31 Oct 2014

Friday party!

Caught these cool cats on Rue Notre Dame in Bordeaux:

Bleg: The history of non-revenue water as a concept?

TL emails:
I am looking for someone who can help me track the history and evolution of NRW as a concept/methodology. Any ideas who I could talk to?

I have read a lot of general and context specific reports and done an embedded interview study with a water utility, but I have never found an expert who could articulate the concepts' institutional foundations. Any ideas?

Bleg: Coefficients of industrial water consumption?

DC asks:
I´m looking for industrial and commercial water use in terms of consumption. The most useful database would be consumption by industry and commercial by sector (as many as possible) expressed as as a coefficient (for example, gallons per employee). Any kind of additional data (locations, periods, country, etc) would be very useful too.
I'd add/suggest that the data be based on units of production (e.g., tons of water/ton steel) or value (tons of water/$ revenue)

30 Oct 2014

Economists are not the only ones...

Speed blogging

  1. Mangroves store carbon, protect juvenile fish and diffuse flood damages. Too bad corrupt governments ignore those public benefits for cronies' shrimp farms. Related: How to use nature (swamps, etc.) to absorb higher water flows due to climate change

  2. Americans in the West use far more water... because lawns. Remember that when you drink dust

  3. Another parallel between California and India: Rich farmers can drill deeper wells than poor households [Indian version from 2009]

  4. Market failure: water prices in Chile do not reflect [enough] scarcity because the value of water (its market price) is too low relative to investment and operation costs. The implication is that water will be overused (and depleted) too quickly, e.g., "in CopiapĆ³ (in the desert of Atacama) people irrigate grass lawns and wash sidewalks to reduce dust" :(

  5. Tufts University is offering a 4-week MOOC -- "The Biology of Water and Health" -- starting 4 Nov (free or paid)

  6. This paper comparing efficiency in public & private French water utilities finds (contra their "conclusion") that they are similar, once you consider taxes, debt, and tariff schedules. Regulation matters!

H/T to MV

29 Oct 2014

Bleg: How can I get started in environmental sustainability?

J, a former student, asks:
I'm living in Toronto and I'd like to work as a consultant on environmental sustainability. I majored in economics and minored in Geography, but I seem to lack the knowledge that people get from environmental engineering. Can you give me some advice on skills to learn (more education? professional certificate)?

The Armchair Economist -- the review

I assigned Steven Landsburg's book to students in my Principles of Economics class (their first economics class) because I wanted them to read a "popsci" book that would help them see "the economics of everyday life" (the book's subtitle). I'm glad I did, but I had to make a few corrections of Landsburg's perspectives in class. I don't think that's a problem -- economics is not always a "science" -- but it's worth remembering that some of his assumptions and/or logic may not survive scrutiny. That's probably no great shock to Landsburg, who's presenting an "armchair view" of numerous complex issues.

More important for some of you: I decided against Freakonomics (too pop), The Economic Naturalist (too many just so stories) and Economics in One Lesson (too dated) when choosing this book, although all these books have something to recommend them.

So here are a few comments on Armchair Economist*
  1. Overall, I found the book to be breezy, but sometimes too breezy. I recommend readers pursue their favorite topics on blogs, which are now far more dynamic, detailed and accessible

  2. Landsburg gives lots of great, common sense explanations for everyday phenomena, e.g., the role of asymmetric information with insurance, why weird people are the best ones to trade with, who really earns monopoly rents (the owner of scarcity), that BOTH sides -- exporters and importers -- benefit from trade, and so on

  3. He also spends some well-deserved pages explaining how economists are far more interested in happiness than wealth (something that regular folks should also consider more often), how a good policy may not be a great policy compared to alternatives (opportunity cost), and the most important policy question: you enact a policy that changes rules "...and then what happens?" I try very hard to impress these ideas on my students as they are perhaps the most useful economics can give

  4. Landsburg covers Rawlsian justice, the opportunity cost of the draft ("free" labor isn't free), and the useful tool of redistributing wealth among citizens rather than (inefficiently) redistributing opportunities. These discussions -- and others -- should help readers see the "fair" side of a discipline which is often (ignorantly) characterized as a "neoliberal justification for exploitation"

  5. I enjoyed his (macroeconomic) discussions of taxes, spending and debt as well as his simple but powerful defense of free trade (and attack on special interests)

  6. Landsburg sometimes misses critical elements, e.g., the importance of work per se over the wages that work deliver, the positive externalities of literacy (educated citizens), and/or the "irreversability problem" that makes it much harder to return a parking lot to rain forest. His last chapter -- "Why I am not a [ideological] environmentalist" -- is useful for its analogy to religious zealotry, but a failure when we compare the impact of religious people (reading old fiction) to the impact of "earth killers." Overall, Landsburg should spend a little more time on negative externalties that cannot be addressed by simple Coasian (common law) methods, due to their large scale (transaction costs)

  7. Most readers will be interested in some of these issues. Landsburg's contribution is to present a different -- often original -- perspective on their incentives and impacts, which will keep curious readers engaged and biased readers enraged.
Bottom Line: I give this book FOUR STARS for its engaging and provocative discussion of many important areas of our everyday life.

* I realize that my reviews tend to be "note heavy" and structure light, but this is easier for me. Look up the table of contents (or wikipedia for well-known books) if you want more on the structure.

28 Oct 2014

I'm teaching common pool resource challenges!

The class will take more than a few minutes, but it's good to notice when we succeed:
Wikipedia, along with open-source software and other free collaborative projects, are examples of “commons-based peer produc­tions... in which the central characteristics are groups of in­dividuals that successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands.” These motivations include the psychological reward of interacting with others and the personal gratification of doing a useful task.

Anything but water

These threats are unlikely to kill you
  1. The "clean coal era begins" with a carbon capture and sequestration project in Canada. I see this as a greenwashing excuse to keep buring coal, and I doubt that it will (1) ever capture enough to retard the onset of climate change or (2) work "forever" as required

  2. Americans worry about Ebola and ISIS due to their failure to grasp basic statistics? The real threats are guns (3), traffic accidents (2), and heart disease (1). Related: The UK Independence Party takes advantage (and promotes) innumeracy so that frightened citizens vote against a flood of muslims stealing welfare (lies x3)

  3. Judges for sale in the US? Why not? Corporations are people and money is free speech (reminds me of this Grisham book, based on fact)

  4. Crony capitalists in Tunisia got monopoly profits and paid lower taxes. That corruption suggests a solution for Tunisia's future as well as a way of defeating terrorists:
    The Arab world’s informal economy includes vast numbers of potential Islamic State recruits—and where they go, so goes the region. It is widely known that the Arab Spring was sparked by the self-immolation in 2011 of Mohamed Bouazizi, a 26-year-old Tunisian street merchant. But few have asked why Bouazizi felt driven to kill himself—or why, within 60 days, at least 63 more men and women in Tunisia, Algeria, Morocco, Yemen, Saudi Arabia and Egypt also set themselves on fire, sending millions into the streets, toppling four regimes and leading us to today’s turmoil in the Arab world.
    These suicides, we found, weren’t pleas for political or religious rights or for higher wage subsidies, as some have argued. Bouazizi and the others who burned themselves were extralegal entrepreneurs: builders, contractors, caterers, small vendors and the like. In their dying statements, none referred to religion or politics. Most of those who survived their burns and agreed to be interviewed spoke to us of “economic exclusion.” Their great objective was “ras el mel” (Arabic for “capital”), and their despair and indignation sprang from the arbitrary expropriation of what little capital they had. Bouazizi’s plight as a small entrepreneur could stand in for the frustrations that millions of Arabs still face.
  5. How do you build a successful startup? "(1) Learn a lot about things that matter and then (2) work on problems that interest you (3) with people you like and respect." (0) Read this insightful essay
H/T to RM

27 Oct 2014

Monday funnies!

