HowTo: make saving ancient buildings pay

UPDATE: If you’re reading this, welcome to my blog! The graphs in here have gone wrong – a result of me leaving images named things like ‘new picture’ (since corrected). The graphs you see are in another post, actually, and wordpress has lost the ones that should be here. Do your best – or email me and ask what the originals looked like.

The Medieaval Art Historian is busy, these days. Tour-guiding around New York city and learning Latin. Her Economic Objectorvist husband is not so busy. Just finished his own thesis and not teaching anything (in fact without legal rights to work at all until our visa is sorted. Or leave the country without permission to re-enter. Which in my case was a positive freedom, not a negative one, making it smart all the more). So I can fill in for the missus every now and then. Like now. This post was originally put up over on her blog.

The recent news about the yellowing Tower of London and the similarly declining stature of the Taj Mahal brought this issue to mind. Michigan, too.

We should view these as the phenomena of interest. Not pollution, but the yellowing of the buildings. These are the ‘bads’ (as opposed to the ‘goods’ usually discussed in economics). They exist because there’s no market for them. We don’t actively pollute – polluting isn’t the good or service we buy, or in which we engage. Driving stinky cars and burning up our pre-history at a million years an hour is. Pollution is the negative externality of those activities. The trouble is, we don’t buy-and-sell the externality.

Pollution represents a cost to society, but when we drive we don’t pay that cost (I should say ‘they’ – I don’t drive). This is why we drive too much. Consider the example of electricity:

Electricity production causes acid rain. If we paid for the social cost of that acid rain along with the ordinary cost of electricity we would only consume Q₂ units at price P₂. Instead we consume Q₁ units at price P₁ – i.e. we consume too much electricity, for which we pay too low a price. As a result we get more acid rain than society wants (the equilibrium Q₂, P₂ is called allocatively efficient, by the by – meaning price equals marginal cost to society, and resources are allocated according to society’s preferences).

So – back to historical buildings. Why do they yellow with pollution? Because we pollute too much. We pollute too much because the prices of the polluting activities (road taxes, electricity prices, petrol prices) are all too low. That is, they don’t include the social cost of the negative externality. This is among the reasons why governments go around imposing taxes on things: so that consumers are forced to include the cost to society of their externalities (or producers – one can tax consumption or production, it makes no difference in the marketplace). By doing this, the government can make sure that Q₂ gets consumed, rather than Q₁ (for example).

This, by the by, is called a Pigovian tax. Pigovian taxes are taxes that are implemented to alter consumer behaviour to bring a market equilibrium in line with social welfare, rather than just raise money.

Now, we have options. The government/city council/etc. can impose taxes. Look at Ken Livingstone’s congestion charge, for example (and ignoring for the moment the ulterior motive – New Yorkers beware!). That is used to keep the number of cars in certain parts of london down, for purposes of reduced congestion and pollution. Not by banning cars but by implementing a price for entering London. Hey, presto! A market solution appears where once there was no market at all.

The same principle applies to the damage caused to buildings. Make a ‘pollution tax’ in London, equal to the cost of cleaning up these buildings, divided by the polluters (cars, aeroplanes flying in and out of Heathrow and Stansted, the underground, GNER, ordinary industry). At the end of the day, the cost to society of pollution affecting our historical buildings will become a part of the prices we pay for the activities that cause the damage in the first place. Then we will be allowed to make our own trade-offs.

This is the principle behind the slightly different Coase theorem. The classic example is a manufacturer polluting the river that runs out back. Why do they do it? Because it’s cheaper to pump their shit in the river than it is to dispose of it properly. Since nobody owns clean air or clean water, nobody can sue the manufacturer for the loss – making it free. Coase’s original paper is all over the place.

The Coasean solution (Ronald Coase won the Nobel prize in 1991, incidentally) says, give ownership rights to people living downstream, or ’sell’ pollution rights to manufacturer, where those rights cost around about the cost to clean up the river. Then the polluter and society interact in a market where therer was none before:

At one end of the extreme is no pollution reduction. Society doesn’t want that, because society doesn’t like pollution. At the other end there is zero pollution. Society, frankly, doesn’t want that either. We cant cars, and middle-class holidays overseas. The Coasean solution manufactures a market for pollution reduction, allowing us to decide how much driving and flying we want, and how much non-polluting we want.

