Real barrier facing new development of power plants

Last week I found this article in the WSJ quite interesting. The NIMBY mindset that has impaired building large conventional power plants in US and in many parts of UK has crossed over to the renewables. Yes - we are talking about "green energy" and saving the environment. But not in my backyard. This is a real problem and a barrier to building anything new to address the energy needs. How do we get by this barrier?

Back in the days, when coal and nuclear were built, the big challenges were closing a set of contracts with a bunch of agencies and then arranging financing for the project. With time, the paper work and permit processes increased in volume and slowly projects were not realized because the contracts and commercials did not work out. Structural limitations throttled and abated many technically and economically viable projects. It is at this point where we find so many academic pundits and the "realists" diverge. The realists say structural barriers in contracting throws the economics out of the window while the academicians seem to be still under the belief that the economics work.

In the recent past we have entered a different era --one where NIMBY mindsets, environmentalists, and other special interest groups have been remarkably successful in stopping projects from happening. In most cases, more than the substance of the arguments - the protests are caused by narrowminded local interests providing a fertile ground for local politicians to grab a low hanging fruit to make their political careers.

This is nothing new in the way politicians behave. What is troublesome is that development gets stalled. Over and over again. Narrow selfish interests of a group of individuals overrides national interests. But what bothers me is in recent times the success in getting local interest trump national and general societal interest is quite high. This leads to -- how do we deal with this?

The NIMBY mindset is quite natural but also hard to understand. On one side we are a country of responsible people who send our kids to the war for a national interest. How is it that we can not tolerate a visual change in the middle of nowhere. Is this a mindset created out of perception or are we are ready to do some sacrifices and not something else. Either way, expecting something like green electricity will take some sacrifices just like anything else that came from someone else's blood and sweat -- whether it is the Brooklyn bridge or interstate system -- all of which we take so much for granted. We need to revive that mindset. Question is how. I will keep pondering on that.

VC survey

Here

Extraterrestrial lights as a sign for development

It was interesting to view Paul Romer using lights on earth viewed from space as an indicator for development of that area (country if you will). Even The Economist has an article on measuring growth using these light. Well, it is another way of using electricity as an indicator of development. How valid is this? I'll keep thinking about it.

Efficient Market Hypothesis Now

There has been a series of articles, discussions, and debates on the validity of the efficient market hypothesis in light of the financial crisis. The following pieces are quite interesting.

Link1 and Link2

Problem with the current climate change bill

Prof. Mankiw's article in NYT underscores the fundamental shortcoming of the climate change bill. It gives permits for free which undermines policy being able to creating enough incentives to control negative externalities like dumping CO2 in the atmosphere.

Q&A with Austan Goolsbee

Here

Thaler has a new column

Prof. Richard Thaler has a new column in New York Times.  Here is the first one.

Independence Day

This amazing feat was a part of Belarus' Independence day celebration on July 3.   

Cricket and America

Just a tangential post on a game I am a big fan of.  Nice to see this post from an American viewpoint.  Enjoy!

Link from CFR on economic crisis

Here

Jobs report - Obama's plan working or not working?

Prof Mankiw's post is scary.  One can give the benefit of doubt to the policy makers saying the baseline was overly optimistic (as Mankiw suggests).  But either way -- looks like things are worse than what the government presumed.  If that's the case, where are we headed? Japanese style recession as Krugman suggests.  (In short, Japanese style recession is when there is a slowdown in economy including slow bust of housing prices.  Even if production increases a bit but not enough to keep unemployment from increasing or the machines from staying idle)

Thinking about systemic risks

After spending few years in engineering safety systems for nuclear power plants and the transmission grid - I can say I have a deep sense of appreciation for complex systems.  To me, they are as close as to the proverbial butterfly that flaps its wings in the Amazon causing a storm in Japan.  One of the key design criteria in the nuclear power plant is that it has to be able to shutdown safely if an adverse event occurs.  Thinking for banks, I believe the same can apply.  In case of a major macroeconomic (or other) shock, the bank has to design ways to safely "shutdown" and wind-up without causing a cascading set of reactions resulting in a financial "meltdown" or "blackout".  Anil Kashyap in his FT piece talks something in those lines.  

Debt as a palliative?

In this piece, Ben Funnell asserts that debt has been used to assuage the pain that was caused to the lower income groups as their incomes decreased and while they witnessed the higher income groups becoming richer.  This thought is in line with what Rajan spoke in Chicago Booth's convocation address.  BTW, just free wheeling -- Is it the same reason why student activism has vanished from colleges?  Is it because even before students graduate they are sunk in student loans.  Are student loans a good thing then?  Or, there is a better way for public policy to stimulate higher education but not take away the freedom to stand up against poor governance and be passionate for a cause and take the role of activist to bring in change.

