Of Vikings and Credit Rating Agencies

Yesterday's post reminded me of a story that encapsulates much of my own feelings about credit rating agencies (and, indeed, the naivete that characterised the build-up to the Great Recession).

The year was 2008 and I was working for an economics consultancy specialising in the sovereign risk of emerging markets. We primarily marked African countries, but also had a number of "peripheral" OECD countries on our books. One of these was Iceland and I was assigned to produce a country report that would go out to our major clients.

By this time, the US subprime market had already collapsed and it was abundantly clear that Europe (among others) would not escape the contagion. With credit conditions imploding, it was equally clear that the most vulnerable sectors and countries were those with extended leverage positions.

Iceland was a case in point. The country had a healthy fiscal position, running a budget surplus and public debt only around 30% of GDP. However, private debt was a entirely different story. Led by the aggressive expansion of its commercial banks into European markets, total Icelandic external debt was many times greater than GDP. Compounding the problem was a rapid depreciation in the Icelandic króna, which made the ability to service external liabilities even more daunting. (Iceland was the world's smallest economy to operate an independently floating exchange rate at that time.) Wikipedia gives a good overview of the situation:

At the end of the second quarter 2008, Iceland's external debt was 9.553 trillion Icelandic krónur (€50 billion), more than 80% of which was held by the banking sector.[4] This value compares with Iceland's 2007 gross domestic product of 1.293 trillion krónur (€8.5 billion).[5] The assets of the three banks taken under the control of the [Icelandic Financial Services Authority] totalled 14.437 trillion krónur at the end of the second quarter 2008,[6] equal to more than 11 times of the Icelandic GDP, and hence there was no possibility for the Icelandic Central Bank to step in as a lender of last resort when they were hit by financial troubles and started to account asset losses.

It should be emphasised that everyone was aware of all of this at the time. I read briefings by all the major ratings agencies (plus reports from the OECD and IMF) describing the country's precarious external position in quite some detail. However, these briefings more or less all ended with the same absurd conclusion: Yes, the situation is very bad, but the outlook for the economy as a whole remains okay as long as Government steps in forcefully to support the commercial banks in the event of a deepening crisis.(!)

I could scarcely believe what I was reading. What could the Icelandic government possibly hope to achieve against potential liabilities that were an order of magnitude greater than the country's entire GDP? Truly, it would be like pissing against a hurricane.

Of course, we all know what happened next.

In the aftermath of the Great Recession, I've often heard people invoke the phrase -- "When the music is playing, you have to keep dancing" -- perhaps as a means of understanding why so many obvious danger signs were ignored in favour of business-as-usual. It always makes me think of those Icelandic reports when I hear that.

PS- Technically, Iceland never did default on its sovereign debt despite the banking crisis and massive recession. It was the (nationalised) banks that defaulted so spectacularly. The country has even managed a quite remarkable recovery in the scheme of things. The short reasons for this are that they received emergency bailout money from outside and, crucially, also decided to let creditors eat their losses.

Bad science: Paleo diet edition

A while ago, I wrote a post praising the scientific approach that advocates of the paleo diet appeared to be adopting in arguing their case. In particular, the language used by people like Gary Taubes in discussing dietary health seemed to show a keen appreciation for the key principles underpinning the scientific method. This includes separating causation from correlation, controlling for placebo effects and selection bias, etc, etc.

However, apparently not all paleo advocates are such sticklers for good scientific practice. For example, see this blog post by Jacques Rousseau, which skewers a new "occasional study" by Tim Noakes.[*] There is a lengthy follow-up post that also well worth reading when you have time.

The short version is that Noakes is a very prominent sports scientist in South Africa. He also happens to be an extremely vocal proponent of the low-carbohydrate-high-fat (LCHF) paleo diet, having undergone a Damascene conversion in recent years. The occasional study in question was published in the South African Medical Journal and details 127 unsolicited responses that Noakes received from people who have followed his advice in switching over to LCHF. These correspondences tell of all manner of dietary miracles and health wonders that have followed as a result, from substantial weight loss to curing "incurable" diseases like type II diabetes.

