Tag: Economics

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Backyard Eggs
Backyard Eggs

So, the Champaign City Council legalized backyard chickens a while back. You have to file a form, pay a one-time fee, and get a notarized permission slip from your landlord (if you’re a renter), but it all looks quite doable. As I’d mentioned when I wrote about the issue before, this would have been a determining factor in my willingness to buy a house in Champaign, and now it isn’t. The fee isn’t cheap ($50), but figured into the cost of buying a house, it’s insignificant.

But thinking about the fee got me to thinking about why one raises chickens in the first place.

Probably most of the people in Champaign who want to raise backyard chickens are yuppy locavore types looking to reduce their food-miles to minimize their carbon footprint and know that they’re eating organic and cruelty-free. More power to them. But there’s another category of people who might raise backyard chickens: poor people.

Someone who’s poor—someone whose budget barely stretches to cover their other expenses, someone who’s on food stamps, someone who uses a food pantry—is another person who might find raising backyard chickens very attractive. Eggs don’t cost much, but someone who raised chickens might be able to save a few dollars a week and get some high-quality protein and have a surplus that they could share or trade. But a $50 entry fee just about blocks this reason to raise chickens.

I guess I’m not really surprised. Local politicians in Champaign have a lot of incentive to help upper-middle class people eat local and organic—those people vote. They probably don’t feel the same pressure to help poor people get a little high-quality food as cheaply as possible, because poor people don’t vote as much—and when they do vote, the legality of backyard chickens probably isn’t a top issue.

It does bug me just a little that Champaign (which thinks of itself as conservative place) has created this whole big-government scheme with forms and approvals and fees and regulations on chicken coops, while Urbana (which thinks of itself as a liberal place) doesn’t have any of that stuff, just a general rule against letting your animals become a nuisance. But that’s just me, asking for consistency from politicians.

So, half a cheer for Champaign legalizing backyard chickens, even if they came up with a way to do it that only helps yuppy locavores and not poor folks.

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In his dedication to educating the public about the zero bound, Paul Krugman has asked several times (most recently today):

. . . what calculation leads to the notion that a target of “close to but less than 2%” is appropriate, as opposed to, say, 3 or 4 percent.

I think I know the answer: An inflation rate of 2% is small enough that price changes due to inflation are unnoticeable in the noise of other price changes, even over periods of a few years.

Among the costs of inflation are those that come from uncertainty about not only future prices, but also about current prices.

When inflation is under 2%, the price of a cookie at the local bakery might remain unchanged for years at a time. I can stop by the bakery with exact change, and be reasonably confident that I’ll be able to buy one. The costs of flour, sugar, and chocolate will vary over time—but some will rise and others will fall, and the bakery will be able to hold the line on the price of a cookie. This is a convenience for me. It’s also good for the bakery, because people who are confident that they have enough cash in their pocket to buy a cookie are more likely to stop and get one. If they had to make a stop at the ATM first to get cash—or worse, be sent away to visit an ATM mid-transaction—they might not.

At some point—and I assert that the point turns out to be slightly above a 2% inflation rate—stores find that it’s necessary to raise prices at least annually, just to keep up with inflation.

Even if the inflation rate is known and not a surprise, there’s still the threshold effect of one day the price is $x and the next day it’s $x+3%.

When the inflation rate is below 2%, prices can remain stable for years at a time—long enough for people to learn what they are. And that knowledge can make their day run more smoothly. They can be sure they have appropriate cash on hand. They don’t need to check prices ahead of each transaction.

When the inflation rate is above 3%, stores might need to raise prices twice a year, to avoid falling behind. When the prices of a hundred things are all being raised more often than annually, it becomes impossible to learn what prices are, and impossible for that knowledge to make the day run more smoothly. All of a sudden, you have to pay attention to price changes, because they’re happening all the time. In advance of every transaction, you need to allow for the fact that maybe today is the day that prices went up several percent.

Some prices change all the time anyway, especially where the item being sold is a single commodity, such as milk or gasoline. For exactly this reason, prices of those items are often prominently displayed—to reduce the transaction effort of the consumer who wants to know what the price is going to be.

I think that’s why 2% inflation is different from 3–4% inflation: Because price changes due to inflation begin to stand out from changes in relative prices, adding another whole layer of informational costs on every purchaser, on every purchase.

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more-st-croix-chickensThe News Gazette had an article yesterday saying that the Champaign City Council has agreed to “schedule a study session” on the topic of legalizing backyard chickens.

