Author Archives: Hongjun Yu

Municipalization of Electric Utilities

Thesis: Municipalization of electric utilities is beneficial to consumers.

Our electricity market comprises of two parts, generation and distribution. The generation of electricity is done under a competitive setting, and then sold to retailers at wholesale. However, the retailers who handle distribution are monopolies (Forbes). This is allowed because they are natural monopolies. A competitive setting would mean that multiple transmission lines connect to the same consumer, which would be inefficient. Unfortunately, this would also allow the firms to charge any price. Furthermore, some distributors of electricity also own generation facilities. Obviously, there would be heavy regulations to prevent the abuse of market power.

According to an article on the Wall Street Journal, the profits allowed for electric utilities are capped at around 10% of the shareholder’s equity that they have tied up in transmission lines, power plants, and other assets. Such that the more the firms spend on these assets, the more profits they are allowed to make. And firms are indeed abusing this loophole to increase profits. Electricity utilities are pouring billions into new equipment, even when they don’t need to. And then easily transferring the costs onto consumers because our demand is inelastic and they are a monopoly.

Additionally, heavy regulations have prompted electric utilities to spend obscene amounts of money on lobbying. An article on Forbes lists companies that paid more lobbying than federal taxes, the list is full of energy companies. Firms lobby in order to protect their interests, which is almost always profits. The cost of lobbying is also passed on to consumers.

Private firm’s relentless efforts to maximize profits is ultimately causing another inefficiency through reckless spending on unnecessary infrastructure. One might suggest that we can simply fix this by increasing oversight of firms’ spending activities. However, this could be difficult to achieve and would require resources from the government. Instead, it would be better to municipalize the electric distribution network altogether. Having publicly owned utilities, run by municipal government, would eliminate the need to extract profits from consumers, lowering our power bills.

Reducing the amount we pay for electricity is not the only benefit. As of now, clean and renewable generation such as wind and solar are still unprofitable. Our government has to offer subsidies to encourage firms to build these generators. But it is not enough, as wind and solar only account for a tiny portion of electricity generation. By taking over the industry, we can directly build more of these generators.  Municipalizing generation plants could benefit consumers from an environmental standpoint as well.

 

Inefficient Power Plants Should Not Be Protected

Thesis: Nuclear power plants that cannot compete in a deregulated electricity market should not be granted bailouts or special deals.

In recent years, the price of natural gas has remained low and steady compared to pre-2009 levels. As a result, many natural gas power plants have been built. Furthermore, wind and solar energy has grown as they received a lot of support such as government subsidies. According to the U.S. Energy Information Administration, natural gas, solar, and wind is leading electricity capacity increases in 2014; and similarly in 2013. In electricity markets, demand is inelastic, but as supply increases, the price undoubtedly fall. Consumers benefit from cheaper electricity prices, but existing power plants suffer.

Natural Gas Prices

According to an article on the Wall Street Journal, many nuclear power plants in deregulated electricity markets claim they are operating at a loss. In order to stay in business, some are seeking government compensation, while others want to make special deals with electricity retailers to sell at a higher price to consumers. They should not have their way as it undermines the whole point of a deregulated electricity market. If they are truly economically inefficient then we should just let them shut down.

The argument for keeping the nuclear power plants active mainly focus on three parts. One, nuclear power plants are required to keep regional electricity grids stable. This could be somewhat true as electricity demand at different hours of the day can change dramatically, so much that at some hours the regional demand could match regional supply. However, we could simply use transmission lines to bring in electricity from other regions. Two, nuclear power plants produce no carbon emission and should be encouraged thus. This argument is invalid because emission costs are already accounted for as part of the marginal cost of generation. If these nuclear powers are operating at a loss, that means the other power plants are more economical even after adding in the cost of carbon emissions. Three, keeping these plants active makes consumers pay more now, but they will save more in the future when price of natural gas rises. An argument based on speculation should be taken with a grain of salt.