A quick hat-tip to a colleague, Dave, who describes the Coase theorem as ‘my right to own a gun vs. your right to listen to Megadeth at 2 in the morning.‘ Let’s see the snots at Chicago law come up with that one.

There’s a problem or two, though, with the Coase theorem. First: it only works with zero (or nearly zero) transaction costs. What’s a transaction cost? How about figuring out how much the damage-due-to-pollution costs? We can figure out the cost of cleaning the Tower of London or the Taj Mahal – what about the cost of lost tourism? Cost to the ‘brand’ of London? That is harder – and more expensive – to figure out. And that’s just for the government side. That firm pumping their shit into the river. They then have to decide how much it’s worth to buy the permits to keep doing so. Then there’s the cost of getting everyone together to negotiate. A Coasean solution requires efficient bargaining.

Look out for more of this sort of thing as this carbon trading deal starts gaining more ground.

So will a Coasean solution work for historical buildings? Can we sell Ryanair and the motorists of Rome the rights to dump gypsum and acid rain on the Colosseum? Short answer = no, frankly. Remember those transaction costs? Suppose you advertised that you were going to sell pollution rights to motorists, trucking companies and Air Italia, and you were convening a big…convention…for all sides to come together and negotiate the optimal P (price/compensation) and Q (pollution reduction). Just think for a minute about all the people that would come, all the activist groups, architects, historians, industry lobbyists, CEOs, CFOs, etc. You’d be there all year. No efficient bargaining on the horizon at all.

What is more likely for historical clean-up is punitive/Pigovian taxation – imposing a tax on the polluters, and using the money to clean and maintain the buildings. That cost of production is then passed along to consumers. Whether we like it or not, our activities keep all of these Aspidistrae flying, and we should pay for it. If we want to keep the Tower of London.

This is all fairly hypothetical. We’ll need to see a lot more historical buildings suffer from acid rain before this becomes a discussion. In the meantime, there is always the new debate about carbon taxes vs. carbon trading. In the meantime, there is one interesting paper by a fellow by the name of David Throsby, called Paying for the Past: Economics, Cultural Heritage and Public Policy. It’s quite interesting.

Finally: there’s no doubt some disconnect here. A lot of my wife’s audience will not be at all amenable to my discussion – how can we place a price on culture and heritage? Our knees jerk us into insisting we can’t. But in fact we must. Because as long as these things remain ‘priceless’, they remain costless. Most industries and firms don’t care if the North Sea runs out of fish. They sure as hell don’t stop to worry about a few old churches. So ask yourselves this: who do our governments really really consider their constituents? Somehow I don’t think we contribute enough to their campaigns to count all that highly. Not highly enough for the government to go completely command and control about pollution. Nor are they efficient.

And lastly, we want unsullied churches, sure – but we also want Duane Reade, American Airlines and Interflora, and I dare you to say otherwise. A trade-off needs to be made, and economics is historically the lingua franca when it comes to this sort of thing. The sooner our side masters that tongue, the sooner we might stop getting trampled in parliaments, congresses and city halls.

Did you mean: gone

Even Google News doesn’t think I’m serious.

Clearly the only story today is Paris Hilton learning the lesson that being a celebrity scion will even get her out of gaol. However, don’t forget that crazy hurricane careening into the world’s petrol bowser.

Courtesy of the Oil Drum and Chuck Watson of KAC/UCF and the good folks at Tropical Storm Risk:

By the way, Australians? Heads up.

Fortunately, it’s slacking off:

Final score: Gonu, 23. But some industry is back up:

Brent crude fell on confirmation that Oman’s main oil port hadn’t suffered major damage from Gonu. In London, July Brent crude futures dropped 17 cents to $70.85 a barrel on the ICE Futures exchange.

The port of Fujairah in the United Arab Emirates reopened Thursday after it suspended all refueling and ship-to-ship supply operations at the world’s third-largest shipping fuel center.

However a few terminals are down for two or more weeks. So we shall see what becomes of oil prices (dropping to over-USD70 per barrel? Yikes. And I’m pretty sure the US budget was built using the USD60-62 range, no? Revise those deficits up and the GDP growth down, people).

Oman was also a non-OPEC oil exporter – it’s handy to have those guys on-line during peak oil times, what? As the Oil Drum guys mention, there’s also, so far, no real information on shipping out of the Straits of Hormuz or the Gulf itself. As mentioned previous, it’s where the oil tankers come out, after all.

