Category Archives: The Economy

Shuffle the Deck and Deal.

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The “recent unpleasantness” of the housing bubble and collapse has disguised a larger and more long-term movement. As economists never tire of pointing out, education is linked to prosperity—for both the individual and the community. In 1970, 11 percent of the population aged over twenty-five years had at least a BA. These people were spread around the country fairly evenly: half of America’s cities had concentrations of BA-holders running between 9 and 13 percent.

By 2004, things were very different in two respects. First, 27 percent of the population aged over twenty-five years had at least a BA. So, Americans appeared to be much better educated. Second, educated Americans now clustered together in a few cities. The densest concentrations are around Seattle, San Francisco, up toward Lake Tahoe on California’s border with Nevada, Los Angeles, San Diego, Phoenix, Denver, Salt Lake City, Austin, the Northeast Corridor from Washington to Boston, and in college towns scattered across the map.

 

Why this sorting?

Part of the explanation is a reciprocal relationship between educated people and prosperity. Businesses in science, health, engineering, computers, and education need to be where there are a lot of educated people; people who want to work in these industries need to be where they can get rewarding jobs. Part of the explanation is that some cities tolerate, or even foster, a high degree of diversity. All sorts of people who move toward these cities find a ready welcome and at least some other people like themselves. It’s easy to fit in. It’s easy to find people with whom to share ideas and projects. Seen from these two vantage points, another part of the explanation is that some cities got there first. Like early-birds at a yard-sale, they snapped up all the best things. Seattle, for example, had Boeing (lots of engineers), a big and more-or-less respectable university, a lot of racial diversity (and not just the White-Black kind that most Easterners mean), and a spectacular physical location. It’s easy to see why Microsoft stayed where it started. Others flocked there for the same reasons.

 

What are the effects?

The more that talent concentrates, the greater are the synergies that spin-off innovations—and economic growth. The more that prosperous people concentrate, the greater are the demand for all sorts of other services and amenities.

The production train used to run from innovation to design to manufacturing to distribution to sales to service. In this system, virtually all the different stages and skill-levels would be located in the same area. Detroit and cars or Pittsburgh and steel offer good examples. Today, much of the lesser-skilled work can be either automated or out-sourced to low-wage foreign suppliers. So, great prosperity can co-exist with economic decline.

But not for long. High income earners bid up the price of housing. It is common to find people without BAs being forced to re-locate away from the areas of tech prosperity. A long commute is one of the badges of un-success in contemporary America.

Steel and cars are waning as major American industries. The “knowledge economy” is central to future American prosperity. The transition has costs and problems that we don’t yet know how to resolve.

Richard Florida, “The Nation in Numbers: Where the Brains Are,” Atlantic, October 2006, pp. 34-35.

Freedom from Farmers.

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Back in the 1920s and 1930s almost half of Americans lived in communities of fewer than 2,000 people and a full quarter of them lived in rural areas. Massive over-production of basic crops led to an agricultural depression long before the onset of the Great Depression. The larger collapse of the American economy in 1929 eventually led to an effort to address the agricultural problems. The New Deal’s Agricultural Adjustment Act tried to push up farm incomes. The Act linked desirable prices to their highest recorded level, then combined subsidies with payments to not grow crops as a way to meet desirable incomes for farmers. Generally, it worked. The program had been intended as a temporary “emergency” measure, but Congress made it permanent in 1949.

Since then the program has grown while the number of farmers has been reduced. Until recently, the government made direct payments to farmers and picked up almost two-thirds of the cost of insurance against weather-related problems. All farmers, great and small, have benefitted from this program: the average farmer made $87,000 a year in 2011, largely thanks to federal welfare, compared to the national average income of $67,000. At the same time, the “family farm” has become largely imaginary. American farming has become concentrated in the hands of a few giant “agribusinesses.” Since most of the beneficiaries of these programs are in a minority of “Red” states, Republicans bought off the Democrats by including the food-stamp program in the Farm Bill.[1] Probably not what Thomas Jefferson had in mind. Or maybe it was.

