Thursday, October 16, 2014

Could it affect schools, too?...

 Over the next couple of decades, I think the much-needed infrastructure upgrades in the US will increasingly be financed by private-public partnerships (PPP). I've seen this in action on the Indiana Tollway (I-90), but more about that in a moment.

The theory is interesting. There are trillions of Euros, yen, and yuan with nowhere to invest, especially as the global economy slows. We have thousands of miles of road s and bridges to build and maintain. Americans will not raise taxes for anything. There is an unsubstantiated belief that private construction and operation of public capital improvements will be more efficient.

And we have incredibly efficient new toll-extracting technology.  This last point is the big one. I thought about it when we added E-Z Pass Transponders to our cars because of my work and family in the Chicago area.

I am ambivalent on say, Brazilians owning I-74 and the French building bridges in Kentucky.
Tall said U.S. states are becoming more comfortable with private investment, in part because there are more examples of successful projects and fewer alternatives to pay for mounting infrastructure needs.The U.S. has used mostly fuel taxes and public financing for such projects. And the federal gasoline tax hasn’t been raised since President Bill Clinton was in office. A divided Congress only managed a short-term measure in July to prevent the Highway Trust Fund from becoming insolvent.California passed the first legislation allowing public-private partnerships for transportation projects in 1989. Today, 33 states and Puerto Rico have such authority, according to the National Conference of State Legislatures.After years of debating the Ohio River bridges, Daniels and Beshear got on the phone late in 2011 and agreed to split the work, paying for each share separately.Kentucky’s portion includes a new six-lane downtown bridge for northbound Interstate 65 from Louisville and a reconfigured “Spaghetti Junction” where I-65 and two other interstates meet. Indiana is building a new bridge eight miles (13 kilometers) upstream connecting Louisville’s east end with southern Indiana while also expanding highways and building twin tunnels under historically protected property to connect to the new span.Indiana’s history of tapping private industry for transportation work includes the $3.8 billion, 75-year lease of the Indiana Toll Road that Daniels sought in 2006 to pay for roads and bridges. The toll road’s private operator sought bankruptcy protection last month when traffic didn’t match projections.The state’s piece of the Ohio River Bridges uses a different public-private financing model that could require taxpayers to cover any shortfall in tolls. The Indiana Finance Authority issued $677 million in tax-exempt, private-activity bonds in March 2013 on behalf of WVB East End Partners. The authority is also making $392 million in “milestone” payments during construction and annual “availability” payments for 35 years -- assuming the operator maintains the bridge -- using toll revenue on the new spans that the states are splitting. [More]

Note the mention of the I-90 bankruptcy. Here is one flaw that should be addressed, at least.
Even though earnings “increased every year between 2008 and 2013, they were lower than projected,” forcing the company to devote an ever-greater share of operating income to debt service, Redondo said.Open since 1956, the road spans 157 miles (252 kilometers) across northern Indiana, connecting Chicago to major East Coast traffic arteries, according to its website. It took more than 6,200 engineers and laborers 786 days to complete the project.ITR Concession Co. acquired the rights to operate the road in 2006 from the Indiana Finance Authority, according to a company statement.The Indiana company said it put together a reorganization plan that has the support of more than 87 percent of its senior secured debt-holders and unanimous acceptance from its equity owners.Under the proposal, the company would either be sold through a competitive process or restructured with $2.75 billion in new debt with almost all the equity going to the secured creditors, according to the disclosure statement describing the plan.Since it already has the necessary support from stakeholders, the company asked the court to approve the reorganization plan within 30 days. The sale process or restructuring could run until next August, after the company exits court protection.In either scenario the ITR Concession’s unsecured creditors owed about $8 million, its only other listed debt, will be paid in full.Traffic volume has plunged by about 42 percent on the Indiana highway since ITR took over operations eight years ago, according to data on the website of Macquarie Atlas, the unit that owns ITR.First-half revenue increased about 5.2 percent from last year, including a 7.2 percent jump in the quarter ended in June, according to a Macquarie Atlas statement. Traffic gained only a third of 1 percent over last year’s first-half figures, with a 3.2 percent drop in the first quarter due to bad weather.Toll rates for passenger cars paying cash increased 30 cents to $10 for a full 157-mile trip on July 1, according to an ITR statement. Rates for a typical semi-trailer truck rose $1 to $39.70.Travelers using an electronic toll-collection system pay only $4.65 for a full trip, the same rate since 1985. Electronic collection accounts for more than 70 percent of toll receipts, according to the Macquarie Atlas documents. [More]
This is the Pigovian outcome I find intriguing. As formerly free public infrastructure become toll-paying, how will users respond? With little or no growth in wages (see above), more and more could be priced out of these improvements and forced onto secondary routes. Another response could be greater concentration as commuting from the suburbs becomes more expensive that paying for costly urban housing and riding public transport. (Of course, there is no reason "public" transport would not shift to PPP operation as well.)

