EclectEcon

On Interest Rates

Here's a simple way to look at central banks, monetary policy, and interest rates.

Interest rates are an effect, not a cause.

1. If central banks increase the rate of growth of the money supply, ceteris paribus, initially interest rates will fall.

Call that effect "the liquidity effect". The central bank floods the money markets with liquidity and people try to make loans, offering favourable terms.

2. If the central banks maintain a higher rate of growth of the money supply over time, this will lead to higher rates of inflation. Eventually, higher rates of inflation will lead people to expect those higher rates of inflation, leading them to offer and demand higher interest rates in market for lendable funds. Call this effect "The Fisher Effect" (after the famous economist who first wrote about it, Professor Effect).

In general, central banks cause interest rate movements by what they do to monetary reserves and the money supply, not by what they say about interest rates.

For more detailed descriptions and analyses see this by The Grumpy Economist.

So why do we have low interest rates now? because the US Fed pays interest on reserves, sucking tonnes of reserves out of the monetary system, offsetting all their grandiose efforts at quantitative easing.

On Predatory Journals

I'll probably never get another academic job after posting this information ( ;) ), but my last two "refereed" publications were in so-called "predatory" journals. Interestingly, I never felt preyed upon in any way. My co-author(s) and I agreed to the publications willingly.

The first one in the list below was actually a more-than-decent paper, we didn't pay anything to have it published, and the referees' comments indicated they had at least read the paper.

The second paper listed below was a good enough paper, not path-breaking probably, but it was a non-mainstream interdisciplinary piece that would never have found a standard outlet in the standard economics journals. The proceedings of the conference where we presented the paper were never published, and so when we saw the title of the journal, we all said, WTF, kicked in $50 apiece, and sent it there. The refereeing was horrid -- boilerplate comments that bore no resemblance to the article. But the title of the journal was perfect for our article.

We knew what we were doing. And we knew that most schools that don't have committees to actually read an author's work wouldn't much care, whereas the schools where people actually read the papers would nod and say the work was good. So let me repeat. We were not preyed upon. We were glad to have the outlets for our work.

If authors feel preyed upon by these journals, it's because they are ignorant whiners and/or because the current reward system encourages too many schools to count publications without reading people's articles.

I am quite certain that these last two items on my curriculum vitae would count against me at schools that assess people only by the prestige of the journals in which they publish. I call journals like those two, "vanity journals", not unlike the vanity press that publishes some authors' novels: pay-to-publish.

The problem is that reading a candidate's publications is time-consuming and difficult. It's easier to count publications and/or count publications weighted by the number of characters published, weighted by the prestige of the journals in which the articles appear, and perhaps weighted by the citations the article receives.

Misuse of signals is not an indictment of the efficient use of signals. Just don't say I was a victim for having chosen to publish in these journals.

---

Actually, my most recent c.v. item is forthcoming in a refereed conference volume. My article is "Property Rights and Contract Enforcement in the Post-Zombie Apocalypse".

•  “Misallocation Costs under Rent Control: Experimental Evidence” (with Jason Childs), Scientific Online Publications: Transactions in Economic Research, (May, 2014)
• “The Economics of Culture: Implications and Underpinnings” (with Jason Childs and [the late] Gary Tompkins), International Journal of Liberal Arts and Social Science, (May, 2014)

Award the Nobel Prize in Economics to Deirdre McCloskey

I have said this before, but I think the work that Deirdre McCloskey has done for the past 50 years or so merits the profession's top award, the Nobel Prize in Economics. McCloskey is a renaissance person, incorporating a rich understanding of history, literature, culture, sociology, the arts, philosophy, mathematics, and economics into her work. Further, she has done a superb job of pillorying the empty mathematics that fills too many pages of too many economics journals. She has a sense of relevance, and she has a long-term view of the importance of institutions, culture, and price systems. For example, see this, which I wrote in 2004, when I first started blogging. A quote from her in that piece:

"Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad. All my friends, my dear, dear friends in economics have been wasting their time. You can see why I'm agitated about the Two Sins [oversimplified, these are: qualitative theory with no questions about 'how much?' and quantitative tests of significance that don't include loss functions -- but read the whole piece!]. They are vigorous, difficult, demanding activities, like hard chess problems. But they are worthless as science."

My impression is that things are slowly changing in the profession. Very slowly and too slowly.

For some of her recent work in the same vein, check out her correspondence regarding double-entry bookkeeping or see anything on her page: http://www.deirdremccloskey.com/

I'm looking forward to meeting her this weekend. It's too bad we didn't quite overlap at Chicago in the late 60s.