In 1973 and again in 1979 oil supplies from the Middle East were interrupted and gasoline prices soared. People eager to insulate the American economy from such price shocks urged the development of alternative fuels. One of the most prominent alternatives was ethanol—alcohol derived from plants. In particular, Middle Western farm states pushed for the conversion of corn into ethanol. However, other adaptations provided a first response. Not until 1995 did the United States government begin to subsidize the production of corn-based ethanol. This program grew tremendously over the next decade as Congress. In 2007 the United States produced about 5 billion gallons of ethanol from corn. It seems likely to grow even larger: in 2007 Barack Obama told an Iowa audience that he favored raising ethanol production to 65 billion gallons by 2030.

So far, so good. Is there a down-side to this pursuit of ethanol as an alternative fuel? Yes, there are several. First of all, corn-based ethanol is incredibly inefficient compared to other forms of fuel. The “energy balance” of any fuel is the ratio between the amount of energy produced and the energy consumed to produce it. Gasoline produces five times the amount of energy needed to produce it. Sugar cane-based ethanol yields eight times as much energy as is needed to produce it. Corn-based ethanol, however, produces only about 1.3 times as much energy as is needed to produce it. In short, you get virtually no benefit for the energy expenditure. Second, ethanol absorbs water. As a result, it cannot be shipped by existing gasoline pipelines and it cannot be mixed to more than a 1:9 ratio with gasoline because it would corrode engine parts. In turn, this means that ethanol has to be shipped by less energy-efficient tanker trucks and that it can only reduce oil-based gasoline consumption by 10 percent. Third, because the energy balance of corn-based ethanol is so low, it takes huge amounts of corn to produce much ethanol. About one-fifth of the existing corn crop is devoted to ethanol. (To reach President Obama’s goal of 65 billion gallons of ethanol by 2030 would require using thirteen times as much corn as is used currently—or about 250 percent of current total corn production. Since corn is used for many different things, the existing 80 percent devoted to producing corn for those purposes would have to remain in cultivation. This means that the real level of corn production would have to go well above triple the present level.)   Devoting corn to ethanol drives up the price of all other corn-derived products: Mexican tortillas, corn-fed beef, anything sweetened with corn-syrup or fried in corn-oil. Shifting land from producing something else to producing subsidized-corn then drives up the price of other goods.

If the energy balance of ethanol is poor, that of campaign contributions is not. One agribusiness giant made $3 million in campaign contributions between 2000 and 2013, but received subsidies for producing ethanol worth $10 billion.

[1] Although, in 2013, in one of those fits of insanity that have become their hall-mark, Republicans decided to shred the food-stamp program. President Obama threatened to veto any bill that didn’t fund food-stamps. “A welfare program for agribusiness,” The Week, 16-23 August 2013, p. 13.

 

A fine kettle of fish.

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Wage increases haven’t kept pace with inflation for at least a decade. Generally, American families earn less than they did in 1999. A host of factors lie behind this depressing trend. There is intensifying competition from overseas (globalization); there is the difficulty of workers adapting to technological changes that wipe out lower skill/lower wage jobs while creating higher skill/higher wage jobs; and there is a government that is managing the past more than helping create the future. Still, there are a couple of factors that capture the attention.

First, America has been suffering from slow economic growth for quite a while. Why have we suffered slow growth? One answer is that high energy costs exert a drag on the economy. Beginning with the oil shocks of the 1970s, energy costs rose until the 1990s. They dropped for most of that decade, but have returned to the post-1970s “normal” in this century. Energy costs work like a regressive tax: everybody drives, so everybody pays the same gas tax; high energy costs for employers drive them to hold down other costs, like wages, or to pass them on to consumers. Another answer is that American workers used to have an enormous education advantage over most foreign workers. Now other countries have moved forward, while Americans have remained stuck in neutral. This affects productivity in a competitive economy.