Afroman is back, telling you why you should VOTE for people's right to get high

Reviewing Libecap's review of Living with Water Scarcity

I was pleased to see a review [page 7-9 of this pdf] of Living with Water Scarcity in Regulation, a monthly quarterly review published by CATO, a free-market think tank based in Washington DC, but then I was disappointed.

The author of the review, Gary Libecap, is a professor at UC Santa Barbara with decades of experience in water economics. We can see the depth of his experience in the review, of which two-thirds is devoted to his work and one-third to my book. This is a pity not due to the lack of space for my ideas but for Libecap's extended "rebuttal" of ideas I do not hold and his omission of ideas I propose to put his life's work into use.

Let's start by acknowledging Libecap's contribution to the role of property rights in enabling markets for water for economic use, as well as the importance of minimizing interference with markets by overweening regulators or citizens invoking a "duty to public trust" as an excuse to nullify or restrain the use of rights. These factors are indeed important when discussing water markets. Libecap, sadly, appeared to miss my extensions of his ideas. On Page 66, for example, he says:
Auctioning would confiscate existing prior appropriation rights, not strengthen them... water would be moved from existing owners into the political process... the discussion does not make clear whether such auctions would be recurring, or... whether water could be traded subsequently.
In my book, however, I address all of these concerns, i.e.,
I designed a forced market that was not an oxymoron. An all-in-auction (AiA) puts all rights (or allocations) into a pool and allows eligible parties to bid for that water in a single-price auction. The key innovation is that the proceeds of the AiA are distributed among those whose rights are auctioned. The AiA moves water to those who value it most without violating the rights of owners because owners can "bid for their own water" if they want to keep it... AiAs should be matched to local conditions [i.e., in frequency or as complements to existing markets]. Rights owners decide who can bid.... Note that this market --- like any other --- can reallocate permanent rights or temporary flows. [p 54]
Libecap's critique, in other words, does not apply to the auction I describe in the book. But what about his concern that the "public trust" will impede market efficiencies? On page 65, he says:
Zetland allows the public nature of water to confound potential private solutions... The community is never defined, and why politics fails in one case but not the other is not explained... [and] how will scientists weight the value of competing uses or opportunity costs.
It's unfortunate that Libecap failed to notice that I had addressed exactly these problems, i.e.,
Interacting economics and politics complicate water management. I have tried to simplify matters by grouping chapters into two parts. Part I covers economic topics in which one person's action or water use does not necessarily affect others. A bottled water company need not affect agricultural irrigation; long showers do not prevent green lawns. Part II covers political topics in which people's decisions or uses interact. A dam changes flood risks, environmental flows, and the cost of irrigation. The separation of personal topics in Part I from social topics in Part II clarifies whether we should rely primarily on economic or political tools...

The book's ordering of parts and chapters does not imply that water should be managed in that order. Indeed, it is often necessary to resolve political issues before implementing economic policies. It is not possible, for example, to set the right price for drinking water without an engaged and knowledgeable regulator. Allocations to farmers should, for similar reasons, only occur after water is set aside for the environment. [pp 4-5]

From this, we address his worry about "political interference" in markets for water as a private good while allowing for a political discuss of social allocations of water as a social good. What about over-conservative scientists? On page 90, I say
Greater environmental flows will upset some people and please others. Some people will change their habits or business models. Others will gain (real or imagined) benefits from increased flows. Extraction limits can be administered with prices, regulations, or other techniques, but their level needs to be agreed upon though a political mechanism that reflects social priorities.

"Acceptable" levels should not be set by those with an interest in diverting water. They should be set by scientists who understand the connections between flows and healthy ecosystems. Scientists may be vulnerable to the bias of reserving too much water for nature. That means we should make changes if their recommendations lead to outcomes that over- or undershoot the community's ecosystem targets. These adjustments will add or subtract water available for private uses, but a two-step allocation (reserve environmental flows before allocating remaining waters among human uses) is much easier to manage than balancing between "co-equal goals."
I don't know if Libecap read that passage or if he distrusts my mechanism, but his response -- "Private water rights are routinely traded for augmenting stream flows by Oregon's Freshwater Trust" [an example I also mention] -- does not even come close to supporting his conclusion that such an example proves that "state environmental mandates are not necessary to protect aquatic and riparian habitats" [p 66]. I wish that was true, but ill health of rivers in the US (and around the world) shows that Libecap's solution is far from being implemented on any reasonable scale. "Flow augmentation" will not restore the Colorado River Delta, let alone protect ecosystems under assault in Europe, the Middle East, South Asia, China, Brazil, and so on.

Finally, we need to consider the audience for my book: people who want to know more about how to manage scarce water to balance among different economic and social demands. Libecap's review will cover familiar ground for CATO's government failure choir. I know those tunes, but I have also spent a lot of time with people opposing those arguments -- people who hold sensible views in terms of logic and passion. I wrote my book for both groups in the hope of creating consensus on reasonable steps. Libecap missed an opportunity to evaluate this middle ground when he argued against a straw man I've never met.

Bottom Line: I hope Regulation's readers put Libecap's perspective aside until they form their own opinions. It will only take them a little time with the book (free download!) to read what I really said on liberating water management from dysfunctional perspectives and outdated institutions.

24 Oct 2014

Friday party!

Some Australians having fun

Speed blogging

These "lily pads" clean water (cost needs to fall)
  1. News from Chile: Water market participants are more efficient with water than non-market participants and new challenges facing water suppliers who now provide drinking water and wastewater services to 99 percent of the population

  2. California bureaucrats are "trying really hard" (but not doing so well) when it comes to following their own conservation mandates

  3. These Silicon Valley guys are drinking recycled water (toilet-treatment-tap)

  4. Biased source, but Westlands has indeed swung a nice deal (free water, lots of money) out of the Feds. Rights or corruption?

  5. Monterey residents are protesting "unfair" water rates. CalAm's rates guy emailed me an explanation:
    Residents are billed on an allotment based structure where the more used the higher the terminal rates. Non-residential are billed on compliance or non-compliance with best management practices and the amount of outdoor watering. Residents are protesting that non-residential are billed on flat rates per division (based on compliance and outdoor watering), so they have a "sweet" deal. We have strongly defended the current structure since the two lowest residential tiers are less than the lowest non-residential rate and over 80% of residential consumption being in the lowest two tiers.
    So, let's not defend the "water hogs," eh?
H/T to ML, RM and SS

23 Oct 2014

A few thoughts on California's Proposition 1

California Proposition 1, the Water Bond (Assembly Bill 1471), is on the November 4, 2014 ballot.

