Who Killed Coal?

The Libertarian Party convention is going on this weekend.  The party is choosing, among other things, their candidates for president and vice president.  The eventual nominee, Gary Johnson, was booed on stage for suggesting the free market, not government intervention killed the coal industry in the United States (the Libertarians are rabidly anti-regulation).

But was he wrong?  I don’t think so.  I think the evidence suggests that it is free market competition that killed coal; the EPA regs have been largely coincident, not causative.

The crux of this argument relies on the notion of substitute goods in the US power generation sector.

According to the EIA, the US power generation industry is powered largely by coal (38.8% as of 2014), Natural Gas (27.4%), and nuclear power (19.5%).  The remaining 14.7% is renewables and “other.”  Further, the majority of coal consumption in the US is for power generation. However, it is important to note coal has been losing share of power generation noticeably since about 2005.  (the actual peak was about 1990, but the decline was very moderate/nonexistent until about 2005).

The year 2005 is important.  Why?  Because that’s the year natural gas prices reached their peak and began their decline.  Since December 2005 (the month natural gas prices hit their all-time high), natural gas prices have fallen 84.5% thanks to fracking. Over that same time, natural gas’ share of power generation has risen 15 percentage points, from ~18% to ~33%.  The rise has come entirely at the expense of coal.  Coal’s share has fallen 18 percentage points, from ~50% to ~32%.  Nuclear power has stayed flat.  Renewables gained the remaining three percentage points.

Natural gas is a substitute for coal.  With such a precipitous decline in natural gas prices, natural gas became the better option for power generation, forcing coal to the back burner, especially considering it’d be three more years before coal’s price peaked.

It certainly is true the Obama Administration’s EPA has passed new regs on coal and coal power plants.  But these regs occurred too late to have been a causative factor in the coup against King Coal by Prince Natural Gas (keep in mind Obama wouldn’t be elected for three more years, and his regs wouldn’t be approved until 2014). They’re more likely the final nail in the coffin.

It seems to me this is just another case of the free market doing something good (reducing carbon emissions), causing creative destruction (death of King Coal), and the credit/blame going to government.  Unfortunately, this time it was the Libertarian delegates mis-attributing the actions of the market.

The Point of Exchange Is To Increase Utility

Don Boudreaux’s Quote of the Day at Cafe Hayek got me thinking on value.  The quote, from the indispensable Armen Alchian, is excellent in its own right, but Don’s follow-up comments are where I want to focus.  Don says:

Tom Palmer often recalls how, many years ago, he – a young man of very modest means – was bidding to buy a rare book.  Another of the bidders for this same book was Charles Koch, already a very wealthy man.  Tom won the bidding.  Alchian’s insight [quoted in the paragraph] above helps to explain why.

One of the more common justifications we hear regarding price floors for wealthy people (for example, minimum wage or tariffs), is “they’re wealthy so they can afford it.” However, this justification misses the point of exchange.  The point of exchange is to increase one’s utility, not to buy whatever one can afford.  One isn’t going to buy something, even if he can afford it, if it does him no service.

I use as an example myself.  I thank God that I have been able to make good money for someone of my age and skill.  When I go to the grocery store, I buy many kinds of things, but I do not buy pork.  Why not?  I can afford it.  My bi-weekly grocery bill rarely exceeds $60, and adding on a few extra dollars for pork products wouldn’t bankrupt me at all.  The reason I don’t is because I don’t like pork that much.  I’ll eat bacon from time to time, but that’s really it.  Buying pork would make me worse off because the dollars I spent on pork (something which brings me little pleasure) I could have spent on something that would have brought me more pleasure, like baseball tickets.

The situation is the same as in the story Don recounts between Charles Koch and Tom Palmer.  Both were bidding on a book and it eventually reached the point where Koch’s value gained from the book was lower than the price he had to pay.  In economic terms, his marginal cost exceeded his marginal benefit.  Conversely, the price was spot on for Tom, where the value gained from the book was equal or greater than the price he had to pay (in other words, his marginal benefit was equal to or greater than his marginal cost).

It is this simple concept that rests nearly all of economic and social thought.  It is why taxes are effective at altering behavior.  It is why minimum wage leads to lower employment.  It is why the Demand Curve slopes down (and the Supply Curve slopes up).  When the assumption is made that higher taxes/mandated wages/etc won’t change behavior because “they can afford it,” there is a fundamental misunderstanding on how people operate and why such schemes are ultimately doomed to fail.

Buggy Trade-offs

Up here in the Northeast, mosquitoes are a big problem.  Triple E and West Nile are perennial threats. Typically, states will spray in order to keep the bug populations in check and lower the risk of disease.  But this year, Massachusetts won’t be spraying as much as they have in the past. Mass Audubon*, a private non-profit dedicated to wildlife preservation in Massachusetts, as well as other land owners have asked their properties to be exempt from the spraying, affecting some 60,000 acres state-wide. Their concerns are the effect the chemical will have on other wildlife and the ecosystem under their charge.  Of course, the flip-side of this is potentially increasing the risk of mosquito-borne diseases in the Commonwealth.

Every decision has a trade-off.  If Massachusetts sprays for mosquitoes, they will reduce the risk of disease in the Commonwealth but potentially harm other wildlife.  Conversely, if Massachusetts cuts back on its praying, wildlife may be preserved but there would be the greater risk of mosquito-borne disease for humans and animals.  ‘Tis truly a conundrum.

The point of this story is to reiterate that there is no such thing as a cost-less action.  Everything has trade-offs, some which can be seen and some which may be hidden. There is no such thing as a free lunch, no matter what some would have you believe.

