U.S. June Consumer Spending Up 0.1%, Inflation Slows

From Bloomberg.

The 0.1 percent rise in spending reported by the Commerce Department today, which matched economists’ estimates, followed a 0.6 percent gain in May. The personal consumption expenditures index – a price measure closely watched by the Federal Reserve – also rose 0.1 percent, excluding food and energy.

Back at that macroeconomic equation:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

Consumption is, though, rather more than just a part of national expenditure and income:

So increasing exports and government expenditure are all well and good, but as consumption and investment expenditure go, so goes the country.

Looking at the flatting consumer spending, on top of the flattening investment spending: the UK, which has its own run with adjustable-rate mortgages, is facing an upward trend in repayment costs, and attempts at refinancing – and the effects on consumption. The UK also has more debt-financed consumption than anyone else, so they’re facing, potentially, a bigger hit than the US (where, I believe, debt-financed consumption is used more for house-improvement/expansion than, say, holidays and mobile phones). Nevertheless, you borrow USD1tr or so annually – and need that much to keep pace at all.

The principle however remains, given that it is basic macroeconomics. Higher housing costs means less disposable income, which means less consumption. Higher interest rates means the same. Higher inflation means less real-valued income and wealth, equalling less consumption. US inflation has slowed, but it is still real (and remember, one ignores fuel and food at their peril).

As for what comes next, I prefer the famous words of Bill Murray’s Steve Zissou, where he tells Angelica Houston’s Eleanor Zissou that he is right on the edge; he doesn’t know what will come next. Marketwatch’s Paul Farell (found on the Big Picture), though, has a few ideas:

1. War/military defense budget busting
2. Real estate bubble raging
3. Foreign trade imbalance, trillions new debt
4. China’s economy overheating
5. Private-equity credit imploding*
6. ‘Homeland Insecurity’ failures*
7. Hedge funds hurting retirement plans
8. Oil rocketing toward $100 a barrel*
9. Weak U.S. dollar keeps sinking*
10. Federal budget deficits
11. Social Security entitlements
12. Medicare’s massive deficits
13. Health-care-insurance deficit
14. Climate change fuels global wars*
15. Personal savings shortfall
16. Consumer debt surging*
17. Corporate pension defaults
18. Local government pension deficits
19. International credibility deficit*
20. Washington politics in endless gridlock

Asterisks show those that the Big Picture considers prime – and I agree, although I don’t know about the climate change/global wars one: mostly because I think it’s hard to tell what will happen with climate change and what conflicts will ensue. Conflict between Israel, Turkey, etc. and their downstream neighbours? How about France, Netherlands, Belgium and Germany as rising sea levels take out half of the land of the first three, pushing them into their Eastern border? North America against South America, over dwindling food? China and Japan, over gas?

Farell’s discussion of these, point by point, it worth 5 minutes of your time. I particularly liked his characterisation of US consumers as “We spend like teen drug addicts with stolen credit cards.”

Labor to overhaul state-federal ‘blame game’: Howard to “ism” you to death, in response…

I mentioned a few days ago that the insistence by Team Howard/Costello that the states were to blame for interest rates was a little … stretched, to say the least, considering the big surpluses that the federal government was receiving, keeping and generally playing around with.

Today’s papers tell me that Kevin Rudd has an idea or two about that:

The states will have freedom to determine how they spend money given to them by the commonwealth under a Kevin Rudd plan that could radically change federal-state financial relations.

A report prepared for the federal Opposition Leader, to be released today, says state governments should be freed from the restrictions now placed on the way they spend $30 billion worth of commonwealth “specific purpose payments”.

The report calls for a dramatic cut to the number of areas that are dual state and commonwealth responsibilities so that only one tier of government would take charge of previously shared functions.

Mr Rudd’s overhaul of commonwealth-state relations is designed to end the “blame game” between the two levels of government, particularly in health and education.

The Prime Minister’s response was, as one would expect, not encouraging. For a start he would have been pissed to learn that his party was, yet again, second in the Ideas Race for this election. Given, also, that Howard can barely put a foot right, while Rudd can barely put one wrong, he must have been worried. Rudd’s plan looks little like devolution, on first glance – meanwhile the Prime Minister’s idea of governing is taking over State responsibilities.

If Being Popular’s love affair with Kevin Rudd continues, Howard has definitely zigged in some heavy zagging country:

Howard attacks Rudd’s ‘federalism’

“They want their national government’s solving problem, they are not much fussed about theories of federalism or theories about blame games they want outcomes,” Mr Howard said.

He said Australian people wanted the Federal Government to play a more not less of a role.