The problem with this study should be all-to-obvious to anyone who understands anything about scientific practice -- more on that in a minute.  Furthermore, a lot of people are (rightly) up in arms about how it managed to get through the peer-review process and into the country's flagship medical journal. Cynical observers have not been shy in suggesting that this is almost entirely down to Noakes' status within the local research community and very little to do with the scientific merit of the study itself. (To be fair, I'm not sure that a double blind submission would have been possible in this case.)

Now, Jacques does a very good job in explaining the manifold problems of the study. He also points out that Noakes' position on the necessity of such anecdotal evidence is very inconsistent. (If we had proper, scientifically validated evidence about the benefits of LCHF then we wouldn't require anecdotal evidence on top of that. To argue otherwise is to suggest that the scientific evidence in favour of LFHC is not actually particularly strong.) However, I think some of the commentators actually do a better job of pinpointing exactly why this study does not belong anywhere near a reputable scientific journal. For instance, "Chris" writes:

[...]You could prescribe or promote absolutely anything, and you would see some people benefit. The key point is that the sample you have is self selected from those who benefited enough that they felt the need to contact you. That is likely to be a small number of the total number of people who did indeed benefit. And we have no idea what proportion of the total number of people to have tried LCHF those people are. The fact that there are 127 people who've shown a benefit is evidence of one thing, and one thing only: those people's ability to write you an email. Can you tell me exactly what their dietary regimes were, down to the last macronutrient? Can you assure me that the change in their diet was not simply a catalyst for them to become more active, thus they expended more energy? Can you tell me that there were no other outside influences that could potentially act as a confounding variable? You can't, and you say so yourself in the article. Which begs the question of why did it get published? If we can't say anything other than these people got amazing results and said they were on LCHF then what exactly can we say?[...]

Emphasis mine. A follow-up contribution by another commentator (who was actually involved in one of the cases that Noakes cites) is equally worth reading here.

To underscore something that Jacques and many of his commentators try to make abundantly clear; criticism of this particular study does not amount to criticisms of LCHF in of itself. The outcry is entirely about sloppy scientific reasoning and misuse (absence?) of the scientific method. Proponents of LCHF and other paleo-style diets may well be correct in identifying the causes of our modern dietary ills. I personally know more than a few people who credit it with helping them to shed weight and improve their overall sense of well-being. On the other hand, I can say exactly the same thing about friends who have converted to veganism. (You see the problem with anecdotal evidence!)

To conclude, if paleo advocates want to maintain scientific credibility, they need to distance themselves from this type of research. At the very least, they should not try to defend it.
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[*] You may recall that I actually mentioned Prof. Noakes at the beginning of my previous post. Rousseau is a senior lecturer at the University of Cape Town, whom it should be said took me for an introductory philosophy and business ethics course during my undergrad.

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.

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 (1998, 1999) -- 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.

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.

I, for one, welcome our new technocratic, environmentalist, socialist overlords

Any group that successfully manages to perpetrate a hoax involving tens of thousands of individuals from all over the world... would sure be able to elect a politburo of unimagined efficiency.

Ninety-seven percent agreement collusion conspiracy among climate scientists? One can only imagine how effortlessly they will get the trains to run on time, or tame the business cycle.

The future never looked so bright.

[Note to self: File under right-wing paradoxes.]

Unintended consequences

During the last year, South Africa has been in the throes of violent upheaval in the mining industry. Most prominently the "Marikana massacre", which received widespread coverage in the international press. The story is a complex one involving increased tension between mining companies and their employees, warring trade union factions, and growing political dissent in the ANC's so-called Tripartite Alliance with the SACP and COSATU. Of course, the stuttering global economy provides a backdrop to all of this as profitability margins have been inexorably squeezed.

