Pirate capital structures

I’m not in the Horn of Africa right now, so Somalia is no longer next door, but this elucidation of the economics of pirating is really outstanding, e.g.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

The punch line is:

When ransom is received, fixed costs are the first to be paid out. These are typically:
• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.
The remaining sum — the profit — is divided between class-A shareholders.

Julian Simon got lucky (or not)

Paul Kedrosky re-analyzes the famous Simon-Ehrlich bet on commodity prices, and concludes that Simon (who won) got lucky.

It will surprise no-one that the bet’s payoff was highly dependent on its start date...

Simon was right but fairly lucky. There is nothing wrong with being lucky, of course, but compulsive Simon/Ehrlich-citers need to be reminded that it is no law of nature (let alone of rickety old economics) that commodity prices (inflation-adjusted or otherwise) trend inexorably downward, even over a decade.

Here's how the bet would have turned out since:

Via MR, and by the way, I am a bit confused by Alex Tabarrok's take - he seems to say that Ehrlich was betting on "scarcity", but instead the "value" of commodities has since gone up as developing countries got richer, increasing demand. He is the economics professor, but isn't the cardinal precept of economics that scarcity and value are fundamentally linked?

Update: Or not... Mark Perry responds:

I'm not so sure that Simon was just lucky. If Simon's position was that natural resources and commodities become generally more abundant over long periods time, reflected in falling real prices, I think he was more right than lucky, as the graph above demonstrates.

Stated differently, if Simon was really betting that inflation-adjusted prices of a basket of commodity prices have a significantly negative slope over long periods of time, and Ehrlich was betting that the slope of that line was significantly positive, I think Simon wins the bet.

American mercantilism, redux

I was sound asleep in Ethiopia for Obama's State of the Union address, and it wasn't pleasant to wake up to this debrief:

Then there was his disappointing discussion of trade, which included a bizarre promise to double U.S. exports in five years. Does this mean he expects the dollar to drop dramatically? He also announced the launching of "a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security" (more on that topic here), and vowed to "seek new markets aggressively, just as our competitors are." Nothing here, other than a cursory, noncommittal mention of the Doha round, indicates that Obama views trade as anything other than a zero-sum game. There's a name for this approach to trade: mercantilism.

Macroeconomics has never been my forte, and I was under impression that mercantilism was essentially a discredited 18th-century pre-economic theory. According to Wikipedia, though, it is not that simple, e.g.:

Paul Samuelson, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

I'll have to let others who are more educated in these matters sort this out, but my feeling is not good and my populism radar is blinking.

Obama can't seem to keep anyone happy - he managed to promote the one plank of the liberal/progressive agenda that Paul Krugman doesn't agree with.

Economics of cap-and-trade

Michael Roberts kindly sketches out the economics of cap-and-trade (and specifically its impact on energy markets and prices) through a classic supply-demand framework. I tend to believe that formalizing these sorts of things into models is a very effective way of thinking through issues and effects, so many thanks to Michael for taking this direction.

It still doesn't feel intuitively correct to me that oil and coal would benefit from cap-and-trade, even in the short term; here's my first thought on where the model might be off:

Thanks for writing this out - much more cogent than my first attempt.

The one thing I'm not sure it captures fully is the interaction with existing low-carbon energy technologies (as opposed to future innovations). The demand for total energy is inelastic in the short term, but the demand for carbon-based energy is probably more elastic because as prices climb higher, broader swathes of existing low-emission technologies (wind, solar, nuclear, etc.) become economically viable.

There may be other tools from the Econ 101 toolkit that can include price-based substitution into the standard supply-demand framework (besides embedding in the demand curve) - if anyone has any ideas, I'm all ears.

