The Security and Prosperity Partnership: it even sounds nasty

I can’t believe I was fired from my advertising job.

Canada’s water is on the trade negotiating table despite widespread public opposition and assurances by Canadian political leaders, said Adèle Hurley, director of the University of Toronto’s Programme on Water Issues at the Munk Centre for International Studies.

A new report released Sep. 11 by the programme reveals that water transfers from Canada to the United States are emerging as an issue under the auspices of the Security and Prosperity Partnership (SPP). The SPP – sometimes called “NAFTA-plus” – is a forum set up in 2005 in Cancún, by the three partners, Canada, United States and Mexico.

Heh. Widespread public opposition. They should call Australia – we know how far that gets you.

The SPP is comprised of business leaders and government officials who work behind the scenes and are already responsible for changes to border security, easing of pesticide rules, harmonisation of pipeline regulations and plans to prepare for a potential avian flu outbreak, Nikiforuk writes.

“The SPP is run by corporate leaders; governments are irrelevant,” said Ralph Pentland, a water expert and acting chairman of the Canadian Water Issues Council.

Pentland envisions a future where, in response to ongoing drought problems in the United States, the SPP will make arrangements to dole out millions of dollars of public funds for private companies to build pipelines to transfer water from Canada.

…

Massive water diversions from Canada do not make economic or environmental sense, according to water experts. Far better and cheaper is to improve water efficiency and eliminate waste. The United States and Canada lead the world in water consumption and are extraordinarily wasteful, Pentland says.

Moreover, most of Canada’s water is in the far north, not near its border with the United States. And even the transboundary Great Lakes are at their lowest levels in 100 years due to climate change, notes Nikiforuk.

Also interesting, while we’re busy concerning ourselves with the price of oil and the relative cost-effectiveness of sapping it from moronic sources:

Most of Canada’s oil comes from the tar sands, a 125-billion-dollar capital project in the boreal forest of northern Alberta province. One million barrels of oil flow south each day to the U.S. making Canada its largest supplier.

However, it takes three barrels of freshwater to produce one barrel of oil from the tar sands, says Nikiforuk.

…

Under NAFTA rules, Canada cannot reduce its energy exports to the United States, according to Gordon Laxer, director of the Parkland Institute, a research network at the University of Alberta. “The U.S. is the most energy wasteful nation on Earth. And Canada is sacrificing its environment to feed America’s addiction to oil,” Laxer said in an interview.

I hate NAFTA. I really do. Sadly, what will be worse is all the protectionist electioneering we can probably expect (on both sides), in the coming year.

What if I ride? What if you walk? Excellent article in Fortune on Bernanke. Being a wanker

I read this wonderful spleen-venting on my phone on the ride back out (marking mid-terms, giving mid-terms, moving apartments in New York – good thing I finished the revisions for my thesis last week).

The players in the biggest trouble, of course, were the ones who’d taken the biggest fliers in junk mortgages, ultra-risky leveraged buyouts, and other financial esoterica that proved to be malignant.

The stock market, which had been begging for a bailout and hasn’t ever seen an interest rate cut that it didn’t like, responded to the Fed’s half-pointer by running prices up. Ben Bernanke, the Street decided, is just what the doctor ordered.

Yes, it is about rate cuts, moral hazard, and coming to the aid of all the wrong people. I don’t want to say the mainstream people are late to this game, of course – I mean they’re only just starting to work out that maybe inflation isn’t being measured properly, maybe housing is in trouble and maybe we ought to pay some goddamn attention (I have a bad attitude about the mainstream of business/economics reporting, it is true. But only because they’re shit).

…as a result of the cut, those of us who keep score in dollars and didn’t need to be bailed out are less wealthy than we were in terms of anything other than our home currency.

Why? Because the rate cut contributed heavily to the dollar’s recent sharp drop in the currency markets – parity with the Canadian dollar, for God’s sake! – and to the price spike in hard assets like gold, silver, copper, and oil. So our wealth, relative to these other things, has diminished.