“In 2007 the two great sentiments regarding governmence are nationalism and localism. They want their national Government solving problems.”

Where to begin? Non-Australians, Howard is, here, trying to tap into the ‘silent majority‘, originally made famous by Nixon, that he has used previously. Brits, remember the Tories’ “Are You Thinking What We’re Thinking?” campaign? Short-lived, though it was, due to just how unsubtley racist it was. Americans, just think of so-called ‘wedge’ politics. Gay marriage, abortion – shit that Bush never did a damn thing about except use to win elections by attracting the votes of suckers.

Speaking of the Tories, I found this:

The relevance of which is only humour, really. Go deface a political poster at your earliest opportunity. Billboards are evil, anyway. Anything larger than those neat lawn posters should be fair game.

Back to Barking John Howard – I really didn’t follow his argument. I objective, in principle to him telling me what I want out of my government (here’s a tip: you). But to say, barely breaths apart, that we are not interested in theories about federalism (itself offensive) and then to say we want Federalism and Localism (what does that mean, anyway?) strikes me as A Desperate Politician, Spinning Furiously.

The idea that he is above blame games, after playing them every fucking day, does little to help. I don’t know how generous his opinion is of the electorate, but we’re a lot more well-informed and cynical that he thinks. We are not, in short, the fools for which he thinks he can play us. Or rather, hopes he can play us – the Prime Minister seems more and more aware that we just aren’t buying his electoral paternalism anymore.

What we understand, more and more, is government, as opposed to politics. We want the former, but Howard spent his time mastering the latter (not unlike – up yours, Orwell! – his chums up this way, and not unlike what ultimately soured the Blair Prime Ministership).

Personally I like Labor’s idea. It will not remove the blame game – as though anything could – but it will make it a lot more transparent. Now the states can be held accountable for what they spend money on, and/or how effectively they do so, while they can blame not getting enough money from the federal government. Those are rules anybody can follow.

Scientists attempt to roll back emissions

Sorry I’m late. I’m back at work (kind of – for a couple of days).

Amongst my limited news-reading were a few enivoronmental stories in the Guardian, beginning with science saving us all (I was always led to believe it would be the children).

It is a technology which may just save the planet: a machine capable of scrubbing carbon dioxide from the air, potentially halting global warming and returning the atmosphere to its former glory.

David Keith, an environmental scientist at the University of Calgary, has built a prototype device which does precisely this; sucking air into one end of a five-metre high vertical tower and pumping it out at the other end with 30% less CO2 in it.

Inside the tower the air is sprayed with droplets of a sodium hydroxide solution, which absorbs CO2 gas. This produces a solution of sodium bicarbonate, or baking soda. By adding calcium oxide – also known as lime – the sodium hydroxide can be recovered for reuse. This lime is then also recovered, again for reuse, by heating the resulting calcium carbonate – which finally leaves just the CO2. There is nothing magic about it, says Dr Keith; a similar reaction has been used by the paper industry for many years to chemically pulp wood.

Not only is this out there, as it were, but it has competition:

…one company believes it can do better. Global Research Technologies (GRT) in Tucson, Arizona, recently demonstrated a prototype based on the work of Klaus Lackner at Columbia University, in New York. This uses a proprietary material to absorb the CO2, which is then removed by washing it with a solution of sodium carbonate. “Chemically and energetically it’s much easier than using sodium hydroxide,” says Dr Lackner.

According to Allen Wright, president of GRT, a single device measuring 10 metres square could capture 1,000 tons of CO2 each year. On this scale, 1m devices would be needed to extract a billion tons of carbon from the atmosphere in a single year. Given current trends, this would be enough to start significantly reducing the CO2 in the atmosphere, he says. What’s more, GRT believes that when they scale up their prototype it will be able to this at a competitive price.

I have several colleagues (and former students) who will love this. The impetus for this innovating? Sir Richard Branson’s Virgin Earth Challenge, a USD25m prize for:

whoever can demonstrate to the judges’ satisfaction a commercially viable design which results in the removal of anthropogenic, atmospheric greenhouse gases so as to contribute materially to the stability of Earth’s climate.

That’s right: like the X prize (or, hell, the Millenium Prizes), it is a private fund for which to be competed by the smarties.

The scale of these are immense, though the latter is a bit cheaper. Only the second one is even being sent to the Earth Challenge folk – even the cost of a demonstrable cost-effectiveness of the the University of Calgary’s idea is well above USD25m anyway.

