Monday, October 28, 2013


I mentioned the other day that I acted as moderator for the recent TEDxBergen conference. Videos of the various talks have now been posted online, but here are two that I particularly enjoyed as a sample.

1) Mads Nordmo gave a talk on moral psychology, which challenges the traditional "transactional" view of behaviour -- as is favoured by a lot of economic theory.

Mads is actually doing a PhD with me -- albeit in the strategy department -- and also has a degree in clinical psychology. His opening remark about showing that "it wasn't just beginner's luck" was in reference to a quip that I made about him winning a 'Best lecturer' award from NHH bachelor students. (Link in Norwegian.)

He used various examples to underscore his points, including the growing popularity of CrossFit and the paleo diet.[*] For instance, a purely transactional view provides us with very little insight into why people pay such exorbitant sums of money to join CrossFit gyms. The exercises mostly require far less equipment than ordinary gyms and we could all do as many sit-ups and push-ups as we want at home (for free!). However, Mads argued that these "movements" actually constitute a quasi-religious experience -- much like we would encounter at a rock concert or sports match -- where the sense of communal spirit and exaltation actually enable participants to achieve some kind of transcendence.

In the Q&A afterwards (not shown), I suggested that economics would normally explain the high membership fees paid to crossfit gyms as a commitment device. Mads agreed that this too is an important psychological driver. However, there is at the least no reason to regard such phenomena as mutually exclusive. (Interestingly, he also said that psychology is moving closer to economics... not simply the other war around, as is often asserted in some heterodox circles.) Anyway, he is a smart and funny guy, and I think that both traits are evident in his talk. Check it out:

2) The Grammy-nominated violinist, Peter Sheppard Skærved talked about reinvention and finding new purposes for old tools. Peter is a fascinating person -- the Library of Congress has described him as a polymath -- and I thoroughly enjoyed chatting to him about a range of topics, from anthropology to haptic technology, over the course of the day. In this video, he not only makes a compelling case for preserving "museum pieces" by actively using them as much as possible, but also treats the audience to a range of music pieces from across the ages.

[*] As someone who has a number of friends into (at least one of) CrossFit and the paleo diet, I freely admit that I am predisposed towards finding this discussion both amusing and enlightening.

Monday, October 21, 2013

Joe Romm's cognitive dissonance on renewables, nuclear and shale gas

I used to be an avid reader of Joe Romm's "Climate Progress" blog. However, my enthusiasm has waned dramatically over the years due to his selective presentation of facts and data, stark intolerance for any opposing ideas and dogmatic stance on nuclear power. (On the plus side, his blog remains an excellent repository for climate news and he can be great fun when mocking the likes of Christopher Monckton.)

Probably the biggest problem that I have with Romm, however, is that he appears to suffer from acute cognitive dissonance. For example, the overriding theme of his blog is one of impending climate doom, yet he regularly proclaims that renewables are already at grid parity, getting cheaper by the second and ready for mass deployment. So, problem solved surely? Frustratingly, this is a recurrent theme on many green blogs, where Cassandra complexes are hard to square with wildly overstated -- or misleading at best -- claims about current renewable energy performance.

Such cognitive dissonance is again on display in one of Romm's recent posts, entitled "Major Study Projects No Major Long-Term Benefit From Shale Gas Revolution". The study in question is by Huntington et al, (2013) and contains projections from a broad suite of integrated climate models. In addition to GHG emissions, the researchers looked at the wider economic impacts of shale gas and their conclusions are rather more nuanced than Romm's excitable headline would suggest. In short, the final projections depend on a complex set of model assumptions and variable interactions. This is evident from the following paragraph that Romm actually cites from the study (emphasis his):
…this trend towards reducing emissions becomes less pronounced as natural gas begins to displace nuclear and renewable energy that would have been used otherwise in new power plants under reference case conditions. Another contributor to the modest emissions impact is the somewhat higher economic growth that stimulates more emissions. Reinforcing this trend is the greater fuel and power consumption resulting from lower natural gas and electricity prices.
Does anyone else see the irony here? Romm is lauding a study which questions the climate credentials of shale gas... and yet that largely depends on whether cheap gas displaces nuclear power -- a technology that he maligns at every opportunity.