Second, what growth that has occurred has flowed toward those already at the top of the pyramid. Health care costs reduce real incomes. Either employers resist wage increases in order to provide health insurance or employees without work-provided health insurance have to pay their own costs. The long rise in health-care costs cut into the rise in pay for most people. It took a proportionately smaller share from the incomes of the well-off. They plowed the difference back into investments.

Are there any grounds for even a modest optimism? Yes. First, “fracking” has greatly increased the supply of cheaper energy in America. Second, the incessant talk about the importance of education for getting a decent job has led to an increase in the number of high-school and college graduates. In 2000, 29.1 percent of 25 to 29 year olds had a college BA; in 2008, 30.8 percent did; and in 2013, 33.6 percent did. Third, for reasons that are much debated, health-care costs have stopped rising for the last few years. This should allow pay to rise as well.

None of this means that we’re home free. The way forward is shrouded in fog. Short-term results haven’t been very satisfying. American voters clang back and forth between “Hope” and the “Tea Party.” The partisan “grid-lock” in Washington may be less of a cause of our troubles than a symptom of those troubles.[1]

This analysis raises a couple of questions.

First, how do we improve the educational preparation of American workers? Shove 50 percent or more of Americans through college? Create a trades-oriented alternative to college?

Second, how do we get health-care costs down? Western Europe and Japan spend two-thirds the share of GDP on health-care as does the US and get better results, so it can be done.

Third, where do we stand on the cheap energy versus the environment issue? Global warming argues for alternatives to burning carbon; jobs and economic growth argue for it.

Fourth, what is a government supposed to do in a highly complex society and economy? After the “London whale” and the Chrysler recalls, the “regulatory state” has a black eye. That’s hardly a reason to believe in the pure rationality of the market economy

[1] David Leonhardt, “The Great Wage Slowdown Of the 21st Century,” NYT, 7 October 2014.

 

 

Pop. 2050.

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People from Thomas Malthus to Paul Ehrlich used to fear that population growth would outrun resources. These fears proved groundless by the end of the 20th century. Projecting from current trends, the United Nations foresees a world population of 9.3 billion by 2050, with growth slowing to stability at 11 billion by 2200. Other reliable estimates set the “carrying capacity” of the earth (its resource base) at something better than ten billion people. Many estimates hold that the earth could support 11 to 14 billion people. In short, a huge crush on resources seems unlikely to imperil human survival.

Instead, by the start of the 21st Century it was being predicted that “the most important changes in world population over the next fifty years are less likely to be in the total number of people than in their age and geographic distribution.”

For example, the anticipated overall slowing of population growth means that populations will age. In 2002 the median age of the world’s population was 26.5 years; by 2050 it will be something like 36.5 years. In the more-developed regions, long life-spans combined with a previous drop in the number of children below replacement level (2.2 children/family) will create very distinctly aged population patterns. The absolute and relative size of the working populations will shrink. Fewer working people will have to support more elderly dependent people, but fewer children. Unless there is substantial immigration from non-European areas, Europe’s 2050 population will be smaller than its 2000 population and only 57 percent will be of working age (15-65). Italy may be regarded as an extreme case: by 2050 the Italian population will shrink by 25 percent and only 3 Italians will be working for every two over 65 years. In both Russia and the former Soviet-bloc territories population is plunging as people have fewer children, many die younger than one would expect, and others emigrate.

Other areas of the world still face surging population growth: in China the birth rate is double the death rate, in India and Nigeria the birth rate is almost triple the death rate, in Pakistan the birth rate is more than triple the death rate. In general, almost all of Africa, the Arab world, and South Asia can anticipate population growth by 2050 that ranges from at least 50 to over 100 percent. Eight of ten of the fastest growing countries are Islamic-majority countries. Afghan women bear on average 6.8 children, while the population of the Gaza Strips is projected to quadruple by 2050. But it is not just Islam that reports rapid population growth: sixteen million more Indians were born than died in 2002 (20 percent of the world’s population growth); and the population of Africa is projected to increase by 150 percent between 2000 and 2050. This is in spite of the AIDS epidemic, which reduced life expectancy in Africa from 60 years (early 1990s) to 36 years (2002).