The strike action has also spilled over into the farming sector. While the mining industry is located in the far north of the country, the farm strikes have been concentrated in the Western Cape and are therefore much closer to home. The town where my parents live is in the heart of the Cape winelands and the bulk of local industry is very closely linked to farming activity. As I have mentioned previously on this blog, my father is an agronomist and has spent his working life involved in the agricultural sector.

The farm strikes have been much less violent than those in the mining sector, but have still  incurred dramatic economic costs. Stock worth hundreds of millions of Rands has been burned and lost to malicious action. Local trade union leaders have called on international consumers to boycott South African produce until their demands on are met. Quite how all of this is supposed to benefit farm workers and alleviate unemployment is beyond me. (I fear it is beyond the people calling for the boycott.)

One of the most frustrating aspects of these events is that the strikers themselves are not permanent farm staff. They are predominantly seasonal workers and, in even worse cases, simply unemployed people that have been bused in from the cities by venal and opportunistic political leaders. (As some important background, the Western Cape is the only province governed by the opposition DA. The ever gracious and democratically-minded ANC Youth League has responded to this situation not by improving its own service delivery or reconsidering its political manifesto, but by promising to make the province "ungovernable".)

Speaking to some farming friends during my recent trip home, I was left with the distinct impression that they have had enough and will be looking to move into full mechanisation. The ongoing labour issues impose not only higher costs, but also a unnerving atmosphere of unpredictability and uncertainty. Nature waits for no man and an unreliable workforce is one thing that farmers can ill afford; a missed irrigation or spraying session can significantly alter your chances of enjoying a good harvest. One farmer told me that he believes the only way forward for the region is to follow the "Californian model" of grape and wine production, which relies on very little human labour in bringing goods to market.

Going back to mining, the platinum giant Amplats this week announced that it would impose severe cost cutting and restructuring measures to maintain to the profitability of its local operations. Government officials were reportedly "shocked" by the move. Doubtless they are the only ones taken by surprise. With the exception, of course, of our myopic friends in the trade unions.

I'll leave the final word to another friend, also a farmer as it happens, who writes on Facebook:

After months of costly strikes, Amplats will close four shafts and cut 14000 jobs. Massive victory for the labour movement against the forces of imperialism and capitalism. Have no doubt that AMCU and NUM will now provide financial assistance to those 14000 workers and their families, after having pawned them for their blood, union fees and finally, their entire source of income.

Climate, economy and ladies

As a postscript to the previous entry, here's a quick story about a newspaper interview that I had last week. It was with one of the major broadsheets of the region and related to the launch of our new website.

The interview itself went pretty well, I thought. The journalist was mostly interested in discussing our aims, as well as how we perceive the public's general understanding of environmental issues from an economic perspective.

At one point, he asked the inevitable question of how I ended up in Scandinavia all the way from Cape Town. I told him that it was mostly down to my interests in these very issues. You'd be hard pressed to find a country that has a better track record of managing its natural resources than Norway. It didn't hurt that I was also lucky enough to receive some generous funding offers.[*]

However, I went on to tell him a joke that I had heard from another Southern Hemisphere expat upon arrival, which is that people like us usually find ourselves in Norway for one of two reasons: Oil or women. It was a throwaway line of course (and quite obviously a jape), and I didn't think much more of it...

I suppose it reflects my media naivete then that I was surprised[**] by the headline that ran above my interview the next day: "Climate, economy and ladies".
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[*] E.g. For those of you thinking about doing a PhD -- but can't bear the thought of scraping by on a measly tuition stipend for four/five years -- consider this: Doing a PhD in Norway is treated as a job and you are paid accordingly. That is, your salary has to be somewhat comparable with what a Master's graduate could typically earn outside of academia. Accepted PhD candidates are thus awarded a "research scholarship" which currently amounts to around US$71,000 per annum...
[**] Mind you, probably not as surprised as my (non-Norwegian) girlfriend.