That said, whether or not these nuclear power plants are actually operating at a loss is questionable. According to the article, when asked if the plants are actually losing money. Some nuclear power plants who are asking for compensations declined to comment. Large industrial consumers of electricity also argue that “it’s not always clear whether nuclear power plants asking for financial help are actually losing money or are simply less profitable” than they were in the past. This goes to show that some nuclear power plants still make money, but wants government compensation simply to increase their profits.

This is why we should not offer compensation to nuclear power plants. Our best course of action would be to let the market decide which power plants stay in business. Inefficient plants have no place in a deregulated energy market.

Revised: Automation, short-term problem but long-term solution

Thesis: Automation is destroying jobs, hurting wages, shrinking the middle class and exacerbating inequality. However, through proper policies we can more than compensate those who are harmed, ultimately making its impact on society a positive one.

I remember a particular history class back in middle school. My teacher explained that in the early stages of human history, people had to be self-sufficient, they had to hunt or grow their own food, build their own shelter, make their own clothing, etc. Then came one of the most profound changes in human history: specialization. Those who were good at hunting became hunters, those who were good at building became builders, and those who were skilled in weaving became artisans. This increased efficiency and allowed those who were unable to do anything to be fed, while others were free to pursue new things such as astronomy, mathematics, or medicine.

This brings me to my opinion about automation and its effects; an issue that is increasingly being debated (What clever robots mean for jobs, WSJ). Many believe that automation will eventually devour blue collar jobs and take a huge bite out of white collar jobs, and with it the middle class. This is true as robots are taking over manufacturing and algorithms are replacing analysts, statisticians, and the likes. As a result, the falling demand for such jobs causes wage declines and unemployment, leading to wealth inequality. I have found that most articles use this fact to deem automation as something that is killing our economy, but it is more than that.

MIT professors Erik Brynjolfsson and Andrew McAfee wrote Race Against The Machine to discuss how technological advances have indeed contributed to unemployment and falling wages and because workers whose skills have been replaced by machines have little to offer to the job market. Fortunately, through automation our productivity have increase and price have been reduced, increasing the overall economic output and welfare. But income inequality will undoubtedly arise from automation. They suggest that in order to keep up with the changing job market, one must acquire skills that robots cannot replace.

Education being the key to keep up with the rapidly changing job market that is invaded by automation is a commonly accepted solution. But is may not be that simple. According to an article on the Washington PostLarry Summers states that technological advances have largely only benefited the top 1%. Firms are using automation to cut costs and to increase profits. All the while employees lose their jobs while the shareholders cash in. He argues that education will not fix the problem in the short term because a large portion of the labor force is already out of school. He is wrong in this regard as statistics show the age group with the biggest drop in labor force participation turns out to be those aged 16-19, these people may certainly go back to school. More data is presented in the following chart:

Labor Force Participation by Age

First parts on the chart, showing only labor force participation rates and changes for age groups only. (Bureau of Labor Statistics)

Summers’ solution is progressive tax. Despite my concerns about progressive taxing, it does have merits in this situation. Not only can the tax revenue be redistribution to compensate those harmed by automation, it can also be used to fund programs to retrain workers whose skills were made obsolete.

This brings me back to the story of specialization. Robots have certain increased productivity in many areas in the economy. With proper policies, these increased gains can be transferred to those who were initially harmed. Surely welfare can increase in the long run. Heck, our world could even become one where humans are served by robots, like science fiction.

Automation, short-term problem but long-term solution

Thesis: Automation is destroying jobs, hurting wages, shrinking the middle class and exacerbating inequality; but its impact on society will ultimately be positive.

I remember a particular history class back in middle school. My teacher explained that in the early stages of human history, people had to be self-sufficient, they had to hunt or grow their own food, build their own shelter, make their own clothing, etc. Then came one of the most profound changes in human history: specialization. Those who were good at hunting became hunters, those who were good at building became builders, and those who were skilled in weaving became artisans. This increased efficiency and allowed those who were unable to do anything to be fed, while others were free to pursue new things such as astronomy, mathematics, or medicine.