Addendum: to read her biographies (formal and informal) see this page.

 

 

Vitamins for Puerto Rico?

Are there any major (or non-major, for that matter) generic or big-name pharmaceutical or supplement manufacturers who are donating vitamin supplements for Puerto Rican relief. The people on that island, from what I read, will be suffering from food and water shortages for quite some time. Relief organizations are doing what they can to provide water, water purification systems, generators, fuel, food, building supplies etc.

My reaction to the Puerto Rican crisis is straight-forward: do what we can.

I have hated the fiscal irresponsibility of the Puerto Rican gubmnts and their antipathy toward balanced budgets and more market-oriented ways of promoting economic growth. I even hold those things partially responsible for the problems faced in Puerto Rico after hurricanes Irma and Maria -- those policies and the Jones Act, which bars foreign ships from carrying goods between the US and its territories.

But now is not the time to withhold aid because of these views. Now is the time for people who care to do something. Ms. Eclectic and I have already donated to several organizations and will likely donate to more as we winnow the chaff from the effective ones.

Is it silly of me to ask about vitamins? I'd hate for a charitable organization to undercut the vitamin shops there, but for the intermediate-term, nutrition might be important. At the same time, I am concerned about the health and welfare of the people, especially the young children, who might suffer from malnutrition over the next year or so. Is this misplaced? Impossible to do anything about?

Peak Oil? Meet Peak Oil Demand.

Nearly 12 years ago, I was writing on the blog to pooh-pooh the notion of peak oil (see below). Now it looks as if large numbers of forecasters are in fact not worried about peak oil (the notion that we will run out of oil) but instead are writing about peak oil demand. [via JR, my favourite drug dealer] The first two paragraphs:

The world’s largest oil companies are girding for the biggest shift in energy consumption since the Industrial Revolution: After decades of growth, global demand for oil is poised to peak and fall in the coming years.

New technologies that improve fuel efficiency are starting to push down the amount of gasoline and diesel that’s needed for transportation, and a consensus is growing that fuel demand for passenger cars could fall as carbon rules go into effect, electric vehicles gain traction and the internal combustion engine gets re-engineered to be dramatically more efficient. Western countries’ growth used to move in lockstep with their energy consumption, but that phenomenon is starting to decouple in advanced economies.

Yup. And as economies continue to develop more efficient alternatives to using oil, the price of oil will drop, thus inducing more continued use of oil than many of these forecasters are suggesting. People respond to rising prices by increasing the quantity supplied (as we have seen over the past decade with fracking, etc.) and by decreasing the quantity demanded (more fuel efficient motors, uses of alternative energy).

But the lower prices will ameliorate the impact of reduced demand and increased supply. As the prices fall (think $20/bbl or so in 2017 dollars), people will have less incentive to shift away from using oil.

Yes, I think we will reach a peak oil demand point. I tend to side with those who think it will be later rather than sooner, though.

-- - - - - - -

My blog post from August, 2005:

The Hubbert Peak, Oil Prices, and Speculation

 

Over the past weekend, MA and I had several e-mail exchanges about Twilight in the Desert, about which I wrote this brief item yesterday. He pointed out some similarities between Simmons' views and those of M. King Hubbert, who used mathematical models to predict that for a specific oil field, oil production peaks and then drops off suddenly. From Wikipedia:

The Hubbert peak theory, also known as peak oil, is an influential theory concerning the long-term rate of conventional oil (and other fossil fuel) extraction and depletion. It predicts that future world oil production will reach a peak and then rapidly decline. The actual peak year will only be known after it has passed. Based on available production data, proponents have predicted the peak year to be 1989, 1995, 1995-2000, or, according to the Association for the Study of Peak Oil and Gas, 2007 for oil and somewhat later for natural gas. This may lead to major economic consequences for the world since modern civilization is dependent on cheap and abundant fossil fuels, especially for transportation, food production, chemical industrial processes, water treatment, home heating and power generation. The Hubbert peak theory is named for geophysicist M. King Hubbert, who correctly predicted the peak of U.S. oil production fifteen years in advance. While controversial, the theory increasingly influences policy makers within government and the oil industry. The current debate is rarely about whether there will be a peak, but rather when it will occur and the severity of the post-peak effects. Even the most generous mainstream reports estimate petroleum reserves lasting no more than 100 years.

My reaction: Show me some economics. Show me the effects of expectations on prices.

First, it is incorrect to generalize what might be a geological condition in one field to the world economy. As (or if ) world oil becomes more scarce, prices will rise and extraction rates will decline. Also, higher prices induce more exploration. As Phil Miller says, "We will never run out of oil."

