Monthly Archives: October 2009

Clunkers for Climate

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Ok, this is off topic, but I cannot help posting it. Via Mark Thoma's blog comes a great discussion by Jeff Sachs (Director of Columbia's Earth Institute) on the costs of mitigating climate change. I post separate links to the cost estimates that Sachs refers to below. Good to have some hard numbers

by Mark Thoma

Jeff Sachs says we need to be sure that climate control legislation is not captured by powerful special interest groups:

A Clunker of a Climate Policy, by Jeffrey D. Sachs, Commentary, Scientific American: The Cash for Clunkers program offers a cautionary tale for the future of climate change control. … The broad principle of climate change mitigation is to reduce greenhouse gas emissions … to target levels at the minimum net cost to society. There are many ways to reduce emissions: drive more efficient or electrically powered vehicles; produce electricity with renewable energy sources; capture CO2 from power plants and store it geologically; restart the nuclear power sector; weatherproof homes… The list is long, with different time horizons, costs and uncertainties.

 

Clearly, not every method of reducing emissions makes equal sense. …McKinsey & Company has recently published estimates of the abatement costs of various technologies. Highly efficient lighting, appliances and vehicles, along with better insulation and other technologies, can save more in energy costs during their lifetime than the upfront capital for installing them: they are better than free to society. Other options—notably, renewable energy sources, forest conservation programs and carbon capture and storage—tend to come in below $60 per ton of avoided CO2emissions.

 

Some carbon-reduction ideas are so expensive they should play no part in the policy mix. Yet because lobbyists overrun our legislative processes,… lots of terrible ideas will no doubt be advocated.

 

Let’s make a rough calculation of how much mitigation per dollar the Cash for Clunkers program really achieved. …[calculations]… The net annual cost of the CO2 reduction is therefore … $141 per ton of CO2. … This crude calculation is subject to many refinements but shows that Cash for Clunkers represented a very high cost per ton of CO2 avoided. Countless ways to reduce CO2emissions are less expensive than smashing up autos five years before their natural demise.

 

We will blunder badly and repeatedly in climate change control unless we put some transparent control systems in place. We should rely heavily on price signals rather than one-by-one subsidized programs, except for the subsidies needed to bring new technologies such as electric vehicles to the commercial phase. An economy-wide tax on each ton of CO2 emissions, programmed to rise gradually over time at an appropriate social discount rate, would induce the marketplace to take actions that are less expensive per ton than the tax and to leave behind measures such as Cash for Clunkers or corn to ethanol. A carbon tax would be far more effective in this regard than the cumbersome cap-and-trade system proposed by the House of Representatives.

 

We’ll need to spend trillions of dollars over time to save the planet from climate change. All the more reason not to let lobbyists make a financial game out of this deadly serious effort.

So much for Thoma's comments and quotes of Sachs. As promised, here are direct links to the McKinsey study, the video, and the summary

Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?

Consensus is growing among scientists, policy makers, and business leaders that concerted action will be needed to address rising greenhouse gas (GHG) emissions in the United States. The discussion is now turning to the practical challenges of where and how emissions reductions can best be achieved, at what costs, and over what periods of time. 
The central conclusion: 
The United States could reduce GHG emissions in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches and high-potential emerging technologies. These reductions would involve pursuing a wide array of abatement options with marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency. Achieving these reductions at the lowest cost to the economy, however, will require strong, coordinated, economy-wide action that begins in the near future. 
Project methodology overview
Starting in early 2007, a research team from McKinsey worked with leading companies, industry experts, academics, and environmental NGOs to develop a detailed, consistent fact base estimating costs and potentials of different options to reduce or prevent GHG emissions within the U.S. through 2030. The team analyzed more than 250 options, encompassing efficiency gains, shifts to lower-carbon energy sources, and expanded carbon sinks.