And wait, there’s more. Even though the Fed has cut short-term rates, long-term rates, which it doesn’t control, have risen in reaction to the cut. So whatever economic benefits may flow from lower shortterm rates will be partly offset by the rise in long rates, which are at least as important to the economy as short rates.

Finally, consider this. Even though Bernanke’s cut may mean that some junk mortgages will reset at lower rates, the cost of large, high-quality fixed-rate mortgages, which are tied to long rates, will be higher than they’d otherwise be. (Yeah, penalize the people who are prudent – way to go!)

The article does make some good suggestions – nothing regular blog readers (of blogs better than this one, of course) will recognise most of it as (a) old news, and (b) common sense. It is just galling (and has always been, at least to me) that authority somehow remains clinging to the fat, lazy sides of these outlets, who sit idly by and lead most of the cheers in the so-called ‘good times’ anyway. Is it that much to ask that news media have a memory?

I’m sure we all can’t wait for the rash of panic stories that will surely follow all the macroeconomic data covering the last month – without any regard to all their optimism a couple of months earlier when data that didn’t cover the last month came out. Someone ought to find out whether micro-economists get fewer ulcers than macro-economists.

HowTo: Consumer Behaviour. Or, the economics of my wife’s coffee-drinking

Eco 1 students: we’re about to study this sort of thing. Sort of.

So, the other day, my wife calls and asks me to work out her coffee costs. Two cafes at Columbia University, one in (after a fashion) her Art History library (call that one cafe A), and another … elsewhere (okay, I wasn’t really listening to that part – call it cafe B), but near.

Cafe A charges price P_A = $3 per cup – but every tenth cup is free. Cafe B charges P_B = $2.55 per cup. My wife wanted to know which was cheaper, and a third option, which was going to Cafe A and B in about an 80:20 ratio.

First, I assume that, since my wife is a student there, she’ll always benefit from the tenth cup. Her average price then is actually P_A = (3 x 9)/10 = $2.70 per cup. It will always be more expensive than going to cafe B all the time. If I put it graphically, suppose her options are anything from 100% A, to 100% B, and anything split between the two.

And thank God I always tell my students that they don’t need to draw their neo-classical markets to scale.

As she hangs up (this happened a lot – students were rolling by, pre-mid-term), my wife mentions that a nice man in cafe A makes her prefer their coffee, though.

Ah. This presents a problem – the quality of the coffee is not the same. My wife’s enjoyment, or Utility, from drinking coffee at/from cafe A (call it U_A) is clearly higher than that of/at/from cafe B (call that U_B). Now, what to do?

I’m going to assume, ceterus paribus, that this man’s niceness is the deciding factor (and kill him. But first, this). Now, my wife is indifferent between A and B.

Do the prices P_A and P_B need to be equal, for this indifference? No.

Does the quality, measured by U_A or U_B, need to be equal? Also no.

What is needed is that the ratio of prices equals the ratio of the utilities: i.e. that price-per-enjoyment-unit is the same. This tells us the value of coffee from cafe A in terms of the coffee from cafe B:

If we normalise U_B = 1, then P_B/U_B = 2.55. Then, if P_A/U_A = 2.55, as required for my wife’s indifference, and P_A = $2.70, U_A = 2.70/2.55 = 1.059. My wife is deriving 5.9% greater pleasure from cafe A, for which she is prepared to pay 5.9% more – hence a price 5.9% greater!

Now, this is on average. Cafe A is down a bunch of stairs, up which (either with coffee in hand, or having enjoyed it) to walk is a dis-incentive, particularly with a bag full of art history books. So that’s a negative Average Willingness-to-Pay Effect on price at cafe A. On the other hand it is, more-or-less, ‘in’ the art history library, which may make it more pleasant (nicer building, known students, what-have-you), so that’s a positive Average Willingness-to-Pay Effect on price at cafe A.

I’m lumping all of that into my wife’s Utility function, and calling it quality. It won’t all be the friendly man behind the counter, but the quality of the experience of getting/having coffee from or at cafe A is greater than from or at cafe B.

Students! What else is there? I have taken a fashion of behavioural approach to my wife’s indifference between two different cups of coffee at two different prices – but she is a price-taker. What might exist at the level of market demand for coffee from cafe A and/or B? Might one supply curve be higher? Might one demand curve be less elastic? Remember, we only know the market price, not the market quantity.

