Green Choices

In the frantic rush to save the planet, the green way is presented as a clearly defined path in the wilderness. Certain choices are labeled as being environmentally friendly without defining how much and under what circumstances. We're told solar panels will prevent fossil fuels from burning but we're not told what quantitiy of fossil fuels were burned to make the panel. Hybrid cars are only effective when they're used in certain circumstances. Compact Flourescent Bulbs are a clear green choice...but not if you throw the bulb away. California is cleaner because of it's policies but what about the areas from where they purchase their electricities. If this is a global problem, surely it demands a global accounting? In general, we have alternatives that have marginal advantages depending upon circumstances.

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Recently, I was asked about the "greeness" of a snowmobile. As an alternative to other winter sports, it probably isn't that bad. Locally, it would distribute fumes from the engine but how much worse is it than the huge ski resorts cut into the sides of mountains where people drive their cars in large numbers. Many continue to live there and have a lasting impact. Which is worse? You'd have to add up all the environmental costs, for construction and usage. You'll likely find that the ski resort option causes more damage over a broader geographical area, whereas the snowmobile causes more locally, where it is used. Neither will be a clear choice over the other.

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Bottom line, people cause pollution. They also enjoy thinking their pollution don't stink like someone else's.

A Piece of the Whole Pie

The drive to renewable, clean energy is clouded by all kinds of hypocrisy and contradictions. It's hard to get to the truth, even for those who claim to be leaders down the right path. Everyone still wants their piece of the pie and we seem to be willing to delude ourselves on our way down the proverbial primrose path. Most recycling programs waste more energy than they save. Almost all of the "renewable" energy sources actually absorb more energy than they produce (and thus pollute more than fossil fuels).

Lost in the cacophony is the fact that the US economy has been naturally striving for more efficiency, the ability to do more with less energy and thus less pollution. Through our own choices in the marketplace, we've been selecting for businesses that have less environmental impact. Manufacturing jobs have been disappearing because the manufacturing industry pollutes more than the service industry. Each year the invisible hand is trying to constrict the population because each person in this culture demands a certain amount of luxury, as much as they can get.

And yet, many of our populist political policies contradict these trends. When the obvious solutions are not palatable, are we really serious about issues like reducing our oil consumption, cleaner economies, etc? Apparently not, first I'd like my slice of the pie and then I'd like to be elected. Whatever it takes to achieve that...

The Demise of the Dollar

It was the best of times, it was the worst of times. Such is the story of the US economy. Today's news concerns the continued downward spiral of the dollar, detailed exquisitely in The Financial Times. To many, this sounds pretty bad and when you see this graph, it looks like a disaster. Oddly, stocks are generally up, though they seem to have corrected downward on the fall of the dollar.

Still there are a lot of questions to be answered if one is going to push the gloom and doom side of the story. Like, why is the trade balance still in deficit? A falling currency is supposed to make exports cheaper, n'est-ce pas, and lead to a correction. A dropping value is also supposed to indicate inflation and interest rates are supposed to soar. Inflation seems to be low. There are many indications that the Fed is going to drop interest rates next year! How can the Euro increase 50% in value to the dollar without us seeing any appreciable indication?

One probable reason is the import imbalance with the Chinese. If Exports and Currency Value are inversely related, holding one low will raise the other and right now, the Chinese are doing exactly that. They rather peg their currency and do not allow the market to dictate the exchange rate. This artifically increases imports from China. The Chinese put the payments in the US financial system which works to keep interest rates low. As I've stated below, this does little good for the Chinese. In 2003, they were holding about half a trillion dollars in account balance. Right now, they've lost about 20% of that in real value. Should they decide to sell dollars, they'll lose even more.

The recent correction with the Euro is most likely due to lower oil prices. Many believe that the Europeans are set to see expansion next year and lower gas prices will help economies already burdened with high fuel costs.

Black Gold

An oil discovery has made a big splash in the news (2). It's odd because oil is discovered all the time. This one is rather large but it's in deep water, 30,000 feet deep. That's over five miles.

People get excited because we're told that the US is too dependent on foreign oil and this will move us toward independency. If we had all our own oil, terrorism would just dry up. Nothing could be further from the truth.

The United States economy is global and is so inter-connected with other economies that words like dependency don't have any meaning. We are dependent on the rest of the world and they are dependent on us. You don't grow your own vegetables because it's cheaper for you to work at what you do best and buy them at the store. It's called specialization of labor. It affords everyone a better standard of living through Ricardo's theory of comparative advantage.