There also exists the moral hazard problem: if you’re insured, you act with less risk-aversion; if you think your gasoline is ‘good’, you drive more. If we think our CO₂ can be sucked out of the air, we’ll run our shitty CAFE-standard cars, burn up all the coal we can find, etc. and basically overdo it, until we’re right back where we started.

A correction for this has also been considered (like I said, they’re smart):

According to Dr Hansen, who is also head of Nasa Goddard Institute for Space Studies and an environmental scientist at Columbia University, in New York, the way to avert this is to set a tax on coal use that is equal to the cost of getting the CO2 out of the air.

This would be in line with Pigovian taxation, previously seen here. In this instance, the perfection of both funding (partly, at least) the solution while containing the cause, with the same tax is as textbook as it gets. Very elegant – if it comes off. The worst-case scenario of course (I mean, not including Douglas Adams’ stuff) is that we burn up all the fossil fuel we can in the false hope that this fix is in, only for it to come to naught.

Development, Interrupted or: At Least Africa Won’t Have An Internet Porn Problem

Via NEWSgrist and the Robert Goldwater Library, from the New York Times.

Attempts to bring affordable high-speed Internet service to the masses have made little headway on the continent. Less than 4 percent of Africa’s population is connected to the Web; most subscribers are in North African countries and the republic of South Africa.

A lack of infrastructure is the biggest problem. In many countries, communications networks were destroyed during years of civil conflict, and continuing political instability deters governments or companies from investing in new systems. E-mail messages and phone calls sent from some African countries have to be routed through Britain, or even the United States, increasing expenses and delivery times. About 75 percent of African Internet traffic is routed this way and costs African countries billions of extra dollars each year that they would not incur if their infrastructure was up to speed.

…

Africa’s only connection to the network of computers and fiber optic cables that are the Internet’s backbone is a $600 million undersea cable running from Portugal down the west coast of Africa. Built in 2002, the cable was supposed to provide cheaper and faster Web access, but so far that has not happened.

…

Rwandan officials were especially interested in wiring primary and secondary schools, seeing information technology as crucial to modernizing the country’s rural economy. Some 90 percent of the country’s eight million people work in agriculture.

But as of mid-July, only one-third of the 300 schools covered in Terracom’s contract had high-speed Internet service. All 300 were supposed to have been connected by 2006.

Over all, less than 1 percent of the population is connected to the Internet.

It is hard, from the story (and from, I imagine, the actual circumstances) to figure out exactly the problem. The company, Terracom, is based in Boston and, after its original sales pitch and monopoly-win, bought out the national Telco, Rwandanet. Meaning Rwand’s monopoly telecommunications provider is in Boston, in the hands of a guy who’d never set foot in Rwanda before, and has only been there a few times a year since.

The owner Greg Wyler is criticised for delivering very little of his internet promises, while signing up as many people to mobile telephony as he can, and while complaining that the bandwidth problem is the bandwith problem – there are only so many satellites to go around, satellites offer much less bandwidth and one company cannot hook Africa up to FTTN networks on its own.

To some extent that’s fair, however he’d have generated a lot more interest by governments if his operation were more serious. After being busted a while ago, trying to offload Terracom shares to a regional provider, in contravention of the contract he’d signed with the Rwandan government, Terracom has a new Chief Executive, who’s worked in Africa a lot and is in Rwanda full-time (apparently, service has improved).

The New York Times manages to stitch together the solution:

Prices remain high because the national telecommunications linked to the cable maintain a monopoly over access, squeezing out potential competitors. And plans for a fiber optic cable along the East African coast have stalled over similar access issues. Most countries in Eastern Africa, like Rwanda, depend on slower satellite technology for Internet service.

…

Internet rates have been lowered, from about $1,000 a month when Terracom arrived in 2003, but most people still can’t afford it. The average Rwandan makes about $220 a year, and a fixed-line Internet hookup costs about $90 a month. Basic wireless Internet is about $63 a month. Those rich enough to pay the fees complain about poor service.

…

Terracom is moving ahead with plans to give Rwanda the most advanced Internet infrastructure in Africa. A nationwide wireless connection should begin operating near year-end, he said, about the time a nonprofit group, One Laptop Per Child, based in Boston, is to introduce a $100 laptop in the country.

And Terracom is continuing to lay fiber optic cables to connect Rwanda to several other African countries, eliminating a need for phone calls and Internet traffic to be routed via European or American networks.

The government, meanwhile, is moving forward with its own plans to build a fiber optic network. It also has granted Internet service licenses to South African companies and plans to issue several more. “We think we are going to have a healthier market pretty soon,” said Nkubito Bakuramutsa, director general of the Rwanda Information Technology Authority. “We have learned from past experience.”