Here are my few thoughts on this $7+ billion bond.*

NB: I am ignoring the (possible and probably likely) existence of federal, state and local laws and financing relating to these topics; the possible conflict among these topics; the probability that some/all of these spending priorities will be blocked by lawsuits; and the typical complexities of implementation. All of these issues are likely to reduce the effectiveness/impact of this bond's promises.
  • $2.7 billion for water storage projects, dams and reservoirs. Waste of money, given that most storage is now empty and the best way to store water (moving forward) is in aquifers
  • $1.495 billion for competitive grants for multibenefit ecosystem and watershed protection and restoration projects. Reasonable idea, in terms of spending on public goods. Tricky to turn "competitive" into "results." Does not make sense in cases where ecosystems have been damaged by urban or agricultural activities. Difficult to justify if the money is going to some regions but not others, as this cross subsidy may not benefit net payers
  • $900 million for competitive grants and loans for projects to prevent or clean up the contamination of groundwater that serves as a source of drinking water. This should be paid by polluters (farmers and industry)
  • $810 million for expenditures on, and competitive grants and loans to, integrated regional water management plan projects. "Plan projects" should be paid by the regions involved
  • $725 million for water recycling and advanced water treatment technology projects. No point in subsidizing industry for development. Water utilities may want to, in exchange for equity or discounts
  • $520 million to improve water quality for “beneficial use,” for reducing and preventing drinking water contaminants, disadvantaged communities, and the State Water Pollution Control Revolving Fund Small Community Grant Fund. Again, should be paid by polluters. If they are bankrupt (you know, like Westlands), then the State can pay this
  • $395 million for statewide flood management projects and activities. Again, a regional concern. The Dutch tend to subsidize flood projects at the national level, but they are far more united
  • Oh, and I don't see anything here about better governance (e.g., groundwater regulation, markets for water, or increasing prices to improve resource use), which makes me worry that voters may tax themselves $7 billion to get no results. (Governance is both necessary AND sufficient to get results. Money is neither -- just look at the $5 billion+ spent wasted on studying the Delta!)
Bottom Line: The water bond appears to be a desperate plea to throw Other People's Money money at problems users should pay for. Vote No.

* Here are some posts on the 2009-2010 (failed) campaign to spread water pork all over the state: moves ahead, fail [best one], pork pork!, delayed (for now), and some history

22 Oct 2014

Anything but water

  1. Dutch pensions are managed with a firm grasp of reality, unlike American "fantasy plans" that will leave workers in the lurch

  2. It's Final -- Corn Ethanol Is of No Use (except to crooked politicians)

  3. Margaret Mead described how "proper" behavior depended on culture, not moral absolutes. Speaking of culture, we just finished using Small is Beautiful for my microeconomics class, and I'd update my 2009 review to include:
    Schumacher has a lovely vision for how a bottom-up system of production by the masses would work, but he does not describe a strategy for dealing with people(s) who prefer large and ugly, e.g., China, the US, Canada, et al. This weakness puts his advice into the aspirational rather than pragmatic section of my bookshelf.
  4. Bryan Caplan argues that open borders are the best way to help the poor (and ourselves). I asked him:
    What's your response to "they're taking our stuff" when people (a) don't care about the 95% who are better off, (b) don't understand how policy works (e.g., waiting period for unemployment) and (c) support nativist populists (e.g., Marine Le Pen or Gert Wilders)?
    His reply -- "teach them how policy works" -- will not counter their logic. Thus, I stick with my (second-best) idea of two passports for everyone

  5. Russ Roberts's new book on Adam Smith explains how Smith reconciled loyalty to family and society with the efficiency of markets

21 Oct 2014

Ecosystems are complex and amazing

TR sent this nice video on the benefit of wolves to Yellowstone's flora, fauna and (water) flows

The Price of Thirst -- the review

I asked for a review copy of Karen Piper's book because I wanted to take some time with an "anti-capitalist" perspective on water issues (the lead blurb comes from Maude Barlow) whose subtitle is "Global Water Inequality and the Coming Chaos."

This review is based on my reading of one-third of the book (Introduction, California and Conclusion). I didn't read the rest because my objections to Piper's unsubstantiated, biased and inflammatory analysis opinions were coming much faster than insights or useful ideas.

Allow me to explain.

Piper is a postcolonial geographer, which puts her (stereotypically) at the opposite extreme in perspective from economists. I have no gripe with that orientation, as we probably agree 80 percent of the time on the tragic outcomes of abuse of power. Where we differ is in the diagnosis of driving forces, the relative scale of harm from market versus government failures, and the useful responses to these problems.

We also differ in our analytical methods, at least as far as this book is concerned. Piper undermines herself numerous times with cheap shots, unsubstantiated innuendo and non sequiturs.* I really wish that she'd had a stronger editor. This book is too biased to appeal to anyone with a shred of interest in capitalism and markets; it will only serve as a 290pp bludgeon for anti-colonial protestors who have not bothered to check their privileged discourses at the entrance of clear -- or realistic -- thinking.

Rather than respond in a chronological fashion, I will try to distill my remarks into themes:

Corporate vampires
Piper frequently invokes an "us-vs-vampires" image of corporations, as if We, the People, are totally helpless in the face of corporate greed. On page 3, she says:
And now they [Suez, Veolia et al] are mining our water, quietly gaining control over the world's water supplies, with the help of national governments and institutions like the World Bank and IMF... in the future you may be just as likely to be buying your water from China [due to Chinese companies entering the water business] as France.
This rhetorical slant is wrong in both fact and substance. The fact is that corporations are merely one party to ALL water-related activities. Where there is a buyer, there is a seller; where there is a vendor, there is a regulator; where there is a bribe on offer, there is a politician asking for it. This last duo underlines her mis-emphasis on substance, i.e., corporations do not have the power to rule us without the permission from corrupt politicians who have a greater power to allow their rule (more below). Perhaps the root of Piper's misunderstanding lies in her definition of "privatization," i.e.,
Privatization means charging higher water rates or redistributing water to make a personal profit. Theoretically, speaking, privatization means applying a new market paradigm to our water systems, one that sets up the "free market" as the regulator for water distribution. [p 10]
I'd like to find a "free market" in water distribution like the one she describes. As far as my knowledge of the world goes, I've never seen a "free market regulator" -- or anything like such an oxymoron -- in operation.

Multi-lateral (colonial) organizations
Piper's contempt for multilateral organizations like the World Bank and IMF is matched only by her admiration of the United Nations and NGOs, groups that are governed by money and populism, respectively. Although I am sympathetic to the plight of the powerless, I also see the importance of balancing between these interests, rather than taking a sure-to-fail stand with one against the other (either way). That's why I balanced between the two sides, respectively, in Parts I and II of my book. Piper will have none of this, as she puts scare quotes around "cost-recovery", "water pricing" and labels this and that as neo-liberal, ex-colonial, money making ventures. Frankly, I was distressed and disgusted by her populism: many water problems can be traced to under-investment and failure to recover costs (seen those headlines about how the US needs to invest $1 trillion to preserve water services?)

Presumably, Piper opposes the "cost recovery" and "water pricing" that are necessary to protect services, reduce demand, and prevent shortages in California, Sao Paolo, Spain, Saudi Arabia and dozens of other countries and regions. Sadly, she puts the blame for these failures on colonialism without looking for deeper problems. Yes, colonial administration (and ideas) underpin many exploitative systems, but can we blame colonialism for failures in China or South America? How long can we blame them for failures in India, Pakistan and African nations? What about water failures in Ukraine? Shall we blame those on the Russians -- or should we blame the Ukranians (who colonized Russia)? Can Americans blame Britain for disasters in California, Ohio, W Virginia and elsewhere? Piper would have got a lot more traction if she stopped blaming long dead outsiders and looked at today's corrupt, incompetent local failures.

How will you save yourself, without water, Mr. Bond?
Piper loves hyperbole and exaggeration. Her book opens with the 2012 World Water Forum in Marseilles (I was also there). She tries to sex up a boring meeting of ministers (10 percent), businessmen (20 percent) and water wonks (70 percent) with hush-hush conspiracies that were neither new (the World Bank loves dams) nor interesting (water companies had big booths). If her stories were supposed to be insightful, then I'd have wanted to see more facts; if they were supposed to be entertaining, then I'd have wanted to see more sex and violence. The WWF is big and boring, sure, but there are no Bond villains walking around.***

Sadly, Piper resorts to ad-hominem attacks on various engineers and bureaucrats (e.g., Lesseps, Camdessus) as if these men's failings can be extrapolated into a global conspiracy to kill the poor. This mis-emphasis sounds not only churlish -- it distracts from the broader issues of public policy failure (at the Bank but most often in national governments). Her book would have been far more powerful if she had pursued (accidental and intentional) government failure. Instead, she draws false conclusions from imaginary connections, claiming that "by visiting every continent except Antarctica, I demonstrate not only the scope of the problem but also how these stories are interconnected. This is truly a planetary problem" [p 34] Sorry, no. Water flows are global but management failures are local.