Tom Bruno, who was the guy who offered me some encouragement when I inquired earlier seems ready to support the idea. Other members of the council sounded more ambivalent. The comments on the News Gazette article are decidedly mixed as well. (The people who object not because they think the chickens would actually cause any sort of problem, but because they’re afraid that it would make the area seem too “redneck” surprise me.)

So, it’s by no means a sure thing. Time to get organized.

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I’m big on reducing poverty, both locally and globally. (I do worry that more rich people will use more resources, suggesting that reducing poverty isn’t an unalloyed good thing. On yet another hand, only rich people can afford things like sequestering carbon or preserving habitat. It’s complicated.)

Since I’m interested in reducing poverty, I was interested in Lant Pritchett’s recent talk Everything you think you know about poverty is wrong.

Pritchett and I see pretty much eye-to-eye on how to have a rich country, I think.

These well-off countries have a productive economy, a government that is responsive to the citizens, a capable bureaucracy, and the rule of law.

This has interesting implications for global development, because these are all things where it’s very difficult to improve someone else’s situation. If a country has government by-and-for the elites, or a corrupt bureaucracy, it’s going to be poor—and there’s very little outsiders can do to help. One of Pritchett’s points is that things that seem like they might help, such as improving education, seem to do more harm than good—perhaps because well-educated corrupt bureaucrats are worse than ignorant ones.

His solution is for rich countries to create or expand guest worker programs, which I think is a poor idea.

It’s not that I don’t think it would work. A poor worker who came to a rich country and worked a couple of years could both support relatives back in the poor country and save up enough money to return home and start a business. That would relieve poverty both immediately and going forward. It would also produce another person with first-hand experience of the advantages of a less-corrupt society (as opposed to merely seeing the advantages of getting in on the corruption).

The main reason I think it’s a poor idea is that enforcing a guest worker program eventually requires a police state. Somebody has to check all workers—it’s the only way to identify those who aren’t legally entitled to work. Somebody has to make sure those whose permission to work has expired get fired. Those whose permission to live here has expired, but who don’t go home, become an underclass with all the usual problems of an underclass—crime, violence, oppression, disease. I’ve written about this before (see Missing the point on immigration).

There is also the issue of how guest workers affect salaries, wages, and working conditions of citizen workers (short version: I think it makes them worse).

The ideal solution, of course, would be for every country to be rich enough and free enough that people from all over the world would want to move there. But that just brings us back to where we started.

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During the debt ceiling crisis back in 2011, I suggested that it would be no big deal if the government just “prioritized” spending so as to match revenues for however long it took Congress to get its act together and raise the debt ceiling. I got some push back on this by people who said I was crazy if I thought that much spending would suffice, but I never thought it would suffice—I was just sure that the result would be so onerous that Congress would knuckle under in no time. I figured that was what the Treasury secretly had in mind.

I’ve changed my mind.

It would have gone like this: The laws are contradictory—Congress sets the tax rates, Congress sets the spending levels, Congress sets the debt ceiling. The poor Treasury, simply doing the best it could in a no-win situation, would hold up pretty much all payments except interest on the debt, judges pay, soldiers pay, and social security. Once payments to major corporations in districts where recalcitrant Congressmen lived got held up, the stalemate would have ended pretty quickly.

I no longer think that’s what’s going to happen. Basically, I’ve come around the view that the Treasury meant what it said when it claimed that its hand were tied: It is legally required to spend the money the Congress has appropriated, whether the money is raised or not.

And I think there’s a solution.

Really, it’s the same solution as the “platinum coin” solution or the “issue scrip” solution, but those solutions are just gimmicks to put a pseudo-legalistic shine on what basically amounts to paying our bills by printing money.

I don’t think there’s any need for the gimmick. I think what the Treasury means to do once the headroom for keeping under the debt ceiling runs out is: Nothing. They’ll just go on writing checks exactly as they’ve been doing.

They’ll stop issuing new debt of course, so there’ll be no new money in their account at the Federal Reserve to pay the checks.

At which point, I’m reasonably sure, the Federal Reserve will just pay the checks anyway—which the Fed can easily do by just crediting the depositing bank’s account. (In other words, printing the money.)

Basically, the Fed would let the Treasury run an unlimited overdraft.

This works on several levels.

First of all, it doesn’t require any reprogramming or rejiggering of the Treasury’s numerous systems for making all the many payments they make every day. (No entity makes more payments than the US Treasury.) That’s good, because any attempt to do so would be problematic at best, and probably catastrophic in the short term.

Second, the people who are being most recalcitrant about raising the debt ceiling are the ones who would be most outraged. (I can just see them frothing at the mouth. Oh noes! Inflation!!1!)