Mr. Bakuramutsa said he hopes to bring the price of Internet service down to about $10 a month.

I realise I wrote only on Friday about natural monopolies, but in this instance it won’t operate quite the same – or it will, but the monopoly will be state-owned. In order to generate the seriousness of the priority, several competitors will need to be in place. Mostly, I would say, that is because, at the moment, it is people complaining about not having internet access (or electricity), but not all that many, and not commercial enterprises. Once more companies are competing, driving prices down and generating critical mass for the demand, the Rwandan government will become very serious about those plans for the fibre-optic network, and should ultimately follow the path of, say, Botswana, famous for establishing security and attracting foreign investment, and generally doing well (all things being relative).

At the same time, and leaving the grounded-economics, the effects on information, media, evidence-based medicine and, ultimately, the rights of women and children, land and resources conservation and democracy itself would easily surpass anything we’ll ever achieve smashing the birthplace of civilisation to blood pieces.

Then, who knows. Some stable public ownership or corrupt fire-sale privatisation to cronies. It would probably depend upon the state of the continent, as a whole (who figured on Zimbabwe going to shit so quickly?). Given how far behind they are, though, it is worth the effort of African countries to lay their networks now, before they become another generation of technology behind.

Africa remains the least connected region in the world, and the digital gap between it and the developed world is widening rapidly. “Unless you can offer Internet access that is the same as the rest of the world, Africa can’t be part of the global economy or academic environment,” said Lawrence H. Landweber, professor emeritus of computer science at the University of Wisconsin in Madison, who was also part of an early effort to bring the Web to Africa in the mid-1990s. “The benefits of the Internet age will bypass the continent.”

Here’s the New York Times graphic on internet usage:

And another on world internet traffic using the top 5 protocols, by McAffee’s HackerWatch:

There’s also a great interactive map here. Internet penetration in Niger is apparely 0.2% of the population (it’s 68% in the US, Canada, Australia).

Big-spending government boosts ‘jobs for fat cats’

Blimey. All the time I scoffed at various countrymen (read: family) moaning about government filling their own pockets – which I have observed on this blog – and they may have been on to something, after all.

Total public service employee numbers for the 2007-08 financial year have reached 242,426 – a 28per cent increase since 2000.

Excluding military personnel, the number of Commonwealth employees has risen from 136,014 in 2001-01 to 170,391 this year – an increase of 25 per cent.

The number of public service senior executives has jumped by 44per cent in the five years since 2001.

…

This year’s budget papers state that government spending over the next two years is projected to increase faster than economic growth. Government spending is forecast to increase from 21.3 per cent of gross domestic product (GDP) in the 2005-06 year to 21.8 per cent of GDP by 2009-10.

Amazing what a decent run of rising incomes, bracket creep and budget surpluses will do a for a government’s propensity to toss money and public service jobs at a problem, rather than getting off its ass and really working on a solution.

It’s a nice split. All of the cuts in Howard’s first term have easily disappeared. This, though, I did not know (to be fair, the bastard was elected in my final year of High School):

In the Howard Government’s first term, its then minister for administrative services, David Jull, used a so-called Yellow Pages test.

Mr Jull believed that if you found someone in the phone book who could do a task being performed by government, the Government should not be performing that task.

God, the Neo-Cons over here would have loved that guy.

So, returning to government stereotypes. If Labor can weave this cleverly in with those pay increases (avoiding the blame, itself, of course) it will have a very good page or two in its current narrative – that Team Howard/Costello can go on and on as they like, about the economy: Rudd understands Australian Households.

Closer to home, my mother was livid, last night, telling me that Telstra, formerly public, now private (publicly-listed), would be charging them a bundle of money to examine their cactus telephone line, because it was within their property, rather than outside on council land. I had to remind her that Telstra is not a public service: of course they will charge like plumbers, given the opportunity. They have shareholders and executive expends accounts to satisfy. I wonder how much more such occurrences are costing Howard how many votes, though? It’s hardly something a Prime Minister Rudd can, or even would, correct, but that won’t stop Howard copping it all the same.

At least, for the Liberals, it could be worse: Costello could be leading them. Why has Rudd not been hammering away at the (no doubt very high) likelihood that a Howard victory will mean a Costello Prime Ministership anyway? I would – particularly if he’s as popular as a long-term Treasurer in Australia can be expected to be.

Bob Geiger collects the Saturday cartoons

Again again. Bob Geiger’s excellent BobGeiger.com has today’s editorial cartoons for your mirthful pleasure. A thorough hammering of Bush and Gonzales, this week.