My point is I think this is already happening. Americans are driving less, taking fewer vacations, moving less, and becoming more immobile, so to speak. Adding tolls to more miles of roads certainly won't reverse this trend. I'm not sure this is all bad, either, but it is another consumption pattern that will confound our predictions for the future economic performance.

The "blend wall" could keep falling on corn growers, for example. Fewer cars will be needed. Less oil. Shipping costs - by truck anyway - will escalate. There are doubtless other consequences that will only become evident when they manifest to counteract these new economic frictions. 

Supposing this proves successful on the whole.  Could other public services be supplied by PPP's? Schools? Police? Regulators like meat inspection? It sounds far-fetched, but once we shift from a public-goods to user-pays mentality, I think all bets are off. It seems to shrink government, which right now is wildly popular. 

And how many transponders will we need?

Wednesday, October 15, 2014

Thoughts about Ebola...

1. Wash your hands. Often. Well.
2. Read this.
3. Remain calm. There is money to be made in this slo-mo panic. Don't let it be yours.

We return you to your regularly scheduled crises...

Tuesday, October 14, 2014

Removing the rungs...

Pretty soggy and I've got my video sent for this week, so I need to post. At least, I'm out of excuses. And this is a topic I been grappling with for many months with little success unraveling.

Basically put, does the free enterprise system which so many of us have defended for so long somehow broken down or been superseded? It's hard to look at the flood of numbers that indicate troubling trends and not ask the question anyway.

For example, the story on median income is simply appalling.

Some important caveats: As I (and others) have said before, presidents probably get much too much credit when the economy is doing well and much too much blame when the economy is doing poorly.Mr. Obama in particular inherited an economy that was really just starting the death spiral set off by the financial crisis, as you can see in the chart above. And as Carmen Reinhart and Kenneth Rogoff have shown, economies struck by major financial crises generally take 10 years to fully recover.We’re currently in Year 5 after the crisis first hit.  Since median household income hit bottom in the first quarter of 2010, it has risen about $769.36, not nearly enough to cover the ground lost on the way down. [More]

But the story is not grim at all for some of us.