Second, suppose Hubbert is correct. Sort of. Then speculators ought to be driving up the price of oil now by slowing the extraction rate, if not in Saudi Arabia then elsewhere. And keep in mind that even thought the U.S. imports only a small percentage of its oil from Saudi Arabia, if their oil stopped flowing into the world market, that would have a big impact on the world markets.

There was a very informative discussion of these topics by Hamilton and Kaufman recently here. Hamilton points out that the December 2011 future price of oil isn't much different from the current spot price. Apparently, speculators disagree with those who are predicting doom and gloom. If you really think the Hubbert peak is drawing nigh, this is a good time to buy lots of long-term oil futures.

Where is Julian Simon when we need him?

People Respond to Incentives (part 17.001zillion)

The "martyr fund" creates incentives for people to become martyrs in Palestine. One way to become a martyr? become a terrorist.Yes, the martyr fund induces people to become terrorists.

From The Hill: [via Jack]

... That night, while Hallel slept, a young Palestinian named Mohammad Tra'ayra ... managed to climb over the fence that encircled Kiryat Arba. Tra’ayra was armed with a knife. He somehow made his way undetected to Hallel’s bedroom, and there he stabbed the sleeping girl numerous times.

The ensuing commotion aroused the settlement’s guards, and they rushed to Hallel’s bedroom and confronted Tra’ayra. He was shot dead. Hallel died of her wounds.

None of the foregoing facts are in dispute. Nor is there any dispute that the so-called Palestinian Martyr’s Fund pays Tra’ayra’s family $350 each month, because he is considered to be a “martyr” by the Palestinians.

...

On the day she learned of her son’s death, Tra'ayra’s mother called him a “hero” and a “martyr” because he had been killed after he fatally stabbed a sleeping 13-year-old girl. 

I can say with confidence that Hallel Yaffa Ariel’s mother was not similarly exultant when she learned of the death of her daughter.

People who are seriously interested in advancing peace between Israelis and Palestinians ought to think carefully about the story of Hallel Yaffa Ariel and Tra’ayra, and about what it implies.

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Israel, Gaza 1, Gaza 2, and Hamas

Politicians Hate You

Education and Critical Thinking

The other day Otis sent around this piece bemoaning the fact that undergraduates are unable to engage in critical thinking and that they don't learn a thing about critical thinking at college or university. Some excerpts:

... [A]lthough faculty in the humanities and social sciences claim to be teaching critical thinking, often they’re not. Instead, they’re teaching students to “deconstruct”—to privilege their own subjective emotions or experiences over empirical evidence in the false belief that objective truth is relative, or at least unknowable. That view runs contrary to the purposes of a “liberal arts” education, which undertakes the search for truth as the academy’s highest aim. ...

Unfortunately, such internalization of meaning does not culminate in open-mindedness and willingness to examine the facts and logic of differing views. Rather, it leads to the narrow-minded, self-centered assumption that there is a “right” way to feel, which automatically delegitimizes the responses of any and all who may feel differently.

All of this has a profound impact on students and explains a great deal of what is happening on colleges campuses today, ...  Today’s students are increasingly incapable of processing conflicting viewpoints intellectually; they can only respond to them emotionally.

More to the point, that explains why employers keep complaining that college graduates can’t think. They’re not being taught to think. They’re being taught, in too many of their courses, to “oppose existing systems”—without regard for any objective appraisal of those systems’ efficacy—and to demonstrate their opposition by emoting.

For some reason, although I agree with the general thrust of the article, it provoked me to think about my own general lack of critical thinking ability. I wrote the following to Otis and friends (edited for this blog post).
-----

I was not "taught" critical thinking as an undergrad, at least not in any formal sense. 

In high school I was taught about syllogisms and Venn diagrams. I memorized what I had to about those things to get an "A",  but I didn't internalize much. I learned what I had to learn to get by in my courses --- as an undergrad that meant getting C---- far too often. [As a satisficer, I upgraded that goal to getting a B---- in my senior year and an A---- as a grad student. BTW, those are minuses, not dashes.].

 

I didn't really learn about critical thinking until my 3rd year as an undergraduate at Carleton College (Northfield Minnesota). A number of things contributed:

1. I had a roommate who questioned things. His doing so forced me to question and think. He was VERY smart, an elitist interventionist, worldly. I will always be grateful to him and the memories I have of the challenges he posed for me. He and my other roommate combined to help me grow more, intellectually and emotionally, than I had before. For those who know me, I am referring to the late Fred Barra  and the late Carl Young. I wrote about them here.
   
