The cut-throat world of economics #nlpoli

Anyone who attended Wade Locke’s presentation on Muskrat Falls got a tiny glimpse of the vicious world that is modern academics.  it came in the unusually large bit where Locke sliced into his colleague Jim Feehan.  Locke even made a strawman and set fire to it – figuratively of course – just to make sure he had a really persuasive argument. (<--- sarcasm)

Well, it turns out that the field of economics is just seething with this sort of stuff.  Statistics and political science prof Andrew Gelman writes:

Some attitudes surprise me. For example, on his blog, journal editor Steven Levitt wrote, “Is it surprising that scientists would try to keep work that disagrees with their findings out of journals? . . . Within the field of economics, academics work behind the scenes constantly trying to undermine each other.” See my discussion here.

Academics work behind the scenes to undermine each other.

Wow.

Read the link.  The whole discussion is way more interesting than just that bit.

-srbp-

Funny how things come together #nlpoli

First, there’s a new post at the Monkey Cage that notes a discussion in economist circles about public discussions of economic subjects:

… economics lost communication with policymakers and practitioners leaving room for all sorts of “charlatans and cranks” to fill the void. In doing so, academics ceded important ground to think tanks aligned with one party or the other, to self-appointed economic experts, to business economists maximizing profit rather than public knowledge, and to a media that doesn’t always comprehend the economics that underlie a particular issue.

Second, there’s a short piece in the Telegram that torques the latest Statistics Canada labour force stats:

Newfoundland and Labrador is bucking the national trend, adding jobs in October, even after the rest of the country faces higher unemployment.

The bucking of the trend thing is zero point nine percent year-over-year.  Not necessarily something to write home about, especially considering the national decline the story runs with is actually an increase in employment of 1.2% year of year as well.

One month decline nationally but a year over year gain.  Growth provincially month-to-month and year-over-year.

Unfortunately that doesn’t fit with the accepted narrative of the economic miracle that is Newfoundland and Labrador these days, supposedly.

Third, as if to confirm the generally poor understanding of things economical, there’s the text of a speech Premier Kathy Dunderdale gave to an energy forum in the United States.  It includes copious references to the economic miracle thingy, along with a raft of other completely  - and demonstrably - false claims about Muskrat Falls.

Fourth, there’s a piece in the Atlantic Institute for Market Studies blog that  - purely by coincidence - takes up the economics ignorance theme and relates it to a politician who thinks a remittance economy is a good thing.

Fifth and for those who don’t know, that economic miracle thingy in Newfoundland and Labrador has been built in large measure on shipping workers outside the province and having them ship their paycheques back home. You can get a sense of that, and some of the previous discussions of this from a post at SRBP back in December 2008.

There are parts of the province that are almost entirely dependent on migrant labour and remittance workers.

In others - like Stephenville - the economic disaster of losing a pulp and paper mill on the Premier's watch didn't materialize solely because the workers there could find jobs in Alberta.

But yes, you say, there has been more people coming back to the province since 2007, you say.

At the time, they were coming back in advance of the huge recession.  Just as surely they started heading out again as the economy picked up again in other parts of the country.

Sixth, flip back to that first post on economists and public commentary.  Follow the link back to the original article.  There’s a fascinating discussion about the use and misuse of economic arguments and models. 

Just for the fun of it, then, consider:

• the amount of media coverage the most recent pronouncement by a certain economist on the Hebron project even though it was nothing more than an update of previous assumptions using new assumptions and that they are all – wait for it – assumptions.
• Note, in particular, the references to the relatively better prospects for Hebron  - heavy sour crude in a highly fractured structure - compared to Hibernia, lots of light sweet crude and a fair bit of natural gas. Despite the fact that Hibernia will generate more than double the economic benefit to the province in terms of royalties over its lifespan than Hebron – even using the most recent assumptions – the lesser of the two is apparently worth more.
• Of course that sort of conclusion has nothing to do with the fact that the same economist criticised Hibernia when it occurred and that his old predictions of horror never showed up, in practice.  In no way could his previous, dubious predictions or any other non-economic consideration have in any way influenced his most recent assessment of relative gloriosity for Hebron.
• It’s not like the guy has made some boner projections based on knowledge he acquired from his consulting work for the provincial government and its agencies. Sure he’s talked about debt problems that the provincial government folks might not like but he avoided a discussion of Muskrat because he’s been doing some consulting on the project.
• And it’s not like his public comments for different audiences haven’t sometimes crossed each other much to his embarrassment.
• The one guy has a colleague who has also been known to produce some ideologically tainted bits of commentary.

The media’s relationship to economists is almost as bad as their attachment to the equally dismal science of the pollsters.

But what is truly remarkable here is the way a whole bunch of economist related stuff wound up appearing in different places for different reasons in the same week.