*In the interest of full disclosure, I have donated to Mass Audubon in the past and thoroughly enjoy their trails.  However, I have received no compensation for this article.

Can Open Borders Promote Free Markets?

As readers of this blog know, I am very much in favor of open borders (that is, the free movement of peaceful peoples across international borders).  I promote this policy on moral ground and on principle.  However, I wonder if there isn’t a reason to promote open borders for the sakee of advancing liberty in other means, namely free trade (which can be described as the free movement of peaceful capital across international borders). (Warning, a bit wonky)

How would this work? Like this:

So, if workers are prevented from emigrating from their current lands, they will have to work in their homelands.  However, since they are less productive in their homelands (or remain unemployed), their wages would, naturally, be lower in comparison to a more productive workforce (like the US); remember that wages are determined by marginal productivity.  After all, that would be the economic reason for emigrating: better (ie more productive) opportunities elsewhere.

Assuming that the home country trades on the world market, its workers could have a wage-advantage that could lure some production from higher wealth countries to the lower wealth countries (similar to how the US has relocated some factories to China). The higher wealth nations could lash out with tariffs or taxes on the newly imported goods because of “unfair labor practices” (paging Mr Trump or Mr Sanders).  These resulting tariffs would, necessarily, result in less-free trade and could even result in a trade war.  Furthermore, both countries would be deprived of the productive benefits the increased division of labor would have created, leaving both nations less wealthy than they would have been otherwise.

So, at last hypothetically, open borders could help promote the idea of free trade naturally (and, by contrast, closed borders would lead to less free trade).

PS: Please forgive any and all spelling mistakes.  I am writing this post from my Samsung Tab and, for some reason, it doesn’t have spellcheck.

Hayekian Baseball

Yesterday, I was watching the Washington Nationals vs Chicago Cubs baseball game.  During the broadcast, an interesting conversation about sabermetrics (that is, the empirical study of baseball statistics) came about.  One of the commentators mentioned the phenomenon of shifting (adjusting the defensive positions of players in order to greatly increase the opportunity of making an out) and, in a related fashion, the virtual disappearance of sacrifice bunting.  The conversation lead into a broader discussion of sabermetrics and how effective it really is.  One of the commentators pointed out that same sabermetric-heavy teams, like the Oakland A’s or the Red Sox under Ben Charrington, had very little success whereas other teams/managers that rely less on measurements have enjoyed more success.

Before I continue on, I’d like to mention that I have not verified the claims the commentator made.  I have no idea if the examples he cited are norms or exceptions to the rules.

There does strike me to some truth to what the commentators were saying.  Ben Charrington was the Red Sox general manager from late 2011-2015.  He is very much a Sebermetrics guy.  During the course of his tenure, the team saw 1 Word Series (2013) and 3 last-place finishes (2012, 2014, 2015). Numerically, all of the teams he put together were, on paper, world class teams.  But, in each of the losing seasons, chemistry issues, management issues, and (as in the case of the 2014 team) copious amounts of bad luck came into play.

Baseball is very much a game of details. Some of the best managers (like Don Zimmer, Joe Maddon, Terry Franconia, and Dusty Baker) rely on statistics, but also very much on their “gut,” or what Hayek might have referred to as “local knowledge.” Dusty Baker (who currently manages the Washington Nationals) knows his players better than any statistician. He knows their mood on any given day at the park. He can read their body language.  The statistician may argue that (making up numbers here) Bruce Harper hits .400 in day games after a night game when a left-handed pitcher is on the mound, but if Baker sees Harper is distracted, he may opt to replace him in the game.

This local knowledge is important to fielding a championship team and winning games. Statistics are important too; none of this is to discourage sabermetrics (I personally am a huge fan.  I used sabermetric analysis in my undergraduate thesis).  But men are not machines. Without application of local knowledge, these mathematical models will fail.  This is true of baseball and of the economy.

Experimentation

The other day at Cafe Hayek, Don Boudreaux responded to an e-mailer who argued that minimum wage experiments should be run for social science (readers may recall I faced a similar question this past Fall).  Don raises many good points, but I want to talk on a more broad scale.

Those who make this “experiment for the sake of science” argument make one fatally wrong assumption: that the experiment can only be run by government.  That government is needed for “bold, persistent experimentation,” to borrow the words of FDR.

The reality of the matter, however, is that privately these experiments are constantly being done.  As I write this (and you read it), some people are experimenting paying their people a higher wage.  Some are experimenting paying them less.  Some are experimenting with discriminatory business practices.  Some are experimenting with inclusivity.  Some experiment with imports.  Some experiment with domestic-only.  These experiments are being run day-in, day-out by millions of people. There isn’t any need for government direction.

In fact, probably the worst thing that could happen is for government to conduct social experiments.  Aside from the fact that the times it has in the past haven’t exactly been positive (looking at you “progressive” reformers behind Jim Crow, eugenics, forced sterilization, etc), government tends to crowd out other kinds of experiments, the ones not approved of.

Another great thing about market experimentation is, when it fails, that’s the end of it.  The business loses money (or goes out of business).  Other participants see this as a signal and don’t engage.  Government, however, not so much.  Milton Friedman once said “There is nothing so permanent as a temporary government program.” Governments are, almost by their nature, very bad at admitting failure and cutting their losses.  In fact, since they are often isolated from the costs of their actions (unlike other economic actors), they don’t often know if an experimentation is succeeding or failing.  This makes them terribly unqualified for any kind of experimentation.

I am all for experiment.  Maintaining the status quo is stagnation.  However, I think those experiments should be left to those who bare the costs and who are flexible enough to end it should it become a failure.