Apropos the latter, Antiwar.com’s list of casualty and fatality figures is …sobering, to say the least. Only hit “refresh” if you’re prepared to see those numbers change while you watch.

Bush fails to calm battered stock markets

To think I’d just said the economy was boring! This, by the by, is my favourite of the stories making up the pictures.

The White House last night made a concerted attempt to inject fresh confidence into the world’s battered stock markets as share prices suffered a new day of falls on fears that a credit crunch will end an era of cheap funding for corporate takeovers.

With Wall Street down 100 points in early trading after Thursday’s 311-point plunge, Mr Bush and his treasury secretary, Hank Paulson, downplayed fears of contagion from the crisis-ridden real estate market and claimed that the US economy was strong.

Are they out of their fucking minds? For a start, nobody with actual money at risk is subsequently stupid enough to believe either (i) the canard about sub-prime mortgages being contained (will Greenspan please bend Bernanke over his knee and give him a good hiding?), or (ii) that the Bush administration can manage anything, ever. Hell, while a good economy and two odds-on favourite wars go to utter shit around them, they’re busy cooking up arms deals with the Saudis (nothing at all to do, I’m sure, with the weird sale-price they got on Saudi Aramco oil, a week or two back).

You’ll note that deal sells advance US weapony to “Saudi Arabia, other Arab allies of the United States and to Israel”. Thanks for all the hard work on peace in the Middle East and keeping down the proliferation of weapons, you bastards. It also includes “allies of the United States” such as Egypt – whose relative lack of those freedoms and democracy we’re exporting Bush and Rice themselves have criticised, repeatedly. At least now we’ve given them the weapons with which to fight back.

So here’s a tip for the White House: you guys don’t seem to have any sense of shame or, say, reality. But when everything from equity deals to hedge-fund-speculated commodities to housing to the risk profile of banks is tipping over, it’s best not to go on television, spewing pure fantasy and generally appearing like desperate, shrieking incompetents are at the helm of the ship of state. That might work with Fox News and CNN, but you’ll find the Stock Exchanges of the world are populated by intelligent people, not shills and hacks. This isn’t MSNBC’s bloody Trader Talk; it’s the actual traders.

So that was interesting. Meanwhile, more and more, writers are pondering aloud about Big Ones (market crashes, not Aerosmith albums). I never particularly gave this credence, given the differences (the biggest being that the Big One was a crash in value – actual value – rather than what had been occurring here), but those differences aren’t so stark anymore:

• According to Moody’s Economy.com, 2.5 million first mortgages will default this year. Delinquencies should peak in the summer of 2008 at 3.6% of all outstanding mortgage debt, up from 2.9% in the first three months of 2007, and it won’t get better until 2009. That’s driven by sub-prime and Adjustable Rate Mortgages, and it will most certainly affect everything from auto sales to garden hoses to curtains.
• New and Existing homes drift forever (and sometimes sharply) downwards – meaning the stocks of building companies are taking a hit. Shares of major homebuilders plunged to the lowest in almost four years after D.R. Horton Inc. and Beazer Homes USA Inc. reported losses totalling $US1.47 billion on lower sales and huge write downs of unsold land and houses.
• As bond sales go awry, and as lenders of money are unable, increasingly, to sell that debt on as bonds, banks are stuck with bonds and other debt that nobody wants, increasingly junk-rated and likely to vanish anyway. Shares for Deutsche Bank and Citigroup, among others, fell 5% and 4% respectively yesterday.
• Oil is, ultimately, down (I’m not eating my hat yet – or is it crow?) a couple of cents, as hedge funds drop their investments in them. So is gold, copper, nicel, etc. (Australians: this will effect immediately the value of the commodities boom, not to mention the Australian Dollar, which is already down).
• Sadly, even things like the Wesfarmers purchase of Coles Group, which I loved, are in great danger. Wesfarmers, you will recall, was doing it old school – straight cash and share offer. Well, their share price is off the cliff. Meanwhile they’re the only buyer, though – the other bids were from Private Equity, who ultimately couldn’t find a loan-bridge-er to back their play. So Coles Group can look forward to their value tanking, too.
• If the US sneezes? Euro is down, AUD and others are down. Our All-Ords (Australia’s Dow Jones, if you will) lost ground, while Asia had it’s worst week in a year, as the S&P 500 has its worst in 5 years. Canada’s week was the worst in 6 years. Bloomberg tips US stocks to fall 10%, based on options trading.