This is the stuff we’ve learned so far: how markets clear, and at what prices. What we’re coming to is why, or under what conditions, consumers decide to participate or not in that market, at that price.

China’s SimEconomy: a USD200bn foray into Sovereign Wealth Funds

This is not the first time. According to Wikipedia’s quite capable explanation of the phenomenon, China has about USD300bn of the estimated USD2.5tr total wealth belonging to Sovereign Wealth Funds, sloshing around the world. A USD200bn is nothing at which to sneeze, though.

The Chinese government launched a company Saturday to invest $200 billion from its vast foreign reserves, creating one of the world’s richest investment funds at a time of rising scrutiny of such state-run entities.

Financial analysts are watching to see where the new company invests and the impact on financial markets, especially demand for U.S. Treasury securities, in which Beijing holds a big share of its reserves.

Beijing announced plans for the fund in March in hopes of earning higher returns on its $1.3 trillion in foreign reserves, which are the world’s largest.

The announcement also mentioned the fund “starting out” with USD200bn – suggesting that, should said fund make money (or otherwise assist the economy of China), it could easily see it capitalisation expand in big increments. The world is already reacting quite predictably:

An official involved in creating the fund told The Associated Press in May it was likely to try to avoid causing political strains by buying minority stakes in companies abroad rather than pursuing outright takeovers.

Chinese companies have been uneasy about foreign acquisitions since an uproar in 2005 over state-owned oil company CNOOC Ltd.’s attempt to acquire U.S. oil and gas producer Unocal Corp. CNOOC dropped its bid after American critics said it might endanger energy security.

Some officials and economists want the new fund to finance foreign expansion by Chinese companies or buy oil and other resources needed by the country’s booming economy.

The rapid growth of such sovereign wealth funds run by Asian and Middle Eastern governments has raised questions about their intentions and impact on financial markets.

The European Union might restrict investments by government funds unless they disclose more about what they invest in and why, the top EU economic official said this week.

“If they don’t agree to these criteria, we can find good reasons to react in some cases,” EU Economy Commissioner Joaquin Almunia told London’s Financial Times in an interview.

China’s investments have drawn special attention because of the country’s large and growing economic and military might.

Again, and I’m pretty sure I’ve mentioned this previously: I don’t much agree or disagree with economies that benefited from gunboat diplomacy or their various East India Trading Companies turning about and lowering booms on anyone else trying to join their club – same goes for nuclear power – but it is hypocritical. Very, very hypocritical. Particularly when said countries (and this goes, also, for the nuclear question. Particularly given who has actually dropped Atomic bombs on whom) blithely overlook their own histories and the sources of their wealth.

But, then, why not? Who among the Bush supporters can even identify, still less justify, just where his family’s money and passport to aristocracy came from? Hint: grandfather made money with Hitler, great-grandfather (yes, America, there is an aristocracy – and you aren’t invited) profited as an industrialist and chief of the Ordnance, Small Arms, and Ammunition Section of the War Industries Board in World War I. The one before that was a Reverend. They didn’t so much enter US 20th Century aristocracy as help found it.

The trouble with globalisation is not, necessarily, things like Sovereign Wealth Funds, which we attack as destabilising while agreeing, in principle, to idiot notions like merging the New York and London Stock Exchanges. The principle problem with globalisation is that we’re all trying to participate in it while some people/countries believe they ought to own it. Or, like the US, are terrified of a financial world in which they cannot hope to participate, owing around thrice, in debt, that which China alone has in ready cash.

Newsweek knows inflation

And has a very entertaining way of talking about it. Even down to the illustration!

There’s No Inflation (If You Ignore Facts)

…

Catch that bit about “core inflation”? That’s Fedspeak for: inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month. Factor them in, and inflation is about as moderate as Newt Gingrich. In the first eight months of 2007, the consumer price index—the main gauge of inflation—rose at a 3.7 percent annual rate. That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting) while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).