This brings me to my opinion about automation and its effects; an issue that is increasingly being debated (What clever robots mean for jobs, WSJ). Many believe that automation will eventually devour blue collar jobs and take a huge bite out of white collar jobs, and with it the middle class. This is true as robots are taking over manufacturing and algorithms are replacing analysts, statisticians, and the likes. As a result, the falling demand for such jobs causes wage declines and unemployment, leading to wealth inequality. I have found that most articles use this fact to deem automation as something that is killing our economy, but it is more than that.

MIT professors Erik Brynjolfsson and Andrew McAfee wrote Race Against The Machine to discuss how technological advances have indeed contributed to unemployment and falling wages and because workers whose skills have been replaced by machines have little to offer to the job market. Fortunately, through automation our productivity have increase and price have been reduced, increasing the overall economic output and welfare. But income inequality will undoubtedly arise from automation. They suggest that in order to keep up with the changing job market, one must acquire skills that robots cannot replace.

Education being the key to keep up with the rapidly changing job market that is invaded by automation is a commonly accepted solution. But is may not be that simple. Larry Summers believes that education will not fix the problem in the short term because a large portion of the labor force is already out of school. He states that technological advances have largely only benefited the top 1%. Firms are using automation to cut costs and to increase profits. All the while employees lose their jobs while the shareholders cash in. According to him, progressive tax is the best solution to the inequality problem. Despite my concerns about progressive taxing, it just might be the best solution here.

This brings me back to the story of specialization. If robots are increasing our productivity, and they are. Then we can use taxation to redistribute the fruits of this technology. And surely welfare will increase in the long run. In the end, our world could become one where humans are served by robots, like science fiction.

Now is the best time to kill OPEC

Thesis: OPEC is efficient in pushing up oil prices when demand is high, but it is unable to function properly when oil prices drop. In times like now, the cartel may be broken up when it’s pushed in the right direction.

OPEC can be effective in pushing up oil prices because the short term demand and supply is inelastic. However, this inelastic nature can also hurt them when prices drop. Many events in the current oil glut is similar to the oil glut in the 1980s. Back then, the 1970s energy crises has slowed economic activity in many industrialized countries, reducing global demand for oil. Oil prices plummeted from $40 per barrel in 1980 to less than $10 in 1986. The main culprit of this price crash was OPEC’s failure.

In the early 1980s, it was apparent that an oil glut was forming. In order to keep prices high, OPEC has decided as a whole to cut production quantities. As a result, its market share dropped from 1/2 to less than 1/3 of the world oil market. In those difficult times, opinions within OPEC began to clash. Many smaller OPEC countries were cheating and produced more than their agreed-upon quotas, the cartel was failing. Saudi Arabia, angered by the fact that other OPEC nations were benefiting from its loss of market share, decided to punish them by producing at maximum capacity, resulting in oil prices dropping to as low as $7 per barrel. Saudi Arabia wants to avoid this from happening again, it is the reason why the country has refused to cut production this time around.

It seems that when oil prices fall, OPEC falls into disarray. In an article on the Wall Street Journal, OPEC countries are competing with one another for buyers. As it turns out, Kuwait and United Arab Emirates are outmaneuvering Saudi Arabia and have cut deals with oil importers such as China and India; Kuwait has entered into a 10 year supply deal with China’s largest refiner. Saudi Arabia, in order to maintain its market share must also offer better deals, which could cause oil prices to fall further. Competition within a cartel will likely fuel more mistrust and further undermine their ability to collude.

