Thursday, February 5, 2015

Keystone Pipeline: Politics is not about policy

(I had written this out, but I was sitting on it, debating whether to soften it up, and I saw that Menzie Chinn made a post this morning that is, unfortunately, a perfect example of the problem.  Our central bank treats success as failure, and our academic economists treat costs as benefits.  So, I decided to post this.  I promise I will get back to my housing series.)

I was listening to NPR this morning, and they were talking about the Keystone Pipeline.  Politics is about imposing our factional collective will on others.  So, the point of engaging in politics is to stubbornly refuse to acquiesce to reasonable opposition.  That being the case, the way to win in politics isn't to engage in thoughtful dialog.  If anyone disagrees with you to begin with, in the political realm, they will be engaging with you specifically to avoid that.  So, you win by appealing to whatever misconceptions or biases they have already committed to, which happen to support your policy preference.

So, when I happen upon political dialog, what is striking to me is how often basic truths are avoided by everyone involved in the discussion.

And so it is with the Keystone XL Pipeline.  Regarding the economics of it, there is really only one significant measure of value, and that is the consumer and producer surplus it will provide.  On the margin, the consumer surplus will only come about indirectly and will be difficult to measure.  But, by the conventions of modern finance and accounting, we tend to keep a precise record of producer surplus - profit.  The economic profit the owner expects to reap from it is really the only measurable point of clarity here.  This point appears to be stridently ignored by all involved.  In a sane public debate, instead of arguing how many jobs it would create, we would ask the intended owner how much they were going to make on the pipeline, and the higher the number, the more support we should give it.

The jobs created by building and maintaining it and the materials and capital used will presumably be slightly more valuable as a result of this additional opportunity for their application.  But mostly, on the whole, it will simply divert labor and capital from some similarly valued activities that are competing for our limited resources.

So, here's a test.  Tell someone that you like the pipeline, but you would really love it if instead of creating all these jobs, the owner simply had a state of the art machine that would quickly lay down the pipeline with little cost, and could reap millions in profits without hiring more than a handful of workers or spending more than a small amount of capital.  That would really be great.

If the person looks at you like you have cottage cheese coming out of your ears, then they are operating with a morally perverse frame of reference.  They are making an ascetic imposition on the rest of us based on a preset determination of who they morally favor.  It is the moral equivalent of a segregationist or a tyrannical monarch who forces women out of school.  They are explicitly willing to harm the whole society if it seems to harm a particular group proportionately more.  If cash is transferred to the group they favor (labor), they go so far as to treat costs as benefits.  If cash is transferred to the group they disfavor (capital), they will treat benefits as costs.

It's disappointing to me how foundational this sectarian status battle has become in American politics.  I see so many otherwise good, intelligent people proudly calling for the rights of other Americans to be curtailed - people who are keenly aware of these human tendencies when it comes to race, gender, and sexual orientation, and who actively fight for a better society in those realms, yet they engage so explicitly in motivated reasoning and ad hominem regarding economic matters.  Get-out-the-vote rhetoric like, "Help make sure the voice of the 1% isn't heard this Tuesday."  Profit as a reason to oppose something.  Explicit calls to roll back Bill of Rights protections for commercial associations.  I trust that the pendulum will swing back at some point.  But it is a little frightening and disappointing to see how easily people can believe harm is a virtue.

This bias against capital is so built into our public consensus that introducing the idea in a conversation like this is generally met with bewilderment.  It should be patently obvious that we are better off if some new service can be provided with less effort and material.  Sadly, for most people, it is not.  This is one of those cases - much like with, say, someone in a creationist community who is confronted with the evidence of evolution - where, on the facts, it seems like it should be very easy for people to see something.  But, we are human.  Community matters a lot to us.  Affiliations give our lives meaning.  Having villains, and sharing those villains with a group of like-believers, is powerful.  If acceptance of a simple fact challenges that, it is most definitely not an easy thing to do.  It could, in fact, be rational for that person to concoct a story that ignores the fact, but saves their personal identity.  That doesn't mean it's good.  Local optimums are not global optimums.