Slogans for Heartland

Given my previous discussion of the Heartland Institute and climate change, I feel to compelled to comment on this latest development. From The Guardian:

Heartland Institute compares belief in global warming to mass murder 

Billboards in Chicago paid for by The Heartland Institute along the inbound Eisenhower Expressway in Maywood, Illinois. Photograph: The Heartland Institute

It really is hard to know where to begin with this one. But let's start with: "What on earth were they thinking?" 

The Heartland Institute, a Chicago-based rightwing thinktank notorious for promoting climate scepticism, has launched quite possibly one of the most ill-judged poster campaigns in the history of ill-judged poster campaigns. 

I'll let its own press release for its upcoming conference explain, as there's simply no need to finesse it further:

Billboards in Chicago paid for by The Heartland Institute point out that some of the world's most notorious criminals say they "still believe in global warming" – and ask viewers if they do, too…The billboard series features Ted Kaczynski, the infamous Unabomber; Charles Manson, a mass murderer; and Fidel Castro, a tyrant. Other global warming alarmists who may appear on future billboards include Osama bin Laden and James J. Lee (who took hostages inside the headquarters of the Discovery Channel in 2010). 

[snip] 

The people who still believe in man-made global warming are mostly on the radical fringe of society. This is why the most prominent advocates of global warming aren't scientists. They are murderers, tyrants, and madmen. 

As argumentation via guilt by (extreme) association goes, I would place this in the "WTF" category. Still, if this is the way Heartland want to play the game, I have some suggestions for future campaigns:

- "CHARLES MANSON BELIEVED IN THIS SO-CALLED THEORY OF EVOLUTION. AND HE WAS A MURDUUUUUUURERRRR." [Note: This argument has already been made.]

- "POL POT ALSO LIKE THIS 'GRAVITY' IDEA. THINK TWICE BEFORE YOU USE THOSE FANCY NEWTONIAN MECHANICS."

- "KARL MARX THOUGHT THAT BABIES CAME FROM A MAN'S PEE-PEE. ARE YOU A FREEDOM-HATING COMMIE? (www.heartlandforstorks.org)"

- etc.

For the record, I've double checked that the campaign and associated evidence were sourced from Heartland's official website and Twitter feed. Barring some extraordinary hack, I think that we're on safe ground in saying that this is legit.

So, Bob (Murphy), if you happen to be reading this, I guess my question to you is: Does this "reveal that these people really have no idea how their opponents on the climate issue actually view the world?"

The real reason to be wary of Kony 2012

With the internet abuzz about Invisible Children's "Kony 2012" viral campaign, it was predictable that there would be some blow-back from critics. The most compelling criticism from my perspective is that Kony 2012 offers an extremely simplified message that is largely disconnected from the problems that presently plague Uganda.

In its own small way, I believe that such issues are laid bare by IC's vocal endorsement from James Inhofe, the Oklahoma senator who features prominently in the viral video.[*] Call me crazy, but I don't think that someone who has campaigned on the discriminatory platform of "God, gays and guns" is particularly well suited to act as spokesman for Uganda's current problems... Which -- more than the unspeakable acts of the now exiled Joseph Kony -- include massive discrimination and violence perpetrated against gay people.

Non-partisan support is something that we should almost always strive for. However, I am troubled by the fact that IC have unquestionably accepted and advertised Inhofe's endorsement, even though he has a record of overt bigotry. I suggest that IC might want to think a little more critically about the signals that they are sending to the Ugandan people, given the country's struggles against rabid homophobia.

UPDATE: Well, it seems that the case against James Inhofe's moral leadership on Ugandan issues is even stronger than I first guessed. A group of evangelical US politicians and lobbyists -- Inhofe foremost among them -- have been documented as providing advice to David Bahati, and implicitly inspiring him to introduce Uganda's infamous anti-Homosexual Bill (aka "Kill the Gays Bill") that I linked to above. Disturbing stuff.

