What has promise to succeed?

This week The Wall Street Journal ranked what it thought were the top US venture-backed companies with promise to succeed.

Some of the trends in what they chose are a bit telling about where our future is headed. Half of the companies were related to media, web or communications technology. Meanwhile 20% of the companies were healthcare related either bio-tech or healthcare management.

Most telling, was that 32% of the companies dealt with issues of data protection, data processing and security. As every individual has access to the internet and the ability to create and publish content of their own (damn those pesky bloggers!) the data generated is overwhelming. Interestingly when you combine the need for organized, actionable data with trends of personalizations and communication you get something like Yammer - one of my favorite companies on the list. Yammer is a new tool that creates a corporate or organizational social network aimed at allowing people to connect and transfer information quickly and securely. In office environments where more people are on the go, working from home or collaborating with people in other offices all over the world--- it's important to get the productive communication flow right.

There were some glaring category omissions from the list, namely companies aimed at improving education and the environment. These are two categories that could use new ideas and innovation and the support of venture funds and the Washington Post. I did not note any companies on the list that were aimed at improving education. There were three that improve the environment. The last, again a personal favorite, is a bit of stretch in terms of how environmentally friendly it is. Etsy is an online vintage and homemade marketplace. The rationale being that reusing vintage items or valuing handmade goods will eventually reduce our consumption and manufacturing of new goods that require new resources. Like I said, it's stretch!

Which company from the list get your vote? What areas do you think we need more development and investment to improve our future?

Thoughts on the Waxman-Markey Bill

The Waxman-Markey bill is the US's first major attempt to control the emissions linked to global warming. As you might expect, it has elicited a fury of views from economists.

Greg Mankiw points out the bill's major shortcoming: that most of the emissions permits are given away for free. These permits were projected to bring in $1 trillion in revenue over the next ten years, money that could be used to pay down the debt or help fund healthcare reform; instead, the bulk of this value will simply be given away to business interests.

In spite of the shortcomings, however, Dean Baker and Paul Krugman support the bill because the cost of doing nothing is higher than the cost of a bad bill:

"Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?"

Provocatively, Krugman calls failure to act against the "existential threat" of Global Warming treasonous.

Don Boudreaux takes issue with Krugman's accusation:

"It's more accurate to say that Mr. Krugman is committing treason against reasoned debate. One of the most compelling arguments against climate-change regulation is not that global warming isn't occurring but, rather, that the dangers of further regulation far outweigh its likely benefits. Government regulation inevitably is a political animal; it's never guided purely, or even largely, by disinterested science.

Is it treasonous to worry about the influence of interest-groups on regulation? Is it treasonous to fear that centralizing more power in Washington will result in unforeseen negative consequences? Is it treasonous to believe that the threat to our well-being posed by further constraints upon markets is worse than is the threat posed by higher temperatures?"

The interchange between Krugman and Boudreaux highlights the major ideological conflict surrounding attempts to curb Global Warming. Putting science aside for a moment, we are talking about the correct response to a market externality (carbon emissions). For Krugman, externalities can be dealt with through policy intervention, such as a tax (or a cap-and-trade bill, which has the same desired intent). Boudreaux, on the other hand, is a firm adherent of Public Choice Theory, and worries about interest groups capturing the policy process and stifling individual liberty. Theirs is a conversation that would be substantively the same if we were talking about subsidizing research, overfishing or any other commonly cited externality. Krugman is more worried about the externality and Boudreaux is more worried about the intervention.

Like anything else, we economists can easily boil the issues of our time down to the basics of "government vs. the market."

Should we welcome the new climate bill?

After years of denial and feet-dragging, the US Congress may finally begin to deal with climate change. The Waxman-Markey bill now before Congress calls for a cap on carbon emissions, with tradable emissions permits distributed to industry. More energy efficient firms can sell their permits to less efficient firms, producing a financial incentive to reduce emissions.

"Cap and Trade" is not the only policy option out there. Many scholars have advocated a simple tax on carbon emissions.