Fortunately, cartels are considered as a market inefficiency. As consumers, it’s better for us if they weren’t around. OPEC was established for the purpose of pushing up oil prices so that its members can benefit. In fact, since the establishment of OPEC in 1960, oil prices have been drastically pushed up. Despite being unstable, oil prices seem to also behave in cyclical patterns since OPEC, with slowing economic activity as a leading indicator of price drop.

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Historic price of crude oil, in nominal values, and real values based on 2014 dollars. (Taken from Macrotrends)

Negative Interest Rates on 10-Year Swiss Bonds

Thesis: Switzerland’s new 10-year sovereign bond’s negative yield imply a struggling economy but will encourage rebound.

For the first time in history, a government has issued sovereign bonds on the 10-year time scale with a negative yield: Switzerland is the first to issue 10-year sovereign bonds with a nominal rate of -0.055%. This negative yield has made headlines on newspapers. Surprisingly, more than $377 million francs worth of such bonds have been sold. On the surface, the small negative value seems to be meaningless given high deflation, but in reality the changes are huge.

Switzerland’s last issue of 10-year sovereign bonds, which was two months ago, came with the near zero rate of 0.011%. Compared to the current issue, the yield has only dropped by 0.066%. On the other hand, deflation has been growing at a much faster rate. According to the Swiss Federal Statistics Office, Switzerland’s inflation rate forecast dropped from -0.5% in January to -0.9% by the end of March. This drop seems to more than offsetting the change in bond yields, such that the real returns have actually increased, but that may not be the case.

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Graph taken from Trading Economics.

The yield for 10 years bonds occur over 10 years of time. To have purchased a bond 2 months ago, one would have to hold it for the next 9 years and 10 months. And a bond purchased today would also have to be held for the next 9 years and 10 months plus another 2 months. If we assume that the interest rates on these two bonds are equal for the overlapping time frame, that means the discrepancy of -0.066% change over 10 years must be accounted for in the two months that the bonds don’t share. This is 60 times -0.066%, or -3.96%. Deflation certainty doesn’t account for this much. This also means that buying one of these bonds would be similar to buying a 2 month bond with -3.96% annual yield plus a 9 year and 10 month bond at 0.011%. Obviously, no one in their right mind would buy a 2 month bond for -3.96%, unless extremely harsh economic conditions make this worthwhile. The fact that so many of such bonds are selling signals that Switzerland’s economy is in really bad shape. To make it worse, bonds issued in the future might have even lower yields.

On the bring side, this empowers Switzerland’s negative interest rate. Firms are able to borrow at super low rates, encouraging investment and growth in the private sector. These low rates also encourage capital outflow, which will counteract Switzerland’s unwanted capital inflow following the Russian ruble crisis.

 

Pay me for my time

Thesis: Response rates to many important social surveys are low and still getting lower, the government should offer payment as an incentive to encourage participation.

Economists, policy makers, and many other professions heavily rely on social statistics for many aspect of their functions. To obtain these statistics, our government set up agencies such as the Census Bureau or the Bureau of Labor Statistics. These agencies use various methods to collect data from the general population, one of the most important is surveys. Unfortunately, many of us refuse to take them.

An article on the Wall Street Journal presents some interesting statistics about consumer spending trends and how they vary among different income levels. These statistics are derived from the Consumer Expenditures Survey. But economists worry about the accuracy of the survey as it is plagued by non-response bias.

Another article on the Wall Street Journal argues that U.S. inflation data is built around the failing survey, because not enough people takes it. Data from the Consumer Expenditures Survey is used to determine the weights in used for CPI. The survey consists of an interview survey and a diary survey. The interview survey is where households are asked about their purchases of large items, such as cars and houses. The diary survey asks households to track all of their spending in two weeks. No doubt, these surveys are not only troublesome but can take up a lot of time, so much that people just don’t want to do them.

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It is very difficult to get accurate results when response rates become low. In statistics, correct sampling is stressed as paramount to get unbiased results. When the sample is disrupted, the inaccuracy can also be very difficult to detect. Non-response creates such a disruption. The immediate solution to the non-response problem would be a legal requirement to participate. But this would create controversy and lead to other problems such as survey takers filling in random answers, or a response bias. People love to get paid for their work, so a better way would be to pay people to take these surveys.