And this is the crux of the matter. THE big debate in economics is whether wildly unequal outcomes are now baked into the capitalistic cake, so to speak. Have we reached a point where the leveling mechanisms (economic mobility) are not up to the task of preventing an ever more concentrated wealth distribution?
But here’s where I become less optimistic than the president. Imagine that same prognosticator had added one more bit of clairvoyance: Despite all those positive trends, the real median weekly pay of full-time workers in mid-2014 would be slightly lower than it was in mid-2011. Or than it was in mid-2008, the year before Mr. Obama took office. Or in mid-2000.It’s certainly possible that we’re on the verge of a pay surge, much as we were in the mid-1990s, when the situation also seemed bleak. It’s also possible that the forces behind the great wage slowdown – from globalization to our often-sclerotic government to (at least for many workers) technological change – are still more powerful than the positive forces. In that case, the wage slowdown won’t end until the country makes much more progress in improving education, cutting medical waste and energy costs and creating a more responsive, nimble government.Either way, the great wage slowdown, or the end of it, will help set the tone for American life in the coming decade. It has already done so in the century’s first 15 years, causing widespread unhappiness with the country’s direction and leading voters to shift partisan directions multiple times. The political turmoil isn’t likely to end until the economic reality changes. [More]
One of our most central beliefs in the US has been the idea of any person could make it big. While that's still true, it is now so rare that we use the same handful of examples to defend it (Zuckerberg, et al.) instead of pointing to people in our neighborhood of circle of friends.
We have been enamored with the example of "the self-made man". I just don't see that option as any more relevant that lottery winners as paradigms of conduct. Mostly because, along with others, I now see circumstance as having become more defining than character.The dynamite and ginger Jack brought to the roofing trade was necessary to exploit this advantage. But listening to him describe the factors that produced Eastern’s early success, I realized I’d fallen prey to the same fallacy that had led Milton Gordon to attribute the achievements of Jewish garment workers solely to their industry and ambition, and not the conditions in which their ethic thrived. The self-made mythology has evolved in its 200 years: from an exuberant celebration of opportunity in the young republic to a stern admonition against excess in the antebellum years; from a naive story of pluck rewarded in the post-Civil War-era, to a brazen defense of money-getting in the Gilded Age; from a beacon to the great wave’s huddled masses, to a pep talk for the young women of the digital age. The one constant, however, has been the idea that character trumps circumstance. I’d caught myself buying into it.Jack knew better. Though an unapologetic believer in the power of hard work to lift men above their means, he allowed that even the hardest worker can’t impose his will on the world—he acknowledged that other men, and other forces, played a role in his rise. Over the years, I now saw, I had revised my father’s story in the retelling to emphasize his accomplishment, and his agency, just as William Temple Franklin had done with his grandfather Benjamin’s story. I’d counted myself a skeptic. It turned out I’d been a believer, and a mythmaker, all along. [More of a superb essay]
My father was a devoted reader of Horatio Alger in his youth. The wretched prose and simplistic plots shaped his view of how the world worked.  I just couldn't see it. After all this time, I think I have found our divergence point: the value of simple labor.

I think we have reached a level of technology that is relentlessly devaluing hard physical labor. Even in agriculture, the idea that hours in the field will translate to success is quietly recognized as incomplete, if not flawed. You need to pick your parents carefully, and memorize the plat book before dating.

Moreover, the example of a hired man going on to become a successful independent farmer pretty much ended with my generation, IMHO. As much as I have suspected our profession evolving into a hereditary agristocracy, I am now convinced.  And to my embarrassment, I am fueling the change by building a castle with ramparts and moat for our family.

Wednesday, October 08, 2014

Reluctant pessimism...

One unspoken reason for my posting pause was a fear I was becoming just another grumpy fault-finder. My theory was I would wait until the clouds cleared and I was able to ferret out good news and how it could apply to agriculture. I thought the myriad changes occurring in our farm and lives were distorting my views.

This could still be the case. But it could also be the reasons I am unsettled have some basis in reality. For example, while I am moderately secure in the outlook for Jan and I, and confident our sons will manage well, I am troubled by the future I see for our grandchildren.

Turns out I'm not alone. (And I am aware that this mindset will incline me to seek out confirming data.) But consider typical look forward from someone whose judgment I value.
It’s certainly possible that we’re on the verge of a pay surge, much as we were in the mid-1990s, when the situation also seemed bleak. It’s also possible that the forces behind the great wage slowdown – from globalization to our often-sclerotic government to (at least for many workers) technological change – are still more powerful than the positive forces. In that case, the wage slowdown won’t end until the country makes much more progress in improving education, cutting medical waste and energy costs and creating a more responsive, nimble government.Either way, the great wage slowdown, or the end of it, will help set the tone for American life in the coming decade. It has already done so in the century’s first 15 years, causing widespread unhappiness with the country’s direction and leading voters to shift partisan directions multiple times. The political turmoil isn’t likely to end until the economic reality changes. [More of a short must-read]

The value of a meritocracy has always struck me as worth the strain to operate under. The competition will keep you strong or some such nonsense. But two things seem to have intruded on the theoretical workability of such a system.