In contrast to developed Western countries (including Japan), in less-developed regions, the continuing comparatively high number of children will create distinctly youthful population patterns. The absolute and relative size of the working populations will grow. More working people will have to support more children, but not as many aged people.   (Retirement homes and elementary schools may become the key institutions in two different societies.)

More importantly, it is difficult to see how “developed” societies are going to do without a large influx of workers from “developing” countries. What school-teachers call “cultural competencies” are going to start to count more and more. “Controlling the border” will take on a different meaning.

 

Don Peck, “The World in Numbers: Population 2050,” Atlantic, October 2002, pp. 40-41.

Climate of Fear IV

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Of all the water on the earth, 97.5 percent is salt water. The polar ice caps and the glaciers hold about 68 percent of this fresh water. Another 31 percent of it is not readily accessible because it is buried deep underground.

Like oil, the problem of adequate water supply can be addressed by a combination of greater efficiency in consumption and the opening of new sources to expand supply. For example, between 1980 and 1995 increased efficiency of use in the United States reduced both total consumption of water (10 percent) and per capita consumption (20 percent). Agricultural irrigation is very inefficient and better irrigation methods are available for those who want to use them.

Or you could move water from surplus areas to deficit areas. In a reversion to ancient governmental practice, the Chinese are building three huge canals to carry fresh water from the Yangtze River to northern China. The canals will end up being more than 700 miles long and will carry 12.7 trillion gallons of water per year.

Only about one-third of total annual run-off water is “caught” by reservoirs and dams; therefore, more dams and reservoirs could catch a lot more water for human use.

Deep drilling for water could tap into the 31 percent of total freshwater that is currently unavailable for human use (as compared to the 1 percent of fresh water that is available).

A much more serious problem is the availability of safe drinking water. About forty percent of the world’s population—most of them peasants in developing countries, 1.5 billion in India and China alone–lack access to modern sanitation systems. What this means in real terms is that people and animals shit upstream from where they get the water in which they bathe, with which they cook, and which they drink. What this means, in turn, is that about 2 million children under the age of five in developing countries die each year from waterborne diseases. As many as 76 million people are going to die of water-borne diseases by 2020, according to one projection. This is because 1.1 billion people don’t have a regular supply of safe water for drinking and 2.4 billion people have no access to sanitation systems. As a result, there are about 4 billion cases of diarrhea per year.

How to control this source of illness and how to treat the illnesses it causes are well understood. (Developed countries have been doing this for more than a century.) The real sticking point is that it is expensive to build sewage systems, water treatment plants, and hospitals. In theory, “These nations don’t have a shortage of water; they have a shortage of money.” In practice, a decade of economic growth since this statement was made has generated a lot of national wealth for China and India. Of course the problem is how to get at it. Taxing rich people in developing countries is as difficult as drilling for oil deep off-shore and drilling for the deeply-buried water.

Still, if you want to ask “what is the good” in environmental crisis, the answer is that it is good for American engineering companies. They have the skills to build sanitation and water-treatment facilities. They have the skills for all kinds of deep drilling.  Maybe the could capture melting polar ice at the source.

Or you could open a marina on Baffin Island.

 

Jen Joynt and Marshall Poe, “The World in Numbers: Waterworld,” Atlantic, July/August 2003, pp. 42-43; “Dirty Water: Estimated Deaths from Water-Related Diseases,” Atlantic, November 2002, pp. 46-47.

Climate of Fear II

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Recently, the New York Times has published pieces by economists arguing that the costs of limiting climate change may be much lower than people have feared.

The Cornell economist Robert Frank has made a series of arguments in favor of vigorous action in responding to climate change. Some of them are more persuasive than are others.