The power and persistence of democracy

FP has a list of the Top 100 Global Thinkers for 2009, which is interesting through. I enjoyed this description of #58 and one of my favorite economists, Amartya Sen:

Sen is that rarest of hybrids -- "the only recent or living economist who takes philosophy seriously," in the words of Martha Nussbaum (No. 93). Taking his cue from such diverse figures as Karl Marx and Adam Smith (whom he hails as an underappreciated moral philosopher), Sen earned a Nobel Prize in economics in 1998 for his groundbreaking insight: Food scarcity doesn't kill people; bad governments do. Central to his thinking is the concept of "capabilities" -- the idea that it is not just the distribution of resources in a society that matters, but the ability of its members to make informed choices about the use of those resources and to punish leaders who fail them. [emphasis mine]

Sen's emphasis on the power of democracy is interesting when juxtaposed with the career-establishing claim of #65, Francis Fukuyama, that the spread of liberal democracy is inevitable:

The foreign-policy world can be pretty cleanly split into two groups: those who passionately agree with "The End of History," and those who passionately disagree. Fukuyama's seminal work came out 20 years ago, but its central conclusion -- that liberal democracy will supplant other political ideologies as the dominant paradigm of the 21st century [emphasis mine] -- remains the crucial issue of the day. With Moscow and Beijing flexing their global muscles and the recession driving Western democracies inward, Fukuyama's thesis might seem in doubt, but he's still making the case. "I am still fairly confident that democratic systems are the only viable ones," he told Newsweek. This year, Fukuyama joined in debates about the future of Iran -- arguing, against conventional wisdom, that it may be possible for the Islamic Republic to "evolve towards a genuine rule-of-law democracy," even while allowing for continued strong clerical influence.

It's hard to win the debate over whether democracy will prevail (I suspect it will remain a debate for decades). One con argument that I enjoyed was made by #66 Robert Kagan in The Return of History and the End of Dreams, which basically opposes Fukuyama’s thesis (a point not captured by FP, which only notes that he “calls for the creation of a "league of democracies" to promote political liberalization and human rights globally”).

Personally, I'm skeptical of seemingly fatalistic or starry-eyed arguments that democracy will prevail, and I'm also skeptical of the dogmatic faith that liberal democracy is the only effective way to govern, particularly from an economic perspective (see: China).

Green jobs: 1 - 1 = 0

Tim Haab of Environmental Economics puts a little theoretical framework around green jobs, runs the inductive argument starting with full employment, and concludes that:

To simplify this whole discussion, the simple math of green jobs is this: 1-1=0.

Funny

This was too good not to re-post in full (the sincerest form of flattery):

I was sitting in church this past Sunday morning listening to the annual stewardship sermon "... and money is not just a medium of exchange..." and I'm thinking "... amen preacher, it's also a unit of account and a store of value."

Intellectual arbitrage

Chris Blattman reflects on how few economists knew Elinor Ostrom, the recent Nobel laureate, before her award, and he sees major arbitrage opportunities:

There are vast amounts of relevant knowledge in related fields, seldom exploited. The economists have been pouring into the economics and psychology gap, but the economics-politics gap is just starting to close. Politics and behavioral psychology is still wide open territory.

Even within the disciplines there are gains from exchange. Just the other day I listened to a group of grad students suggest that political theory (i.e. philosophy) wasn’t answering questions relevant to other fields of politics. Sounds like a research frontier to me. Why, for instance, has political science left the human rights and humanitarian debates to ex-journalists?

This resonates with me, and I think this probably holds in the resources world (both in academia and in the private sector). I don’t have a tremendous amount of experience interacting with academics specializing in natural resources, but my sense is some lack the groundedness of having spent years working on the ground in the private sector (and obviously many actors in natural resources industries are not up to date with the latest academic thinking). And these opportunities hold between private sectors as well - Lord knows a deeper knowledge of the complexities of oil refining economics and markets would be of great use to many people working in biofuels, for example (I'm sure there are many others).

Trying to develop that type of broader perspective is one of the reasons I started and continue to enjoy this blog, and I highly recommend blogging to anyone else who is interested in the same thing!!

Economics Nobel and the Environment

Ms. Ostrom "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized," the Nobel judges said. "Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, [Ms.] Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes."

Via Environmental Economics, which posts multiple times on the significance of this year's Nobel Prize selection for, well, environmental economics.