2. I was going through the most serious stages of the identity crisis, which opened me to new approaches and ideas.
3. I spent roughly 3 weeks mostly alone over Christmas break and had to face a lot of personal issues [the same thing happened again, with further development, when I lived alone in a rooming house after my first marriage ended -- more questioning, more critical thinking about many things: my life, my career, my relationships, economics, the non-meaning of life].

After that, I began to realize (slow learner that I am) that textbooks were not gospel truths. I began to read much more critically, not just underlining things to be memorized, but writing in the margins, questioning, challenging. A few years later, a seminary professor [Frank Littell] called this "dialoguing with the author". 

 

I was such a compliant product of the conservative 1950s that it took me even longer to begin to question what professors were teaching. 

 

But honestly, I believe that I never really learned to think critically.

 

Most of us do not think critically. Most of us do not question and examine things most of the time. My reflecting on the article that Otis sent helped me realize this fact. Well, at least it is a fact from my own biased perspective.

 

What helped me begin to think critically the most was being subjected to arguments, both in person and in print, from very smart people who had different views from my own. Only when this happened did I approach the possibility of thinking critically; it happened only when I was challenged in fundamental ways.

 

To be honest, as a professor, I NEVER wanted my students to think critically or to question or challenge me. I always wanted them to understand what I was teaching, and welcomed their questions in that regard. I never wanted them just to memorize but to learn to apply the tools I was teaching. But I didn't want any deconstructionist marxist humanist socionomologists challenging me in the classroom. 

 

And I really don't think I was much different from many other profs (Ms Eclectic disagrees, but then she and I don't agree on other things as well). Professors want the students to question what they (the students) believe and what they think they know if it's different from our own perceptions of "truth". We are far from enthralled (for the most part) if they don't learn our truths and if they won't think critically about their own beliefs and attitudes the way we want them to.

 

In that regard, I expect  we are no different from our deconstructionist marxist humanist socionomologist elitist interventionist colleagues. We all have our own versions of (or approaches to) truth; we all want students to challenge and think critically about views other than our own. ... with one set of exceptions: they may question and criticize us so long as they accept and believe our answers and rebuttals.

 

After reading the article Otis sent and thinking about it (and the comments!), and after writing what I've written so far, I wonder if the best way to teach critical thinking to university and college students is to subject them to the very best thinking, writing, speaking, and debating on many topics: The very best from all perspectives.

 

Perhaps that was one thing my education at Carleton College did for me. We had numerous outside speakers who presented various critical and different views about many different topics, and we were required to attend seven out of ten of these presentations (called "convocations") during each ten-week term.  I don't remember much from those presentations, but they must have contributed to the overall tone of criticism, exposure, exploration, and questioning.

 

I know I would lose debates against the brightest elitist interventionists (I would lose against even those who are bright but who are not the brightest). I am not quick, and my mind is often muddled. Not surprisingly, I am not keen on the debate format for teaching critical thinking; debate seems to reward the glib and the quick. But presentations like those I experienced at Carleton, followed by open discussions in small groups, were terrific. 

 

Nevertheless, I didn't begin my serious critical thinking about economics until I left Carleton College. There I had been taught by very bright Ivy League elitist interventionists that Milton Friedman, George Stigler, and "The Chicago School of Economics" were wrong. Unfortunately I didn't understand their counter-Chicago arguments very well and concluded I was stupid (despite 99s on the Graduate Record Exams in econ and math [puerile digression: I think I was more proud of my 69 on the verbal GRE]).

• Then while in seminary I read the Friedman-Samuelson debates in Newsweek magazine. Friedman won, hands down; I thirsted for his column every third week. I felt a strong sense of loss when the columns/debates were discontinued.
  
• Then I read some John Kenneth Galbraith and it made no sense.
• Then I read Capitalism and Freedom and for the most part was persuaded (his take on race and discrimination in that book still bothers me).
• And then I took courses from Robert Fogel and learned even more.

 I finally realized I wasn't all that stupid, but my elitist interventionist profs at Carleton hadn't been all that bright either. 

 

Wouldn't it be wonderful if students could go through these exposures to other ideas more efficiently than I did? Unfortunately, I fear increasing numbers of students are exposed to less and less critical thinking and fewer and fewer programmes and professors and courses challenging ideas this way.

 

A classroom, even a few classrooms, cannot provide the depth of exposure to new ideas that I experienced during my four years at Carleton College plus two years at Chicago Theological Seminary. Perhaps I am generalizing too broadly from my own experiences and my own attitudes, but I think professors' egos are too weak, for the most part, for us to provide unbiased and even-handed approaches to conflicting approaches; we won't tolerate much criticism. 