[*] I've previously discussed Inhofe here if you are interested. Notably, his demanding role as the US Senate's climate change denier-in-chief... a hotly contested title if ever there was one. (A sadly amusing postscript to that saga here.)

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Disclaimer -- I wrote this post, and especially the title, with my tongue pressed angrily against my cheek. Joseph Kony undoubtedly deserves to face justice for his crimes. If this Kony 2012 campaign achieves nothing else, it's still good to know that millions of people around the world have now learnt who he is and understand the nature of his barbarism. Still, I think that this illustrates how simplified messages can distract from the real issues in development; a sadly recurring theme in field. For a nice, short summary, see Chris Blattman.

Irony

From the Wikipedia page on Agricultural Policy:

Some argue that nations have an interest in assuring there is sufficient domestic production capability to meet domestic needs in the event of a global supply disruption. Significant dependence on foreign food producers makes a country strategically vulnerable in the event of war, blockade or embargo. Maintaining adequate domestic capability allows for food self-sufficiency that lessens the risk of supply shocks due to geopolitical events. Agricultural policies[...] may be an ongoing subsidy designed to allow a product to compete with or undercut foreign competition.

Could this possibly backfire? Hmmm, let me think... This week in Scandinavia:

Danish dairies say no to Norway

Dairy producers in Denmark have said they won’t export butter to neighbouring Norway, despite moves by Oslo to cut tariffs as the country battles to get the product back on supermarket shelves.

Norway, like Sweden and Finland, has been hit by a major butter shortage in recent months. The Nordic trio have seen less raw milk available annually amid soaring demand for high-fat dairy products such as creams, butters and milk. 

[snip] 

But while the Danes are happy to help out the Swedes and the Finns, Norwegian shoppers look set to be left in the lurch with Christmas looming. 

Oslo has slashed import tariffs on butter for the month of December in an attempt to attract foreign producers, but leading Danish dairies remain unimpressed. 

“We’ve been bashing our head against an excise wall in Norway for more than ten years, so we don’t have enough faith in a little hole in the wall to start sending butter via that route,” said Mogens Poulsen from dairy Thise Andelsmejeri to news website foodculture.dk. 

Danish news reports said the country’s other main dairy producers were similarly disinclined to make a beeline for the Norwegian market. 

“We can’t start building something up only to dismantle it again three weeks from now,” said Arla spokesperson Theis Brøgger to foodculture.dk.

It may only be butter, but still a telling example. On a general level, I don't know which I find more impressive: The fact that so many people are in agreement about the need to drastically scale down agricultural subsidies... Or that these subsidies somehow remain as entrenched throughout the world as they do.

UPDATES: (1) Norway is a great place to live in many ways, but their protectionist trade policies suck. Most of the Norwegians that I speak to are pretty happy to echo these sentiments, although that might not be a representative sample. (2) Damn. Butter futures would have been a good investment. Black market bids currently going around $500 per half kilo!

Homeopathic A&E

Following Monday's post, which touched on the murky world of alternative medicine... South African comedian, Warren Robertson links to a brilliant Mitchell and Webb skit, "Homeopathic A&E":

Bryce Lawrence Reffing Flowchart

Quick links - History Repeats Itself edition

Some things that I've been meaning to write about, but short on time[*]...

1) A heavily fancied South Africa bombs out during the knock-out stages of the Cricket World Cup. As I wrote on facebook: "Wait. I've seen this movie before." Or, in the endearing words of Yogi Berra: "It's déjà vu all over again!" (In related news, the ever reliable Zapiro brokes little sympathy for the apologists.)

2) Speaking of déjà vu... South Africa's favourite electricity monopoly, Eishkom Eskom, has covered itself in glory yet again. This time, serving up "a comedy of errors" that ultimately resulted in a massive explosion at a key power plant. The end result: Expenses of R3bn ($440m) for the company - thanks tax payer! - and a "severely compromised" national electricity supply. Seriously, is there anyone left who believes that we can delay the move to a competitive power market any longer?