First, the same people who argue that climate change isn’t certain also go to the dentist once a year. Why? Because fillings are cheaper than root canals. The same reasoning goes for the uncertain effects of an uncertain degree of climate change.

Second, the same people who want to protect capitalism from excessive regulation ignore that the market works really well. Raise the costs of pollution to producers and consumers and they will find lower-cost alternatives. Carbon taxes and cap-and-trade policies can cut pollution without pushing up over-all prices.

Third, we restrict the right of individuals to exercise their “individual liberty” when it would harm others. Same thing goes for discharging greenhouse gases.

Some of his arguments seem to come from cloud-cuckoo-land.

First, capitalism is “creative destruction.” If carbon-based industries get destroyed by prices that reflect their real costs to the environment, then investors will plow money into alternatives. What Frank fails to understand is what Catherine the Great tried to explain to Denis Diderot: “You write your reforms on paper; I must write them in human flesh.” Coal miners don’t easily convert to barristas. Look at what happened to British coal miners after the Thatcher government decided to close many inefficient coal mines. Boozing away their dole in the local.

Similarly, there are only a relatively small number of convicted felons or people discharged from mental asylums who want to obtain a permit to carry a concealed weapon, but lots of people drive cars. It is easy to restrict the rights of the former, but it will be hard to restrict the rights of the latter.

Second, what you lose on the swings you make up on the merry-go-round. That is, high taxes on pollutants would generate huge revenues that would allow other taxes to fall. What Frank fails to notice is that American taxation is highly progressive. The top one percent on tax-payers provide over a third of all income tax revenue, while the bottom fifty percent pay less than five percent. Raising gas taxes, for example, would penalize the vast majority of Americans while off-setting tax cuts would benefit the “one percent.” Good luck getting that through Congress.

However, the proponents of the carbon tax increase + other taxes decrease frankly acknowledge that the two have to run together to keep the tax effect neutral. If the carbon tax is increased without an offsetting reduction in other taxes, then it really is a significant additional cost for the economy.

Third, American leadership would give us the moral high-ground, while the threat of tariffs could be used to lever the Chinese and the Indians into following our lead. I suppose we could ask Vladimir Putin what he thinks of America’s moral high ground—and of economic sanctions.

In short, there are some interesting ideas on offer. However, the political bugs haven’t yet been worked out of the system.

Robert Frank, “Shattering Myths to Help the Climate,” New York Times, 3 August 2014.

Eduardo Porter, “The Benefits of Easing Climate Change,” NYT, September 2014.

Climate of Fear I

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Climate change is an important, but testy, issue. It involves a number of distinct, but related, problems. The problems are more political than scientific or technological.

Burning carbon emits greenhouse gases into the atmosphere. Coal, oil, and gasoline powered the previous Industrial Revolutions. Most of the greenhouse gasses of the past came from what are now wealthy Western nations. Now, non-Western nations have embarked on a headlong pursuit of industrialization as a way of raising the living standards for their people. Developing countries now produce two-thirds of all greenhouse gases, and China is the single biggest emitter. China accounts for 28 percent of all emissions. This is more than the United States and the European Union put together. The greenhouses gases of the present and future are chiefly the product of these late-industrializers.

First, how do we cut future greenhouse gas emissions without telling non-Western countries that they can’t industrialize? One answer appears to be heavy investment in renewable energy sources like wind and solar energy. Yet China and India have as much access to solar and wind energy as do Western countries. What they don’t have are well-organized, articulate environmental lobbies. Taking a coldly economic view, the rulers lean toward carbon. They aren’t very interested in developing alternative energy when they have a lot of coal.

Second, who pays for the adjustments caused by the climate change that is already underway? Much attention focuses on countries suffering from “a case of bad latitude.” Climate change threatens “nations” on coral atolls in ways that don’t seem so threatening elsewhere. The Seychelles Islands in the Indian Ocean and the Marshall Islands in the Pacific Ocean are in danger of disappearing under rising seas. Bangladesh and the Caribbean Islands could face the same fate. (If we get lucky, so could Florida.)

