Category Archives: Uncategorized

Links for the Week Ending 2 February 2014

  • A year ago, the U.S. was suffering from a major drought in the Great Plains area. This year, it is California that is experiencing an unprecedented lack of rainfall. The US Drought Monitor shows the situation here, and The New York Times reports on the implications for California here. If you want to put this drought in some perspective, then I recommended looking at a series of charts published by the National Climatic Data Center (NCDC) that can be found here. In particular, look at the time series chart half-way down the post that shows drought categories for the contiguous U.S. changing over time. The U.S. does appear to be experiencing more exceptional (D4) droughts in recent years but the overall drought picture looks more mixed.
  • Preliminary figures suggest that the U.K. economy grew 1.9% in 2013. Much of the media has now accepted a narrative of continued recovery, but there are a few dissenting voices. The Telegraph‘s Liam Halligan in an article titled “Britain’s shaky growth is papering over cracks” points to missing fixed capital investment, a worsening external balance, more debt and a growing real estate and financial asset bubble as all suggesting that the expansion will end in tears. Halligan also quotes a pamphlet by Douglas Carswell at Potiteia (here), which links every credit boom since the 1970s with a subsequent real economy bust.
  • John Cassidy, a staff writer at the New Yorker, wrote one of the better books about the Great Recession and utopian economics called “How Markets Fail: The Logic of Economic Calamities“. His articles for The New Yorker are similarly perceptive, such as this recent one suggesting “Ten Ways to Get Serious about Rising Inequality”.
  • On a similar theme, I have talked a lot about stagnating median incomes in the U.S. that date back to the 1970s (such as here), but have rarely referred to the experience in the U.K. The Office for National Statistics (ONS) published a report on this topic on January 31 called “An Examination of Falling Real Wages, 2010 – 2013″, which has drawn a lot of press comment, such as this in The Guardian. It came out just a day after a study by the Institute of Fiscal Studies looking at the same theme (here), with commentary by The Financial Times (access free after registration) here. I intend to post on this issue soon.
  • And in The Telegraph again, Jeremy Warner argues that Britain has “A broken schools system wholly unprepared for march of the machines“. It’s good to see that the mainstream press has started having an intelligent discussion on how technology is transmogrifying the workplace.
  • Time for some interesting eco counter-culture thinking with David Holmgren’s “Crash on Demand” paper, in which the permaculture guru upgrades ‘brown tech’ as his mostly likely scenario for the future—that is, one of severe climate change but a slow decline in energy usage. He then goes on to suggest that a global economic crash is in the interest of the sustainability community, and that it should be positively encouraged. All provocative stuff and sufficient to give rise to a flurry of posts within the ‘descent’ blogosphere, including comments by Dmitry Orlov (here), Nicole Foss (here) and Rob Hopkins (here).

On Sustainability and Happiness (Part 2)

In my last post (here), I looked at the mounting evidence that GDP per head is correlated with happiness when tracked for individual countries through time—a finding that goes against the previous orthodoxy that went under the moniker of the Easterlin Paradox (if we all get richer, none of us get happier).

The U.S. and China are sometimes argued as key countries that show no such improvement in happiness, but anti-Easterliners explain away the U.S. by pointing to stagnant median income growth through time (GDP per head has risen, but it has all gone to an elite, so most people haven’t secured any income-induced extra happiness), and view the China findings as irrelevant due to a lack of sufficient data.

The situation is ironic since it is only recently that advocates of the Easterlin Paradox have made headway in transferring their ideas out of academia and into the public domain, so catching the attention of politicians. Here is the economist Andrew Oswald in an Op-Ed in The Financial Times in 2006 (here):

But today there is much statistical and laboratory ­evidence in favour of a heresy: once a country has filled its larders there is no point in that nation becoming richer.

The hippies, the Greens, the road protesters, the downshifters, the slow-food movement – all are having their quiet revenge. Routinely derided, the ideas of these down-to-earth philosophers are being confirmed by new statistical work by psychologists and economists.

Justin Wolfers, the Easterlin Paradox’s great nemesis, would beg to differ. Accordingly to him, GDP per capita has captured human welfare as encapsulated in the idea of self-evaluated happiness quite well. Indeed, he views the happiness literature as maturing to a stage where it aligns well with GDP and, indeed, the old stalwarts of economic analysis ‘utility‘ and its first cousin ‘revealed preference‘—as such happiness has become respectably boring and quite neo-classical economics in tone.