More importantly, to say that shale gas confers no long-term climate benefits (in of itself) is extremely misleading. It all depends on whether it is complemented by a carbon price, as anyone interested in this debate (at least that I am aware of) readily acknowledges. You get a sense of this from the very figure that Joe Romm chooses to include in his blog post:

Comparison of low shale scenario (light blue), high shale scenario (dark blue), and a scenario depicting a reference case combined with a carbon price (green). This reference case is in between the low and high shale scenarios, while the carbon price starts at $25/tonne in 2013 and increases at 5% each year. Source: Huntington et al. (2013).

The dramatic reduction in emissions due to a carbon price is clearly evident. However, the above figure is still not really comparing apples with apples, since the carbon price is not adapted to the high shale scenario. (It is applied to a reference scenario that is somewhere in between the high and low shale cases.) Luckily, the data that would allow us to make the correct comparison is available here. I have therefore reconstructed the above graph, this time adding a new column that specifically combines the high shale scenario with a carbon price.

Based on Figure 13 of Huntington et al. (2013). The figure now includes a fourth column (purple) where a high shale scenario is combined with a carbon price.

This updated graph makes perfectly clear that the shale revolution can be fully compatible with deep long-term emission reductions, as long as it is complemented by a carbon price. To his credit, Romm does mention this briefly in the article and has also commented on the issue previously. Yet, by continuing to disparage shale gas and pretend that its supporters ignore the need for a carbon price, he simply serves to further polarise the climate debate.

THOUGHT FOR THE DAY: Adapting to the threat of climate change will require a broad suite of interventions. Nobody should claim that the proliferation of shale gas is a sufficient development for de-carbonising the global economy. However, together with a carbon price and other technological breakthroughs, it will likely form a very necessary component.

PS - It probably goes without saying that the economy also benefits from cheap and abundant shale. Huntington et al. state as much in their report (p. 7):
Higher shale resources reduce the costs of natural gas development and expand opportunities throughout the economy. Relative to its path in the low-shale case, [real GDP] is higher in all models that track the economy’s aggregate output. The cumulative aggregation of these GDP gains over all years is significant standing at $1.1 trillion (2010 dollars).
Showing this in graphical form is a little trickier, since some of the models actually take economic growth as an exogenous assumption, or don't extend all the way until 2050. Nonetheless, here is a graph showing a selection of models that compare changes in real GDP up until 2035.

Thursday, October 17, 2013

Manufactured controversy and the "hockey stick": A football analogy

Even if you're only vaguely aware of the climate change debate, then you will probably have heard of the "hockey stick". You know, this bad boy:

Source: Mann et al. (1999).
This famous depiction of global temperatures going back into time has generated a lot of controversy. It doesn't seem to matter much to sceptics that the initial hockey stick(s) -- i.e. those produced by Mann, Bradley and Hughes (19981999) -- have since been replicated by multiple studies using different lines of evidence and computational procedures. No, we are invariably told that the hockey stick is a fraud and has been debunked by the likes of Steve McIntyre and Ross McKitrick.

The problem with these debates is that they are necessarily technical and involve concepts that are very unfamiliar to most people. Whenever I tried to explain things to my friends and family, I could see their eyes glazing over as soon as I mentioned the words "principal component analysis". So here is a sports analogy that captures the essence of what critics like McIntyre and McKitrick got wrong.

Tuesday, October 15, 2013

Obligatory comment on the 2013 Nobelists

Seeing as it is very de jour to comment on this sort of thing in the econ blogosphere, here is a quick personal take:

I know that this year's laureates have raised eyebrows -- not least of all because people think that Fama and Shiller are at complete odds with one another. This doesn't strike me as especially correct. (Hansen is really the odd one out in this triumvirate, but we'll get to him in a second). For starters, and as pointed out many times over the last two days, Fama was one of the first people to publish results that ran counter to EMH predictions. Mark Thoma is exactly right in pointing out the EMH remains a really useful benchmark/framework for thinking about markets in an empirical sense. I've used it a fair bit when looking at energy and commodity markets for my own research and also when asked to to advise/comment on market trends. 

Shiller has played less of a formal role for me personally, though his housing index and his "dividend returns" data have been extremely handy tools in the blogosphere. The former is better known, but the latter is especially useful when, say, debating your average goldbug. (E.g. When dividends are taken into account, U.S. stocks have enjoyed inflation-adjusted returns of +/-1,000% since 1974. Gold, on the other hand, has yielded a rather more modest 130% over the same time period...)