The index lacks references to politics, governance and corruption, but Piper discusses these themes -- usually in an upside-down manner. In one surreal passage (p 57), Piper says that California "farmers threatened to sue, and the state could not afford to fight... [so it] was forced to the negotiating table." Statements like these omit the fact that states (anywhere) can do what they want when it's legal to do so or change the laws to make their will legal. Piper fails to grasp (or discuss) this fact at the same time as she misses its corollary -- that corruption ("the abuse of public power for private gain") is directly related to the monopoly power of the state. Farmers, water companies, and even the IMF cannot dictate terms to sovereign states. Those facts mean that states either negotiate because the alternative is "worse" (e.g., privatizing water companies rather than reducing military spending) or because corrupt politicians prefer to sacrifice their people. The important issue here is not that Piper would disagree with my summary (I don't think she would). It's that privatization is only one way for a broke or corrupt state to abuse its people. Another way -- and much more common -- is for the state to neglect or run down the public water utility. That outcome equally or more tragic for water consumers.** Indeed, in her section on "how to profit from a water crisis" [p 26], Piper identifies threats from pollution, groundwater depletion, and climate change. I agree that these are problems, but she jumps from the problems to the "corporations celebrating, rather than lamenting, uncorking champagne as the ship goes down" [p 28]. I would have said "in the absence of governance reforms to counter these problems, people will look for solutions and corporations will step in when government fails to do so," but Piper misses that context. Worse, she jumps in the wrong direction: "Corporations can make profit by raising water rates, cutting spending on infrastructure and labor, receiving government subsidies, and selling more water" [p 29]. And where is government during all this? Presumably no government exists in Piper's neo-colonial hell.

What solutions does Piper propose? She supports the "Alternative Forum" (FAME, in French), which is composed of "happy people of all colors and genders... that promotes the idea that no one owns the water" [p 8-9], which is surely a lovely image, except for its massive failure in addressing water's rivalrous nature. Presumably, Piper would be pleased to allow anyone to take water from anywhere. This would leave poor farmers dry, as their richer neighbors pumped deeper or bribed higher. It would leave the poor in slums without water that was intercepted and routed to rich neighbors. It would desecrate and destroy environments far and wide, as water was taken from rivers and put into cotton fields. Piper clearly misses the basic idea of separating water into private OR communal property. The English say "different horses for different courses," but Piper wants to use the same horse for racing, pulling a cart and sausage (as les FAMEeurs would say).

Her over-simplified view would wreak havoc with our systems of allocating water for food, drinking and the environment, and it's based on ideology over rationality or practicality. Piper dismisses the "language of development... with terms like benchmarking, scaling up and best international practices." Instead she evokes a "language of water [that] is evasive and a trickster [sic]. It is smarter than those in power. It will turn to steam and then to clouds when it is hot..." Piper gets so carried away with her revolutionary rhetoric that she forgets that humans just want water for drinking, bathing, eating and living. Water is not a revolutionary ideology. It's a necessary and rich part of our lives that deserves respect, requires cooperation, and must be managed for safety, efficiency and equity.

In her concluding chapter [pp 222-227], Piper offers a wish list of solutions ("stop climate change, stop throwing people off their land, recognize indigenous knowledge, revive small-scale and local solutions, regulate the virtual water market, imagine alternative economies, imagine an alternative blueprint, and reform the globalization regime") that reflect her anti-corporate, anti-money, anti-globalization agenda more than the real issues in the water sector. I would have given one suggestion -- hold public and private water utilities accountable to customers --  over all of these, but Piper has a different agenda. Indeed, she ends with a sob story about how her ears were damaged at an anti-G-20 rally in Pittsburgh, parting with a final non-sequitur: "Although I learned nothing about water privatization at the G-20, I did learn what its opponents are up against" [p 231]

Bottom Line: I give this book TWO STARS for describing the dark side of water governance failures without providing any useful analysis of how failures arise, or how to fix them. Piper makes 3-4 overwrought, sensationalist statements for every good point, which undermines her credibility at the same time as it distracts attention from real problems. Don't waste your time or money on this book. Go talk to your community's water managers to understand how the system works, where it's at risk, and how you can help.

* For example:
  • "Imagine that we should withhold medical care as... a method of population control... this is precisely what he [Camdessus] is saying about Africa" [p 15]
  • "China owns 9 percent of Thames water... RWE decided to dump American Water on the open market" [p 18]
  • Drinking water was not a primary concern [of the World Bank] because drinking water offered no obvious return on investment" [p 22]
  • The re-emergence of a powerful water industry could only occur through deregulation and force" [p 23]
  • OMG: "Corporations raise water rates as high as they can... unlike public utilities, corporations have to pay taxes... they have high advertising costs, which public utilities do not... layoffs are the main reason for privatization... corporations can require that governments provide subsidies for poor people who cannot pay their bills... cities are losing a permanent income stream from water bills" [p 29]
  • "Water rights and utilities are being bought up at bargain basement rates in the US, thanks to the housing market crash in 2008" [p 32]
  • "The Ganges River is now being diverted to Suez in Delhi" [p 33]
  • "I will show how privatization lead to a growing insurgency in Iraq" [p 33]
  • "My goal with this book is to help return cultural diversity to the management of the world's water supplies... the solutions just need funding and legitimacy" [p 36]
  • "Today, California cities are going bankrupt at a staggering rate... they lose leverage to control their own water supplies" [pp 62-63]
  • "Thus, Fox News" [p 65 -- and yes, no context]
  • "Along with suicides, water cutoffs are increasing throughout Greece" [p 217]
  • "The truth is that the IMF kills people" [p 219]
  • "The price of a thirsty world has been an increase in vultures, or corporations that would steal the last pennies from dying people" [p 221]

** More tragic if you consider the benefit of separating the water company into a "corporate unit" whose operations are easier to understand, before or during privatization.

*** Another howler  [p 30-31]: "The 2008 James Bond movie Quantum of Solace shows an uncanny presentiment about the shadowy world of water corporations... the WWF was like a fundraiser for a Bond villain... in this world, bribery and corruption seem to be an industry standard"

20 Oct 2014

Monday funnies

Speed blogging

  1. Fleck discusses different governance models on the Colorado River (a resource that REALLY needs improved governance). Related: Aquadoc on the "dark side of governance" (i.e., unseen and/or corrupt)

  2. Louisiana politicians dare the federal government to NOT protect "valuable" industry that they are citing in flood plains. Hint: don't play chicken with feckless cajuns

  3. The UN's Green Infrastructure Guide for Water Management [PDF]

  4. Spanish farmers cope with drought reshuffling private and communal water rights

  5. A timeline on California's new groundwater regulations
H/T to RM

17 Oct 2014

Friday party!

This is my bike commute to the pool (and back) through Amsterdam's canal zone:*

* You can run at high speed with HTML5

The middle class is dead, long live the middle class

Many people blame crooked politics for the growing (and ridiculous) income and wealth gaps between the 1% and 99%. I totally agree that corrupt politicians are a big part of the problem, but exogenous pressures from globalization and technological change are also transferring power and money from labor to capital in ways that nobody can stop (except by ending trade and innovation). Those exogenous pressures are affecting people, worldwide, so they will disrupt life in well-managed countries at the same time as they push dysfunctional countries even further towards class warfare (economic chaos and social disruption).*

I'm not going to dispute the claim that technology is cannibalizing "middle class" jobs (law, accounting, engineering, teaching, etc.), as the patterns are already clear. Instead, I am going to offer some ways to offset the inevitable, negative impacts.