There are two things at work: one is Bloomberg’s Housing Recession, which is properly heading for being an Actual Recession; the other is the capital markets, or credit crunch (a term that, for some reason, I really do not like). Capital drying up means more and more Private Equity deals are falling through – meaning that, if these aren’t likely to come through, or even come up, shares that are declining will continue to decline, because the expectation of an Equity buy-out won’t exist (and this has been fairly key in keep the paper value of a lot of firms buoyant – like Coles Group). Every story, lately, talks about risk aversion being nearly at its lowest – and it probably isn’t finished.

So, what? Nothing, really. Returning to Moody’s, their Moody’s Economy.com In the News is a telling list indeed:

Stocks down, currencies tied to the US down, housing down, etc. The only ‘up’ news came from the government – meaning it was a pitch, not a story.

In some good news, the US economy did go a little ahead of predictions, based on exports (that low US dollar), commercial and government spending. Commercial contruction, though, won’t last. The durable goods numbers are down, when aircraft, cars and trucks are removed, indicating that commercial investment is down. Government spending can only last while government borrowing can last – i.e. not forever. Exports might hold, though. Remember that old Macroeconomics equation:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

Aggregate Demand also is Aggregate Expenditure and Incomes.

Consumption is already falling, thanks to the housing problem; Investment looks like it is declining, and ought to anyway, as consumption catches up and the credit problem fills out. That leaves Exports, at the mercy of the US dollar (which can’t be allowed to decline too far, because you need it for your borrowing – a complication that has upward pressure on US interest rates, which will hurt the economy further), and Government Expenditure, which (i) is already too large, relative to income, and (ii) is yet, to me, to be undertaken at all competently by the Bush administration, who seem never to have taken a Macroeconomics class in their collective lives.

Gets messy, doesn’t it? And what picture are these thousand words (no, I did not count them) worth?

Dow Jones:

S&P 500:

Which may as well be the FTSE100, the EUROFIRST 300, the NIKKEI, the ALL-ORDS. Take your pick.

A stroll through the S&P Goldman-Sachs Commodities Indices will give you the same losses or volatility in returns on cocoa, coffee, corn, gold, industrial metals, you name it. It’s a long list.

The Big Picture blog is also looking specifically at how – relevant to the rose-tinted press conferences being given – the US economy has lagged the world by a good long way for a good long while, now (we use the terms “Bush Boom” with not a little irony. Or sarcasm, it kind of depends on the tone).

HowTo: Minimum Efficient Scale

Minimum Efficient Scale refers to a situation in which the economies of scale for a given business/firm/industry have been “fully exploited” – economies of scale in a moment. Minimum Efficient Scale is the name given to the size of a firm when it is achieving the lowest possible Long-Run Average Costs.

To begin, consider a firm – let’s call them a manufacturer of waders (those weird thigh-high boots that fishermen wear):

Suppose this firm starts off quite small, but does reasonably well. As it increases in scale (meaning it expands, builds a new workshop, gets more machinery), one of three things will happen to its Average Total Cost (Total Costs divided by the Number of Pairs of Hip-Waders Produced):

• Economies of Scale: this will occur when increasing scale results in decreasing Average Costs (meaning that production increases, say, 10%, but Total Costs only increase 5% – so Average Cost Per Pair of Hip-Waders will decrease)
• Diseconomies of Scale: this will occur when increasing scale results in increasing Average Costs (production increases 10% but Total Costs increase 15%, so Average Costs are increasing)
• Constant Economics of Scale: this is when Average Cost does not change (both production and Total Costs increase by 10%)

This is not to be confused with Returns to Scale, which is the percentage increase in production that results from a percentage increase in inputs or scale (so if you increase in scale by 10% and production increases 10%, but only increases by 5% after the following 10% increase in scale, you have Decreasing Returns to Scale – for example).

In the Long Run, Economies of Scale vary. Consider the following, from my undergraduate textbook (meaning the one that I use, not one that I wrote):

Click for a larger image. Each smaller curve is Short-Run Average Total Costs (wherein Labour is flexible but Capital – machinery, factory space – is fixed)

As the manufacturer expands, or increases scale, Average Costs decrease until the optimal point: Minimum Efficient Scale. As they expand beyond that, they become inefficiently large, and face increasing Average Costs. Hence (if we assume they expanded too far, and finally settled at the Minimum Efficient Scales) they have exploited all Economies of Scale, and Diseconomies of Scale, in production.

What brought this to mind was, not surprisingly, a story about a manufacturer of hip-waders in England.

Geoff Guyers is one businessman not suffering from the floods. As the only UK manufacturer of fishing waders, his business is booming.

Liverpool-based LC Waders has been inundated with calls. Turnover has doubled; the family business is now operating 24 hours a day, seven days a week. But he still cannot meet demand.