The 2013 Nobelist who has had the most relevance for me, however, is Lars Peter Hansen. I suspect that this is true for many people working in economic research today, simply because the tools that he bequeathed us are so widely used in modern empirical work. Alex Tabarrok has one of the best "layman" explanations of GMM that I've seen here. Guan Yang has a more wonkish (but still accessible to anyone who is familiar with basic econometrics) exposition here.

Predictable Nobel Prizes in the Economic Sciences?

The subject line is taken from an email sent around my department by one of the finance profs. Here's the email itself:
A curiosity: In the very first edition of their textbook Financial Theory and Corporate Policy (Addison-Wesley, 1979), the authors Thomas E. Copeland and J. Fred Weston dedicated the book to 15 named “pioneers in the development of the modern theory of finance”. Out of these 15 pioneers, eight have since been awarded the Nobel Prize (viz. Debreu (‘81), Modigliani (‘85), Miller (‘90), Markowitz (‘90), Sharpe (‘90), Merton (‘97), Scholes (‘97), and Fama (‘13)), one was already a Nobel laureate (Arrow (‘72)), and three are dead and thus not eligible (Lintner, Black, Hirshleifer). So what about the chances of the three remaining finance pioneers Michael Jensen, Richard Roll, and Stephen Ross? By the way, this year’s laureates Hansen, Shiller, and Fama (a well as the previous laureates Engle, Lucas, Arrow, and Samuelson) are all among the twelve elected Fellows of the American Finance Association, recognized as having made a distinguished contribution to the field of finance.
So I guess it's even money on Jensen, Roll and Ross then...

PS - Here's the evidence.

Wednesday, October 9, 2013

Quote of the Day - Privacy

"At a moment of austerity and with a general sense that our state's ability to guarantee prosperity for its citizens is in retreat, that same state is about to make the biggest advance ever in its security powers. In public, the state is shrinking; in private, it is shrinking until it gets just small enough to fit into our phones, our computers, our cars, our fridges, our bedrooms, our thoughts and intentions."
- Taken from a long, but very worthwhile (and disconcerting) article by John Lanchester.

Monday, October 7, 2013

Why a functioning electricity grid is crucial to economic development

... in two graphs:

THOUGHT FOR THE DAY: Decentralised power is a nice ideal -- and in some cases is the best option -- but it remains a poor alternative to the grid for the moment.

PS - I've previously written about why the electricity grid is best viewed as a (regulated) natural monopoly here.

Saturday, October 5, 2013

Links and happenings

Busy times for yours truly over the last two weeks. Here is a list of things that I've been doing, plus one or two items that I spotted on ye olde internet.

1) I moved apartments! More or less the same size as our old place, but more comfortable and modern. Here is a little photo taken from the (car-free) route that I cycle to school everyday. Not too shabby, eh?

2) I had the pleasure of acting as moderator for the inaugural TEDxBergen conference. (My school has actually been hosting TEDx events for a while, but they've now expanded to include the other educational institutions in the city.) The speakers were all very interesting, with two or three in particular being excellent. I believe the video(s) for the event will be made available shortly, so I'll link to them then.

3) I gave a lecture on shale gas (and fracking) to the master's class in Petroleum Economics this week. My slides are here!

4) On a more prestigious note, two Nobel laureates recently gave lectures at my school. (i) As I pointed out on Twitter, Chris Sims is sounding an awful lot like an MMTer /Post-Keynesian lately. (ii) Finn Kydland makes a provocative claim that we are more resilient to energy price hikes today than we were in the past. His argument is that the adverse economic effects of the 1970s' oil shocks largely manifested themselves as inefficient tax rises due to the monetary and fiscal systems of the time. This in turn caused investment and employment to fall. I'm entirely not sure about this story -- the declining energy intensity of our economies would seem to play a bigger role -- but it's an interesting idea.

5) As predicted, some people are using the terrible events at the Westgate Shopping Mall in Nairobi to disparage "interventionist" foreign policy. I'm not saying that they don't have a point -- although, the ongoing anarchy in Somalia is certainly destabilising to the area and has negatively affected Kenya's economy. I'm saying that if blowback is the measure by which policy is to judged, then consistency dictates that one should make equally narrow arguments against (say) liberal immigration policy, subsidy revocation or economic austerity. What's sauce for the goose, is sauce for the gander after all.

6) To my American friends that have to suffer through the asinine politicking of the Republican party and the twilight-zone-thought-vacuum of Fox News, you have my sympathies.