Technology is going to result in even stronger gains in income to the creative and capital classes who design the widgets we buy or collect a few pennies from billions of fans. Coming from the opposite direction, we're going to see more people chasing fewer jobs, as technology automates more tasks. Computers are now faster than us at many things (most teens can barely add or subtract these days), but new software is going to make computers smarter than us at many things (doctors are already losing credibility to expert systems). It's not clear that people will enjoy a middle class lifestyle on lower class wages.

There are three possible policy responses to these forces: denial, opposition and coping.

I'm pretty sure that US politicians will go with denial, as their pro-rich policies serve them well [pdf]. Most Americans still believe in "the American dream," even as they commute further for a lower standard of living and smaller chance of their children rising above their socio-economic status. The same goes for politicians in other corrupt, plutocratic countries (Russia and China spring to mind), since they don't really care about average citizens.

Politicians in other countries will go for opposition, in a foolhardy attempt to either soak the rich or block technological change. I'm pretty sure this is the case in Italy, Spain and Greece, where politicians are busy "defending" wages and punishing businesses. Those actions will merely push more activity into the black market and offshore.

Politicians will try to cope with these imbalances in countries where exogenous forces are understood and balanced though social welfare programs. It seems that the Netherlands and Scandinavian countries fall into this category. Coping will mean extending existing programs for job training, unemployment insurance and social housing, but these will need to be augmented.**

Perhaps the best idea is to implement a "basic income" support for all citizens that will (1) help them pay for necessities and (2) work fulfilling jobs that pay less due to automation, offshore competition, etc. Such a program would support work in human services (health, learning, psychology), the arts and other areas that are considered hobbies today. I cannot put enough emphasis on benefits of this program, in terms of human security, fulfillment and cooperation.

I think that a basic income program should be funded with property taxes. Higher taxes on income are unlikely to work, as the rich and corporate can evade/avoid them in numerous ways.*** Higher taxes on consumption would merely push transactions underground. Taxes on property are easy to collect, regardless of ownership or use, since property cannot be hidden and property values are fairly easy to estimate when there's a property market.

Bottom Line: The gains from globalization and technological evolution are going to a smaller group of people. Politicians should allow this process to continue for its economic benefits, but they should tax capital (land) to provide financial support to the masses who must (and should) find their own, not-so-profitable ways of living with dignity in a harmonious society.

* The Economist recently wrote on this topic: Introduction, rewards to capital, losses to labor, the end of development-through-industrialization and potential solutions

** Econtalk has many episodes on labor. This recent one discussed how "technology is a complement for the high skilled but a substitute for the low skilled." They also glossed over a troubling problem, i.e., the last technological wave did not cause huge social problems because people displaced by agricultural innovations could move into industrial and service jobs, but where will those people go when technology destroys those jobs?

*** I reckon that half the corporate fraud and lobbying would disappear if corporations were not taxed. The economic theory supporting such taxes only makes sense in the context of income taxes (i.e., shifting income back and forth between real and corporate "persons").

16 Oct 2014

The risks of cheap water

About a dozen people have sent me this NYT article, and I agree with its point: water for urban and agricultural use is too cheap, which is why demand is outpacing supply.

I sent one correction to the journalist in response to this statement:
"Rates have little relation to water's replacement cost. In Fresno, which gets less than 11 inches of rain a year, a family of four using 400 gallons a day faces a monthly water bill of $28.26. In Boston, where rainfall exceeds 40 inches, the same family would pay $77.73."

Your example misses the fact that prices are set to recover system costs and they usually exclude the value/replacement cost of water. That's why Boston's is expensive: their system is complex, etc.
For solutions to the problem of cheap water, I recommend my cheap free book, which explains how to fairly and efficiently price water in cities as well as balance between environmental and irrigation uses of bulk water.

Colliding with institutional failure

Outdated rules turn crowding into annoyance
I admire the Dutch most of the time for their thoughtful and efficient policies, which makes it all the more jarring to encounter their inefficient and exasperating policies. One such concerns "flow control" in Dutch swimming pools.

I have swum laps in many countries. In most cases, swimmers in shared lanes go in anti-clockwise circles that allow a continuous "flow" of people coming and going off the walls in either end. This first step allows many people to share one lane.

The next step takes speed into consideration, so that swimmers are sorted in to slow, medium and fast lanes. Some pools clarify this sorting with signs that say "move to a slower lane if you're being passed or a faster lane if you're passing people." Proper sorting keeps the flow going by reducing the need to pass, which can be annoying or dangerous (if two passing swimmers meet head on).

The Dutch use the first but not the second method of improving flow, due to a curious tradition of separating swimmers into "snelle baan" (fast swimming) and "borstcrawl" (crawl stroke). The separation by speed and stroke leads to people swimming "fast" breaststroke in snelle baan lanes (there are even slower lanes nearby) and slow crawl in the borstcrawl lane. These divisions leave fast crawlstrokers like me with the choice of passing many breaststrokers in the snelle baan lane (making them mad for swimming the wrong stroke) or passing slow crawl strokers in the borstcrawl lane (making them mad for swimming fast). Some swimmers (nearly always men) kick in your direction or push off in front of you in protest of going too fast in their lane, which is both dangerous and rude.

I've discussed these problems many times with lifeguards, who usually reply "this is the way we've always done it" or "it's in the rules," which are codes for "butt out of our culture" or "good luck getting administration to listen," respectively.

The Dutch are usually quite good at reforming outdated institutions, but this one seems to be stuck. I'm not sure of how to tackle it, but I guess that it will require a debate within the national organization of masters swimmers (or equivalent) due to the need to keep the rules in sync. That may take some time.

Bottom Line: Outdated institutions at Dutch pools have turned a non-rival "club good" into a rival "common pool good" that cannot cater to demand from swimmers. A reform of the rules would make it easier to accommodate more swimmers in a safer environment.

15 Oct 2014

Speed blogging

  1. Kim Weir (Up the Road) wrote a great overview of Living with Water Scarcity in one two three parts

  2. Taps run dry in Porterville, California (due to agricultural overdrafting), but Fleck makes a good point: 99+ percent of Californians are still getting water. My comment? Porterville as a canary does not bode well for California's future. (Neither does San Lucas, whose water is contaminated by ag chemicals)

  3. "Water politics must adapt to a warming world." Where's that? Check out the global drought map

  4. "A Case Study of the Murray-Darling Basin Authority" that may be useful for reforming Colorado River Basin (CRB) governance. Related: The 1975 prediction of the CRB's "water bankruptcy"

  5. Access to clean water is "worth a year of extra education" to rural Chinese children

H/Ts to LB and SC

14 Oct 2014

Anything but water

During the student posts, I saved a lot of cool stuff for you:
  1. "In the Utopia, unlike today, schools would be designed by people who asked systematically about the main problems in people's work and home lives – and then worked backwards" to provide those schools

  2. People think CEOs get paid a lot, but they don't realize CEOs get paid 6 (Poland) to 50 (USA) times as much as they think. How much would an American worker make, at "ideal" rates? $1.8 million. Is American innumeracy to blame? Related: excellent interview on Capital in the 21st Century (Piketty)

  3. The Great Lightbulb Conspiracy gave us "planned obsolescence." Will we see that with CFLs? Speaking of energy, the EU's "renewables" policy is neither green (burning wood from abroad) nor economic (subsidies). FAIL.