The luxury we afford ourselves today comes from the specialization of our economy away from labor intensive, low yield jobs. The US specializes in high tech services. This puts us at the top of the food chain. Adding oil into the market will certainly help us but it will also help other countries. Oil is a global market, after all. We will do better to concentrate on education and development rather than finding oil, that is, staying on top of the food chain.

A Single Step

For some, I seem like all gloom and doom when I talk about solutions to our energy and environmental problems. This is because many of the "alternative" energy sources or "sustainable" solutions aren't really viable. Those solutions which do present some relief are not really saviors of mankind. Any improvement is likely to come through small measures.

Case in point: The Compact Fluorescent Bulb. I attended an advisory meeting where a speaker spoke at great length about the great benefits of compact fluorescent (CFL) bulbs. These are fluorescent bulbs which can replace incandescent bulbs. The benefits are rather obvious. A typical CFL produces the same light that an incandescent produces for 1/3 the energy. Here's the often overlooked detail. An incandescent produces heat with its waste energy that will produce a higher energy bill due to cooling (this is assuming that you have the air conditioning running). On various sites I've seen, lighting accounts for about 25% of residential energy consumption. An additional 5 to 10% is consumed to cool those lights!

Since CFLs are more expensive than Incandescents, our question becomes at what point do CFLs make sense. Hours=(Price of CFL - Price of Inc)/((0.075 $/KWhour)*(Watt of Inc*1.2-Watt of CFL)). This assumes an average of cooling needs across the US of 20% or 1/3 of the heat produced by an incandescent. For a 60 watt equivalent (20 watt CFL), the price difference today is about $1.20. The CFL reaches the break even point at about 320 hours. When we consider that the average life of a incandescent is about about a fifth of a CFL, the savings are substantial. Should you have a light that you use on average 5 hours a day, you're looking at about 5$ on your first year and over 7$ every year after. The net present value of your decision to go with a CFL over an incandescent is well over $20/bulb. So CFL's are an obvious way to go. They do the same job for less energy which means less polution due to burning coal.

Inevitably, proponents rarely talk about the mitigating factors. Here's the rub... or rubs.

1) CFLs have mercury in them. Throwing the spent ones in the trash to go to the local landfill could cause a lot of expensive problems.

2) CFLs don't really produce high quality light. They are not for every application. Dimmable and 3-ways have come on the market but their advantages are not as obvious as standard CFLs.
3) Lastly and most importantly, we must ask ourselves what is done with the savings we realize? People generally consume something else when they experience savings. No matter what we do, we're still tied to the world economy which inevitably grows and inevitably produces pollution.

This last point gets back to my standard point on environmentalism. Essentially, pro-environment means anti-people. That tradeoff is very unsavory but essentially the gist of the matter.

Still, little steps is how the world progresses.

More info on CFLs.

Dispose of CFLs properly.

A Challenge to the Law

An Irish company has recently placed an advertisement in the Economist challenging the scientific community to disprove their perpetual energy machine. Even their press releases cause a stir. Is this company for real?

A goal of this blog is to bring an understanding of energy flow in ecosystems into the realm of economic study. Though this seems like a perfect subject, this econogineer is very skeptical. Many have called it a scam, but it could be a misunderstanding or misinterpretation of the results. Many years ago, I was paid by an investor to look at a perpetual energy machine in Rome, Georgia. This company had also issued challenges and only very slim details. I visited them and got a stack of information. They also told me a Civil Engineering professor at Georgia Tech could find no problem with their assertion that they could produce steam with less energy than the latent heat of vaporization (ie, the energy required to turn water from a liquid state to a gaseous, higher energy state). Their process involved the commonly known phenomenon of cavitation. They literally had money pouring in. However, one look at their apparatus in person revealed the flaw in their logic. They did not account for quality. They were using tap water at 60 psi and producing steam at atmospheric pressure. It takes energy to deliver water at 60 psi; that's part of what you pay in your water bill.

Energy is such a generic word without substantive meaning. It needs qualifiers to be properly compared to other forms. Those qualities are time, space, and power. When and how fast does it produce? Where is it? How does it relate to other forms of energy, that is, what is the transformation to useful forms of energy like electricity.