3) More promising news is that South Africa is finally set to hike water rates in a bid to secure desperately needed investment for ageing infrastructure. A.F.T, as far as I am concerned. If you don't charge people rates commensurable to the cost of supplying water, sooner or later you won't be able to supply anyone at all. Or, as I commented: "To speak some 'economese', we need to charge water rates equivalent to the long-run marginal costs of providing it." You can see some of my (brief) previous thoughts on water pricing here and here.

4) I'm less optimistic about the Chinese command-and-control approach to water management, as officials announced plans to reduce water use per unit of GDP by 7%. I share the sentiments of many in thinking that water will ultimately prove the defining barrier for China's continued growth explosion, which has thus far come at a very large environmental and health cost. That the government has pledged a 30% reduction in water consumption (per unit of GDP) over the next five years is a start. Like any good economist, however, I maintain that they'll have to get prices involved if they want to make real improvements in water conservation over the long-term. (Having said that, and while I much prefer the market mechanism, the Chinese have been successful in their stated aims of reducing energy intensity thus far... moderate as these may be in reality.)

5) And now, for something completely different:



Alan! Alan! Alan!... Al! Alan!

I also enjoyed this:

"What was the answer?"
"Spatula. They're just making them up now."

[*] That, coupled with the fact that I was somewhat overzealous at both the gym and (later) the bar over the weekend. I can still barely straighten my arms. Walking around like a hungover T-Rex. 

Dumb regulation

As should be clear from some of my previous posts, I think that some areas of our economy are in need of regulation; others distinctly less so. Here is an article describing some cases that fall into the latter category: A License to Shampoo: Jobs Needing State Approval Rise. 

Apart from the more ridiculous stories of occupational licensing, perhaps the most interesting insight is that the call for more regulation is coming from the practitioners themselves. They argue that "regulation will boost the prestige of their professions, provide oversight and protect consumers from shoddy work." Of course, the cynical economist in me says it would be remiss of us not to highlight problems of rent-seeking. Still, this is an admirably balanced article and not simply an anti-Government rant. 

A quote I rather enjoyed:

Mr. Lykins says it's in the public's interest to insist manicurists are well-trained. "Have you ever had a nail fungus? It's terrible," he says. "That's why we're there."

[Snaps fingers, bobs head]

(HT: Adam Ozimek)

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I've also been meaning to describe a particularly daft case of regulation that I've come across here in Lisbon. Across the city there are many decrepit and abandoned buildings, literally right in between thriving office blocks. This was really puzzling to me at first as, Portugal's wider economic troubles notwithstanding, I couldn't understand how you could get such variation within the same neighbourhoods... even the richest parts of the city are afflicted. From asking my Portuguese friends there are various reasons for this problem, including a rush out to Lisbon's outer suburbs that left the central parts of city suddenly much emptier than they had ever been. However, here is aspect worth retelling as cautionary note for all would-be rent controllers: 

(The precise details may be a little off here, but not so much that it materially affects the story.)

After the Carnation Revolution in 1974 overthrew the authoritarian Esta Nova regime created by Antonio Salazar, the left-leaning revolutionaries instilled a new law whereby property rent was fixed from the time that a person first moved in. Tenants may have celebrated this ruling at first, but of course this also meant that landlords had no incentive to invest in maintaining or renovating their buildings over the years that followed. I believe the law has since been amended to allow for rent increases in line with inflation, but long-established tenants (particularly in the south of the city) are still paying absurdly low rentals. This includes historic neighbourhoods like the otherwise beautiful Alfama... even buildings that would constitute prime real estate right in the financial district.

The same tenants that benefited from decades of low rentals now have to live in dangerously decrepit buildings. Worse, there is a very real social problem at stake, since the housing "shortage" has pushed up prices for residents in functioning buildings all over the city. As with abandoned neighbourhoods around the world, there is a lingering problem of crime in places where no-one is investing and actively living. 