“Utility’ and ‘revealed preference’ are the two trump cards of orthodox economists when confronted by arguments from non-economists that money can’t buy you happiness. Such economists will say “don’t listen to what people say, look at what they do”. And what people frequently do is buy, buy, buy—or work like hell so they are able to buy, buy, buy— to the exclusion of all those things that are supposed to bring happiness like hanging out with the kids, communing with nature, going for a jog, catching up with old school friends and taking up charity work.

Nonetheless, while Wolfers appears to relish his bar fight with Richard Easterlin, he has been very reluctant to take on the titan of behavioural economics, Nobel Laureate in Economics Daniel Kahneman. In Wolfers last major paper on happiness written with his wife Betsey Stevenson, the conclusion purposefully avoided any confrontation with Kahneman:

To be clear, our analysis in this paper has been confined to the sorts of evaluative measures of life satisfaction and happiness that have been the focus of proponents of the (modified) Easterlin hypothesis. In an interesting recent contribution, Kahneman and Deaton (2010) have shown that in the United States, people earning above $75,000 do not appear to enjoy either more positive affect nor less negative affect than those earning just below that. We are intrigued by these findings, although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results.

This is interesting, because Kahneman says some quite specific things about the use of the word ‘utility’ by economists in his magnum opus “Thinking Fast and Slow”.

As economists and decision theorists apply the term (utility), it means “wantability”—and I have called it decision utility. Expected utility theory, for example, is entirely about the rules of rationality that should govern decision utilities; it has nothing to say about hedonic experiences.

Kahneman goes on to make a distinction between the ‘remembering self’ and the ‘experiencing self’. The latter is concerned with the immediate emotions of joy, love, hate, sadness and so on and is completely distinct from the former’s happiness calculus gleaned from a balancing of a perceived life’s worth.

The book highlights an example of this dichotomy: the contemplative question of whether one’s happiness would increase if one moved to sunny California from the weather-challenged Midwest. The example is played out as a husband and wife spat. The wife believes that all will alter in a move to a sunnier clime, the curmudgeon of a  husband says nothing will change. And on this occasion, the data suggests that Kahneman is right. Weather (and climate) is the wallpaper of our lives: it is something that we will barely give thought to for more than a few minutes per day—and most often we see it as a given in our lives: neither a subtracter of happiness nor an additor.

Here is Kahneman filling out the different concepts of happiness:

So what happens if we start to measure experiential happiness rather than remembered happiness? The former is sometimes divided into positive affect—joy, love, hope, amusement and so on—and negative affect—pain, sadness, hate, regret and so on. What we find out, accordingly to Kahneman, is that the correlation between the remembering self and the experiential self is only 0.5. Events that will maximise self-evaluation of happiness will not necessarily maximise experiences. That is why people choose to take a job with a long commute or work for a bulge bracket investment bank like Goldman Sachs, even though both choices may be very negative in terms of experiential happiness.

In a classic paper with Angus Deaton, Kahneman actually teased out the impact of a rise in income for the remembering self and experiencing self. He came up with this chart (click for larger image) from this seminal 2010 paper (here):

Positive affect, blue affect, stress and life evaluation jpeg

And for those who like numbers, we have this table below from the same paper. What you see is a reasonably high correlation between income and how we perceive our lives (the Cantril ladder of life satisfaction from one to 10) but a very low correlation with positive affect (joyish kind of stuff) and blue affect (sadness kind of stuff).

Life evaluation jpeg

So Justin Wolfers may have felt he had won the war, but has he in fact just won an insignificant battle? More to come on this.

On Sustainability and Happiness (Part 1)

The last few years has seen a big bust-up within the academic economist community over whether higher income makes you happy. Since the experimental and survey data are still immature—albeit expanding and deepening year by year—even the seminal papers on happiness remain open to attack. And battle has certainly commenced over the so called Easterlin Paradox, named after the economist Richard Easterlin. For the sustainability community, the debate is important because it deals with the link between happiness and economic growth.

Somewhat simplistically, the Easterlin Paradox refers to the phenomenon whereby the level of happiness in a society doesn’t grow with absolute income but rather with relative income. The landmark paper which first promoted this idea is Easterlin’s “Does Economic Growth Improve the Human Lot? Some Emperical Evidence” published in 1974.