There is much moral similarity between strident moralists - think of angry marchers with anti-gay signs or anti-Wal-Mart signs.  These are both working from sectarian impulses, yet thoroughly convinced that they are morally compelled.  They are both working from a pre-determined set of good vs. bad, with a determined refusal to consider any of the constraints or needs of the chosen villain, a demand that you, nonetheless, bend your lives to their moral code, and a complete ignorance about what that would realistically entail created by a refusal to engage you with even the slightest empathy or understanding.  And both insist on acting as if there is some damage being done to hetero families or workers, with reasoning that is highly motivated.  I think that, even though there is a lot of discomfort still in our society regarding sexual identities, there is generally a consensus about the shamefulness of those protesters.  Economics is a complex subject, so there will always be ignorance about it, but I would like to think that we will someday have the same consensus about both sets of protesters.

Human nature wants to make everything moral.  We used to think that droughts and famines were the gods' punishment for our moral failings.  We have shed those tendencies in so many ways, but we retain them in the realm of finance and economics.  In the Wal-Mart or Keystone examples above, people are still imposing moral biases, consciously or unconsciously.  Or, think of the Great Depression and the Great Recession.  How many people believe that these events were payback for the "excesses" of the preceding decades?  The inevitable falls from grace resulting from our greed.  We make this error, and we end up destroying ourselves, as humans always have.  We've come a long way, but we have a hell of a long way to go.

PS.  I don't want to debate the pipeline itself.  There may be other reasons to oppose it.  I am speaking only about how the distribution of its economic effects would affect someone's support.

PPS. (added)  One character of prejudice is that we impose a moral framework on our targets where we would allow ourselves to operate more pragmatically, and we ignore the constraints that our targets have in  meeting our moral demands.  The striking thing about this regarding anti-capital prejudice is that we have this remarkable, real-time measurement of the constraints on capital - the stock market.  A butterfly flaps its wings in Bangkok, and the next day GE stock is down three ticks.  Literally by the second, we can measure the constraints on capital.  So I am blown away by the level of self-imposed obtuseness that leads to those back-of-the-envelope geniuses who figure out that Wal-Mart could raise wages or improve working conditions without losing profits, or better yet, gaining profits.  Can you believe the $280 billion worth of capital trading up and down every second because of those wing-flapping butterflies missed this one?  Stop watching those butterflies, people!  That guy with the dreadlocks, the venti fair trade latte, and the necklace with the artisanal aboriginal pendant that's been out yelling at passersby in front of your store just made you a ton of money.  He's got the basic idea scribbled out on a napkin in his back pocket.  Do this before the guys on Shark Tank find out and steal the idea first!


  1. I faced a similar circumstance in scoring the recently announced Apple project in Mesa ($2B over 30 years). Ignore for a moment the weakness of the Apple commitment across time and the 30-year projected investment period.

    The common issue raised was that this would "only" employ 150 new workers. I proposed it was miraculous that 150 employees could efficiently manage a $2B investment, and that the money had to go somewhere. Conveying the argument intelligently and convincingly to those outside this discipline, however, is not easy.

    I do not think the intent is malicious. I blame naivete. The metric of interest in politics is always going to be "net jobs created". Discussion of outside options seldom enters the argument. This is why government contracts are (often) explicitly made labor INEFFICIENT.

    1. I completely agree, Glenn. But, most sectarian or bigoted behavior is not done maliciously. That's the most dangerous aspect of it. Most harm is inflicted by people with the most strident sense of morals and self-righteousness.

    2. Thinking more about your Apple example, there would be some local benefits from having those jobs here instead of in another city. And, capital follows the same logic. It would be even better if they could produce the same product with only a $2 million investment. But, given that it's $2 billion, it's probably better to have the capital in your city as opposed to somewhere else.

      In fact, this is what is happening with the tech revolution. Improvements are made with very little capital. And this is screwing up our methods of measurement. Before, we could measure producer surplus with profit, and we could get pretty close to consumer surplus by making hedonic comparisons over time, and estimating real growth by seeing how much extra consumption was available after purchasing the same real level of goods over time. The rate of innovation, and the balance between producer and consumer surplus were pretty stable.