[UPDATE: Here is an article discussing the same problems behind  the abandoned buildings of Lisbon. Here's another.]

THOUGHT FOR THE DAY: Dumb regulation will make everyone's lives worse off, no matter how good the underlying intentions.

America is in good hands...

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Chair Apparent
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

[HT: Aguanomics and Env-Econ]

I'd like to to echo the sentiments expressed in the above blogs: Oh. My. God.

PS - Reminds me of a comment I left elsewhere: 

Yup, the Tobacco Institute-esque funding of Climate Change denial is a huge problem in trying to clear all the misinformation out there. (I almost feel sorry for sincere sceptics, because it's increasingly hard to separate the BS from legitimate concerns. Although, perhaps that says something in of itself...)

Still, with some people, 'evidence' will never be enough:

“Climate change is real, and man is causing it,” Mr. Hill said, echoing most climate scientists. “That is indisputable. And we have to do something about it.”

A rain of boos showered Mr. Hill, including a hearty growl from Norman Dennison, a 50-year-old electrician and founder of the Corydon Tea Party.

“It’s a flat-out lie,” Mr. Dennison said in an interview after the debate, adding that he had based his view on the preaching of Rush Limbaugh and the teaching of Scripture. “I read my Bible,” Mr. Dennison said. “He made this earth for us to utilize.”

http://www.nytimes.com/2010/10/21/us/politics/21climate.html?_r=1

Take *that* science!

Facts vs Beliefs

I should really be studying... but my attention has been drawn to several articles and interviews over the last few weeks that coincide with a recurring theme here at Stickman's Corral: The tendency of beliefs to trump facts, and a priori biases to cloud objective decision-making.

For instance, the below radio interview discusses new research on the problem of "backfire". As the name suggests, this is the phenomenon whereby facts don't necessarily have the power to change people's minds... Indeed, quite the opposite, as people actually tend to cling to their beliefs more strongly when presented with opposing evidence!

A related article on the same research can be found here:

The general idea is that it’s absolutely threatening to admit you’re wrong,” says political scientist Brendan Nyhan, the lead researcher on the Michigan study. The phenomenon — known as “backfire” — is “a natural defense mechanism to avoid that cognitive dissonance.

Similarly, this article (which links to this report) discusses the problems of the "Enlightenment Model", which

holds that people make rational decisions by assessing facts. All that has to be done to persuade people is to lay out the data: they will then use it to decide which options best support their interests and desires.

A host of psychological experiments demonstrates that it doesn’t work like this. Instead of performing a rational cost-benefit analysis, we accept information which confirms our identity and values, and reject information that conflicts with them. We mould our thinking around our social identity, protecting it from serious challenge. Confronting people with inconvenient facts is likely only to harden their resistance to change. [HT: WTD]

Regular readers will know that I've been trying to make a similar point on this blog for a while (e.g. here, here and here).  Stickman's Corral tries to abide by the relaxed principles of El Duderino and this approach was motivated by the realisation that: a) Making purely unequivocal statements is a one-way ticket to intellectual stagnation, and b) The fear of embarrassment or being wrong is among the most powerful motivators out there. If you don't offer people a way out that preserves their sense of dignity, you don't really offer them anything all. I'm always taken aback by how many people don't seem to grasp this simple rule of human behaviour. Or, as I've said several times now: Calling someone an "idiot" is not the best way to convince them of your position.

Now, of course, being respectful of someone you disagree with is hardly the same as not having an opinion. I take numerous angles on this blog that I feel are pretty clearly laid out. Further, I abhor false equivalences. Being open to changing your mind is of fundamental importance, but there are many issues where I think the evidence is simply too compelling for any reasonable person not to embrace a particular side. On this topic, it really grates me to see how tautological the defensive arguments against, say, evolution and climate change are. The first of these is well documented, but the latter typically goes something like this: 

Knee-jerk Sceptic: There is no scientific consensus about humans causing climate change.

