What You Should Think About Economic Churn

December 11, 2007

“So now, as an infallible way of making little ease great ease, I began to contract a quantity of debt.”

–from Great Expectations by Charles Dickens

Wall Street’s elite and television news anchors seem largely of one mind when it comes to the recent decision to cut interest rates again. None of them seem to have a problem with the ongoing trend. To the contrary, their complaint is that the latest cut was relatively modest when continuing turmoil in the world of high finance is thought to constitute a demand for bold cuts to continue. Chronically drunk on loose credit, they find mere moderation of the trend cause to for vocal complaint.

The underlying thinking is simple enough. Lower interest rates mean that consumers and businesses may borrow more easily. All else being equal, this also means that consumers will make more large purchases and businesses will undertake more aggressive expansion. It also lowers the hurdles aspirant entrepreneurs must overcome to launch a new venture. So far, so good, right?

The problem with this nice neat simple thinking of this sort is that we do not actually live in a nice neat simple world. After all, if great economic success was automatically the result of lowering interest rates, why not slash them to the practical minimum with all possible haste? The answer lies in the fact that not all economic activity is actually a good thing. Sometimes new ventures actually are a bad idea, destined to waste resources then fold for lack of revenue. Sometimes existing businesses are not actually better off at a larger size. Sometimes consumers are not best served by another big ticket purchase.

One major influence on present economic conditions is proof enough that this is true. The ongoing problems with mortgage-related financial instruments in the United States have much to do with a mismatch between real estate acquisitions and suitable lifestyle choices. This goes beyond low interest rates and a shamelessly underegulated mortgage industry enticing homeowners to bite off more than they could possibly chew. The rise of media promoting lavish home improvement aspirations, even idealizing fairy tale rarities in which amateurs “flip” properties they have no intention of inhabiting, fueled a wave of cultural pressure to go big with real estate.

No doubt there are many Americans with the resources to live in large houses or even own multiple homes. However, there are also many Americans who attempt to do this in spite of lacking the resources to make it a sound decision. There was a definite sense of schadenfreude in the early 1990s when Japanese investors, coming from a crowded island nation, took tremendous losses on commercial real estate in the U.S. The idea that an office tower in a major city might actually be less valuable from one year to the next simply did not compute among analysts willing to be literally crammed inside trains for their morning commute.

When excessive capacity ran up against sagging U.S. demand for that urban office space, even world famous landmarks had difficulty holding their value. Somehow that experience, well-covered in financial media of the time, seems to have been forgotten by figures framing American real estate policies and practices this century. Year after year of steady growth in the sector was thought to be part of a perpetual boom. It seems to me anyone claiming to be an expert in economics and/or personal finance ought know better than to ever endorse the notion of a perpetual boom.

Yet what has happened to American housing lately is not all that divergent from what has been happening to American business lately. For years and years “more more more” has been the battle cry of pundits and policymakers alike. Yet more activity does not necessarily generate more real value. One healthy aspect of the business cycle is that downturns weed out marginal operations that are not thriving on their own merits.

An ideal economy has very little churn — makework activity or meaningless transactions that serve no useful purpose. The more churn involved in an economy, the more demands will be placed on working citizens without any compensatory increases in quality of life. To a simpleton spellbound by Gross Domestic Product and unemployment figures, there is no difference between churn and meaningful productive endeavors. Yet to the people actually doing the work, there are huge consequences for morale. Perhaps more importantly, to everyone participating in the economy, there are huge consequences for the quality of goods and services obtained by a given unit of purchasing power.

Replacing a lifelong pharmaceutical therapy or an expensive surgery with a simple remedy for a common medical condition is seen as bad for the economy by prevailing metrics. Yet who among us would prefer to live in a world where a $500/month treatment is widely promoted in spite of being no better than a $150 treatment that provides at least as much health benefit? A pro-churn paradigm has our nation favoring the perpetual prescription or the sophisticated surgery over simpler approaches. While the market ultimately promotes smart choices when they become available, it also discourages the development and popularization of smart choices when there are huge profits to be made from continued dependence on costlier alternatives.