On the surface, there's no theoretical reason for a carbon tax to be any better or worse than a cap and trade system. Both systems put a price on carbon emissions, which should lead to lower carbon emissions. But some people are worried about the process of permit distribution, which opens the door to political bribes, or as economists call it "rent seeking". Greg Mankiw puts it like this:

"Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is, 'Cap-and-trade = Carbon tax + Corporate welfare'."

However, not everyone is so down on the cap and trade plan. For Paul Krugman, cap and trade is a workable second-best strategy, which is more politically palatable to powerful groups weary of climate change legislation:

"...handing out emission permits does, in effect, transfer wealth from taxpayers to industry. So if you had your heart set on a clean program, without major political payoffs, Waxman-Markey is a disappointment.

Still, the bill represents major action to limit climate change. As the Center for American Progress has pointed out, by 2020 the legislation would have the same effect on global warming as taking 500 million cars off the road. And by all accounts, this bill has a real chance of becoming law in the near future.

So opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are."

In my mind, the real debate is over which is worse: the dangers from climate change or the dangers from political corruption. If the only way to get a climate change bill passed is to risk some rent-seeking, then it may be worth the cost. If, however, your biggest concern is economic efficiency, then the downside risk of the Waxman-Markey bill is more than you're willing to pay.

Trying not to oversell it

Wouldn't it be great if "green jobs" could simultaneously end the recession and prevent global warming? Of course it would. But before you sit down to your free lunch, Paul Krugman reminds us that it's not quite that simple:

"...limiting emissions would have its costs. As a card-carrying economist, I cringe when 'green economy' enthusiasts insist that protecting the environment would be all gain, no pain."

UCLA economist Matthew Kahn explains why most economists feel this way:

"Many of these ideas are very much worth pursuing for environmental reasons. But it’s doubtful they offer a double dividend of helping to jump-start the economy. For one thing, the global financial crisis is fundamentally about different issues: the popping of housing and credit bubbles from St. Petersburg to San Francisco, the associated implosion of a highly leveraged international banking sector, and the resulting fallout on real economies. These pressing problems won’t be solved by switching to hydrogen-powered cars or installing solar panels on every roof.

Second, let’s be honest: Anti-carbon regulations will simultaneously create and destroy jobs. Take the United States: Given the country’s current reliance on cheap, coal-fired power plants, carbon caps will translate into higher electricity prices. (How much higher remains an open question.) Older manufacturing firms—especially in energy-intensive industries such as petroleum and coal products, paper, cement, and primary metals—will face higher costs of doing business, and this may lead them to shut down or seek international locations where electricity prices are lower and carbon regulation is less stringent.

In the long run, a little creative destruction will likely be a good thing. The same regulations that might kill jobs in smokestack industries will act to stimulate a host of new manufacturing opportunities, ranging from energy-efficient household appliances to solar panels to energy-efficient vehicles. Even former U.S. Vice President Dick Cheney might consider buying a fuel-efficient vehicle if gas prices rose enough.

But don’t count on clean technology to pull us out of the doldrums. The green revolution won’t happen overnight."

The obvious, but important lesson to remember here is that tradeoffs are everywhere. A "green revolution" is a long-term project, and in the mean time investments in alternative energy divert investment from other projects.

But it's not all bad news. Just because green policies aren't free, we can still afford them:

"Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits. That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate."

So while there are no free lunches in life, there are some cheap meals, if you know where to look.

It is (sometimes) easy being green

President-elect Obama is facing many tough challenges, not the least of which is how to spend a roughly $700 billion stimulus package. Yes, it's harder than it seems.

On a basic level, anything that spurs the economy is worthwhile. The government could buy $700 billion worth of Hannah Montana merchandise or buy every US citizen a haircut. But many people want to see the money spent to further other long-term policy goals. In particular, there has been a strong push to use the stimulus to jump-start "green" industries through the creation of "green-collar jobs". We can call it "green stimulus".

The appeal of green stimulus is understandable: we need to create jobs and we need to become more energy efficient. Why not use this as an opportunity to do both?