 

It especially cannot happen within a given department. 

 

How long would a Keynesian elitist interventionist last in the economics department at George Mason University [GMU]? Students there, while being exposed to very bright people, will likely never be taught by such economists. 

 

How many students at the Ivy League schools are taught by Ayn Rand scholars? Hunh. Few, I suspect.

 

We drum our opponents out of our departments with the (often unspoken) belief that if they don't think the way we do, they are obviously not very bright. 

 

In my own economics department at The University of Western Ontario, we lost one senior economist who had (horrors!) Keynesian leanings. Also we hired a few exceptional young scholars from Yale a couple of times who, after being here a year or two left. And you know what? I was glad they left then, and I'm still glad they left because I thought what they were teaching was crap (oops: misguided). 

 

Still, to learn critical thinking, students need to be exposed to that stuff, to question and be questioned, to have our own views and approaches challenged.  I just don't think it can happen in one department or institution. 

 

Maybe it can happen at a place like George Mason where undergraduates are undoubtedly subjected to more interventionist views in other departments. 

 

An alternative might be to bring in guest professors to teach for a term, making sure they teach from a different perspective. That sounds nice, but generally I doubt it would work very well. To caricature myself, I would never want any Keynesian intellectual elitist interventionists teaching at MY school, so that's probably not a very realistic alternative very often. [To its credit, the Carleton economics department tried to hire George Hilton (the economist, not the actor) when they received funding for an endowed chair; he ended up, appropriately, at UCLA].

 

Another alternative might be to encourage students to take a term or a year studying elsewhere. Yet again, I'd rather have my economics students study at GMU than at some Ivy interventionist school (well, maybe if they had classes from Greg Mankiw it would be ok at Harvard, but you get my drift).

 

To learn critical thinking, students need to be challenged and pushed and questioned, and they need this from many different perspectives.

 

I doubt that large gubmnt-funded universities can provide these experiences. And so, like the article that prompted me to write this post, I despair.

One Reason for the Housing Bubble in Trono

The news media have been full of stories and hand-wringing about the high prices of homes in Vancouvre and Trono. From Lawrence Solomon [via Dr J]:

The Greater Toronto Area is heading into a catastrophic housing bubble, some experts warn, pointing to a raft of scary statistics, such as the sale of detached homes averaging $1.2 million in February, a 32.5-per-cent increase over a year earlier. In a panicked response to this possible crisis — the 2007 U.S. housing bubble is still fresh in people’s minds and some still shudder over Toronto’s 1989 housing bubble — politicians, planners and pundits are recommending everything from tighter lending rules, to a tax on purchases by foreigners, to subsidies for more affordable housing.

 But one reason people are paying outrageous prices for houses in Trono is that apartments are taxed three times the rate of houses:

Unbeknownst to most tenants, their property-tax rate is three times that of homeowners since apartments are taxed at triple the rate of private homes. City councillors have good reason to turn the screws on tenants. For one thing, tenants don’t pay property taxes directly — these are buried in their rent, leading tenants to blame their landlords, rather than their councillors, for high rents. For another, homeowners are likelier to vote than tenants, largely because many tenants are immigrants who lack citizenship.

If the city taxed homeowners and tenants equally — or even better, if the city moderated the property tax through user fees that had homeowners and tenants paying a fairer share of the costs they impose on the city — home ownership would look much less the bargain to the tenant feeling pressure to buy a home. If city property taxes on businesses also reflected actual costs — rather than being raised to confiscatory levels to cross-subsidize the homeowner — home ownership would look like no bargain at all.

Renters are often under the illusion that it's the landlords who pay the taxes, not the tenants. But of course the rent must cover all the costs involved. Renters pay these high taxes, albeit via a pass-through operated by landlords. The high rents, caused in part by the discriminatory high taxes, induce more people to look into buying homes, thus driving up the prices of homes.

Quite honestly, I have no idea how young people with families live in big cities. I look for more companies to move to smaller cities to attract workers with shorter commutes and lower housing costs.

Economic Poetry

I led off one of my early publications with this paraphrase of a poem written by Dennis Robertson

When I had scarcely learned to toddle,
my parents handed me a model
with lots of little leads and lags
and pretty [hyperbolic] bags.

Robertson wrote the piece in frustration because he was skeptical about the mathematical and econometric modeling that was occurring in the 1940s and 1950s, but his original poem said "... and pretty parabolic bags." I changed it to "hyperbolic" to suit the content of that paper.