First, we now can choose between the merits of 7B people instead of those in our local community. This meant that before there was room for the mediocre to achieve mediocre rewards simply because they were the best around at that level. Now we sort out the best from the globe, which means the fortieth-best is still the best ever somewhere. 

The second is the growing possibility of not enough work. This is what Leonhardt (above) talks around, and Ryan Avent addresses full on.
The world has more than enough labour. Between 1980 and 2010, according to the McKinsey Global Institute, global nonfarm employment rose by about 1.1 billion, of which about 900m was in developing countries. The integration of large emerging markets into the global economy added a large pool of relatively low-skilled labour which many workers in rich countries had to compete with. That meant firms were able to keep workers’ pay low. And low pay has had a surprising knock-on effect: when labour is cheap and plentiful, there seems little point in investing in labour-saving (and productivity-enhancing) technologies. By creating a labour glut, new technologies have trapped rich economies in a cycle of self-limiting productivity growth.Fear of the job-destroying effects of technology is as old as industrialisation. It is often branded as the lump-of-labour fallacy: the belief that there is only so much work to go round (the lump), so that if machines (or foreigners) do more of it, less is left for others. This is deemed a fallacy because as technology displaces workers from a particular occupation it enriches others, who spend their gains on goods and services that create new employment for the workers whose jobs have been automated away. A critical cog in the re-employment machine, though, is pay. To clear a glutted market, prices must fall, and that applies to labour as much as to wheat or cars.Where labour is cheap, firms use more of it. Carmakers in Europe and Japan, where it is expensive, use many more industrial robots than in emerging countries, though China is beginning to invest heavily in robots as its labour costs rise. In Britain a bout of high inflation caused real wages to tumble between 2007 and 2013. Some economists see this as an explanation for the unusual shape of the country’s recovery, with employment holding up well but productivity and GDP performing abysmally.Productivity growth has always meant cutting down on labour. In 1900 some 40% of Americans worked in agriculture, and just over 40% of the typical household budget was spent on food. Over the next century automation reduced agricultural employment in most rich countries to below 5%, and food costs dropped steeply. But in those days excess labour was relatively easily reallocated to new sectors, thanks in large part to investment in education. That is becoming more difficult. In America the share of the population with a university degree has been more or less flat since the 1990s. In other rich economies the proportion of young people going into tertiary education has gone up, but few have managed to boost it much beyond the American level.At the same time technological advances are encroaching on tasks that were previously considered too brainy to be automated, including some legal and accounting work. In those fields people at the top of their profession will in future attract many more clients and higher fees, but white-collar workers with lower qualifications will find themselves displaced and may in turn displace others with even lesser skills. [More good stuff]
I am coming to the reluctant conviction the system I have thoroughly believed in is not so much broken as superseded - no longer applicable. We simply never envisioned machines that are doing what they do today, let alone a population as large as we now support fairly easily if not evenly.

While I do not think agriculture will be exempt from this questionable advance of progress, there are intrinsic brakes that may slow the concentration in crop farming, at least. Land ownership, cultural patterns, relative isolation from faster evolving urban areas, and other factors could retard but not redirect this trend.

IF this is even close to correct, what should we do as a profession and individually? Those answers I think are contradictory - a tragedy of the common future, as it were. The things I think important for family survival will almost certainly diminish the outcomes for the community.

This has slowly been uncovered as the great weakness of free market systems - without constraint they tend to proceed to wildly unequal systems. Sort of like gravity forming planet, in my mind.
In this at least, Marx was correct. Preventing, or even slowing this, confounds us economically and especially politically.

Proposed solutions all seem an enormous reach from current entrenched positions. Historically, only political turmoil - even revolution has been able to effect such drastic changes. Which leaves us in an uncomfortable position. 