  4. The two jobs closest to 50/50 male/female split? Property managers and computer operators. Surprises: economists and mathematicians are 46% and 51% male, respectively

  5. An update on "how we relate," i.e., a person usually has about 150 friends, 50 close friends, 15 people you can trust for support and 5 "best friends." There's also an upscale, by threes. Big "no news"? Social networks don't alter these ratios, since they are more about time budgets than apps

13 Oct 2014

Monday funnies

In his Clio-acceptance speech, Jerry Seinfeld blasts ad-men as liars and worse (I agree):

Want to know how marketeers see YOU? Look up the marketing profile for people in your ZIP code (USA only)

Creating the conditions for change

Dr. Hans Gutbrod (@HansGutbrod) responded to "What can a California state employee do to fight corrupt policy" with some excellent advice:

"I read with great interest your post on the state employee who says that his organization is going around in circles, and who was wondering about how to change things. The question resonated, since I have been involved in a number of situations that required a degree of turnaround. Most of them worked well, though I learned even more from those that failed spectacularly.

I would recommend two books to your correspondent. One is John Kotter, who has written about how to lead change. He suggests an eight step process. This may sound formulaic, but when I looked back at cases of successful change and compare them with cases where the change did not succeed, the comparison lined up rather well with the eight steps that Kotter describes. To initiate change, according to Kotter, you need (1) a sense of urgency and (2) a guiding coalition. As your correspondent describes it, there is not yet any such sense of urgency, and one had the impression that he was relatively isolated. Those are key things that need to be addressed, and Kotter has a number of suggestions on how that can be done.

Note that it obviously is not a formula for guaranteed success. I once found myself in charge of a big project where things were going terribly, in which a key client was telling me that they were unhappy, but where the organization I had just joined was unwilling to change, and my supervisors expressly instructed me not to talk about a crisis, or aspects of a crisis. There was no sense of urgency. I still tried to build a guiding coalition but a power struggle higher in the organization made that difficult. Ultimately Kotter's steps illustrated that the basic preconditions for change were not in place. This in turn was useful, as you do not want to continue spending your lifetime in places that refuse to change. (I departed a few weeks later. The key client indeed stopped working with the organization.)

The second book that is worth reading, even if it is written for the mass market, is "Switch: How to Change Things When Change Is Hard" by the brothers Heath. The authors do an excellent job of highlighting a number of approaches to change, including the focus on the bright spots: where are things already working that could be expanded further. Another interesting aspect they mention (again, it is for the mass market) is the need to "find the feeling". They describe someone at a large firm who wants to streamline purchasing, and has absolutely no success in doing so – until she puts, on a single table, all the gloves that the company has purchased with respective prize tags. Executives review the pile of gloves, realize the disparity in quality, and how sometimes the same kind of gloves seems to have widely varying prices. They recognize that they have a problem, and that it is worth streamlining all the purchasing.

So a vivid and salient illustration of how bad things really are matters. This has also been the experience in my latest project. There has been, for some time, a concern about how policy research is being funded, and how some of that funding remains opaque. Influenced in part by the considerations above (and other research that showed that improvement often comes from wanting to catch up with your peers) we set up Transparify, an initiative to assess how transparent think tanks are about who funds them. We used a simple and robust method to assess 150+ institutions from around the world. Through the five-star rating system, institutions could compare how they were doing in relation to others. In other words, we made transparency transparent. We also gave institutions an option to improve their rating, which many think tanks decided to pursue.

The effort was more successful than we had anticipated, with many institutions engaging positively with an effort that (as someone at a major institution said) essentially "came out of nowhere". We were lucky in our timing (there already was a sense of urgency out there) and we did find good partners (the guiding coalition). More could be said, but the brief sketch illustrates the approach.

Using some of these approaches, I think it should be possible for your correspondent to come up with a strategy, adapted to the very specific situation he or she is in. If your correspondent finds that things cannot be changed from within (by the criteria), then that is also a good indication that it is time to tackle the issue from another perspective, and potentially from another institution."

10 Oct 2014

Friday party!

I've never seen a cat do this, so I filmed it:

The Iowa car crop

This "guest" blog post is a short chapter from Steven Landsburg's book, The Armchair Economist (review coming soon). I'm posting it here as a very fine example of how (1) gains from trade benefit both sides and (2) protectionism harms both consumers AND producers.*

A thing of beauty is a joy forever, and nothing is more beautiful than a succinct and flawless argument. A few lines of reasoning can change the way we see the world.

I found one of the most beautiful arguments I know while I was browsing through a textbook written by my friend David Friedman. While the argument might not be original, David’s version is so clear, so concise, so incontrovertible, and so delightfully surprising, that I have been unable to resist sharing it with students, relatives, and cocktail party acquaintances at every opportunity. The argument concerns international trade, but its appeal is less in its subject matter than in its irresistible force.

David’s observation is that there are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, truck it to California, load it onto ships, and sail the ships westward into the Pacific Ocean. After a few months the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well- being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

There is much talk about improving the efficiency of American car manufacturing. When you have two ways to make a car, the road to efficiency is to use both in optimal proportions. The last thing you should want to do is to artificially hobble one of your production technologies. It is sheer superstition to think that an Iowa- grown Prius is any less “American” than a Detroit- built Volt. Policies rooted in superstition do not frequently bear efficient fruit.

In 1817 David Ricardo— the first economist to think with the precision, though not the language, of pure mathematics— laid the foundation for all future thought about international trade. In the intervening 150 years his theory has been much elaborated but its foundations remain as firmly established as anything in economics. Trade theory predicts, first, that if you protect American producers in one industry from foreign competition, then you must damage American producers in other industries. It predicts, second, that if you protect American producers in one industry from foreign competition, there must be a net loss in economic efficiency. Ordinarily textbooks establish these propositions through graphs, equations, and intricate reasoning. The little story that I learned from David Friedman makes the same propositions blindingly obvious with a single compelling metaphor. That is economics at its best.

* I recently asked the US Ambassador why the ongoing US-EU "free" trade negotiations are taking so long.

He said that there are a lot of interest groups to be appeased, like farmers.

I said "Why farmers? They are only 3 percent of the population."
He said "... but they have a lot of political power."
"So," I asked "you're sacrificing the interests of 97 percent of Americans for a special interest? Doesn't sound like either free trade or a functioning political system to me."
"You hate America, don't you?" he replied.
"No, I don't. Just the people who are destroying it." <== Jon Stewart has more

9 Oct 2014

Should I stay or should I go? Marriage counselling for the UK

Nadine F writes:*

If you haven’t been living under a rock for the past month, you may have noticed that the people of Scotland took part in a referendum last week in order to determine the fate of the United Kingdom. The Scottish people were asked ‘Should Scotland be an independent country? Yes or No’ and they took to the polls in droves. 84.5% of voters turned out on referendum day, and the No vote squeezed through to clench the win, and save the union, with 55% of the votes.

Whilst the pro-independence campaign opted for the punchy name of ‘Yes’, the pro-union side united under the banner of ‘Better Together’. Perhaps not the most inspiring choice of campaign monikers, armed with the entirely uninspiring, (and appropriately British) slogan of ‘no thanks.’

Comedian John Oliver perhaps put it best when he said (in a hilarious pre-referendum broadcast which you can watch here):
It sounds like what people say to convince themselves to stay in a dead marriage, ‘look, look, I’m not saying we’re good together Marion, I’m saying we’re better together. Tax wise it’s preferable to the alternative. Why are you crying, Marion? I’M SAYING SOMETHING NICE.
Perhaps he’s onto something. Perhaps our 307 year long marriage has become slightly stale over time and this referendum was Marion’s final ultimatum to her insensitive jerk of a husband (We’ll call him Billy, after Scotland’s greatest) .