Read the executive summary (PDF – 460 KB) 
Read the full report (PDF – 4.11 MB) 
Launch the video presentation 
Launch the slideshow (PDF – 7 MB)

Savings Rebalancing

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Menzie Chinn's blog at Econbrowser has an interesting analysis of updated savings data that can
be immediately applied to Chapter 14 to predict changes in the trade balance. 
To see if your predictions are true, check out the BEA data. Here is an edited extract of that blog:

The National Saving Identity: Private Saving, Household Saving, and Rebalancing

The National Saving Identity states:

CA ≡ (T-G) + (S-I)

Where CA is the current account, (T-G) is the consolidated government budget balance, and (S-I) is the private sector saving-investment balance. Figure 1 depicts the profound shifts that have occurred in these components (normalized by nominal GDP).

nsi1.gif 

Figure 1: Net government saving (blue), net private saving-investment balance, (red) and current account (green), all normalized by nominal GDP. NBER defined recessions shaded gray; assumes latest recession ends 2009Q2. Source: BEA, GDP 2009Q2 3rd release, Tables 3.1, 4.1, 5.1.

How much of the recent shift in the net private saving is due to changes in personal saving? Actually quite a bit. Of the 2.6% shift in net private saving since the first quarter of 08, 2.9% are accounted for by the shift in personal saving.

nsi2.gif 

Figure 2: Net private saving (pink), and net personal saving, (teal). NBER defined recessions shaded gray; assumes latest recession ends 2009Q2. Source: BEA, GDP 2009Q2 3rd release, Table 5.1.

How persistent will this shift in the personal saving rate be? This is the big question, in terms of the rebalancing issue (keeping in mind that the national saving identity is a tautology). Deutsche Bank provides an interesting set of calculations, which indicates how long it will take to hit the 20 year average net wealth/disposal personal income ratio.

nsi3.gif 

Chart 6 from Hooper, Slok, Dobridge, "U.S. Consumer Balance Sheet Adjustment: Half Way Done," Global Economic Perspectives (Deutsche Bank, Oct. 7, 2009) [not online].

Peter Hooper, Torsten Slok and Christine Dobridge write:

To try to gauge historical norms that households may aim for we appeal once again to average values that have prevailed over time. The 20-year average of household net worth is 533% of income. On this basis, net worth has returned about half way to its historical norm from the low reached in Q1. Chart 6 shows two prospective paths of adjustment back to the 20-year average, a 3-year path and a 5-year path. To follow these paths, we assume that households use half of their saving to pay down debt, and the other half to purchase assets. We also assume that income grows at 1% a year and asset values grow at the same rate. In order to rebuild wealth in three years then, households would need to raise their saving rate to 7% immediately and to 8% by 2012. In order to rebuild wealth in 5 years, however, households would need only a 2% to 3% saving rate. The saving rates implied by this wealth calculation are lower than the rates implied by the debt calculation. This is because net worth has risen since Q1 because of the rebound in the stock market. Net worth-toincome looks to have been about 500% in Q3; households have already made good progress towards their wealth target.

This set of calculations suggests at least a few years of relatively muted consumer behavior. The key factor is the rate at which households seek to reestablish their target net worth/income ratios.

It's interesting to contrast this perspective with that the "Blame it on Beijing" view, which holds Rest-of-World excess saving as the driver. I believe that when considering the US economy — which is about three times as large as that of China (according to IMF WEO data) — one can reasonably argue that what happens here is at least as important as what happens in East Asia (in contrast to some observers, I take Chairman Bernanke's recent speech, focusing on raising US national saving, as a welcome return to thinking about the primacy of US factors [speech text]). 

Crisis Update 10/09

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Not much of a V

by James Hamilton

The latest auto and employment numbers paint a picture of an economic recovery that remains tepid and potentially fragile.

September was the worst month for U.S. auto sales since February, down 23% from September 2008 and down 41% from the August 2009 outlier.

Data source: Wardsauto.com
autos_oct_09.gif

Many of us had wondered whether the cash-for-clunkers program would simply cause people who would have bought cars in September or October to buy instead in July and August. Now we seem to have an answer, though General Motors Sales Chief Mark LaNeve believes that low inventories also lost the industry 300,000 potential sales for September. If you average the three months of July, August, and September together, the impression is one of improvement since the terrible first quarter that's still left us below 2008:Q3. Inventory rebuilding should give a cyclical boost at some point, but at the moment this is not looking at all like the sharp recovery some had been hoping for.

Data source: Wardsauto.com
autos_qtr_oct_09.gif

But the biggest worry remains employment. Initial claims for unemployment insurance and number of hours worked are often viewed as leading economic indicators. Initial claims peaked in March, but have improved little since August.