And it all ties together.

- srbp -

Economics as ideology, or, The Other Dismal Science

So at some point people thought that economists actually might be good at forecasting things.

No wait.

This is serious.

Apparently, some people actually believed that.

But only now is some mathematician figuring out there might be some doubt as to the ability of your average economist to forecast much of anything with any accuracy.

According to David Orrell:

Current economic theory is less a science than an ideology peculiar to a certain period of history, which may well be nearing an end…

All jokes aside, the Globe piece by Brian Milner is worth the time, if for no other reason than there is an audio excerpt of Orrell reading from his book, Economyths: 10 ways economists get it wrong.


While Orrell uses ideology in another sense, it is interesting that two of the economists who get the most popular attention in Newfoundland and Labrador seem to be more ideological or partisan than analytical.  To wit:

• Federal job presence,  - updated links here - 2005 and 2006  
• Historical polemics,
• Industrial development then,
• Industrial development now,
• the recession, 
• Labrador development, and,
• Equalization.

- srbp -

Local math prof stirs international economics controversy

Odds are no one heard of Antal Fekete.

The Hungarian-born emeritus professor of mathematics at Memorial University in St. John's isn't someone local media  look to for commentary on economic issues.

But through a series of articles published on his website - professorfekete.com - he's earned some measure of international notariety for his arguments about backwardation of gold, the problems of unsupported debt and the global economic crisis.

Backwardation is the phenomenon of spot gold prices being higher than futures prices.  That situation happens frequently in other commodities but seldom in gold.  The difference is that gold, once used as the ultimate support  for paper currency, is a monetary commodity.

It's also a clue that the commodity is, or is perceived as being, or will be in short supply.  Logically, no one would buy gold today at a price higher than it could be purchased in as little as two weeks time.  The only reason to do that would be in a case where there was some doubt about delivery in the future.

Here's the way Professor Fekete describes the situation in his most recent article:

We are facing a pathology of the international monetary system based, as it is, on irredeemable promises to pay. People are enjoined through 'legal tender' legislation to use these irredeemable promises as if they were the ultimate means of payment, even though they are not, and the world would rather use gold and silver as the natural and ultimate extinguisher of debt. But gold and silver have been coercively eliminated from monetary circulation for the competition they offered to synthetic debt-liquidating devices.

Mainstream economics pretends that the issue has been settled for once and all. It asserts that liquidation of debt through the coercively maintained payments system has no threat to the national and world economy. Yet what is happening is that the government keeps kicking the toxic garbage upstairs which keeps accumulating unobtrusively in the attic, only to come crashing down in its own good time to cause untold amount of social damage.

In the real world it is natural law, rather than man-made coercive laws, that prevail. The pathology of the regime of irredeemable currency has not been attended to, and day of reckoning has dawned. Our pathological monetary system has allowed the burgeoning of debt beyond all rhyme and reason. It has no mechanism to extinguish debt. It pretends that transferring debt to the banks, and ultimately to the government, is tantamount to extinguishing it. However, the truth of the matter is that only gold circulation is able to extinguish debt. When it is stopped in its tracks, as it is under conditions of backwardation, debt explodes. [Italics in original]

Fekete's theories have attracted global attention since gold started backwardising in early December.  That's the first time such a situation has occurred since the early 1930s by some accounts, let alone lasted for more than 24 hours.  As The Australian columnist Robin Bromby put it:

It wasn't just the internet sites. London's Daily Telegraph was reporting the gold markets being in turmoil, with traders saying it was extremely hard to buy physical metal in the form of coins or bars, a problem the paper attributed to the emergence of backwardation.

Fekete said the development showed a drastic drop in the velocity of gold circulation and was a repeat of the situation in 1931 when, in the face of serial devaluations started by the British, gold circulation seized up. And we all know what happened after 1931 -- 1932, the worst year of the Great Depression.

It's not like Fekete hasn't been predicting this for a while.  In June - before the peak crude price and long before the credit meltdown - Fekete forecast gold backwardation.

There are plenty of people around who will tell you what everyone else says.  Sometimes it's the ones who go against the grain who are worthy of more attention than they get.  Sometimes they are a bit more clued in that people forecasting more of the same. 

-srbp-

Avoiding other people's mistakes

There's a compelling point in the middle of this 1991 article from the Montreal Gazette: "... Hydro-Quebec is losing in a big way by selling its electricity so cheaply to big companies rather than exporting it for a much higher price."

The economics of hydro-electricity and industrial development haven't changed in the past 30 years even if the price per kilowatt hour fluctuates. The consistent policy of successive governments in Newfoundland and Labrador - including the current administration's plans to develop power for export makes sense.