Like all relationships, this one can be broken down simply by looking at what Scotland had to gain and lose in breaking all economic ties with its long time partner, and since the UK has decided to stick it out for the time being, let’s give some suggestions as to how we can get this marriage back on track.

The Yes side is pretty clear on their issues. "Scottish money" from taxes and (most contentiously) North Sea Oil not all being spent in Scotland is a big one. Westminster maintains control over crucial areas of public policy, most notably defence, and huge spending on Britain’s ‘illegal wars’ has been a major source of Scottish disaffection over the past decades. There’s also been a lot of talk about how Scotland can more than provide for itself with oil reserves, tourism, whiskey and renewable energy, and that Scotland is essentially a strong independent country who don’t need no England.

Is this a natural resource? (Photo by Nadine F)
Why? It is true, Scotland’s natural resources are by far its biggest financial asset, with a prosperous oil industry flourishing in the north east, and rumours of untapped reserves worth billions to the west. There’s more to this little country than just that though. Thousands upon thousands of foreign students flock to Scotland every year to pursue higher education, adding significantly to the working age population in the country [pdf].

Leaving, on the other hand, would create all kinds of awkward financial issues; who gets the pound, the pesky issue of dwindling oil reserves, and the swift removal of the safety net which stopped Britain from going entirely down the toilet after ’08. Not to mention the barriers (be they tangible or simply psychological) to the thousands of workers, tourists and students coming in and out of Scotland to and from the rest of the UK every day.

In staying, Scotland is running the risk of the UK tightening the purse strings even further, and investing more and more Scottish sterling in policies that the majority of Scots do not support.

Therapist’s advice:
Billy. Loosen up a little. Marion may be smaller and less populous than you, but she’s pulling her weight, pumping black gold out of the ground and into the joint account, taking in everyone else’s kids for their rebellious student years, and on top of all that she’s still holding onto your nukes for you, even though she hates them and wants them gone. Marion, perhaps your mistake was getting ready to leave, but having nowhere to go. You’re fantastic, and don't you forget it. Keep pushing him for more say on how things are run in your domain, and hopefully he’ll begin to understand.

Bottom Line: As Scotland’s leading historian put it, to justify his pro-independence stance, "there's very little left in the union except sentiment, history and family," and even if we disagree with him on whether that’s true or not, isn’t family still worth sticking around for?

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

In Dutch higher education, the regulator is king

Menno S writes:*

Another day, another alarming report about the erosion of Dutch higher education. The Dutch system graduated about 200.000 students last year from three different systems of vocational or academic training, and all three systems are plagued by complaints about the quality of education.

In my view, these problems are the result of dysfunctional incentives set by the Dutch government, as the provider of the funding for higher education. The government has three goals - quantity, cost and quality - which are in tension with each other. Quality systematically loses out. I think this is due to the incentives created by the government. Investing in students is just not profitable in Dutch higher education, but attracting more students and teaching them cheaply is.

The government aims to raise the number of Dutch students that finish higher vocational training or a university programme to 40% of the working population. This would make the Dutch one of the best educated nations in the world. Thus, institutions are paid per credit (ECTS) a student earns. The only way an institution can earn more is to scale up. And universities have. The number of university students increased from 160.000 in 2000 to 245.000 in 2011.

As the number of students increases, the government must foot the ever larger bill. It aims to keep costs per student low. Budgets for education divided by the number of students have dwindled. While the number of students has skyrocketed, the number of faculty at universities has stayed the same. The list of cost-cutting measures is long. Many programmes have started to enforce a ‘minimum number of credits per semester’, so students who don’t perform can be removed from the college. Universities don’t get paid for teaching a course when a student fails the course. Institutions are penalised when students take longer than three years to obtain 180 credits. Therefore, universities have an incentive to ‘push’ students through the educational funnel by lowering standards.

The government also aims to improve the quality of education. All degree programmes are audited and must pass to receive funding. This system encourages minimal effort (any performance beyond ‘pass’ is not rewarded), but it's also hard to get right. Educating a student is a complex enterprise, and there are few objective criteria for what constitutes a ‘good education’. For the purposes of regulation, ‘quality’ is reduced to a number of criteria which are achieved on paper. The audits are mostly about paperwork: test scores, a clearly structured curriculum, meeting government standards for diploma types and having administration in order. The classroom experience of students is not part of the audit. Educators don’t see auditors in their classroom, and as a result, they report that they don’t ever see upper management in their classroom. Why would those managers come to class? To earn funding for their institution, the classroom experience is basically irrelevant.

To improve the system, the government has to upgrade its quality controls, or give students themselves a more meaningful role in allocating resources. Given the problems with quantifying quality, I support the latter. Give students generous public loan programs to them let them choose between different programs at different prices. In the end, students will always have a greater stake in and be better informed about their education than any regulator.

Bottom Line: While students numbers and expenditures are easy to track and difficult to fudge, quality in education is not captured easily. Dutch higher educational institutions have scaled up, while ‘gaming’ the quality ratings to pass.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

8 Oct 2014

America's prisoner paranoia increases incarcerations

Jan B writes:*

If one looks at the stats, one will find the vast increase in incarceration rates in the US since 1960. Between 1980 and 2012 the numbers have almost tripled (figure at right). Now, this could all be justified. Perhaps the American society is becoming more corrupt every year, organized crime is increasing and criminal offenses are more common. However, the crime rates indicate differently. They have decreased 45% since 1990 (figure below). Then, where is this all coming from?

In the last 50 years, American citizens have responded to complications in a very paranoid way. The red scare, the anti drug abuse act of 1986 and the war on terror are some of the most famous fear campaigns the US has lived since the 1950’s. An American citizen today lives in more fright than he would have 50 years ago. Without any actual wars and only one major attack on its land in the last 50 years it seems quite irrational. However, I do not want to discuss America’s irrational fears but rather the consequences of those.

Governments respond to public fear in various ways. One is certainly the prosecution and incarceration of those who might be practicing that which induces the fear. Those who many call criminals, I would call “fear inflictors." For example, a government might want to convict those people using drugs if the population is very scared of the effect of drugs on society. People are scared, and they want “fear inflictors” locked-up for as long as possible to protect society.

The problem is that fear is creating a dangerous demand. People are scared of drugs, gangs and terrorists. To reduce this fear and increase their well-being, citizens will demand action by the government. The easiest way for the government to satisfy those needs is arresting “criminals”. All these small criminals end up in prison. So really, all the government is doing is producing a supply (of prisoners) that satisfies the demand of the American people for convictions. This is arguably fabricated by the government and promoted by the media but is still up to the people to change.

There are many negative externalities to having an overbooked penitentiary system. One very vivid debate is the penitentiary expenditure vs the education budget. Others include private prisons arising in states such as California. All these problems are often blamed on the government and a solution is demanded. What people do not realize is that their attitude -- demanding immediate action for temporary satisfaction -- is actually creating the problem.

Bottom Line: The high incarceration rate in the US is a government produced supply in response to a high demand urged by the American people.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

How airlines trick their clients

Dennis M writes:*

When travelling by air, customers often get asked whether they are interested in becoming a member of an airline alliance. Being a member of such an alliance offers several benefits, such as receiving access to airline lounges or being able to take along extra luggage. Clients perceive these benefits as rewards for customer loyalty, but it is important to be aware of the fact that in reality air alliances serve a far more self-seeking purpose.

Before the foundation of these alliances, the competition between single airlines was much higher, but today collaboration protects airlines from underbidding each other. In other words, an airline alliance is an establishment that makes sure that airfares do not sink too far. The airlines do this by agreeing on who is offering which service at which price. An important component of this system is the idea of code sharing which enables airlines to share aircrafts and other resources. This business structure allows each airline to save costs and increase its revenue as it gets access to new markets.