Third, under the current circumstances, it would probably be good for the economy. I’ve pretty much come around to Paul Krugman’s analysis that at the zero bound there is no inflation risk to printing money. Even better, if it did produce some inflation, that might get us up off the zero bound. (I for one would be very pleased to be able to earn a return on my capital.)

A generation ago the Fed would have hated this—bankers used to hate overdrafts in the deepest depths of their bowels. But overdrafts have been so profitable for banks these past 20 years or so, I expect we have a whole generation of bankers who have gotten over it.

As to whether it’s really legal or not, that’s something for the courts to decide. The debt ceiling applies to debt “subject to the limit.” The Fed and the Treasury will just say that, while an overdraft is debt, it’s not debt “subject to the limit.” The debt ceiling will be resolved long before any court case plays out.

The Treasury never admitted to having any contingency plans last time. Their take on it was that not raising the debt ceiling was unthinkable, therefore they would not think about it. But this is the only thing I can think of that could actually play out without chaos. If they weren’t planning on doing this (or something much like it), they’d have done something by now (such as having a dry run of their scheme for prioritizing payments).

Last time, I figured we’d get an 11th hour deal. This time, I think it’s pretty likely that the debt ceiling won’t get raised, and I think the Treasury will actually end up doing this—so I thought I’d share my thinking in case people find it useful.

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I was reminded yesterday that I wanted to mention Property Assessed Clean Energy, which came up in the course I’m taking on electric power. (What reminded me was Tobias Buckell’s post about how the real issue for photovoltaics is the capital cost of installing the capacity, which he mentioned in reference to a rather interesting article on issues with solar feed-in tariffs.)

Property Assessed Clean Energy (PACE) is a clever idea for funding homeowner investment in solar power. The way it works is this: The municipality raises money with a bond issue, then lends it to homeowners to invest in solar (or potentially wind) power generating capacity. That investment is then paid back to the municipality over 15 or 20 years via an assessment on the property tax bill. The money is easy for the homeowner to pay back, because the debt repayment is funded by savings on the power bill.

The property tax assessment stays with the house if it is sold, which is reasonable because the photovoltaic system or wind turbine stays with the house as well. This means that the capital is available quite cheaply, because the money is very likely to be paid back.

The really big win of PACE is that it greatly reduces the biggest financial risk that a homeowner takes when making an investment in solar power—the risk that he or she will end up having to move before the rather long payback period, and end up being on the hook to pay the loan back, without enjoying the benefits of the lower power bills.

The problem is, even though about half the states have laws authorizing some form of PACE, the whole scheme has been blocked by the Federal Housing Finance Agency, which instructed Fannie Mae and Freddie Mac not to underwrite mortgages on properties with a PACE assessment.

As I understand it, the issue is that the property tax assessment (like property taxes in general) are senior to the mortgage in the event of a default. But if this regulation is legitimate, the federal mortgage authorities can regulate all municipal activity. They could ban mortgages on houses where the municipality is funding public art through a property tax assessment (or on houses where the municipality isn’t funding public art). If this principle stands, municipal governments will have to do whatever the mortgage authorities demand, or else only people rich enough to pay cash would be able to buy a house in town.

There’s a group called PACENow that’s working various paths to get the prohibition reversed.

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Some years back, I read a financial newsletter article that offered a technique for predicting inflation rates six months in advance. It had charts that compared its predictions to actual results, that showed that it was pretty accurate. Not perfect, but more than close enough to be useful for short-term planning.

Then I read the details. Their “technique” was this:

  1. Take the actual inflation for the previous six months.
  2. Double it.

As I say, their technique was pretty accurate. Partially it was accurate because the economy rarely turns on a dime—recent trends tend to continue. But it was more accurate than that, because half the months they were “predicting” had already happened! Even if the next six months were rather different from the previous six months, that would only produce so much change in the full year results.

I think that was the point when I decided to let my subscription to that newsletter expire.

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I’m taking a course on electric power. The instructor, Debbie Insana, lived through the blackouts and brownouts in California produced by the intersection of partial deregulation of the energy markets with corrupt individuals at the (also corrupt) Enron corporation. Prompted by that experience, when she moved to Illinois, she wanted a house that required no net energy inputs to function. That was hard to scale for a single house, so she ended up developing a whole subdivision of energy-efficient houses in Urbana. (The instructor’s title was “The Changing World of Electric Power,” but the people administering it decided pimp it up a little and listed it as Shocking Events in the Changing World of Electric Power. )

It’s of particular interest to me, because I’ve studied much of this same material long ago. Back in 1976, when I was in high school, I attended a National Science Foundation workshop on the energy crisis. The physics hasn’t changed, the politics has probably gotten worse, but the technology has changed, and with it the economics. It’s all very interesting.