Also no information yet about non-directly-the-storm damage as Gonu went through (don’t forget – what we call Hurricane Katrina in New Orleans wasn’t storm damage, but flooding and shitty levies). The surge is predicted to look something like this.

(I’m linking these mostly, rather than hosting them – the Oil Drum is carrying a tonne of great images) Which heads a good deal further in than the storm itself. Should be interesting – no tropical storm of any kind has wandered this far into/up the gulf, since 1995, apparently, and forecasters are dealing with very new ground, here.

For the moment, it’s a bit wait-and-see (as it always is with OPEC), although:

In the Organization of Petroleum Exporting Countries (OPEC), the Saudis are the swing producer — the only major oil producer with enough extra production capacity to increase supply when the price of a barrel of crude soars, and the only major oil producer with the political will and foresight to cut supply when prices fall too low. Right now, the Saudis are producing at 8.5 million barrels a day. Depending on whose figures you believe, their production capacity is anywhere from 9 million to 11 million barrels a day.

If the Saudis allow oil prices to climb too high, then consumers will cut back on use, and energy alternatives will become sufficiently attractive to investors to cut into oil’s share of the global energy market. Worst case: Oil prices will climb so high that they cause a global recession that will certainly cut demand.

I see it more as a harbinger (I would, as an Australian). Perhaps we be here, with peak oil, warming seas and more/bigger tropical storms and hurricanes. By this time next year will Tropical Storm Risk need a NW Indian Ocean section? And here we are worried about terrorists and rogue states taking the oil route down. Perhaps the Saudis themselves will start trying to build stable oil pipelines. Lord knows we’re not getting very far with them.

Reading through the Oil Drum’s phenomenal coverage, one gets the distinct impression that we dodged a bullet this time (I don’t ascribe to them the standing-in-the-wind sort of thoroughly idiotic alarmism in for which our newshour weather reports go. I really hate TV news, have you noticed?). If this is the start of a new trend, and the next one is bigger, faster, travels further into the gulf? Peak oil isn’t called peak oil for nothing. The market won’t absorb a serious shock at all well, OPEC or not.

HowTo: the Phillips Curve

Quick, while Scientific Workplace crawls through it’s spell-check (a long process when you write in Econometrics, let me tell you. Bivariate is too a word! And don’t get me started on the American English dictionary).

This isn’t really a how-to of any proper kind. I just couldn’t think of a song lyric that matched. It is more an opportunity to discuss a very good example of something mentioned earlier: full-employment in Australia. Specifically Australia is, currently, a good example of the Phillips Curve:

I particularly like this because the Phillips Curve is my white whale in class – it’s the chapter right after where we always end up stopping (we teach Eco 1 in one semester – micro and macro. I’m considered successful just by getting through Monetary and Fiscal policy). So I teach Unemployment, and Inflation, but I never get to teach, formally, just how interdependent the two are.

As you can see, the Phillips curve represents the relationship between Unemployment and Inflation, specifically that as one goes up, the other goes down, in the short run. In the long run the short run curve can/will shift, such that the long-run Phillips curve is vertical (NAIRU = non-accelerating inflation rate of unemployment). It was nutting this out that helped get Phelps last year’s Nobel prize. Milton Friedman, too.

The long-run Phillips curve is how we ended up with stagflation in the 70s. Heretofore (theretofore?) converntional wisdom had said that as unemployment decreases, inflationary pressures increase, and vice versa. In the 70s we saw unemployment increasing, but inflation not decreasing. This is problematic, to say the least. Fiscal and Monetary policy works together, to deal with the two principal macroeconomic problems faced by a government: inflation, and unemployment. They aren’t supposed to occur at the same time (in problematic levels), and no policies deal with both at the same time (try, and you’ll go the way of the pound sterling, circa 1992). Hence the business cycle:

At the bottom, unemployment is the problem. At the top, inflation is the problem. In the 70s (and, in England, the 60s), both were a problem. Which is to say, stagflation (stagnant inflation) was a problem. There are a bundle of theories for what causes it. Practically, more than one thing can cause it. As the wikipedia pic above shows, a macroeconomic policy that takes the economy below the natural rate of unemployment, inflationary expecations increase, accelerating inflation. You end up on the new short-run curve, at the same point but higher inflation. The causes of expecations, rational or otherwise, or the natural rate of unemployment, can be many – hence disagreement on what causes stagflation.

(Possible) Stagflation in the US?