The most recent announced decline in interest rates, as with all others, is thought by its proponents to spur new ideas and new investments that will advance the cause of American prosperity. Yet this method of growing the economy is more like blowing up a balloon than building up a structure. Absolute emphasis on quantity, with no regard at all for quality, drives greater levels of economic activity without driving any greater satisfaction of human needs or desires (save the desire to prop up specific economic indicators.) In the long term, it actually undermines prosperity by amplifying the extent of future losses when an inevitable reckoning comes to pass.

This is not to say that there is no place for manipulation of interest rates as a means to stimulate or fortify a national economy. In fact, the prospect of surging foreclosure rates in response to rising interest rates is precisely the sort of scenario in which a bold cut could accomplish some useful purpose. Unfortunately, this purpose — encouraging stability in the face of troubling fundamental conditions — is best accomplished when the bold cut stands out as a sharp contrast to historical changes. When national policy has long been “cut, cut, and then cut some more,” no practical cut will be bold enough to send the right signals, and anything less than continued sharp cuts only compounds the influence of troubling fundamentals.

If managing a national economy were like running a horse race, we would find America’s productive elements so heavily whipped that no further action is likely to bring about a more energetic effort. Had the implement been used more sparingly, then it would have much more potential to motivate a surge at this point in time, when there is a clear imperative for stimulating intervention. In this way it becomes possible to provide effective support as it is needed. Realism, sensitivity, and selectivity all have crucial roles to play in these decisions.

Alas, along with just about every other issue that has some political dimension, most discussions of interest rate policy have been dumbed down beneath the point of usefulness. “When rates go down it is good, when rates go up it is bad,” is just a slightly more nuanced perspective than Frankenstein’s monster’s thoughts on fire. Yet widely respected financial analysts seem unable to do better in their assessments of Federal Reserve actions. This mindset is a wonderful thing for promoting even more economic churn, but when it comes to promoting real productivity and building real value in the American economy, it is anything but wonderful.

What You Should Think About Nuclear Energy

October 9, 2007

For 50 years, nuclear power has been a solution in search of a problem.”

–George Monbiot

Born into the 70s, making my first efforts to comprehend “the grown up world” in the 80s, my earliest perceptions of atomic power were shaped by a blend of rosy corporate propaganda and bleak doomsday dramatizations. By the time I was ready for my first political debate, concepts like “control rods” and “implosion triggers” were already familiar to me. Even setting environmental risks aside, my teenaged self could not break associations between constructive and destructive applications unleashed by discoveries in nuclear physics.

As time advanced, so did my views. Much more importantly, scientific understanding has advanced as well. Today the world finds itself in an interesting place vis-à-vis nuclear energy production. It was not so long ago that consensus views favored “cheaper” alternatives. Yet resource depletion, soot production, and greenhouse gas emission are all real costs associated with fossil fuel consumption. A market that demands one industry protect the public commons while making no similar demands of others may indeed place alternatives to nuclear power at a lower price per unit. Yet a more circumspect analysis reveals that polluting enterprises ultimately exact their true price one way or another — whether or not it is reflected in utility bills.

To be sure, nuclear power poses pollution concerns of its own. Chernobyl is now a household word precisely because of the extreme dangers associated with radioactive contamination. Heck, even thermal pollution is an issue with nuclear power. Clearly any sensible nuclear power program demands stringent and redundant oversight. Operating with a flawed design or sloppy management practices creates a very real risk that no nation should tolerate.

Also, there is the security issue. Yet that is an issue that cuts both ways. Every additional nuclear facility is a new target for terrorists intent on stealing material for radiological attacks or even staging a deliberate environmental disaster. On the other hand, every additional petrochemical facility drives up demand for a commodity that is partially under the control of aristocrats involved with promoting religious fundamentalism and financing terrorist organizations. This would seem to suggest the American energy sector should be heavily invested in alternatives to either approach.