…

In the United States, companies are passing along high-er commodity and fuel costs by boosting prices, slashing portions and tacking fuel surcharges onto things ranging from deliveries to lawn service. And because food and energy prices are so visible—the prices are posted in public, and consumers buy these goods frequently—price increases have a disproportionate impact on perceptions of inflation. Each month the Conference Board asks consumers what they expect the rate of inflation will be for the next 12 months. The figure has been above 5 percent since April.

Told you. The article also contains an interesting tie to China, and a wonderful pat on the nose with a fist for Alan Greenspan (I just withheld about a thousand hyphened-in insults, all deserved):

There are sound macro-economic reasons to believe higher inflation may be a fact of economic life, according to former Federal Reserve chairman Alan Greenspan, who discusses the topic in his new memoir, “The Age of Turbulence.” (Apparently, the editors killed the original title: “The Dotcom Bubble Wasn’t My Fault. Nor Was the Housing Bubble.”) Greenspan notes that vast anti-inflationary forces in the 1990s—especially China’s emergence as a low-cost producer of goods—helped tamp down prices. But China’s rampant growth and rising living standards could encourage inflation. “China’s wage-rate growth should mount, as should its rate of inflation,” he writes.

Indeed. China’s CPI leapt forward 6.5 percent between August 2006 and August 2007, the highest rate in 11 years. One of the main culprits? An 18.2 percent year-over-year increase in the price of food. In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States.

…

China is bound to export its inflation—it exports everything else, after all—either in the form of higher prices for toys, or in the form of higher global prices for the commodities it consumes in increasingly huge gulps. The Wall Street Journal noted that iron-ore producers are about to ask for a 50 percent price increase for 2008, thanks to rising demand from Chinese steelmakers. Chinese car sales are up 25 percent through August, which helps support oil prices.

The punchline? That we delight in China’s ham-fisted macro-economic management (seriously, export tariffs?), but the Fed’s response to inflation – abject denial – is more like China’s response to SARS (“Problem, what problem? We just lock all our hospitals from the outside ’til they die or improve. No problem”).

The article is well worth reading in its entirety.

I sure am looking forward to teaching macroeconomics later this semester…

This will never be an academic blog

I could settle for academic-ish. Do you like Radiohead? I periodically re-discover this wonderful video somebody made, of the song “Creep”.

Royal mail update x

Oh, Royal Mail. Why do your workers insist you bleed slowly to death?

The main postal union, the Communication Workers’ Union (CWU), has announced further details of its forthcoming UK-wide strike action.

Its 130,000 Royal Mail members will walk-out for 48 hours between noon on Thursday, 4 October, and the same time on Saturday, 6 October.

A second 48-hour strike will take place from 0300 BST on Monday, 8 October, to the same time on Wednesday, 10 October.

What is it about this time? The same thing it’s been about every time.

At the centre of the dispute is the CWU’s objection to the Royal Mail’s 2.5% pay offer and modernisation plans.

The union claims the shake-up plans will put about 40,000 jobs at risk.

It just doesn’t change. This time around, managers look like joining:

Royal Mail managers look set to join postal strike action over cuts to pensions.

The managers have previously stepped in to provide cover during strikes by Royal Mail workers but they look likely to join the strikes, according to the Unite union, which represents 12,000 Royal Mail managers.

I’m somewhat sympathetic to the Royal Mail. Somewhat – as I’ve said before, irregardless of the reasons why the Royal Mail has come to this point, 40,000 of its jobs are at risk because it has lost its monopoly on mail delivery in the UK. Soon it will also lose its functioning monopoly on “lest-leg” (i.e. to your door) deliveries. And it’s bleeding customers.

It can lose 40,000 jobs and fit in, in this new world, or it can keep the 40,000 jobs and lose itself. The insistence of workers on striking just seems to me cutting off one’s nose to spite one’s face. Or however that goes. This insistence is common, and commonly justified, by unions. It can easily be true that the a company is being pared back while its own executive level bathes in cocaine and leather-upholstered meeting rooms. I just don’t see that at the Royal Mail.

And I’m Australian – I won’t even cross a picket-line. Also, I’m less sympathetic to going after pensions. These people worked to your conditions, for the fixed income in retirement that you promise. Leave them alone.