Easterlin’s paradox rested on the fact that in-country income disparities (the rich and poor within a particular country) corresponded closely with life satisfaction, yet between-country comparisons (rich country, poor country) showed a much smaller-than-expected happiness gap. Moreover, if you tracked a specific country through time, life satisfaction did not improve even as the country grew richer. Easterlin asked the question: “Will raising the income of all, increase the happiness of all?” And his answer was “no”, or rather “not so much”. This is one of the tables printed in the paper as evidence for his thesis:

U.S. and Happiness jpeg

As to why this should be the case? This came to rest on the theory that our lot in life is to live on a hedonic tread mill, ever resetting our happiness to the income and wealth of a particular time and place. So the thrill of a brand new car, house or holiday will always dull and pale.

In the following decades, Easterlin and his disciples amassed further evidence to support the income paradox, and, critically, it become one of the lynchpins of the new heterodox strands of economic thought that questioned the wisdom of neo-liberal growth without end. As such, it showed up in such canonical texts as Herman Daly and Joshua Farley’s “Ecological Economics” and Tim Jackson’s “Prosperity Without Growth.” Daly, Farley and Jackson believe (as do I) that there exist both resource and pollution limits to growth.  Critically, if the Easterlin Paradox is correct, you can have your cake and eat it, since a steady-state, or no-growth, society can be just as happy as one emphasising rampant consumerism and exponential expansion.

Almost inevitably, a counter-attack was launched in the form of a 2008 paper by the husband and wife team of Betsey Stevenson and Justin Wolfers titled “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox” and a subsequent follow-up in 2013 called “Subjective Well-Being and Income: Is There Any Evidence of Satiation“.

In this post, however, I will pull out the abstract and a chart from a third paper which Stevenson and Wolfers wrote together with  Daniel Sachs titled “The New Stylized Facts About Income and Subjective Well-Being” since it gives more prominence to the question of whether happiness increases with an individual country’s income through time.

The abstract to the paper blasts a broadside into the Easterlin Paradox.

Economists in recent decades have turned their attention to data that asks people how happy or satisfied they are with their lives. Much of the early research concluded that the role of income in determining well-being was limited, and that only income relative to others was related to well-being. In this paper, we review the evidence to assess the importance of absolute and relative income in determining well-being. Our research suggests that absolute income plays a major role in determining well-being and that national comparisons offer little evidence to support theories of relative income. We find that well-being rises with income, whether we compare people in a single country and year, whether we look across countries, or whether we look at economic growth for a given country. Through these comparisons we show that richer people report higher well-being than poorer people; that people in richer countries, on average, experience greater well-being than people in poorer countries; and that economic growth and growth in well-being are clearly related. Moreover, the data show no evidence for a satiation point above which income and well-being are no longer related.

And here are a set of charts purporting to show that growth in life satisfaction and growth in per capital GDP are linked through time (click for larger image).

Life Satisfaction and GDP jpeg

It’s worth hearing the argument directly from the horses’ mouths, so here is a podcast over at EconTalk ,with Stevenson and Wolfers taking about happiness and growth to Russ Roberts. And below we hear Wolfers debating happiness with Robert Frank at the Aspen Institute’s Ideas Festival:

Right-wing politicians love to characterise anti-growth advocates as out-of-touch ‘hippies’, so the attack on the Easterlin Paradox has met with a warm reception in such quarters. So is this the revisionist counter-revolution that will put the anti-growth ‘hippies’ back in their box? Well, not really. But I will leave that to my next post.

E.U.’s New Climate Targets for 2030 Plus More Rubbish on Competitiveness

One of the European Union’s saving graces is its relatively enlightened climate change policy. The push to decarbonise the European economies may be too slow but at least it is going in the right direction.

In this connection, an important set of E.U. reports, that together form the new climate targets out to the year 2030, was published on 22nd January. You can find them all here. The critical components of the 2030 policy are threefold:

  • 40% cut in greenhouse gas emissions (compared to 1990 levels)
  • To achieve at least a 27% share of renewable energy consumption
  • Energy efficiency to play a vital role, but no specific target at this point.

In this post, I prefer not to delve into the details of the targets, but rather want to take a brief look at energy costs. The dominant meme in the financial price is that renewables and carbon taxes are fatally undermining European competitiveness. As an example, read this article in The Financial Times titled “High Energy Prices Hold Europe Back“.

