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January - March 2013

Passing of a Giant

Power Disconnect

 

Saturday, January 19, 2013

   Passing of a Giant -  Last week, on January 9, Economics Nobel Laureate James Buchanan passed away.  I came across a pretty good commentary from Robert Higgs which was also posted up on the Mises site.

     I had the pleasure and privilege of meeting Professor Buchanan shortly after he won the Nobel prize.  He was invited to make numerous presentations at the University of Hawaii, where I was a graduate student.  He gave a couple of public presentations, spoke to an econ undergrad class, gave a seminar, had a dinner with the faculty, and had breakfast with graduate students in the econ program (including me).  I especially remember the public presentation at the East-West Center on campus.  After his remarks, he took questions and one student made a critical remark about how low wages were destroying American jobs.  Buchanan replied something like this: "You clearly don't understand the fundamentals of comparative advantage since your question is meaningless."  I think he also said something to the effect of not asking questions unless he knew what he was talking about.

     At our breakfast, he regaled us with stories of his post-doctorate research that lead him to the field of public choice.  I found it interesting enough to find a book on the topic.  I'm pretty sure it was Dennis Mueller's book, but I can't be sure.  At the time I had been working on my dissertation about user costs and urban mass transit.  Following this new interest, I decided to completely put all of my work aside and retool my dissertation into a public choice analysis of urban transit policy.  I capped off my work with a seminar that was well-attended by both students and faculty.  But, there wasn't really much excitement about my new direction, so I went back to my original work, eventually published as "Congestion and Bus Frequency."

     I went to his presentation to a principles class and afterward asked him about the Keynesian policy of running budget deficits during a recession in order to mute the effects on unemployment and production.  Buchanan argued that it didn't matter if Keynes was right or not - run deficits during depressions and surpluses during a boom.  He argued that you just couldn't rely on politicians to actually balance the government's budget over the course of a business cycle.  That's really at the heart of Public Choice - incentives in the political arena, and their effects.  When politicians waste millions of dollars building a bridge to nowhere, we may be appalled, but we shouldn't be surprised.  At the time I thought he was a bit too cynical in his views about politicians.  Now, of course, I think he was being too charitable.  I am pretty sure that this marked the beginning of my own questioning of the Keynesian viewpoint.

     When I first arrived at Northern Arizona University, I lobbied for a public choice class.  But the staffing was pretty tight, with probably 80% (or, more!!) of our teaching load devoted to core business classes (micro, macro, stats).  There are a couple of upper division classes that are always offered, that have broader appeal than to just econ students.  [For example, my Money and Banking classes are overwhelmingly made up of Finance major, because it is a required course for them.]  So, the upper division class offerings were thin, and tenured faculty had first crack at these.  Indeed, the retirement of a senior faculty member put their class in limbo.  When our Public Finance guy retired, so did his course.  Well, twenty years after I arrived, I finally got my shot.  When a faculty member who taught "Comparative Economic Systems," i.e. socialism, retired, it opened the door for me to insert a Public Choice class into our curriculum.  It has been offered three times in the last two years and I have thoroughly enjoyed the experience, as have the students that have taken the course.  In fact, I assign them to watch this short video of Walter Williams interviewing Professor Buchanan.  [Both were on the faculty at George Mason University.]

     As one final note, one of my former students choose to apply to George Mason University for grad school (in economics).  I was happy to write a letter of recommendation for him and he ended up in their program.  I visited with him in the summer of 2011 he mentioned that Professor Buchanan was still active in helping to select their doctoral students.  Engaged to the end!

Tuesday, March 26, 2013

   Power Disconnect -  This week I received my 2012 annual account summary from the electric company, Arizona Public Service (APS).  I like to get these summaries as I use them to make casual assessments of my power usage and associated costs.  But, on the front page of the summary, I read this:

Congratulations!  ... [Y]ou used less energy in 2012 than in 2011.  We encourage you to continue your efforts since even small reductions in energy use can add up to noticeable savings.


     This makes me scratch my head.  Why would the power company congratulate me for using less of their product?  I don't get notes from REI or Amazon or Mobil or Safeway saluting my efforts to spend less money with them.  In fact, they are always trying to get me to spend more!

     So, let's sort this out.  As a consumer with a limited income, I expend time, energy and effort to try and use my funds to maximize my satisfaction through my many purchases.  So, I do want to track my purchases and expenditures.  Well, I don't want to spend too much time, energy and effort, but I am willing to spend some.  And, so I do review my bank account statements, my credit card statements and my various utility bills.  So far, so good.

     Now, what is going on with APS?  Unlike the other businesses I mentioned, they are heavily regulated by the government, especially with regard to their prices.  There isn't any real competition.  If there was competition, then I would expect the APS to be honestly trying to find ways for me to save money, since that would win my business.  [Sort of like DirecTV versus Dish.]  But, they don't have competition.  Their praise for me must be just a sop to the regulators, which tells me that their cost structure is bloated.  Guess who pays for that?!

     There is also some hypocrisy here.  Since APS is regulated, one of the consequences of this is that they are guaranteed a profit.  So, what would happen if all their customers used less electricity?  The regulators would allow them to raise their rates!  I saw this very thing happen back in the 1970s when living in Denver.  At the time, the effects of a recession reduced consumer use of electricity and the state regulators allowed rates to rise to compensate!  Real, competitive, businesses can't do this.

     Finally, consider this - our power consumption is a pretty good proxy for our overall standard of living.  The higher, the better.  Now, I'd like my power to come cheaply, and without pollution.  But, as a general rule, we should celebrate higher power usage, not lower usage!

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