Yesterday’s session was on wind power. The installed base of wind power is growing very rapidly (albeit from a low base). A good bit of the installation is happening in Illinois—but for an odd reason. As a source of power, the wind here is rated only fair-to-good. The big win is that we have excellent interconnections to the rest of the country, with major transmission lines that let us deliver power to the east coast and to the Tennessee Valley Authority.

But Illinois is only slipping in here because of an odd intersection of those grid connections, adequate wind, and tax breaks that encourage building now rather than later. The future of wind power going to be off-shore installations. The wind there is stronger and strong closer to the ground. And, it blows strongly during the daytime, when the power is needed, rather than blowing most strongly at night, the way it does on land.

I’m learning about all kinds of new stuff, from technology such as rare-earth magnets making generators smaller and lighter (easier to install on a wind turbine) to lots of obvious-once-you-think-about-it ideas, such as co-siting a wind farm with a gas turbine generating plant: reliable (gas provides electricity when wind isn’t blowing) and cheap (no fuel needed when the wind blows) and flexible (can operate both to serve peak demand).

Wind turbines only function for a certain range of wind speeds—a minimum speed to begin generating power and a maximum speed beyond which wind load can damage the turbine. In excessive winds, they’re designed to feather the blades, brake to a stop, and then lock in place. The teacher shared a video with us of what happens when these mechanisms fail:

I’m looking forward to the next couple of classes in particular, one on solar and one on balancing power in the grid.

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In many places with repressive governments, nascent political parties (unable to achieve political power via the ballot box, because elections are rigged or the group is banned from participating) provide public services as an organizing tactic. They provide food for children, health care, mediation services, neighborhood watch, financial aid to victims of government actions, and so on.

This tactic has proven to be effective, so I’ve always been a little surprised that we don’t see more of it in the US. So, I was interested to see a post about the Black Panther’s free breakfast program, and the FBI’s concerns about it.

Upon reflection, I figure that the main reason we see little of this in the US is that in the US we really do have public services. There are government programs to feed hungry children, provide medical care to the sick and injured, police the streets, adjudicate conflicts, and so on. They’re flawed and limited, but they do exist. They’re good enough, that it would take a lot of money to compete—and if you have that much money, there are better ways to seek power, especially since our political system is reasonably open.

But this is becoming less true. With constant pressure on public services, holes are opening up that can be—and are being—filled by private organizations. So far, those organizations are mostly charitable non-profits, but there’s no reason that a political party couldn’t join in.

I think we’ll see it pretty soon, especially at the local level. People who have felt disenfranchised will be very willing to support political parties that directly provide what the government won’t and ask nothing in return except that you consider voting for their candidates.

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What makes a country rich? Hint: It has nothing to do with natural resources. Places like Singapore, Hong Kong, and Japan prove that. (See also: How to Get Rich by Being Evil)

We’ve known how to have rich countries for a while now; Adam Smith laid most of the ground work in 1776 with The Wealth of Nations, and we’ve improved on it modestly since then. You need three things:

  1. Private property
  2. Free markets
  3. Rule of law

None of those things have to be perfect for a country to get rich. Look at what China and India have done over the past twenty years. Allow a little private property, reduce government regulation a little, and you unleash a lot of entrepreneurial activity. Pretty soon, you have a bigger economy, higher incomes, and a richer population.

What’s interesting to me is how important that third point turned out to be.




As the Soviet Union began to collapse, a lot of people were offering advice on how to free the economies of the formerly communist countries. Most of the advice had to do with getting state property into the hands of ordinary people in ways that would allow the greater productivity that private property and free markets allow.

There was a lot less focus on how to imbed the rule of law into the system. It was almost as if people figured that the shift from a police state to the rule of law would be easier than getting there from a state of anarchy. (A dumb idea, once you think about it.)

So, thanks to the unhappy experiments in Russia (and other places) we now know what happens if you have (some) private property and (moderately) free markets without the rule of law. You don’t get a rich country; you just get a lot of rich people.

This insight has been guiding me politically for a while now. Obviously, it would be great to be a rich person in a rich country, but few of us have that option. Pretty much by definition, most of us are going to be somewhere in the broad middle. But if you’re going to be in the broad middle, it’s a lot better to do so in a rich country.

Happily, we know how to have a rich country.




Note: This was originally written for Wise Bread, but they decided it wasn’t for them, so I’m posting it here. I’ve kept it just as I’d written it, including the “see also” link back to Wise Bread. And, since it was written for a monetized market, I’ve gone ahead and put some ads in this post, even though I don’t general monetize my blog. Somehow, the post seemed lonely without them.