Whenever I hear a politician or titan of industry reaching for the word “competitiveness” to justify some self-serving policy action I make sure I have a sick bucket near. This is because the mere mention of the word “competitiveness” appears to preclude any further analysis and resort to actual facts.

My point here is that cheap energy prices are neither a necessary nor a sufficient condition for fostering a prosperous economy. Let’s take a chart of wholesale gases prices from the E.U.’s “Energy Prices and Costs Report” that was published along with the new 2030 targets (click for larger image).

Wholesale Gas Prices Globally jpeg

The first point to note is that the U.S. price of around $2 dollars was the absolute 2012 nadir in gas prices. We are now back up to around $4 and the U.S. Energy Information Agency see the price trending up toward $6 to $7 in order to make further shale gas development economically viable.

US Nat Gas Spot Prices Jan 14 jpeg

But this is not the key point I want to make. Rather, if you click on the global gas price comparison chart you will see that at the high price end of the spectrum we have three of the Asian Tigers: Singapore, Taiwan and South Korea. And how about that GDP growth monster China, which has been astonishing the world with consecutive 10% year-on-year annual growth rates up until very recently? Well, its gas price looks—how can I put it—European.

OK, what about electricity prices for industrial consumers (click for larger image)?

Retail Prices of Electricity Industrial Consumers jpeg

True, the price paid in some European countries is high, but the average is only marginally above that in China, Brazil and Turkey. And don’t forget that you would expect Europe to be somewhat higher since its advanced economies have higher wages and steeper land prices. So taking such costs into consideration, Europe looks pretty average.

So there are many paths to economic prosperity, and a cheap energy price is not the only one.

Links for the Week Ending January 19

  • Just as I am close to concluding my series of posts on technology and jobs (herehereherehere and here), The Economist places the topic on its front page with a picture of a tornado ripping through an office. Their editorial is here and briefing here. The times are a changing: there is no disdain for the lump of labour fallacy to be seen (surely a first for The Economist) and, indeed, a recognition that we have a major problem in finding enough jobs.
  • On a tangental theme, many academic economists have pointed to a structural change surfacing in the labour market from around the year 2000. Interestingly, an article in the weekend’s Financial Times sees a structural change in the U.K. housing market taking place at around the same time. In short, from the end of WW2 to the turn of the millennium, housing wealth broadened to encompass a growing share of the population, and since that time it has struck. A further symptom of the return to an Edwardian Downton Abbey-type economy? (Note, FT articles are free as long as you register.)
  • And for an upper middle-class lament on both housing and education affordability trends read this article by David Thomas in The Telegraph titled “We’ll Never Have It So Good Again“(it’s a few months old, but I missed it until seeing it referenced by The Browser).
  • The climate skeptic spin on the scientists stuck in Antarctic ice is too depressing for words, but at least I think this incident will be forgotten within a year or so. Nonetheless, strange things are happening to the Antarctic climate as this piece in The New York Times explains.
  • Still on climate, Michael Mann—he of the hockey stick controversy— has a fine op-ed (again in The New York Times) explaining why he gets involved in the bar fight that is climate change action advocacy. In his words: “How will history judge us if we watch the threat unfold before our eyes, but fail to communicate the urgency of acting to avert potential disaster? How would I explain to the future children of my 8-year-old daughter that their grandfather saw the threat, but didn’t speak up in time?” Bravo!
  • And don’t miss Gavin Schmidt’s talk and comments on the role of scientists in climate change advocacy available at Realclimate here.
  • For an angle on just how much we have left to do, read the International Energy Agency‘s Maria van der Hoeven’s  CNN Money piece on the inexorable rise of coal consumption. Disturbing reading. The IEA report on coal that sits behind this article is here.