“It has been mental,” says Mr Guyers. “The phone has not stopped ringing and I’ve been getting orders from the Environment Agency, councils, police and fire brigades as well as all my usual customers who are selling out of their stocks.”

If he is currently operating 24 hours per day, his average costs are increasing (if you look at a single one of those Short-Run Average Total Cost curves, say for the small scale, in the short-run Geoff Guyers cannot buy more equipment or move into a bigger space – he just hires people around the clock, which is expensive to do). Ordinarily he would expand – moving to a new Short-Run Average Total Cost curve (the ‘medium’ scale, for example), and his Long-Run Average Total Cost would decrease, meaning his profit margin would increase.

Why will he most likely not do that? Because his is a short-run boom. Assuming this does not become a habit, the odds of such flooding in England again, next Summer (or, hell, Winter) are slim, so he will not face this sort of booming demand again. If he expanded, he would be way to the left on the ‘medium’-scale Short-Run Average Total Cost, facing high Average Costs because his production was too low for the size of his company. If, on the other hand, this boom turns out to be sustained, in the long run, he should increase his scale.

Natural Monopolies and Oligopolies

Related to this is the idea of ‘natural’ Monopolies (a single provider, like ConEd or USPS) or Oligopolies (think oil/energy companies, Telcos, etc.). As consumers, we demand Technical Efficiency – the lowest Averate Cost of production (hopefully equalling lowest price-per-unit). Therefore, as consumers, we implicitly demand that each firm in the economy operates at exactly their Minimum Efficient Scale – such that each firm produces their good or service at the lowest Average Cost, and we get it at the lowest price.

How many firms should there ‘naturally’ be in the market? As many as it takes, at Minimum Efficient Scale, to fulfill total demand at that price. Consider a Natural Monopoly – electricity supply:

Because the infrastructure (or fixed) costs are so high, the Average Total Cost curve is very high. If we forced competition, and made two firms produce 15bn kilowatts each, the Average Cost (and unit price) would be much higher than if we allow only a single firm, producing 30bn kilowatts. Ergo, a Natural Monopoly. In the case of a Natural Oligopoly, we would see Average Total Cost curves such that a few-to-several Minimum Efficient Scale productions would satisfy demand, but the economic principle would be the same.

This is among the things that makes the Royal Mail saga so interesting, to me. Mail is supposed (in the objective, not subjective, sense) to be a Natural Monopoly, yet competition is, so far and with limits to the actual production of the mail service, doing quite well. Once TNT goes through with their plan for complete to-the-door mail delivery the experiment will be complete. Here in the US, I imagine UPS is watching closely.

Ask a Melbournian meteorologist about Wall Street

There’s a famous joke in Australia: if you don’t like Melbourne’s weather, wait half an hour.

I keep considering writing properly about formerly interesting topics: Private Equity and the state of debt; inflation, the state of debt and US economy, etc. but it just isn’t interesting for me. Amongst other things, the way everybody else is writing about the stock market is annoying me more and more. Like political stories that go on and on about some party “slamming” another party, everything in our domestic stock for foreign or futures exchanges seems to bolt one way or another with “unexpected” news.

Here’s a quick sample. From the Guardian:

• Investors stay on edge
• Sale of drinks arm delayed
• Dollar back in favour as safe haven

The first two aren’t interesting; just new examples of the same thing: uncertainty in our stock exchanges and take-overs having trouble finding Other People’s Money to spend. If the third doesn’t embarass the Guardian with its gun-jumping, I don’t know what will.

the Wall Street Journal:

• Stocks declined again
• The U.S. economy resurged
• KKR may have to postpone its IPO

The Financial Times:

• Equity turbulence follows credit market sell-off
• Wall Street struggles for momentum
• Consumer spending slows

And I’m sure that, tomorrow, Wall Street, like Melbourne’s sunshine, will be back. These stories are either correct, and the markets truly are hopping all over the place because traders are honestly being surprised, in which case not a single competent person is in charge and we’re fucked anyway, or they’re just filler because we’d rather have non-contextualised stories about random trees than read about the forest burning to the ground around them (reminds one of a certain war, actually). I’ve complained about that, too, just recently.

Unfortunately I’m also just not that into the minutae of the matter as other (better) bloggers out there (go read the Big Picture and Calculate Risk). To me it’s just more of the same, and all trending downwards.

At least Australian politics is still interesting (given that, unlike America and the stupid conniptions of its media, we are having an election soon). The Dana deal has been blessed by the United Auto Workers and their bankruptcy referrees, but I’m holding out for more information about the separate negotiations between the Union and the Big Three, proper, concerning retirement, healthcare, etc.