Unfortunately, it's not that simple, especially in the case of subsidizing green energy production. As John Whitehead, writing at Environmental Economics, says:

Unless consumers decide to increase their overall use of energy products (and they might ...) then the demand for brown energy (i.e., coal and oil) will decrease resulting in a decrease in price and a decrease in quantity (see the second figure to the right). The number of brown jobs in the energy sector falls as a result of the reduction in quantity produced and consumed.

When we talk about the jobs created from green energy production, we forget the jobs lost at coal plants. In the long-term, technological changes in green technology will likely create new jobs. But in the short-term, stimulus spending on green energy will likely just change the composition of jobs, not create new ones. Of course, spending on green energy is still good for the environment and should be justifiably on those grounds alone.

The good news is that there are some ways for green stimulus to work. In particular, the Obama administration has been talking about using stimulus money to make homes more energy efficient, and Congress added $250 million to the budget in October to weatherize 140,000 houses. This plan has several advantages. First, rather than subsidize the energy usage of low-income individuals, this strategy will reduce energy consumption. Second, weatherizing 140,000 homes would create 8,000 new jobs at a cost-effective $31,250 per job. The Obama administration wants to expand the program to 1,000,000 houses, which will create 78,000 jobs.

So there you have it. With the right policies, it can be easy being green.

Think local, buy global

I work next door to a Whole Foods, so the issue of "food miles" comes up a lot.

However, a recent study from Pierre Desrochers and Hiroko Shimizu called "Yes, We Have no Bananas" synthesizes a good deal of research showing that the food miles concept is severly lacking:

"The most problematic aspect of the food-miles perspective is that it ignores productivity differentials between geographical locations. In other words, activists assume that producing a given food item requires the same amount of inputs independently of where and how it is produced. In this context, the distance traveled between producers and consumers, along with the mode of transportation used, become the only determinants of a food’s environmental impact. But any realistic assessment must reflect both transport to final consumers and the total energy consumption and greenhouse gas emissions associated with production."

The data on this issue are striking. The authors cite several studies showing that 83% of CO2 emissions came from the production of food, while only 4% came from the transportation from the producers to the retailer (the piece on which activists tend to focus).

Ronald Bailey, writing in Reason Magazine, explains the implications:

"Food miles advocates fail to grasp the simple idea that food should be grown where it is most economically advantageous to do so. Relevant advantages consist of various combinations of soil, climate, labor, capital, and other factors. It is possible to grow bananas in Iceland, but Costa Rica really has the better climate for that activity. Transporting food is just one relatively small cost of providing modern consumers with their daily bread, meat, cheese, and veggies. Desrochers and Shimizu argue that concentrating agricultural production in the most favorable regions is the best way to minimize human impacts on the environment."

One of the best ways to do this is to lift the huge subsidies that the US and Europe dole out to their agricultural lobbies. This would lead to more food being grown in advantageous climates, and has the added benefit of being an economic boon to the developing world. Lifting the subsidies would be good for the environment, good for the worlds poor, and would free up $300 billion in US government budget. What's not to like?

A tragedy, yes, but one we can avoid

One of the largest environmental challenges we face is declining fish stocks. According to an article published in the journal Science, if trends don't change there will be virtually no fish left to catch in 50 years.

There are many reasons for this. A growing global middle class means more people demanding seafood. And advances in sonar and other fish-catching technology mean that humans can catch fish much faster than they can reproduce.

But one factor that gets less attention is the absence of property rights in our fisheries. New research suggests that Individual Transferable Quotas--a form of property rights for competing fishermen--can help the Earth avert a global aquatic meltdown:

Whichever way they analysed the data, they found that ITQs halted the collapse of fisheries (and according to one analysis even reversed the trend). The overall finding was that fisheries that were managed with ITQs were half as likely to collapse as those that were not.

The problem with global fisheries can be described as a "Tragedy of the Commons". The argument, first made Garrett Hardin in 1968, rests on a metaphor of herders sharing a common field where they are each allowed to let their cattle graze:

In Hardin's view it is in each herder’s interest to put as many cows as possible onto the land even if the commons is damaged as a result. The herder receives all the benefits from the additional cows but the damage to the commons is shared by the entire group. If all herders make this individually rational decision, however, the commons is destroyed and all herders suffer.