Links for the Week Ending 12 January 2014

  • A segment on 60 Minutes bashing Cleantech entitled the Cleantech Crash has caused a lot of controversy around the web. I will just say a couple of things. First, biofuels, the woeful under-performers, are not the only thing in Greentech; successes in electric cars, wind and solar have been many. Second, the development of fracking technology took many decades, went up a lot of dead ends, and has cost a lot of tax-dollars through government support (see here). Grist has a good response to 60 Minutes here, and Robert Rapier of the blog R-Squared Energy, a contributor to the programme, has the backstory of how the segment was made here.
  • With floods in the UK and freeze in the US, now is a good time to revisit a Skeptical Science post explaining the jet stream (here), whose recent volatility is the likely driver of all the turmoil. Ironically, Australia has just finished its hottest year on record (here) and has had a record-shattering start to 2014 as well. Ditto Argentina (here).
  • I’ve been talking a lot about technology munching jobs recently, and am intrigued that this issue is popping up in the most unexpected places. Adam Jones in the management section of The Financial Times tells us how technology and globalisation are creating lives for white collar workers of angst and alienation befitting a Bruce Springsteen song. In the face of such burgeoning job insecurity, he advises the middle class to detach their identities from their jobs if they wish to avoid the psychological damage suffered by blue collar workers of the Springsteen-land rust belt in the 1970s and 80s.
  • I if you were to read only three non-academic articles on the subject of technology and job destruction they would be these: 1) Martin Ford’s “Could Artificial Intelligence Cause an Unemployment Crisis” (yes, we have a crisis), 2) David Rotman in the MIT Technology Reviews’s “How Technology Is Destroying Jobs” (could perhaps be a crisis), and 3) Ben Miller and Robert Atkinson’s  “Are Robots Taking Our Jobs, or Making Them?” (definitely no crisis).
  • I did a post a couple of months back on the Red Queen syndrome with shale gas production (here). Here is Rune Likvern writing over at Fractional Flow on the same theme but with respect to tight oil.

Links for the Week Ending 5 January 2014

Taking a short break from my “Hiding from the Computers” posts, here are a few links that have caught my eye over the last week.

  • If you are to read one thing this week, then it should be the short 6-page report by Andrew Flowers of the Atlanta Fed entitled “The Productivity Paradox: Is Technology Failing or Fueling Growth?“. The arguments are nothing new to readers of this blog, but it is nice to have them restated so succinctly all in one place.
  • Robert Gordon’s 2012 paper “Is US Economic Growth Over?” was a watershed in bringing this issue out of the closet since Gordon is one of the most-respected growth economists in the world. Indeed, the outgoing Fed Chairman Ben Bernanke dealt with the stagnation hypothesis head on in a speech entitled  “Economic Prospects for the Long Run“; the talk referenced both Robert Gordon and Tyler Cowen. Bernanke also brought up the productivity conundrum in his last speech as Fed chair on 3rd January 2014.
  • Yves Smith from Naked Capitalism is one of my favourite bloggers, but she can be infuriatingly uneven at times. But here are 10 of her best posts from 2013. As an ex-investment banker and consultant, she is a past master at unveiling the bullshit espoused by certain sectors of the financial sector.
  • And another of my favourite bloggers, Stuart Staniford of Early Warning, is back after a long hiatus. He kicks off with an update on the oil market. I like his last chart showing crude and condensate production flat-lining since 2004. I don’t take this as irrefutable proof that the peak oilers are/were right since if an alternative liquid functions as an oil substitute (or at least partially functions) then in economic terms it is oil. Nonetheless, I am an advocate of the modern peak oil argument championed by Colin Campbell and Jean Laherrere in an incredibly prescient 1998 Scientific American article entitled “The End of Cheap Oil”. Campbell and Leherrere said: “The world is not running out of oil—at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.” Average price of Brent crude in 1998: $12.76 per barrel. Average price of Brent crude in  2013: $108.41—the third year in a row above $100 per barrel. Why? Because all incremental growth in oil production is now coming from non-traditional (i.e. expensive) sources as Staniford’s chart shows, and Campbell and Laherrere predicted 15 years ago. In short, Campbell and Laherrere were spectacularly right, the darling of the global financial press Daniel Yergin—who has for years preached technology-led oil abundance—was spectacularly wrong.
  • Finally, at one stage I contemplated doing a post at the end of 2013 entitled “Reasons to Be Cheerful”. This is a blog that highlights tail risk, so by definition it focuses on the negative (no apologies for this—I am from a profession that regards such an approach as good risk management). However, certain negative tail risks sometimes get a little less negative. One such, I thought, was climate sensitivity to a doubling of CO2. In the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4) in 2007, sensitivity was given as 2°C to 4.5°C. The latest report published in late 2013, AR5, slightly reduced sensitivity to 1.5°C to 4.5°. However, it is going to be a long time until we have the final word on sensitivity. A new study by Sherwood et al on the impact of clouds provides evidence that the top end (bad end) of sensitivity could be worse than AR5. Such uncertainty over the sensitivity number is, in itself, a big risk. has a lot more on this issue this week.