Equal payment for taking surveys would generally entice those in the low income groups, while higher income groups would feel that the payment is not worth their time, this will cause further biases in the sample. As such, the payment should be proportional to the respondent’s income, so that survey takers from all income group can feel that they are well compensated for their time.

Periodic Mental Health Screening for Pilots

Thesis: Pilots should be subjected to periodic screening for depression and other relevant mental health issues, and should be enforced globally.

I realize that it is unfair and perhaps unethical to force people to reveal their medical history in order to be hired or to keep their jobs, but I will play the devil’s advocate in this blog post.

Many of you may have heard by now of the latest high-profile plane crash, a Lufthansa Germanwings commercial airline crashed into the French Alps, killing all 150 on board. Some of the recent news regarding the incident reveals that the co-pilot may have deliberately crashed the plane. According to an article on the Wall Street Journal, the co-pilot, Andreas Lubitz, was behaving oddly during the flight. When his captain left the cockpit, Lubitz seems to have instructed the flight system to descend to 100 feet. Despite air-traffic control’s repeated attempts to contact the pilot, there was no response from Lubitz. The black box recorded sounds of Lubitz breathing, which sounded normal. The captain was also frantically knocking on the door, which suggests that he was intentionally locked out of the cockpit. All the evidence seems to suggest that Lubitz intentionally orchestrated the incident.

The most recent investigation into Lubitz’s past discovered that the pilot has had severe episodes of depression, and was considered a suicide risk. Investigators believe that the plane crash is connected to Lubitz’s depression, and suspect that crashing the plane could have been an act of suicide. Whether or not this is true would be difficult to prove, but it is undeniable that mentally ill pilots pose a serious threat to both themselves and their passengers. Unfortunately, the screening process for pilots is very lose and differs for countries. In the U.S., the screening process relies mostly on self-disclosure, where failure to disclose information can amount to fining of up to $250,000. Because pilots could potentially lose their jobs, it is likely that they would not voluntarily disclose such information, or at the very least, they would downplay their problems. Luckily, once pilots are hired, medical examiners are legally obligated to warn the Federal Aviation Administration about serious mental health issues, according to the president of the Aerospace Medical Association. Furthermore, airlines have their own systems to monitor problematic pilots.

However, my biggest concern is that there lack a global enforcing agency. A large portion of airline travel consists of international trips. As such, many fliers use foreign airlines, which could potentially lack effective measures of ensuring that their pilots are safe to fly. To ensure that all passengers are protected, we need to subject all airlines to the same standard.

The important of employee morale

Thesis: Just as lay-offs are a huge problem for employees, turnovers are costing employers as well. It is up to the employers to fix these issues, through raising employee morale.

Spawning from the last recession, high numbers of lay-offs have greatly hurt employee morale. Many employees, particularly in manufactures and retails, feel as though they could lose their job any day, and for good reasons. As companies are finding newer and creative ways to reduce costs with automation. Employees thus feel insecure about their current positions and always be on the look out for other opportunities. Companies are also “poaching” one another for good employees, further exacerbating the turnover problem. According to the Bureau of Labor Statistics, job openings and turnover are at their highest in 10 years.

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Turnovers cost companies a great deal of resources. Unfortunately, companies are tackling the problem the wrong way. In an article on the Wall Street Journal, Wal-Mart and Credit Suisse are developing algorithms to determine who will most likely quit. Scrutinizing employees will not help retain them, but give them more reason to look for other companies. Instead, companies should focus on placing employees in positions that best suit them, and make sure that employees get more out of the job than just the salary.