The expectation in some areas is that the wealthy nations of the West will pay. “Don’t tell us you can’t cut emissions, you can’t give money, while you bask in the rich way of life you enjoy now. You know your emissions are damaging us. Help us out here.”—Ronald Jean Jumeau, the Seychelle Islands’ ambassador to the UN for Climate Change. He probably shouldn’t try that attitude on with the Chinese.

Third, people are afraid that the costs of stopping or—better yet—turning back climate change would cause a significant slow-down in economic growth. Alternative energy sources were estimated to cost more than our little friend, carbon, or to involve unacceptable risks (like Chernobyl). A heavy tax on carbon use offers the best means to shift consumption from carbon to non-carbon sources. Many enviro-friendly[1] people are willing to have someone pay it.

Who pays for the investment? Germany has tried taxing carbon to subsidize the development of wind and solar energy. First, they decided to exempt the export-oriented industries from the tax because these are often energy-intensive producers. Higher costs could reduce international competitiveness. German national prosperity through exports came before climate. Then the higher costs of carbon to subsidize alternative energy sources did not produce comparable supplies of wind and solar energy. Instead, energy prices went up. Now the German government has begun scaling-back the subsidies.

Justin Gillis and Coral Davenport, “Push for New Pact on Climate Change Is Plagued by Old Divide of Wealth,” NYT, 21 September 2014, p. 10.

[1] It’s too bad there isn’t some clever euphemism for this constituency in the way that “420 friendly” is a euphemism for dopers.

 

The economic mess

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Every–bored-to-tears–schoolboy knows who propounded the idea of a “social contract”: Thomas Hobbes and John Locke.  The idea of a social contract on the distribution of income has formed one of the pillars of “neo-capitalism” since 1945.  However, that basic idea has witnessed several successive versions.  From 1945 to the Reagan Administration in the 1980s, the US combined high tax rates on the wealthy with the channeling of the gains in productivity to employees.  Eventually, business people pushed back against what they saw an an unfair deal.  A new social contract emerged in which much higher incomes for the wealthy were accepted so long as the real incomes for the middle class continued to rise.  (All this is just my opinion.  In all likelihood, many of my historian friends would rain-down good-humored abuse on this interpretation.)  The financial crisis and the “Great Recession” then ruptured this second version of the social contract.

In 2007-2008 we had the financial crisis and the “Great Recession.”  In 2009 we started back up the road to prosperity.  American Gross Domestic Product (GDP, OK, cue Mort Sahl here) is up 6.7% over 2007.  Per-capita disposable income rose 4.2% between June 2009 and June 2014.  Well, some of us started back toward prosperity, but not all of us did.  In June 2009 the median family income was $55,589; in June 2014 it was $53,891 (in inflation-adjusted dollars).  That’s a 3.1% decline.

How can that be?  Well, the stock market is doing very well.  If you’re the kind of person who puts their  savings  into Vanguard accounts, then your the kind of person who probably has profited from the recovery.  (On the other hand, you’re also the kind of person who took a bath in the recession.  Not that the people at the New York Times give a rip about your experience.)  If you’re the kind of person who depends on wages or salary and your home is your chief investment, there is good reason to feel like the “recovery” is a joke.  (Like a bucket of water propped on top of a partly-open door.  “Hey, can you come in here for a minute?”)  Worse still, the 1999 peak in real household income was a little higher than the 2007 (pre-recession) peak in income.  Five years into the “recovery” and we aren’t even back to the 2007 level and the 2007 level wasn’t as high as the 1999 level.  In sum, we’ve actually had fifteen years of things not working right, rather than five or seven years of things not working right.  There’s probably something in the Bible about this.