Yet those alternatives, as they exist today, fall short. Nature offers up light, wind, water, and earth all as methods of collecting energy from sources that renew themselves. In time the yields and costs of solar arrays may improve to the point where that approach would merit a place as a mainstay of American energy. Yet just when that time will occur is unknown. Windmills, tide mills, and dams are only appropriate in locations that satisfy specific conditions. Surprisingly enough, geothermal resources can be depleted by overuse, and they also depend on an appropriate site to achieve commercial yields.

As demand for fossil fuel resources rises and awareness grows of the hidden costs associated with burning ancient carbon compounds, nuclear power provides an alternative with generating capacity independent of local natural features. At the very least, it merits consideration as a supplement for meeting demands when clouds or calm or cooling produce shortfalls from other methods. Given responsible government oversight (a legitimate worry if pursued under the present administration,) nuclear power has the potential to bridge the gap between what we can harness from natural forces and what is required to sustain economic progress.

Yet nuclear power also offers much potential for innovation. Nuclear fusion research has yet to produce anything like a device for generating more energy than it requires, but new approaches do hold some promise. Decades ago, the scientific establishment abandoned the idea that an intersection of powerful laser beams could be used to contain the intense pressure generated by fusion reactions. A new approach, less like a turbine engine and more like a piston engine, might make it possible to sustain serial bursts of fusion reaction with lasers only active for the briefest of instants. The dramatic reduction in energy cost is just one of several innovations that could pave the way for productive fusion power plants.

Then there is the prospect of breakthroughs in fission as well. European scientists are developing precursor technology with an eye toward constructing energy amplifiers. The concept involves using a powerful particle accelerator to outright disintegrate nuclear fuel. It would require elaborate facilities, but it offers many advantages. Energy amplifiers are “subcritical” nuclear reactors, meaning that they can produce power from reaction masses that are not susceptible to meltdown in the event of unexpected technical problems. They can be used to safely destroy dangerous nuclear materials produced by conventional fission reactors. This includes the world’s stockpiles of weapons grade plutonium. Also, they can derive power from thorium — a substance both much less radioactive and much more abundant than traditional nuclear fuels.

Of course, scientific breakthroughs are unexpected by nature. Low cost, high yield solar panels may emerge at some point in the future. Also, there is plenty of ground to be gained by applying energy conservation to building and product design. Society does well to invest in any avenue of progress that might address a mounting crises related to energy demands and existing fuel supplies. Yet without having already achieved such progress, we have no choice but to make due with what we have.

Considering the overwhelming mix of security and environmental concerns, giving private corporations broad latitude to expand America’s nuclear power industry seems like unacceptably risky business. Yet only politics obstructs the pursuit of a nationalized atomic energy industry that serves the common good while benefiting from tight controls that no nuclear facility should be without. As with other public sector enterprises, free markets and innovation could continue to play vital roles in areas ranging from component manufacturing to facility maintenance.

Personally, I’ve long questioned the merits of letting the whims of profit-seekers create turbulence in a key sector that serves as a foundation on which almost all other economic activity must rest. Entities like Enron operated contrary to the national interest not only because they were managed by dishonest crooks, but also because it was their business to seek profits through playing games with energy itself. When it becomes possible to generate revenue by deliberately choking off the economic lifeblood of a region, clearly a failed paradigm is in place.

Yet it is not my intent, today, to argue for the nationalization of the entire energy sector. Instead it is my contention that only in the context of nationalization can we expect the safest and best results from massive expansion of America’s nuclear power industry. Without the need for any technology yet to be discovered, that context makes it possible to safely generate energy enough to satisfy the needs of a large economy that (hopefully) will continue to grow through the years ahead. Given that numerous problems caused by fossil fuel consumption are already bad and likely to get even worse, I don’t believe it takes a visionary like Albert Einstein to point out that we would do well to make greater use of our capacity to split the atom for peaceful purposes.