Americans: there has been discussion about something similar for the US for a while now. Not due to natural rates of unemployment, necessarily, but more like England under the ERM. As the US needs a billion or so dollars per day, it needs to keep the US dollar attractive. Herein lurks the danger.

For the moment the US dollar is probably over-valued. In part this is because so many countries, companies, NGOs and people use US currency as their liquidity. If/as that declines, the value of the US dollar declines. As the value of the US dollar declines, fewer lenders (not the same group as currency-users, necessarily) will want to lend to the US/invest in US dollar appreciation. They’ll go to Europe or Japan, or wherever else they please. At a time when almost there is almost more foreign owneship of US debt than ever before, that can be problematic.

If/as the yield on US debt/dollar declines, US interest rates will have to go up to attract foreign capital. 2007 is mooted by some as a pretty good time for another recession in the US (and those some include George Soros, the man who broke the bank of England back in 1992. If you find out he’s short-selling the greenback, let me know). Meaning, meaning what? Meaning if the US slides into a recession, it will do so not only without Greenspan on hand to run practically 0% real interst rates, but in a FOREX climate in which the US cannot afford to do so. Irrespective of the domestic market.

Promising to do both in macroeconomics is what draws the sharks, as Norman Lamont discovered. Alternatively, the likes of the Organisation of Arab Petroleum Exporting Countries could strike again. But I doubt it. More likely, you will quite quickly near labour shortages as boomers retire, etc. which, coupled with the effects of corn prices, can also bring on stagflationary pressure of the cost-push variety (I’m using wikipedia for everything, today). Remember, though, this is macroeconomics. We could also observe nothing of the sort.

But enough about the US economy. That’s not even why I began this post.

Full Employment in the Australian Economy

Australian employment increased four times as much as expected in May, worsening a labor shortage that may force the central bank to raise interest rates to ward off inflation.

There we go.

Employment rose 39,400 after gaining 34,900 in April. The jobless rate dropped to 4.2 percent, the lowest in almost 33 years, the Bureau of Statistics said today in Sydney.

The median estimate of 24 economists in a Bloomberg News survey was for 10,000 extra jobs and an unchanged unemployment rate of 4.4 percent.

That has Australia as a pretty low-unemployment economy for a good long while, now, and was what Gittins was referring to an article or two ago. So we are, pictorally, at about point A on the Phillips cuve up the top. Hopefully not heading towards point B, because we’ll just end up at point C.

Meaning what, for Australians? Two things: first, the Reserve Bank is that much more likely to raise interest rates. As a couple of people have commented, they probably regret having held them steady last time. So up go mortgages. Good thing we had John Howard in charge.

Second, look out for scare-mongering. That’s hardly worth the warning, but this is specific. Peak labour is a little like peak oil. At full employment, potentially above full employment, demand-pull inflationary pressure is bubbling pretty well, and cost-push inflationary pressure is probably topped only by inflationary expectations (you can see I’m not a monetarist). I mentioned the labour shortage as well, early on.

If only there was some national economist who could tell us the implications of this? Oh, wait:

But Mr Costello warned that with unemployment so low, there was a risk that inflationary pressures could increase.

“The Australian economy is not bullet proof, the Australian economy has very big risks,” he said.

“The biggest risk at the moment is, on such low unemployment, one miscue, one misfire on industrial relations will set off inflation and bring this all to an end.”

One mis-fire on industrial relations, ay? Americans! Remember how you were going to get hit again if you voted the wrong way? Those are the same lines between which to read the Treasurer’s warning. At a time when Labour’s helping hand is easily polling better than Howard’s nasty AWAs, our Treasurer has taken the time to warn us that he’s done such a good job that he’s placed the economy on a hair-trigger, and only he knows how to handle the gun. The one pointed right at us. What, too blunt?

Where was he a couple of years ago, then? Who knows.

So another thread for the election. One mistake by you, the voter, and we’re all in high interest, high inflation, Keating recession terror-land. I would expect, though, Team Howard/Team Costello to shy away from bringing back the interest rate boogie man. They pulled that one of with bizarre success for the last election – and of course interest rates went up anyway (tip to the non-economist mortgage-holders: that’s what interest rates do when the economy grows quickly).

The Reserve Bank should already be providing a timely pre-election reminder of that gag shortly. Costello won’t want to add to it any more than he can get away with. Inflation and recessions-we-had-to-have, though, is clearly a town-going campaign theme for the Liberal party.

Speaking of Keating, he had some lovely things to say last night. I love that man.