In the interests of balance (not to mention interest), another perspective:

Mail Bosses Want to Smash Union

With the announcement of new strike dates by the Communication Workers’ Union (all out on 5, 6, 8 and 9 October, with rolling action after that), the Royal Mail bosses have decided to go for broke — for instance by announcing a drastic attack on postal workers’ pensions.

Okay.

How to create mega-farms in 2 easy steps

Crikey has an excellent perspective running on the recently announced plan for our government to under-write, with our money, the getting-out by farmers of a game with moving goalposts.

The Murray River irrigation system was installed to maintain a constant supply of water to a huge agricultural area to maintain crops, orchards, dairies, and to drought proof agriculture in the region. And it worked, up until now.

Initially water quotas were hopelessly over-allocated to everyone in the system by a burgeoning bureaucracy keen for income from each unit traded and in which the bureaucracy determines the costs. The idea is that the “most efficient” would have the capital to buy water in lean times and they would yield the most dollars profit per unit of water.

The corporate sector was drawn to higher catchments in Queensland where allocations could be caught and stored from reliable wet season rain. In dry years this leaves little for downstream, and now every flow is captured by a complicated system of lochs, weirs and dams in an effort to sell water to customers, some of whom also capture water for resale.

Any water savings made by piping water do not go back into the river – they have to be traded. That brings us to the package announced by the federal government this week, aimed at buying out “inefficient farmers on marginal land” — it will see even these farms put into more intensive production.

This runs with the same logic that “if you make guns criminal, then only criminals will have guns.”

This, by the by, is another contributor to the crops actually grown – this idea that financial yields are the big payoff. Crikey writer Lionel Elmore comments on the land/water ‘problem’ being a fault of government, rather than farmers. I still think farmers have a responsibility to use resources wisely. Amongst other things, profitable crops do not prepare one for purchasing water during bad times, if those same crops require tonnes of water more than others.

The fault of the government lies in the fact that the current system of water allocation was set up to maximised government revenue, at each level, while taking advantage of the irrationality of individual agents in the market. Eco 1 students, this is Bad Government: government’s intervene to correct irrationality in a market for common resources, not secure money and votes (this is what comes of replacing government with politics).

So to the point of the government’s two recent moves which, embarassingly, I had not connected myself: first, cut off all water allocations to zero – including, along the way, left-over allocations that farmers had thought they’d paid for and secured; second, start offering cash and other incentives to self-identifying ‘inefficient’ farms – those who see into their own future, and see they will not manage to keep their heads above the water they won’t be getting anymore.

Result? Instant horizontal integration. After a fashion. Because ordinary farms will not have the capital, either, to start expanding out over farms far downstream, to which they can apportion the water they’re taking upstream. Who, one wonders, would have that sort of clout? Corporations. The bane of Adam Smith and sensible economic markets everywhere.

With reasonable food prices, it is unlikely that family farmers, with diversified and existing infrastructure, will not be automatically replaced by the corporate sector.

Yet the Victorian and Federal Governments are looking to severely cut water allocations to accelerate this “reform” with zero allocations. It will kill off orchards and vineyards established over decades. This “economic reform” in the form of cash payouts is precisely what taxpayers are being asked to subsidise.

Yes, mega-farm corporations, foreign or existing, or any other corpoation, foreign or existing (or, God help us, Private Equity), can probably anticipate a few deals handing them enormous, horizontally-integrated agri-businesses, in a few months. Economics implications?

First: farms fall into fewer but larger and wealthier hands. Political power also increases. The result will be not less burden of these enterprises on our taxes, but greater. This time, though, our money will given, like the increases in your water and electricity bills this year, to shareholders, banks, etc. Enjoy.

Second: out the other end, will food prices decrease? No. For a start the margins demanded by a family farm are far less than those demanded by fascist suits in air-conditioned offices in Sydney or New York, or their silent partners or shareholders. Half of the reward for a farmer is being on the farm.