One great challenge of the day is to figure out a new version of the social contract.  There has to be a way of achieving broadly-shared economic growth.  There isn’t much political consensus about what to do.  George W. Bush and Barack Obama, Republicans and Democrats all had or have high disapproval levels in public opinion polls.  A big chunk of voters seem to have swung from supporting Obama and the Democrats in 2008 to supporting the Tea Party faction of Republicans in 2010.  The 2014 mid-terms loom next month with no certain outcome.

Saying that there is no political consensus on action isn’t quite the same as saying that professional economists couldn’t come up with some solutions.  It’s just that neither the right or the left seems much interested in listening to what they have to say.  The flight from Keynesian solutions to the recession actually was widely shared.  It is inexplicable in rational terms, especially by Democrats who were going to be left holding the bag in future elections.  Yet it happened.  Probably the same goes for constructive policies aimed at building a better American future.

Paul Krugman, “How to Get it Wrong,” NYT, 15 September 2014.

Neil Irwin, “A Crisis of Faith in the Global Elite,” NYT, September 2014.

Neil Irwin, “Why the Middle Class Isn’t Buying the Talk About a Strong Recovery,” NYT, 22 August 2014.

The Blood of Victory.

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Cotton may be the “fabric of our lives,” but oil makes everything run.

How much oil are we using? More and more each year: 60 million barrels a day in 1985, 84 million barrels a day in 2009; probably 114 million barrels a day in 2035. Oil use will probably accelerate as “developing nations” (Chinas, India), well, develop.

One problem is that there is a finite amount of oil in the earth. But how much is that? No one knows for sure. The current estimate is 1.2 trillion barrels. This is pretty hazy, actually. There may be lots more oil than people previously thought. Still, even “bullish” estimates suggest that we may have enough oil—produced at a rising cost—to provide oil for twenty or thirty or even forty years. So I’ll probably be dead before it runs out, but most people on the earth today will not. In the meantime, world demand for oil drives the exploration for new oil reserves into new areas.  As one oil company spokesman put it, “this is where nature put the oil.  You want to find oil, you have to go where it is.”

Some of the oil exploration sites are in extremely challenging environments.  There are undersea deposits in the Atlantic Ocean off the coast of Brazil, in the Arctic Ocean, and off the coasts of the United States. The American sites are problematic. People first started drilling for oil off-shore in the Gulf of Mexico in about 1950.  Success in the Gulf led to oil exploration elsewhere.  However, in 1969 there occurred a disastrous oil-rig blow-out in the Santa Barbara Channel in California.  The reaction put a stop to off-shore drilling wherever the oil industry was not already powerful.  Both the East Coast and the West Coast were soon out of bounds.  In contrast, Texas and Louisiana were already in the thrall of the oil industry.  Off-shore oil drilling became concentrated in the Gulf: there are about 4,000 oil rigs operating there now.

Since 2005 there has been a tremendous growth in the number of off-shore oil rigs world-wide.  There are about 2,500 off-shore oil and natural gas rigs around the world outside the Gulf of Mexico.  The number of the foreign off-shore rigs will expand.  Brazil claims a recently-discovered under-sea field 200 miles out in the Atlantic.  The oil deposits are estimated at 15 billion barrels.  Tapping into these fields would raise Brazil to the ranks of Canada and Nigeria among oil-producers.  For a rapidly developing economy with all sorts of needs and aspirations, this chance is too good for Brazil to pass up.  There are serious technical difficulties because the oil is four miles down.  The example of British Petroleum’s “Deepwater Horizon,” which blew up and blew out in Spring 2010, sends shivers down the spines of environmentalists.

Environmentalists go crazy over the risks. The “Deepwater Horizon” blow-out, and the resulting spill, gave them a lot of ammunition. How are you going to contain an oil spill four miles down if you couldn’t contain one a mile down? How are you going to contain a spill in the stormy Atlantic Ocean if you couldn’t control one in the comparatively tranquil Gulf of Mexico? Alternative oil sources don’t look much better. The Canadians have been extracting oil from “tar sands” in Alberta and the US is extracting oil from shale rock in the Western states. Getting oil out of tar sands requires six barrels of water for every barrel of oil produced. Water is nearly as scarce as is oil.