Seasonally adjusted new claims for unemployment insurance (red) and 4-week average (blue), in thousands.
claims_oct_09.gif

Average hours per week in manufacturing fell back a bit last month, undoing some of the earlier rebound.

Source: FRED
mfg_hours_oct_09.png

Hours worked for the broader economy remain at the low point for this cycle. 

Source: FRED
hours_oct_09.png

And total employment, generally regarded as a coincident economic indicator, continues to plummet, with a quarter million fewer Americans on payrolls in September compared with August (seasonally adjusted). That this is not as rapid a decline as we saw at the start of the year can no longer provide much comfort to anyone.

Source: Calculated Risk
cr_nfp_oct_09.jpg

The Aruoba-Diebold-Scotti Business Conditions Index also doesn't care much for the latest numbers, having moved back into significant negative readings.

Aruoba-Diebold-Scotti Business Conditions Index.

Although I expect the GDP numbers later this month to show positive growth for the quarter, further deterioration on jobs is bad news for critical factors like loan defaults and total spending.

Carpe Diem has his usual optimistic take on this. Wish I felt the same way.

Reserve Accumulation Update

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International Reserves: An Embarrassment of Riches?

Reza Moghadam updates the reserve currency analysis of the Crisis Chapter 23 of International Economics. The update includes an interesting analysis. 

Once upon a time, those tracking international reserves focused on simple measures of reserve adequacy—enough to cover, say, 3 months of imports or all of the external debt maturing over the next year. However, the relevance of such yardsticks evaporated as a number of countries accumulated reserves that far surpass such levels, partly in reaction to emerging market financial crises of the 1990s and early part of this decade. Brazil’s reserves now exceed $200 billion, while Russia’s are more than $400 billion—and even these numbers are dwarfed by China’s reserves, which top $2,000 billion. 

Reserves are rising, driven by emerging markets and, increasingly, low-income countries

SPRblog3chart1

SPRblog3chart2

While very high reserves may give comfort in times of crisis, they are not without costs—for the holder of the reserves, and also for the stability of the international monetary system:

  • Reserve accumulation, by resisting currency appreciation, stimulates export-oriented production at the expense of domestic-demand oriented growth. 
  • By investing in foreign reserves, countries invest abroad rather than in their own economies. Countries with large stockpiles of reserves may therefore miss out on high-return domestic investments, like education, health and infrastructure.
  • In the long run, it is difficult to both meet the liquidity needs of the global economy and maintain macroeconomic stability in the reserve issuing country, a problem known as the Triffin dilemma. In effect, to meet the world’s ever-increasing demand for international reserves, reserve issuing countries such as the United States need to run external deficits that eventually undermine confidence in their currencies.

Self-insurance is not the only driver of reserve accumulation (an export-oriented growth strategy might be another factor), but it is an important one, and it is worth considering ways of reducing the need for it:

  • More predictable access to official financing when capital flows are disrupted would help. The IMF’s new crisis prevention tool, the Flexible Credit Line, aims to provide just that for countries with very strong policies. The early experience with this new tool is encouraging—countries that signed up for it saw a marked improvement in market perceptions.
  • Increasing the amount of available official financing would also help. The G-20’s April 2009 commitment to triple the IMF’s resources is a necessary complement to the reforms to our lending practices. The decision to provide these additional funds, which will increase the IMF’s lending resources from $250 billion to $750 billion, is a major step in the right direction. However, even with this increase, the IMF’s balance sheet remains much smaller relative to the global economy and members’ own reserves than it was at the time of the Fund’s creation.
  • Special Drawing Rights (SDRs), a reserve currency issued by the IMF to its member countries, can provide countries with greater access to liquidity, making them a potentially powerful crisis response tool. Of the $283 billion SDRs allocated in August and September, about $110 billion will go to emerging and developing countries, significantly improving their liquidity positions.

While lowering reserve accumulation in some countries would provide benefits to them and to the global monetary system, to do so too quickly could be disruptive for a still-fragile global economy. For now, many countries will want to keep the security that their reserves provide. It is therefore also important to consider how the appeal of alternative reserve assets can be improved, to make the system less dependent on the stability of one currency—the U.S. dollar.