The province has a commodity others need. As long as the prices are good, the provincial energy utility can develop and sell power to other places far more profitably than if it tried the Quebec approach or the Icelandic approach of providing massive subsidies to establish industry solely for the purpose of creating jobs.

As economist Jean-Thomas Bernard calculated, the Quebec government would lose about $300 million per year over 20 years as a result of its aluminum smelter policy. Bernard and Gerard Belanger, his colleague at l'Universite de Laval, repeated the same analysis of agreements for aluminum smelters signed in 2007 by the Quebec government. They concluded that in exchange for a $2.0 billion investment and 740 jobs, the Quebec government will forego $2.7 billion over the course of 35 years.

The experience of other provinces should give us pause.

Drawing our water and giving it away
Hydro-Quebec losing big by selling cheap electricity to aluminum patch: critics

Bertrand Marotte
The Gazette
Montreal, Que.
Apr 27, 1991.
Page B.4


They didn't come for the view. The Japanese, European and U.S. interests that decided to set up or expand aluminum operations along the St. Lawrence River valley in Quebec were lured with cheaply priced electricity, courtesy of utility giant Hydro-Quebec.

Today, giant smelters sprout from Trois Rivieres to the Lower North Shore in a concentration known as Aluminum Valley.

It may not have the same high-tech, high-dollar mystique as its silicon counterpart in California, but the aluminum patch is a keystone of Premier Robert Bourassa's economic strategy.

This veritable boom in Quebec's aluminum production is closely linked to plans for a series of giant new hydro-electric developments in the northwestern part of the province - including the controversial $12.6-billion Great Whale project.

Contracts are secret

Aluminum smelters devour electricity like no other industry - up to 30 per cent of their production costs - and Hydro-Quebec offers them a guaranteed supply, often over a 20- to 25-year span.

The smelters buy the electricity at a price that is tied to the roller-coaster price of aluminum on the spot market.

Hydro-Quebec, in other words, offers a "risk-sharing" program to the aluminum companies, as well as to other high-energy users that make primary products, like hydrogen and magnesium, said spokesman Richard Aubry.

But no one is allowed to know how much Hydro-Quebec receives for the cut-rate electricity it supplies to 13 outfits, including the four new aluminum smelting operations along the St. Lawrence.

Recent revelations in the national assembly and at a televised news conference broadcast from the United States have shed light on some of the prices, but the contracts remain secret. Hydro-Quebec, the provincial government and the companies involved have all been blocking attempts to make that information public.

Critics, including the Cree Indians whose land will be flooded once again if Great Whale and other projects go ahead, say one of the reasons Hydro-Quebec needs the new projects is to make up for the revenues lost through contracts that are far too generous for big energy users.

Net loss to Quebec

Jean-Thomas Bernard, economics professor at Laval University and an expert on the economics of hydro-electricity, says such a criticism would be hard to prove.

But Bernard agrees Hydro-Quebec is losing in a big way by selling its electricity so cheaply to big companies rather than exporting it for a much higher price.

It is believed the aluminum companies and others with special commercial contracts pay less than 2.6 cents per kilowatt-hour, compared to more than 6 cents per kilowatt-hour that is charged on export contracts to the United States.

Hydro-Quebec insists the income from the special commercial contracts averages about the same as amounts earned from the higher rates it charges its regular industrial customers - about 3.5 cents per kilowatt-hour.

Quebecers in no way subsidize those contracts, Aubry said.

Bernard, however, estimates that the new aluminum plants will result in a net loss to Quebec of about $300 million per year, over 20 years.

And because aluminum smelters employ so few people, Bernard said that Bourassa's job-creation argument is also shaky.

Each new job created in aluminum smelting will represent a hidden government subsidy of $150,000, Bernard figures.

There are also the environmental costs.

Ingots shipped elsewhere for manufacturing

Aluminum smelting is one of the most polluting industrial activities, and although the new generation of plants are cleaner, they are far from being totally non-polluting, said environmentalist Daniel Green of the Montreal group Societe pour Vaincre la Pollution.

Quebec gets little in the area of advanced manufacturing from the cut-rate sales.

Once the primary processing is done, the aluminum ingots are shipped from the province, where they are transformed into a host of different products.

There was hope for at least one important new aluminum manufacturing plant in Quebec, but that has been killed.

Reynolds Metals Co. of Richmond, Va., which owns Canadian Reynolds Metals Co. of Baie Comeau, reneged on a promise to build a $50- million plant near Montreal that would have produced 750,000 aluminum wheels a year, opting instead for the already rich industrial heartland of southern Ontario.

Says one aluminum analyst: "Quebec is really competing with places like Venezuela and Brazil, which also offer cheap hydro, and cheap oil.

"We are still hewers of wood and drawers of water, but why not?"

-srbp-