Even as we know our goals will worsen the problem, they make the most sense individually. It's becoming obvious there will only be a few winners in our future. This is the grim future I cannot see how to avoid. And it gets worse. As the competition gets more intense, even broad rules could be discarded. Judging from the accounts of the world of finance, this seems to be verified by fact. Social capital and human links will dwindle and the divide will grow.

This all seemed far too unlikely as it required broad participation from individuals and groups, and went against moral and religious teaching. But with technology empowering the need for fewer participants in the economy, and weaker belief systems, such an outcome is more imaginable.  Not in my lifetime as much as my children and grandchildren.

As I stated, these could just be words arising from my own personal funk. But I'm having great difficulty finding plausible alternative outcomes to argue for.

Tuesday, October 07, 2014

Russian re-collapse...

I'm not much on calling catastrophes, but I think the economic sanctions derided as too little and too feeble by the die-hard hawks in DC are seriously biting Putin's butt.
There has been little attention to this in the western media, but the Russian ruble has suffered a major decline in the last few months.  Earlier this year it was running around 25-30 to the US dollar.  Now the official rate is at 40, but the black market rate is at 50 and falling.  There is major capital and human flight going on that is attracting increasing comment in Russian sources.
Two pro-Putin economists have subtly noted problems.  In English in Russia Behind the Headlines this past week, Alexander Shokhin, Director of the Union of Industrialists, has argued that the fall of the ruble will have some positive effects, particularly in the agro-industrial sector.  However, he also warns that it will be damaging in the high technology sector, along with the sanctions, most notably in the nanotechnology sector, which was getting off the ground and has now come to a complete halt. [More]

In an instantaneous world, we have been reluctant to embrace long-haul foreign policy, such as the sanctions on Iran, even though patience seems to be a valid choice. I also think the mad rush to bomb is economic stupidity of the highest level and reveals the shallow thinking of deficit hawks in Congress. Not spending trillions on questionable conflicts is good for the economy.

I have not been thrilled with our ISIS response, but do support the slow vice of economic sanctions now taking a toll in Russia and Iran. It's not showy, but add in an oil price war and the oligarchs in Russia have some real headaches to deal with - all thanks to the breathtaking arrogance of their leader. 

There is a time for troops, but it is exceedingly rare IMHO. And should be.

Sunday, October 05, 2014

The Junkbox...

Is now my Twitter feed.  I'm using Twitter to post my links to stuff with brief comments - it's much faster than copy-pasting and I can do several a day.

The longer stuff will still be here.

Just follow @jwphipps.
Only 5000?...

I'm having enough trouble with texting and eating, but the concern over texting and driving deserves some illumination. To begin with we not at all sure there is a strong causal link, despite the obvious distraction.
That doesn’t mean texting and driving isn’t dangerous. I’m sure it is. Cell phone bans may be a good idea, although the evidence that they save lives is mixed. But the overall situation is surely more complicated than TEXTING-WHILE-DRIVING EPIDEMIC suggests. The whole story doesn’t seem right — how can phones be so dangerous, and growing more and more pervasive, while accidents and injuries fall? At the very least, a powerful part of the explanation is being left out. (I wonder if phones displace other distractions, like eating and putting on makeup; or if some people drive more cautiously while they’re using their phones, to compensate for their distraction; or if distracted phone users were simply the worst drivers already.)Beyond the general complaint about misleading people and abusing our ignorance, however, the texting scare distracts us (I know, it’s ironic) from the giant problem staring us in the face: our addiction to private vehicles itself costs thousands of lives a year (not including the environmental effects).To illustrate this, I went through all the trouble of getting data on mobile phone subscriptions by state, to compare with state traffic fatality rates, only to find this: nothing:


The truth is driving fatalities continue to fall. Since we don't like facts that conflict with our casual observations we simply ignore the inconvenient ones. If the debate over climate change has done nothing else, it has enshrined the right to cherry-pick evidence as valid logic.