So while no fisherman wants to see the fish stocks depleted, no individual has the incentive to cut back on the amount they personally catch. Giving fishermen a quota share in the fishery, however, provides an incentive to maintain long-term sustainability. The benefits are clear:

After a decade of using ITQs in the halibut fishery, the average fishing season now lasts for eight months. The number of search-and-rescue missions that are launched is down by more than 70% and deaths by 15%. And fish can be sold at the most lucrative time of year—and fresh, so that they fetch a better price.

In a report on this fishery, Dan Flavey, a fisherman himself, says some of his colleagues have even pushed for the quota to be reduced by 40%. “Most fishermen will now support cuts in quota because they feel guaranteed that in the future, when the stocks recover, they would be the ones to benefit,” he says.

While there are numerous practical hurdles to overcome, much of the resistance to ITQs is psychological. The notion of privatizing the oceans (or any other commonly held environmental resource) is viscerally jarring. And yet the logic behind the tragedy of the commons and ITQ's is so intuitive and the benefits so clear. Given the dire state of our oceans, I think this is something we need to try. If for no other reason, I'd like my grandchildren to know what sushi tastes like.

Should we "drill, baby, drill"?

While the current political debate focuses a great deal on particular policy choices, we don't (in my opinion) spend enough time thinking about how we should make those choices. What are the acceptable costs and benefits associated with various decisions?

In July, a Gallup Poll on energy prices found that:

"57 percent of Americans would support drilling in the nation's coastal and wilderness areas that are currently closed to exploration—if it helped reduce gasoline prices and if the drilling were conducted under strict environmental safeguards." [emphasis added]

A similar poll from June found that 67% of Americans favored offshore drilling (not including wildlife areas) and 64% believed that it was at least somewhat likely that drilling would decrease gas prices.

A new study takes a look at drilling in ANWR and addresses the gas price issue:

"Domestic oil prices are determined in a world market and would be unaffected by the relatively small annual flows from ANWR. Moreover, the quantity of oil in ANWR, 7.06 BBO, is merely 0.55 percent of the proven reserves worldwide... Analysts also recognize that even if ANWR's supplies were large enough to affect world prices, the Organization of Petroleum Exporting Countries (OPEC) would countermand the increase in production and thereby negate any price effects... It is also clear, with ANWR accounting for a maximum of 3.2 percent of domestic consumption in 2025, that something other than drilling in the Refuge will be necessary to substantially reduce out dependence on foreign oil."

Ben Muse summarizes the study's other interesting findings:

"Kotchen and Burger estimated that the oil had a value of $374 billion (writing in July 2007, they assumed a long-term price of $53/barrel), but that it would cost $123 billion to extract and market. The net return of $254 billion is divided consists of industry rents of $90 billion, Alaska tax revenues of $37 billion, and Federal tax revenues of $124 billion...

Welfare benefits to U.S. oil consumers? There aren't any, except in their role of taxpayers. That's because development would have little impact on oil prices (or energy independence)...

Job creation? Some in Alaska, but with full employment there would be no net job creation; jobs created on the North Slope would be taken from other industries and places.

There would also be costs. The costs of actually exploiting and bringing the oil to market have been accounted for above - those benefits are net of production costs. However, there would also be significant environmental costs..."

While we can't directly measure how much intrinsic value the median voter places on ANWR or other areas that may be opened to drilling, we can directly consider both the total benefits and their distribution. The real winners will be the oil companies that win drilling rights and the Alaskan State and Federal governments. So from the perspective of voters, the benefits are not that great.

Despite arguments to the contrary (and my usual support for these arguments) the polling data suggests that voters have a rational decision making model on the drilling issue: open restricted areas to drilling only if there is a net benefit to consumers and if there are appropriate environmental safeguards. The question is whether politicians and media sources will provide the facts and or if voters have the incentive to seek them out.

Then again, it looks like these people have already made up their minds...