I found this particularly interesting:

One thing that I think is most interesting about Ostrum's work is that where common property regimes work well they are often enforced with very strong social sanctions and/or coercion. The notion that somehow in the absence of markets or government intervention we might get some sort of Kumbuya agreement- a favorite fantasy of some leftist critiques of markets- is not supported by the facts. Instead, complete social ostracization and even physical violence are often necessary in order to enforce common property rules. Bottom line: managing common resources is very hard no matter what institutions are in charge.

I often think of property rights and the rule of law (including safety from violence and intimidation) as an underappreciated prerequisite for well-functioning markets. (E.g. for libertarians who more or less advocate the abolition of government - who do you think will keep people from stealing your stuff? Maybe you with a gun, but that imposes enormous transaction costs that would greatly impeded the much-lauded efficiency of markets.) But this is almost a bizarre inversion - that it may be the very threat of violence (albeit controlled by strictly-observed social convention) which allows certain communities to manage their common resources in an effective way.

Economists against ethanol subsidies

Via Environmental Economics; I am only surprised that >20% of economists do think ethanol subsidies are a good idea.

Government subsidies on ethanol in the U.S. should be (N = 120)

• eliminated - 55%
• reduced a lot - 11%
• reduced somewhat - 13%
• kept about the same - 12%
• increased somewhat - 9%
• increased a lot - 1%

I would love to see a breakdown by region (as a proxy for something like the dependence of the member's university or organization on farm-related funding).

Barney Frank on economists

Via Greg Mankiw:

Not for the first time, as an elected official, I envy economists. Economists have available to them, in an analytical approach, the counterfactual. Economists can explain that a given decision was the best one that could be made, because they can show what would have happened in the counterfactual situation. They can contrast what happened to what would have happened. No one has ever gotten reelected where the bumper sticker said, "It would have been worse without me." You probably can get tenure with that. But you can't win office.

So true... and you'd better believe that the associated frictions help generate sub-optimal political outcomes.

Dear Greg, Why Waxman-Markey is minimally distortionary

Greg Mankiw, whose style and wonkiness I love, posts a simple model of how he sees a cap-and-trade bill or carbon tax functioning.

The trick is how to fix the second distortion [inefficiently high carbon intensity of consumption baskets] without making the first one [work/consumption decision distortions via taxes] worse.

This is a fair way of framing the problem.

The basic problem is that a new tax on carbon-intensive products C1 is also an additional tax on consumption C, unless there is some other offsetting tax change.

This is where the Rorschach test comes in. A carbon tax without a compensating income tax cut makes one problem better and one worse. The question then is which problem is bigger.

Stop there - what I think the crucial point he is missing is that Waxman-Markey will effectively function as an income tax cut for the most part. Let's review the Waxman-Markey allowance allocations and split them into those which will effectively function as consumer rebates, and those which will not.

- 46% to electricity generators and local natural gas distribution companies, "which they must use to protect consumers from price increases" (REBATE)
- 15% to low- and moderate-income households to "protect them from other energy cost increases" (REBATE, although implicitly redistributionary)
- 17% to domestic energy-intensive, trade-exposed industries and refining (REBATE unless there is some collusion in pricing to increase prices beyond the cost increase)
- 11-16% to energy efficiency and clean energy technology (NOT A REBATE)
- ~10% to other public purposes like avoiding deforestation, adaptation and international clean tech transfer (NOT A REBATE)

So almost 80% of the "giveaway permits" are effectively consumer rebates, and the remaining ones, which will be largely purchased by oil refiners, amount to a gasoline tax whose proceeds will be used for energy efficiency, clean tech and other public purposes.

So in addition to Robert Stavins' conclusion that “the appropriate characterization of the Waxman-Markey allocation is that more than 80% of the value of allowances go to consumers and public purposes, and less than 20% to private industry,” I would add that ~80% are effectively rebated to the consumers, mitigating the majority of the distortion which Mankiw laments in his post. Waxman-Markey is in fact, for the most part, a carbon tax with a compensating income tax cut.