Economics and Pirates

While strolling in World Bank's info shop, I picked up The Invisible Hook.  Boston Globe has got a good review mentioning Austrian economists - Hayek and Ludwig von Misses.  Looking forward to reading this over the next few days.

Not a lack of Regulation but a lack of imagination

Regulation is as good as to what extent people can imagine within the context that particular regulation.  In his op-ed, Samuelson drives this point.  This is important and in a way it lends itself to the belief that there has to be a shift in culture from reckless risk taking to a more responsible one -- treating OPM (other people's money) as if it were your own.  Such a culture should reward self-reporting of potential risks and give incentives who bring forth systemic interconnects that can bring down the house.  To build such a culture may well require a radical event. Imagination like anything else will not have in a vacuum.  Carrots and sticks are necessary to drive this.  And that's not what I see is happening.  I keep my fingers crossed.    

Kevin Murphy

I did not take Kevin Murphy's famed "Turbo economics" (Adv Micro) class when I was in Chicago but I became a fan in the few talks and lectures I was able to attend.  He is one of the very few people who can take complex subjects and break it up, distill, and articulate in a conversation format.  He is sharp, witty, and very insightful. Here's a recent interview. 

Regulation .... contd.

Justin Fox's article on regulation is an interesting read.  To put FDR on the cover of Time and comparing him with Obama is also a clever take.  Well, one way to check how close they match is to see how mad the Wall Street bankers are following the measures both these Presidents have taken. This article from NY Time makes it clear so far - these lines in particular.  

"Wall Street hated the reforms, of course, but Roosevelt didn’t care. Wall Street and the financial industry had engaged in practices they shouldn’t have, and had helped lead the country into the Great Depression. Those practices had to be stopped. To the president, that’s all that mattered."

......"In terms of the sheer number of proposals, outlined in an 88-page document the administration released on Tuesday, that is undoubtedly true. But in terms of the scope and breadth of the Obama plan — and more important, in terms of its overall effect on Wall Street’s modus operandi — it’s not even close to what Roosevelt accomplished during the Great Depression."

In all seriousness, I am hoping to see more from our President.  

Regulation - What kind?

The word "regulation" tends to make me feel uneasy most of the time.  However, over the last week - with the new regulatory measures that was under works by the Obama camp was something I was eagerly waiting for.  The fact that there needed to be more regulation in the financial sector is no longer a debatable point. Very few disagree.  The question is - as they say the devil lies in the details - and in this case what they are. As we got some details I am not convinced that the administration is doing enough. In that sense I echo many others not to mention the editorial in NYTimes  .  The big question boils down to the Over-the-counter derivatives and how we regulate those. They are customized bilateral contracts and except for interest rate swaps and few others that follow ISDA Master agreement -- are customized.  As such pricing and valuing and enough hedge is set by mutual consent of two parties.  The real question comes in what happens in the world of absolutely customized contracts.  It is hard to write a code for them so that they can regulated and standardized.  Also, what is a fair value for a one of a kind contract? It is like pricing a painting that I am selling to an art dealer. As econs would call - it is a classic case of "bilateral bargaining problem" in which one cannot set a fair market value price.  Now say we somehow manage to strike a deal - if one of the counterparties defaults, it is hard to set up an auction in the lines of Markit and Creditex since how do we set a price for a one of a kind contract.  If the instrument is in scarcity or bad news has already reached the market, the price will already include the information and we will not get a fair value.  In sum, regulating these contracts is a pipe dream if not plain "nuts".  Of course, if OTC is banned with all customizable options taken off, standardization can happen but why go back.  

A better solution in my mind is to take a leaf out of the page of other regulation.  For instance, systemic failures are not uncommon in complex nuclear power plants or electric grid.  To avoid those, the regulators ask utilities to identify systems, assets, and functional components that are critical to avoid systemic failures.  Why can't we do the same with banks?  Ask the banks to self report on the contracts that have embedded systemic risks.  And then back up with a program to closely monitor and control these puppies and in tandem build a strategy to isolate and island problems and issues to a small local area or department much before they cascade into causing a meltdown of the financial market itself. 

Surface temperature over the years

Via Krugman's post: I landed on this page - any denials that the temperature has gone up over the years. Now the question is - is human lifestyle a cause for this? That I don't know.

Buffet losing his edge?

If markets price goods correctly, then is Mr Buffet losing his rating. Lunch with him is cheaper by 20%. Read here.