As various sources point out the link to traffic deaths is driving. The less you drive the fewer the deaths. Strong correlation, proven causal link.

Which leads us to how we perceive the risks of driving.  Here's one unique analysis.
This whole situation reminds me of a thought experiment Joseph Gusfield posed in his brilliant, if under-appreciated 1981 book on drinking driving and the culture of public problems (a book, not incidentally, I have chosen for my “great books” graduate seminar this fall). Gusfield asks his readers to imagine that some all-powerful god has come to America and offers to give us a new technology that will make our lives immeasurably better by allowing us to go wherever we want, whenever we want, faster than we have ever gone before. The only catch? The god demands that we as a society sacrifice 5000 of our citizens every year for the privilege of this great technological innovation. Do we take that bargain? Would you? With our reliance on the automobile, Gusfield says, we already have. In rejecting the conventional wisdom and moralistic outrage about texting and bringing new data to bear on the dangers of just being in traffic on the roads, I think Cohen is just trying to force us to grapple with this consequences of this collective decision more honestly and directly. [More]
Maybe our world has exceeded our ambition to deal with it rationally, and we leap for easy shortcuts and visual information to label as common sense. More and more, however, good sense in uncommon. Unless we want to revert to a much less complex lifestyle, our eyes and embedded time-saving intuitive conclusions are going to lead us further away.

Saturday, October 04, 2014

My spasmodic inflation report...

Any minute now. Just keep holding the snipe bag.
A Yellow Swan, maybe?...

Could the remarkable yields from much of the southern and eastern Corn Belt be classified as a Black Swan event? I don't think anyone came close to predicting it until late in the summer, and I don't think any crop observer would have given even 1% odds of a national yield over 175.

For example, this is Darrel Good as late as August:

Our analysis of USDA yield forecasts for corn over 1990-2013 did not reveal any evidence of bias in August, September, October, or November.   There is compelling evidence that the accuracy of USDA corn yield forecasts has improved over time, particularly since 2011.  It is especially interesting to note that USDA corn yield forecast errors in 2012 were extremely small, with the August forecast exactly equal to the final estimate.  This performance was exceptional given the severe drought that occurred in the summer of 2012. What, if anything, do these results imply about the ongoing debate about the direction of USDA corn yield forecasts in remaining Crop Production reports during 2014?  While it is, of course, true that longer-term trends in accuracy will not necessarily dominate in any particular year, an unusually large August forecast error this year (5 percent or more) would definitely be counter to the trend towards increasingly accurate USDA corn forecasts over time. (More)

USDA August = 167.4, so 5% error = 8.4.
Anything over 175.8 would be a greater than 5% error.

I'd say the unpredictable part is confirmed.

The second characteristic - disproportionate consequences, suddenly looks more likely as well. We don't know when the freefall will end or how we will use up this ~15B bu. of corn. Business plans and retirement calculations for producers are in shreds. Fertilizer applications have stopped. Seed dealers are not popular.

The third characteristic - it seems obvious looking back - is already occurring.

And we can't stop talking about cash rents.

Oddly enough, on that note there could be a double whammy here. As high payers are trying negotiate lower, more word about what the going rate actually was is filtering out, I think. People who have been getting the same $180 while the next door field was paying $350 are finding out and are not amused. Again, unforeseen and disproportionate consequences.

How resilient each operation is depends on a variety of factors, but regardless nobody is going to be hauling much margin out of the field with the prices where we are now, let alone where they could go. What happens next spring if we are looking at corn in the $2.75 or lower range and beans around $8?

  • Will banks lend for a deeply red ink budget?
  • Will there be a rush to the exit from Boomers?
  • Will seed and fertilizer retailers blink?
  • We we surprise the market again with Black Swan acres?
  • Will Washington step in?
  • [Fill in your speculation here]
 I don't think we can rule out wild reactions if this isn't a spike down but a splat. Frankly, I'm not sure what our plan will be.