      But, now, there is no possible way to make hedonic comparisons between, say, boring my wife to sleep with hour-long speeches about equity premiums and having a global conversation on a blogger platform. Not only is the value not comparable, but there isn't even a monetary transaction with which to begin measuring it. And, the marginal capital required to provide it was insignificant.

      So, before, half a trillion dollars in capital might have been spent, combined with a stable level of innovation that goosed its value, and consumers would have seen $700 billion gains, inferred from higher real incomes, capital would have seen $250 billion in profits and interest income, and entrepreneurs would have seen $50 billion in new capital earned through creation, and measured by its market price.

      In an economy made up of revolutionary software and app improvements, we have no way of measuring the gains to consumers. There are insignificant profits to capital. And, an entrepreneur squeezes his $50 billion out of some sort of advertising or subscription revenue.

      This is an economy that looks like all the gains are going to the top 1%, and it looks like the capital's share is expanding faster than labor's, even though legacy capital isn't earning particularly good returns.

      And, guess what, that's exactly what this economy looks like!

      Now, there is a complex and interesting conversation to be had about that, regarding the creation and distribution of income and wealth. Since the left end of the political spectrum is satisfied using the inequality meme as an excuse to wet their pants and play act like they're Robin Hood, nobody is having that conversation.

    3. "In an economy made up of revolutionary software and app improvements, we have no way of measuring the gains to consumers."

      Ask consumers how much they would have to be compensated to give up their iPhones. Deduct up-front and ongoing costs associated with keeping it.

      But this isn't anywhere near as attractive as, say, "jobs created or saved".

      In the case of Keystone, the metric is particularly absurd. This is an infrastructure project meant to move energy from where it is useless (the frozen deserts of Saskatchewan, or whatever, to where it is useful). The first best - as you say - is for this to be done at de minimis cost, to capital and labor, freeing up more resources for turning out final product wherever that potential energy can be put to good use.

      However, the popular capacity to connect, say, the availability of cheap patio furniture at Target to the existence of container ships larger than a football field with an 11-man crew is tenuous. We are more or less ignorant of the supply chains between us and our products. Considered from this light, then, "all else equal" a container ship with a 12-man crew beats a container ship with an 11-man (just ask the marginal guy).

      Hence Keystone's best hope being maximization of the number of union workers put to work laying steel.

  2. Kevin, this post reminds me of Scott Sumner's tirades against the cognitive illusions that prevent most people from thinking clearly about monetary economics. You raise many great points.

    > boring my wife to sleep with hour-long speeches about equity premiums...

    haha, let me tell you how much my wife likes hearing about the relationship between low interest rates and the stance of monetary policy. :-)


  3. The reaping of millions of profit is an indication of rent extraction surely? If it were easy to do, then others would do it and bid down the profits - the gains would therefore be spread to the consumer - which would be great! You're conflating huge profits from rent extraction with the wider benefit created by competitive markets?

    1. That's a great point, Tom. I was a little sloppy. Profit isn't a perfect measure of surplus. Sometimes it's just producers and owners capturing more of it. But, not all rents are equal. I think we have a much different feeling about the rents Jackie Robinson captured because of his abilities as a baseball player than we do about the rents captured by the player he replaced, which came from excluding Jackie from the game.

      And, here we see all the same errors coming out of conventional biases. The worst rents here are the rents that are being captured now by other producers (pipelines, rail, etc.) by excluding this new pipeline. Rents will be reduced by adding this pipeline, and to the extent that the pipeline creates rents, they will be replacing rents of the "worse" kind (legislative exclusion). Since capital is treated with contempt, its antagonists have an overdeveloped fear of its power to accrue gains for itself. But, of course, capital retains few excess gains when access is open. So they see the new profit as a cost instead of a measure of added value, and they don't account for the reduction of other rents that comes from its creation.

      But, when we turn to labor, rents are seen as a benefit. Some argue for the pipeline because it will create "good" jobs. Some unions are for it. But, those are guild rents that come from legislated exclusion.

      So, only the worst kind of rents gather support from the public, because they line up well with the labor vs. capital bias. And, this bias leads to poor decision making.

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