"A Further Analysis of Provincial Trucking Regulation," The Bell Journal of Economics and Management Science 4 (Fall 1973): 655-664.

• - - - - - - -

Some years later I published a piece on the Social Costs of Adoption Agencies. The lead poem for that was something I read in one of my children's song books, "Sally Go Round the Sun":

This is the day they give babies away,
with a half a pound of tea.
You open the lid, and out pops the kid
with a ten-year guarantee.

One of the administrative assistants back then told me she remembered that rhyme from her childhood in England.

"The Social Cost of Adoption Agencies," International Review of Law and Economics 6 (1986): 189-203

• - - - - - - -

The other day, JR, my favourite drug dealer, attached this poem to one of his messages about economics and health care. I really like it!

“Econometricians are ever so pious,
are they doing real science or confirming their bias?”

He says the poem is from this econ rap battle on YouTube. It's a nice jab at the strength of our prior beliefs and how they influence our attempts at doing science.

Never Reason from a Price Change

Prices change. Sometimes the price change is caused by a shift in supply, sometimes it is caused by a shift in demand, and sometimes both supply and demand change, leading to uncertain ambiguous results.

We try to drill these basics of supply and demand over and over in our introductory economics classes. But these lessons seem to escape many students once the exams are over. And the lessons seem to escape too many economists who too often reason from a price change rather than looking for what underlying factor(s) may have caused the price change.

Scott Sumner at EconLog has an excellent brief post about this issue.

The questions . . .

Would it be a good thing if interest rates rose?
Would it be a good thing if copper prices rose?
Would it be a good thing if the dollar appreciated?

. . . are all basically meaningless. In all three cases, the prices never change for no reason at all. In each case the real question is whether the thing that causes the price to change makes us better off or worse off.

In all three cases, the price/interest rate/exchange rate might rise due to strong economic growth in America. That would probably be a good thing. The exchange rate and the interest rate might rise due to tight money. That would be a bad thing if tight money were not appropriate at that time. Copper prices might rise because of civil wars in copper producing nations. That would be a bad thing.

This isn't just a minor problem; the economics profession is waste deep in reasoning from a price change...

Sumner adds some examples about interest rates.

But the problem is a serious one: when a price changes, don't ask if it is good or bad because the correct economics answer is, "It all depends". Ask why the price changed. And once that answer is clear(er), you'll have a better idea of whether it is good or bad ... and for whom.

Passive Index Funds Win Again

Here is more evidence that the best use of investment funds for the long term is low-cost (low management fees) index funds and passive management. The big endowment funds that used active management were out-performed over the past five and ten years by smaller endowment funds that relied more heavily on passive management, index funds, and low MERs [Management Expense Ratios].  The real take-away nugget appears well into the article from the NYTimes:

Vanguard said a simple mix of index funds with 70 percent in equities and 30 percent in fixed-income assets delivered an annualized return of 7.1 percent over the past five years, and 6.1 percent over the past 10. For a mix of 60 percent stocks and 40 percent bonds, the returns were 6.7 percent for five years and 6.1 percent for 10.

By comparison, the annualized returns for the billion-plus endowments were 6.1 percent for five years and 5.7 percent for 10.

Hedge funds, however, have successfully marketed themselves as offering higher risk-adjusted rates of return, in part because they supposedly minimize losses in down years. But according to Vanguard’s calculations, its simple, low-cost model portfolios have provided higher returns even after adjusting for risk in eight of the past 11 years.

I would love to be able to buy into such a set of mutual funds. But I can't without massive exposure to tax liabilities from the freakin' IRS. Grrr.

I know there are some people who beat the market consistently. They (and their investors) believe they are better/smarter than the hoi poloi of the marketplace. It's also possible they are just luckier: if 10,000 people flip a coin a hundred times each, a few just by chance will get strings of 20-30 heads in a row and 60-70 heads overall.

 

Iowa Election Futures Market Says Hillary Has a Nearly 90% Chance of Winning.

https://iemweb.biz.uiowa.edu/graphs/graph_PRES16_WTA.cfm

Like it or not, when people put their money where their mouths are, they predict reasonably well and certainly better than polls, on average.

John D. Rockefeller Did More To Improve Human Existence Than Did Teddy Roosevelt

That's the point made by Don Boudreaux here, with his quotation and discussion of McCloskey's book on the bourgeoisie.

Lives spent trying to figure out what customers want and how to get the item to them in a nonruinous way and how to improve service and quality at lower cost, one could argue, lead  [sic] the bourgeoisie to ethical attitudes superior in some ways to those of a haughty aristocracy or an envious peasantry or a proud clerisy.  Or at least [Adam] Smith argued.