Even oil is not that interesting, although it’s nice to go this long without hearing some nut go on about the magicness of biofuels. I also have my own work, but it’s too easy to avoid research during the Summer. Much too easy.

It’s a good thing the Summer is nearly over, I suppose. To England, to defend my thesis, then semester begins – second day of which’s classes I’m cancelling, so that I can go and convince some immigration people that my marriage is not a sham and would they please let me stay in the US (until I leave in a year). I have an interesting August ahead of me.

So, if any of my prospective students read this: you’ll get Wednesday off because it isn’t worth covering those lectures, but I’m giving you a quiz on Friday to make sure you study anyway. And that’s just the first week. It’s not too late to try to transfer…

(Part of) Sydney tries to deal with air-conditioning

Blacktown goes green to beat the heat

Demand for power-hungry air-conditioners on the few really hot days of the year – especially in the booming western suburbs where temperatures are higher and houses are bigger – is so strong the NSW Government is considering building a new coal-fired power plant to cope.

But an ambitious project launched today at Blacktown’s Civic Plaza hopes to prove there is a cheaper, more environmentally friendly way to solve the power problem.

With a $15 million grant from the Federal Government and $22 million from consortium members, the Blacktown Solar Cities project is designed to demonstrate how a combination of solar power, smart electricity meters, energy efficiency and innovative approaches to electricity pricing can meet energy needs and cut greenhouse gas emissions.

By “few really hot days”, the Sydney Morning Herald means the handful or more (and increasing) days when it goes over 40º Centigrade (Americans: 104º Fahrenheit, but up to 115º at times). Needless to say – anyone with an air-conditioner and electricity lights up the grid.

The consequences of this drain are two-fold, and very serious. As well as the strain on the electricity grid, there is the climate/environmental harm that so many cooling engines, running simultaneously, will do to a city as concrete as Sydney. For non-New South Welshmen, Blacktown is a city within the City of Sydney:

It is not uncommon. Sydney – the administrative version – extends almost as far West as the green area on that map (Blacktown has 47 suburbs of its own). Building a new coal-powered plant to manage the load would be a nightmare. The smog generated, for a start, would only exacerbate matters: increasing trapped heat, humidity and the haze would just drive more people indoors for longer hours. Up goes air-conditioner (and other electricity use) still further. Obesity too, probably.

Houses and incomes have grown considerably in Blacktown, as gentrification-sprawl pushes ever-outwards, coupled with the whole financial deregulation thing.

That consortium:

The project is backed by BP Solar, Integral Energy, ANZ Bank, Landcom, Blacktown Council and energy efficiency expert Big Switch and runs until 2013. The consortium members hope that by avoiding an estimated 25,000 tonnes of greenhouse gas emissions and shaving $3 million off electricity bills each year the project will drive policy changes that favour demand management, energy efficiency and renewable energy ahead of electricity grid expansion and new power plants.

Not bad at all. I’d need Landcom’s involvment explained to me – although, if they can aid in demonstrating sustainable urban development, they do make their own lives easier. It could also just be state politics, helping out. People often assume that energy companies have little invested interest in such affairs, but that is not the case. New Yorkers need only look around to realise that Con Edison’s life would be a lot less troublesome if demand-management could be brought to bear. Same for any other city. If the loads placed on the electricity grid could only be better-managed, things would go more smoothly for everyone.

Related to which. This article mentions, in passing, something that is key to demand-management, and which I’d like to see discussed more:

The Doherty family are among 1000 locals who have already registered their interest in the project.

Living on a tight budget, but maintaining a home equipped with air-conditioning, several computers and a pool, Gordon and Janet Doherty have had their energy use audited by Integral Energy, and are thinking about taking part in a trial in which their pool pump will be turned off automatically on 12 hot days over summer, during peak energy periods. It won’t affect the cleanliness of the pool but should cut the family’s power bill.

The family of four has already switched its lights to less energy-intensive compact fluorescent bulbs, and has begun turning off at the wall appliances that use standby power.

Setting up intelligent devices, that conserve energy during peak periods (water heaters that operate during the cheapest periods of the day, for example) is usually thought of in the vein of households saving money, but it can save an entire city a blackout, or an entire city of computers the threat of a power surge during the evenings. It also goes a long way towards making the use of renewable energy, even with current storage limitations, all the more feasible.

I hope something comes of this trial/project long before 2013, which will most likely be too late to save anybody. I would expect, though, government and energy companies to respond within a couple of years, if it looks like paying off as it should. At the very least the incentives, on both sides, all make perfect sense.