What to do? Well, if you’re running an oil company, you look in places that have weak environmental regulations and a corrupt government. “Nigeria is for drillers” bumper-stickers should start popping up all over the place. Ecuador, Peru, and Costa Guano should also start to figure in oil company reports.

See: “The search for oil,” The Week, 17 December 2010, p. 15; “Oil rigs: cities at sea,” The Week, 21 May 2010, p. 13.

The Arms Barometer

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Great attention has focused on the dangers posed by Weapons of Mass Destruction (WMD). However, more than 80 percent of the violent conflicts waged during the 1990s employed only “small arms” (weapons ranging from pistols to RPGs). Consequently, the availability of small arms is a matter of real concern. How many guns are there circulating in the world? A lot. The Graduate Institute of International Studies, Geneva, runs an annual Small Arms Survey. The 2002 edition estimates that there are about 640 million small arms worldwide. Some of these guns are newly manufactured. About 8 million new guns were produced in 2000 alone. Some of them are used guns left over from earlier conflicts. Back in 2002, there were estimated to be about half a million small arms in Cambodia, which the Cambodians were busy selling all over the place through the conduit of Thailand.

The “belle of the ball” in small wars appears to be the old AK-47. (See my post on “The Gun That Made the Nineties Roar.”) The black market price of an AK-47 works as a barometer of conflict in a particular society. When the price is really low (say $40 for a used, but functional assault rifle), every little thug in the neighborhood can afford one. Violent robberies and the settlement of petty quarrels by means of homicide spread like wildfire. This is typically the case in the aftermath of some conflict, when the demand for guns has fallen sharply. A price range between $230 and $400 per weapon is the normal market price. Prices above $1,000 a weapon indicate a desperate, time-sensitive demand for weapons. Civil war is about to break out, so people will pay any price to get an assault rifle.

What do local market prices tell us about the state of civil peace in various countries around the world? Well, in 2002, an AK-47 sold for $15 in Mozambique, $40 in Cambodia, $90 in Sudan and Afghanistan, and $100 in both Nigeria and Nicaragua. Happy days were here again in these places after bitter wars. Other places, not so much. At the same time that the price of an AK-47 fell below market level in those places, they were bringing $800 each in Columbia, $1,200 in Bangladesh, $2,400 in Kashmir, $3,000 on the West Bank (more than twice as high as in 1999), and $3,800 in Bihar state in India. This indicated that a new catastrophe loomed over South Asia. It wouldn’t have to turn into a nuclear war to be deadly.

It is worth noting that the “merchants of death” aren’t always, or even mostly, Western industrial nations. One of the key forms of industrialization pursued by developing economies appears to be an arms industry. Many developing countries seem to want to alter their balance of payments by producing arms for sale abroad in a burgeoning world market, rather than importing arms in exchange for other exports. Small producers of arms now include Ukraine, Serbia, Croatia, Slovenia, Portugal, Canada, Saudi Arabia, Argentina, Chile, Peru, Columbia, Mexico, Indonesia, the Philippines, Malaysia, Thailand, and Australia. To some extent, these countries obtain the means to produce arms by attracting European arms manufacturers to license factories in the developing countries. Take the example of Heckler and Koch. The German-based firm licensed factories in Greece and Iran. However, Greece exported some of the weapons manufactured in the licensed factory to Libya. Reportedly, Libya transferred some of these Heckler and Koch weapons to Lebanon. The Iranian Heckler and Koch factory exported some of their weapons to the Sudan. From Sudan the weapons went to Lebanon, Algeria, and Egypt.

I suppose that somebody could use the AH-47 index to run a futures market in No Future.

 

Don Peck, “The World in Numbers: The Gun Trade,” Atlantic, December 2002, pp. 46-47.