……..
……..
This Smithian-Montesquieuian-McCloskeyan argument is certainly correct.  How saddening and maddening it is, then, that so much applause, even from citizens of bourgeois societies, is reserved not for those who risk their own funds in efforts to try, peacefully, to better satisfy other people’s voluntarily expressed desires but, rather, for those who arrogantly order other people about using threats of violence.

For example, John D. Rockefeller, Sr., is to this day called a “robber baron” and is thought by many to have been an anti-social scoundrel as a businessman.  In contrast, Teddy Roosevelt has his face carved famously into a mountain and is widely celebrated as a great and “Progressive” seer.  How mistaken and backward!   During any one ordinary day of his business career J.D. Rockefeller produced more net good for humanity than Teddy Roosevelt did over his entire lifetime.  Indeed, the case is even stronger for Rockefeller: he was without question a huge net contributor to humankind; in contrast, T.R. was quite likely, on net, a wrecker.

Likewise, Sam Walton probably did more than a dozen leading social justice advocates.

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Let's Have Some Fun and Study Some Statistics!!! No Foolin'

This post is actually about studying statistics. It is not about polls or the misuse of data or anything remotely political. No foolin'.

My older son, David Ricardo Palmer, is currently taking an online statistics course. When I learned about it, I suggested that maybe I could do some of the work alongside and along with him because I'd like to relearn statistics. No foolin'.

I studied a fair amount of statistics as a student: one course as an undergrad (in which I received a gentlemen's C-), and at least five courses as a graduate student. At several times, I put in to teach the "intro statistics for economists" course at The University of Western Ontario just so I could relearn statistics.

That never happened, though, and after nearly 83 years since last studying the topic, I figured my statistics tools had become a tad rusty.

Times have changed since I studied statistics.

First, for an MBA course they don't mess about with calculus proofs of existence or discussing the properties of estimators. It's a cookbook course, which I think is wise. I had a two-term cookbook course in gradskool, and it was the only one that stuck with me at all.

Second, back then we had to do all our calculations with pencil and paper or with hand-crank calculators. No foolin'. Nowadays, students are expected to use Excel. That's both good and bad. It's good because it saves them from the drudgery of performing endless calculations (e.g. to invert a 3x3 matrix). It's bad because Excel spits out answers and students don't really get a good grasp of the intuition, the understanding of the statistical tests and what they mean or how to interpret them.

Overall, it's fun. No foolin'.

And a special bonus: I get to spend more time with my son!

 

Yes, Free Trade Hurts Some People, but the Overall Benefits Are Overwhelming.

I am appalled by the extent to which so many political leaders of Canada and the US seem to be pandering to vested interests in North America, arguing in favour of protectionism. As the late great Canadian economist Harry Johnson once said, "Trade barriers don't protect jobs; they protect inefficient business owners who can't deal with the competition."

And now The Economist has come out in favour of free trade (with a well-structured social safety net to help losers from any type of competition). An excerpt:

Protectionism, by contrast, hurts consumers and does little for workers. The worst-off benefit far more from trade than the rich. A study of 40 countries found that the richest consumers would lose 28% of their purchasing power if cross-border trade ended; but those in the bottom tenth would lose 63%. The annual cost to American consumers of switching to non-Chinese tyres after Barack Obama slapped on anti-dumping tariffs in 2009 was around $1.1 billion, according to the Peterson Institute for International Economics. That amounts to over $900,000 for each of the 1,200 jobs that were “saved”.

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The Myth of Middle-Class Stagnation in Canada

There is a commonly accepted view that middle-class incomes have stagnated in Canada. This view is wrong.

Here's why.

The inflation-adjusted median income of Canadian families before taxes was 7.0 percent lower in 2011 than it was in 1976. It’s easy to conclude from such a statistic that, over the past several decades, middle-class Canadians have indeed not gained economically.

...

The statistics that suggest stagnation suffer several problems, including:

• failure to adjust income for changes in taxes and government transfers;
• failure to adjust family income for changes in the number of people in the typical Canadian family;
• an overestimate of the amount of inflation suffered by the Canadian dollar.