Will water allocations become more sensible? Also no. They will appear to become more lucrative, and more efficient, when in fact they will also, like military aid to countries who buy our gunships, be under-written by our tax money. Will ‘the land’ be safer, or used more sustainably? Also, probably, no. Political power of ordinary re-election-chasers, in the face of large agri-businesses, will not be sufficient to halt, or even lessen, the tragedy of our commons (again – this is why Adam Smith did not want corporations ruining his invisible hand).

Which is efficent, if you think about it. Just not, really, in any of the ways we would choose, if given the choice.

Dollar sinks as gold hits 27-year high

That wasn’t even the cool part of this:

The dollar hit a record low against major currencies and gold reached a 27-year high on Friday as investors ignored data suggesting that inflation moderated last month.

Over at the blog The Big Picture, yesterday (or earlier) I saw a terrific term coined for this idea of defining inflation ex-food and ex-fuel (you know, those two things appreciating rapidly, that everybody has to buy): Inflation ex-inflation.

Nice, no? It was in reference to a very cool piece on Bloomberg about the inflation scam (not the conspiracy theory-ish one, but the actual bullshit idiotic idea that we can define inflation as not including food or fuel during an era of depreciating dollar value, terrible crop yields and peak oil).

As the Big Picture noted, if we used inflation properly, it would wipe out most of the advance in GDP over the last however-many years. Just like a jobless recovery and dead flat incomes, the US’s GDP hasn’t moved under these years of GOP economic management (since, according to Greenspan, it’s certainly nothing he did).

So. Sinking dollar, increasing costs. All those appreciated assets (including houses), all undone. My colleague was telling me the other day that he had seen what had been instability in the nominal world, say (the world of interest rates, inflation) not defeated, just moved into the real world (the world of shit you need to buy, to eat and get to work).

Speaking of assets with questionable ‘real’ value: when is a bank a domino? Hopefully not now.

In other news, I finished my revisions, won’t get my PhD taken away from me, and can pretend for about 3 days that I never have to think again. I intend posting, at some point, something actually relevant to what I do. For now I’m just plain tired.

We respond to the risk of getting away with breaking the law

Or, as Thom Yorke once famously said, the more you drive, the less intelligent you get.

The Roads Minister, Eric Roozendaal, has backed away from his promise last year to enforce school-zone speed limits by rotating covertly monitored mobile speed cameras across the state.

Instead, fixed cameras will be installed in just 50 school zones in NSW, meaning almost 11,000 school zones have infrequent and sporadic police enforcement.

So, “rotating covertly monitored mobile speed cameras”: there is a single manner in which a permanent stop would be put to all speeding. By ensuring, publicly, that every inch of road had a speed camera pointed at it. I.e., ensuring, and making publicly known, that your probability of not being caught speeding was exactly zero. Anything less will not be effective. Double-demerit weekends work fine, because they usually include (or at least imply) elevated policing – i.e. the chances of being caught go up.

This, by the by, is also among the reasons why capital punishment is idiotic. It’s just a human logic problem: we’re hyperbolic discounters. We just do not properly value – or evaluate – the consequences of our actions. Especially when behind the wheel.

So, this reaction:

In May last year, Mr Roozendaal announced an initiative to use mobile hidden cameras, warning that “any school zone could have a camera in it”.

is wrong. The message to motorists would be that any school might not have a camera in it – unless there were simply far more zones with them, and this were known. I would say (without any analysis at all) that anything, certainly, below 50% would be ineffective.

Also this:

He said Mr Roozendaal had been “rolled” on the initiative by his cabinet colleagues, who feared a political backlash about revenue-raising from drivers caught by covert cameras.

is probably true but, on the part of motorists, equally wrong. If we honestly believe we will be caught speeding we will not speed. Ergo: the government will invest in all the cameras and earn no money. Which is fine (full disclosure: as well as an unsympathetic non-motorist, I am also an unsympathetic non-road-law-breaker, non-life-threatener, and so forth. Speeding motorists are complete twats).

Using roving, probabilistic methods of policing, however, only ensures that people will speed. Because people will believe they can get away with it. Anything other that total saturation is in fact revenue-raising, but motorists just refuse to see the basic calculus at work. Just like Thom Yorke said.