States—a place with about 160 million civilian jobs—1.7 million of them vanish. Every 30 days, in a perfectly normal manifestation of creative destruction, over 1 percent of the jobs go the way of the parlor maids of 1910. Not because people quit. The positions are no longer available. The companies go out of business, or get merged or downsized, or just decide the extra salesperson on the floor of the big-box store isn’t worth the costs of employment.“

Robert Samuelson discusses a recent study that found that technological advance consistently improves opportunities for labor income. This is caused by cost reductions in the innovating industries, which are subsequently passed through to consumers, business profits, and higher pay to retained workers whose productivity is enhanced by the improved technology inputs. These gains consistently outweigh losses to those who are displaced by the new capital. Ultimately, the gains diffuse throughout society, manifesting in an improved standard of living.

In a brief, favorable review of Samuelson’s piece, Don Boudreaux adds some interesting thoughts on the dynamics of technological advance and capital-labor substitution:

“… innovations release real resources, including labor, to be used in other productive activities – activities that become profitable only because of this increased availability of resources.  Entrepreneurs, ever intent on seizing profitable opportunities, hire and buy these newly available resources to expand existing businesses and to create new ones.  Think of all the new industries made possible when motorized tractors, chemical fertilizers and insecticides, improved food-packaging, and other labor-saving innovations released all but a tiny fraction of the workforce from agriculture.

Labor-saving techniques promote economic growth not so much because they increase monetary profits that are then spent but, instead, because they release real resources that are then used to create and expand productive activities that would otherwise be too costly.”

Those released resources, having lower opportunity costs than in their former, now obsolete uses, can find new and profitable uses provided they are priced competitively. Some displaced resources might only justify use after undergoing dramatic transformations, such as recycling of raw components or, for workers, education in new fields or vocations. Indeed, some of  those transformations are unforeeeable prior to the innovations, and might well add more value than was lost via displacement. But that is how the process of creative destruction often unfolds.

A government that seeks to intervene in this process can do only harm to the long-run interests of its citizens. “Saving a job” from technological displacement surely appeals to the mental and emotive mindset of the populist, and it has obvious value as a progressive virtue-signalling tool. These reactions, however, demonstrate a perspective limited to first-order, “seen” changes. What is less obvious to these observers is the impact of politically-induced tech inertia on consumers’ standard of living. This is accompanied by a stultifying impact on market competition, long-run penalization of the most productive workers, and a degradation of freedom from restraints on private decision-makers. As each “visible” advance is impeded, the negative impact compounds with the loss of future, unseen, but path-dependent advances that cannot ever occur.