In addition, we can observe that there are multiple airline alliances working on the aviation market. The three largest alliances, Star Alliance, Oneworld, and SkyTeam, transport 73% of all global passengers [pdf], which gives them large control over the aviation market. In this market structure, also known as an oligopoly, different airline alliances cooperate with one another in order to prevent any price dumping. This kind of collusion and strategic behavior makes the alliances not only interdependent, but it also enables them to set the airfares at the highest possible price. This would be a price at which each of the alliances is able to make profit, since an economic loss for a certain alliance would force it to lower its prices and the cartel would break apart. In order to increase their profit, alliances aim at increasing their passenger share, but instead of lowering prices, they do this by offering extra services to their members.

The collaboration among alliances profits the airlines that are members of an alliance and discriminates independent airlines and customers. Airlines that are not part of an alliance are increasingly struggling with selling their tickets to customers, as they do not have the same financial means, and are therefore not able to offer the same customer services. The only option left for these firms is to lower their prices, which becomes increasingly difficult as they have to pay all operating costs themselves while alliances are able to share these costs. Therefore, we are, and will continue to see single airlines either going bankrupt or joining an alliance. This decrease in competition will tie travellers even more to the airfares set by the alliances.

Bottom Line: When being a member of an airline alliance, travellers are mistaken when believing that they are profiting from this system. In fact, airlines bait customers by offering travel benefits in order to increase their own profit. This is mainly done through collusion and keeping airfares artificially high. It is of utmost importance that airline clients are aware of this when deciding whether to become a member of an alliance.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

7 Oct 2014

Football, economics, and negotiations

Felix B writes:*

On 26 August 2014, newspapers reported one of the biggest deals of this summer´s football transfer period. The Spanish side Real Madrid had accepted a € 74.95m offer for their Argentinian international, Angel di Maria, from Manchester United. Just one month before di Maria´s transfer, one of Manchester United´s largest competitors, Arsenal London, signed the Chilean international Alexis Sanchez for €42.5m.

This is a significant difference in transfer sums paid, considering that both players share many characteristics on, as well as off, the football pitch. Both play the same position (right-wing), were born in 1988, and come from South American countries. Now, both have been transferred from the two most prestigious Spanish clubs to English ones.

Looking at the performance statistics of the two players raises questions about the difference in transfer prices. In the past two seasons Angel di Maria scored 20 goals and assisted another 44 goals in a total of 104 games, whilst receiving 13 yellow cards, one yellow-red card, and one red card. Yet in the same time period and league, Alexis Sanchez, in a total of 100 games scored 32 goals and assisted 35 goals, receiving 12 yellow cards, and zero yellow-red or red cards.

Analysing the current transfer fees the UEFA president, Michel Platini stated that no player is worth their transfer fee and that these will damage football as a sport. Yet, clubs continue to pay extreme transfer fees, and what is more arbitrary, differing sums for seemingly similar players. Thus the question rises what made di Maria over €30m more expensive than Sanchez. Did Arsenal simply make a bargain and Manchester got ripped-off? Or were there are other factors influencing the value of the two players?

The main problem, involving at least three parties, is based on the question of who (one selling club and at least one buying club) pays for what (the player)?

Football players are legally bound to their clubs, which have the exclusive right to play the footballer. Thus, the selling clubs will have to be compensated to terminate a contract and for the loss of their players, in form of a transfer fee. As such, Real Madrid and Barcelona were the sole supplier of di Maria and Sanchez respectively. This allowed them to set prices higher than the prices that would be found in competitive industries in an attempt to generate monopoly profits. The monopoly effect is not due to the international superstar status of the players but in the lack of reasonable substitutes that give Real Madrid and Barcelona stronger bargaining power.

The monopoly rent argument is the same for both players because both had long contracts at their former clubs. The main difference on the selling side is to what extent the clubs wanted to keep their players. Both di Maria and Sanchez have been victims of new strategies for Madrid and Barcelona. Real Madrid´s corporate strategy requires superstars that are internationally promotable to achieve commercial successes through sponsorship and merchandise. Di Maria has been regarded too introverted to appeal to a diverse international audience, which significantly reduced Real Madrid´s willingness to keep him. Similarly, Alexis Sanchez has been said to be missing the `winning gene´ required at Barcelona. However, only Sanchez has also fallen out with Barcelona´s new manager, Louis Enrique. Conversely, Madrid´s manager, Carlo Ancelotti, always regarded di Maria as an essential part of Madrid´s squad and continued to plan with him. Barcelona's disinterest in Sanchez gave Arsenal greater bargaining power compared to Manchester United in its negotiations with Real Madrid.

The situations at Manchester United and Arsenal also mattered. Every major club follows a certain philosophy to maximize its objectives. That implies that there are some clubs, who are willingly (over) spending to win while others prefer to operate in a more sustainable manner. After Manchester United´s poor 2013/2014 season in which they finished 7th, they publicly promised to spend over €200m on star transfers. This is how Manchester United handed a lot of bargaining power to Madrid, which held their targeted player, Angel di Maria.

In contrast, Arsenal London is well known for its reasonable spending and finished 4th with a young, talented squad in the season 2013/2014. Thus the general need for a player like Alexis Sanchez as well as the club´s inclination to pay higher prices was significantly lower than in Manchester United´s case. Whilst even Arsenal´s manager, Arsene Wenger, publicly announced that he would be investing in the team, he did not reveal Arsenal´s transfer budget or plans. Based on Arsenal´s confidential transfer –conduct and their already in-tact squad, the club did not handle over as much bargaining power to Barcelona.

Moreover, characteristics about a player and his current situation can affect the bargaining power of the selling and the buying club and thus influence the value placed on a player. Although any player has to comply with his contract, announcing the wish to move is a common phenomenon. This wish indicates that a player does not feel comfortable at his current club, which is not good for the current club as well as the player, since it might influence the player´s and/or the club´s performance. In the case of Alexis Sanchez, the Chilean stated that he wants to leave the club, because he does not expect to be playing enough matches in the future. In this manner, Sanchez himself decreased the bargaining power of the Barcelona. In turn, Arsenal gained bargaining power over Barcelona, since the selling team should avoid unsettling the player or the entire team by setting a too high asking price.

Conversely, Angel di Maria did not want to leave Real Madrid and announced his wish to stay at the club several times via newspapers. Thus, the need to sell di Maria as well as the inclination to demand a low price, in order to fulfil the player´s wish, was significantly lower than in Manchester United´s case, because the wish of di Maria was to stay anyways. Based on this wish, Real Madrid gained bargaining power over Manchester United in transfer fee negotiations. As a result, Manchester United was inclined to pay a higher price for its targeted player in order to change the inclination of di Maria and consequently Real Madrid.

Another characteristic of a player is his nationality. Research has shown that Argentinian and Brazilian players may generally come at a premium in the market. This premium relates to the association of ‘specialism’ that can be caused by a general perception of exceptional skill and natural talent of football players from the two countries [pdf]. Thus di Maria might simply provide value through the (perceived) relationship between skills and his nationality, leaving Real Madrid with more bargaining power over Manchester United. In contrast, Alexis Sanchez, coming from Chile, does not have such association with extraordinary, natural skills or talent. Hence, Barcelona´s bargaining power over Arsenal does not improve.

Bottom Line: Economic theories can and should be used to analyse characteristics about clubs and players together with the market power, as they often act as main determinants for the value a club places on a player. The example of Angel di Maria and Alexis Sanchez shows that the value of a football player is based on player as well as market power differences that matter to each individual club differently. Differences that matter also determine bargaining strategies and thus determine where the transfer fee lies.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.