Response: Well, actually every major survey shows that over 95% of practising climate researchers support this mainstream view...

Knee-jerk Sceptic: Those studies are flawed. [Or: Those mainstream scientists are wrong and the minority who disagree and are correct and have simply been marginalised.]

Response: Come on, that's a real stretch. The dissenting research simply doesn't hold up to scientific evidence and peer-reviewed scrutiny... 

Knee-jerk Sceptic: The peer review process has been corrupted. We can't trust it any more as opposing views have been silenced. Just look at the "Climategate" emails.

Response: Well, actually, the whole thing was blown ridiculously out of proportion and three independent reviews have cleared the involved parties of any significant scientific malpractice. 

Knee-jerk Sceptic: The reviews were just a sham and a cover up.

Response: Seriously? Okay, how about the fact that independent media analyses have come to a similar conclusion and even sceptics have offered compelling reasons not to put stock into the conspiracy theories...

Knee-jerk Sceptic: I don't care about those reviews; they aren't official. And there is a conspiracy: The governments of the world want to institute a new communist world order by imposing a huge carbon tax so to regulate the free peoples of the world.

Response: That is ridiculous. The amount of money spent on fighting climate change pales in comparison to money spent on, say, oil exploration and research. Even if it didn't, why do you suppose governments would sabotage their own economies by potentially depriving themselves of "cheaper" fuel? Think about it: They can't even agree to binding emissions targets!

Knee-jerk Sceptic: Governments are just fighting it out to see who gets greatest share of the pie.

Response: Look, scientists working separately all over the world have arrived at the same basic hypothesis that CO2 is the most likely culprit behind the observed warming of the last 150 years. Yes, there is uncertainty, but that should call for more caution if anything. More to the point, putting a price on carbon is ultimately about saving us money, since it corrects  for the negative costs that climate change is likely to entail.

Knee-jerk Sceptic: Scientists/Economists are part of the global conspiracy.

Etcetera, etcetera...
Sealed argument, much?

THOUGHT FOR THE DAY: Facts are important, but you have to play - and be sensitive - to peoples' emotions and values if you really want to win hearts and minds.

Bringing a priori bias back to the level of the mundane

[UPDATE: The situation has been (partially) resolved. Not so much an apology, but at least acknowledgement that I am probably not a backpacking Sheila on a pre-Uni world jaunt "with my girlies". How did I manage this? The way any self-respecting man would: By getting his GF to email and sort things out. (She insisted.)]

A strange thing happened to me today:

I was minding my own business searching the internet for mail-order brides crushed rhino horn very intellectual school stuff, when up popped an email from a B&B that I stayed at during a recent Croatia trip with my girlfriend.

I scanned the first few lines and “realised” what the problem was: Having completed our Croatia holiday, I was requested to review all our various accommodations on Hostel World (the site I originally used to make our bookings). However, due to some computer glitch, the same review ended up getting posted twice for two different places; one in Split, the other in Hvar. As we had enjoyed the latter (i.e. the B&B in question) more than the former, I had tried to edit this double post only to encounter difficulties in doing do so. I eventually left it thinking that readers and the Hostel World team would notice something was amiss; if for no other reason that I referred to a different city in my actual review (Hvar vs Split)!

So, instead of reading through the whole email, I skipped straight to the reply button with an “Oh, yes, sorry about the misunderstanding. This is what happened, can you help us fix it? Blah Blah Blah Kind Regards...” response. This is the reply I got:

“Stop playing , my mail gave you an answer already.Next time don´t close doors for yourself by lies.Your writings on trip advisor gave me a sight in your personality. 

I HAVE NOTHING MORE TO SAY ABOUT THIS.”

Note to self: WTF?

I decided that a second reading of the initial email was warranted and, in keeping with the El Duderino theme* of stickman’s corral, my response upon doing so was: “What in God’s Holy Name are you blathering about??”