A joule of sunlight and a joule of electric current have the same amount of energy, yet the electricity is certainly worth more in economic terms. Sunlight is dispersed, electricity can be concentrated in a wire. I can do a lot more with electricity than I can sunlight. One can be transformed into the other, that is, I can turn on a bright light with electrcity or use a solar panel to generate electricity. Each of theses processes will result in losses, i.e., less than one joule. Thus, according to the first two laws of thermodynamics, we cannot return to our original state. There is no such thing as a perpetual energy machine. Steorn refutes the second law. That they ascribe the second law to Sir Isaac Newton (who was responsible for the laws of motion) does not bode well for their thouroughness.

Like the steam engine above, Steorn may have a useful process that converts energy at one form to a more useful form. In our economy, we need all kinds of energy, from sunlight ( a very low quality energy) to human thought ( the highest form of energy). Whatever Steorn has, it will not change the basic dynamics of man's economy. We will still need materials to make things and we will still need all different types of energy and the processes that produce them. They may indeed have a process that will greatly impact the efficiency of many facets of our economy. One of the greatest processes to do just that is the one you are using now, the Internet. It facilitates the movement of knowledge from one person to the next. It has been the greatest impact to our economy since the gasoline engine.

I seem to recall it coming upon us with less mysteriousness.

The Trade Deficits are Falling!

Okay. So it isn't really big news, especially compared to other recent events. Moreover, the Trade Deficit didn't just fall, it improved!

Not exactly earth shattering stuff, but the trade deficit is typically a hot button issue when the elections roll around. Like the Federal Reserve Funds Rate, not many people really understand exactly what it means. The better term is Current Account Balance. This number tells us who owes who money after exports and imports are tallied up. Currently, the US holds a very large imbalance of payments with China and pretty much the rest of the world. Logistically, this is only an accounting term because, in actuality, China and the rest of the world have been paid, they've just chosen to deposit the money in a US bank rather than exchange it for their currency or buy US goods. The trade deficit, therefore, is not a debt. As Milton Friedman has pointed out, if you include banking services (as an econogineer would argue since goods and services are only different forms of labor), there is no such thing as a trade deficit. Our import partners have merely chosen to purchase interest bearing bank accounts. This shouldn't strike anyone as odd since we offer very good and honest banking services, something not present in many foreign markets. If you had a business in Russia, where would you want your money? In a Russian bank under the greedy eyes of the Kremlin or the US? We offer lots of financial services and security for which we charge a premimum.

Still, the Trade Deficit raises much consternation from many circles, especially those with a protectionist agenda. Accusations of "dumping" are routine when some manufacturing sector feels it is subject to unfair trade practices. This, however, cannot be argued to be beneficial for the entire United States. In fact, what benefit has the US gained by protecting the car industry? It saved jobs for people in that industry at the cost of everyone having to pay many thousands more for their cars. In politics, it's concentrate the gain, spread the pain (but the total pain is almost always more than the total gain).

This has led some to propose absurd arguments to support their negative opinions about the Trade Deficit being the ruin of us all. In this story, the author proposes that there is a correlation between US debt and the Trade Deficit when it is obvious his graph shows the opposite. What's more interesting is that from my own analysis using Bureau of Economic Analysis data, it's easy to show that growth in Gross Domestic Product has a higher correlation with Imports (correlation coefficent of 0.77) than with exports (coeff. of 0.33). In fact, during periods of expansion, that correlation increases for imports and decreases for exports! This shouldn't surprise anyone because when we are expanding, we're even more attractive for investment. All that money lowers our lending rates through supply and demand. Who cares who you pay the interest if that interest is lower? Even with an unusally weak dollar, the Chinese and many others still would rather keep their money here. Mortgage rates are lower now than back in the early 90s when the trade deficit growth was zero. Or how about in the 70s when we had a trade surplus but mortgage rates were over 15%?

Most importantly, we need to remember that the trade deficit is expressed in dollars. In terms of physical goods, we hold a surplus. Although the new Ben Franklins are pretty, I'd much rather look at an HDTV.

Strategically, we should also be happy to hold large balances of the world's money. It makes them less likely to do something to cause us to confiscate those billions. They are, in the world of international politics, bargaining chips.

In the end, we all win though I think the Chinese people in a free system might want to enjoy a better standard of living instead of helping us improve ours. This is the major negative. The econogineer hates government manipulated markets and exchange rates. The Chinese fix their exchange rate artifically low to encourage export. We are certainly making out in this deal but it's creating a false sense of luxury in us at the expense of the Chinese people and perhaps our own and other foreign manufacturers. On the whole, though, we benefit greatly from this exchange.