Furthermore, many employers judge their employees based on productivity, and firing them when productivity is low. But as W. Edwards Deming demonstrated in his famous Red Beads Experiment, in many professions, productivity is directly tied to and limited by the nature of the system the employees work in. For example, a mutual fund manager can incur heavy losses, but it could be a result of broad economic decline instead of personal failure. This is even more true in manufacture in sales positions where employees are constantly judged by their performance. Instead, companies need to recognize this and make improvements within their system.

Firms are also “poaching” other firms for employees. In another article on the Wall Street Journal, firms are approaching employees in other firms, who are not actively seeking another job, to try and steal them away. Obviously, employees who feel comfortable and happy with their current company and position will be less likely to take up offers from another company. That’s more the reason why firms should focus on raising employee morale. There are many ways to increase and retain employee morale. Examples include finding delegating work that is meaningful to the employee, building trust, and treating employees with respect, all of which center on communication. Of course, employees should also be compensated fairly for their work, and the occasional departmental excursion is always a plus.

We need to do away with for-profit colleges

Thesis: For-profit colleges and their “degrees” are are a scam and should be banned.

Competition in the job market is becoming increasingly intense, leading to higher demand for college education and an increased supply of college graduates. As a result, a bachelor’s degree also has less of an impact one’s competitiveness on the job market. On the other hand, college tuition costs have grown tremendously, making headlines and spawning debates that question the real merits of a college education. There are even those who claim that college is the biggest scam ever. However, I believe that it is the for-profit colleges that are running the scam.

bachelors supply

While tuition costs have indeed grown rapidly in recent decades, the amount that is paid by the students themselves have remained more or less the same. According to Scott Wolla, senior economic education specialist at the St. Louis Federal Reservethe College Board reports that average tuition and fees increased from $24,070 for the 2003-04 school year to $30,090 in 2013-14, but the average net tuition and fees (after financial aid) actually decreased from $13,600 per year to an estimated $12,460—a reduction of $1,140 over 10 years. In other words, increases in the distribution of financial aid is effectively padding the entire increase in tuition costs, and then some. Furthermore, colleges are practicing price discrimination so that wealthier students, who are willing to pay more for college, pay more so that poorer students can pay less, which is arguably a good thing.

Unfortunately, the rising demand for college education and increased federal funding to poorer education seekers has created a lucrative market for entrepreneurs to “sell” college degrees through vendors in the form of for-profit colleges. Offering false promises of a better future, these colleges prey on those who can’t find jobs. These people are targeted because they are desperate, and more importantly are financially struggling, thus eligible for more financial aid.

According to CNN, Vantrell Echols was unemployed for more than a year. During this time he has been receiving phone calls from a for-profit college, convincing him to enroll. Desperate, he gave in. But upon enrolling, he found that the quality of education was a complete joke. “They sold many of us dreams about helping us, getting us qualified to work, to help us with jobs, [but] I had to ask fellow students to help me because the teachers wouldn’t. Many of us graduated with honors but didn’t learn anything in our fields,” he said. Echols is now in tuition debt and believes that he would be better off without the degree even listed on his resume, as employers have told him that his degree was not credible. Indeed, degrees from for-profit colleges are generally viewed as something to avoid by employers.

These colleges also flood the job market with bachelor’s degrees, diminishing their value. As the number of degree holders increase, is it also harder for them to find desirable jobs. In fact, many graduates find it necessary to return to school to get a masters degree or higher. This is reflected in diminishing labor force participation from bachelor’s degree and higher.

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An article on The Atlantic reveals that for-profit schools draw more than 90% of revenue from federal funds. Knowing that billions of taxpayer dollars have gone into the pockets of such organizations does not only reflect ineffective policy but makes me sick to my stomach. Despite growing demand for college education, for-profit colleges should be banned. As an alternative, existing colleges can expand their capacities, which many are doing. On the other hand, prestigious colleges such as MIT have free online courses available to anyone with internet access. With small tweaks to their program, these too can serve as an alternatives for anyone seeking quality education.