1. The pre-tax median household income has fallen, but the post-tax median household disposable real income has risen! ... by about 5.6%. In other words, median households have more income at their disposal than they did; they can buy more goods and services, save more, and/or donate more to charity. They are better off financially, not even considering the other corrections to the data.
2. The oft-cited statistic refers to household income. But households are typically smaller now than they used to be. Median household income per family member has increased considerably! From the study,
   

   In 2011, the average number of people in a Canadian family was 2.3, which is 19 percent lower than the 1976 figure of 2.9 persons per family. This difference is not small. It means that the seemingly meager 5.6 percent increase in real median post-tax and -transfer family income becomes a 30.7 percent increase—in per-family-member income—once the data are adjusted for family size.

3. As economists have been saying ever since I started studying economics 87 years ago, the CPI overstates the rate of inflation. Some studies say it overstates the rate of inflation by anywhere from 0.2 percentage points up to maybe as much as 0.5 percentage points. Using the CPI to deflate median income, then, over-deflates current incomes, and by a considerable amount. Again from the study,
   

   Adjusting for inflation by correcting for this bias in the CPI, we find that in 2011 the income per member of the Canadian family earning the median after-tax and -transfer income was 52.1 percent higher than in 1976. This figure suggests impressive economic improvement, not stagnation. It is all the more marked when compared to the initial 7.0 percent decline cited above over the same period.

This conclusion bears repeating:

Overall, contrary to the politically motivated statement that the incomes of people in the middle class have stagnated over the past 40 years or even fallen by 7%, the truth is that the real disposable incomes of people in the middle class in Canada have risen by over 50%. 

[via Cafe Hayek]

Political Realities and Economic Theory

This brief post by Don Boudreaux captures why I reject the economic theories that are used to justify big gubmnt:

The economic theory: the state intervenes in the economy in order to prevent free-riding – in order to internalize externalities – in order to better ensure that all private parties pay the full marginal costs of their activities, and that all private parties reap the full marginal benefits of their activities – in order to promote competition – in order to protect the weak from the strong.

The political reality: the state intervenes in the economy in order to promote free-riding – in order to externalize costs and benefits that the market has reasonably internalized – in order to better ensure that politically powerful private parties escape the full marginal costs of their activities, and that politically disfavored groups be stripped of much of the marginal benefits of their activities – in order to promote monopoly – in order to render some people weak who are then pillaged by the strong.

 Any economics course that teaches the economic theory without including something on public choice and the political realities is seriously deficient.

And anyone who wants bigger gubmnt to correct the evils described in the above "political reality" is living in la-la land.

 

Political Realities and Economic Theory

This brief post by Don Boudreaux captures why I reject the economic theories that are used to justify big gubmnt:

The economic theory: the state intervenes in the economy in order to prevent free-riding – in order to internalize externalities – in order to better ensure that all private parties pay the full marginal costs of their activities, and that all private parties reap the full marginal benefits of their activities – in order to promote competition – in order to protect the weak from the strong.

The political reality: the state intervenes in the economy in order to promote free-riding – in order to externalize costs and benefits that the market has reasonably internalized – in order to better ensure that politically powerful private parties escape the full marginal costs of their activities, and that politically disfavored groups be stripped of much of the marginal benefits of their activities – in order to promote monopoly – in order to render some people weak who are then pillaged by the strong.

 Any economics course that teaches the economic theory without including something on public choice and the political realities is seriously deficient.

And anyone who wants bigger gubmnt to correct the evils described in the above "political reality" is living in la-la land.

 

Medical Marijuana

From an article in last year's JAMA [Jl of the Amer Med Assoc]: (via Jack)

Results.... Compared with placebo, cannabinoids were associated with a greater average number of patients showing a complete nausea and vomiting response ..., reduction in pain ..., a greater average reduction in numerical rating scale pain assessment ..., and average reduction in the Ashworth spasticity scale... . There was an increased risk of short-term AEs  [adverse events] with cannabinoids, including serious AEs. Common AEs included dizziness, dry mouth, nausea, fatigue, somnolence, euphoria, vomiting, disorientation, drowsiness, confusion, loss of balance, and hallucination.

Conclusions and RelevanceThere was moderate-quality evidence to support the use of cannabinoids for the treatment of chronic pain and spasticity. There was low-quality evidence suggesting that cannabinoids were associated with improvements in nausea and vomiting due to chemotherapy, weight gain in HIV infection, sleep disorders, and Tourette syndrome. Cannabinoids were associated with an increased risk of short-term AEs.

 It's time to let consumers decide whether they want to try marijuana to treat some of the symptoms.

Comparative Advantage

Last night I was at a social event with some theatre friends. One person there is widely respected as by far the best tech person in theatre throughout the region -- knowledgeable, creative, industrious, and pleasant to work with. He is also quite possibly a better actor than I might ever hope to be.

I laughed that the only reason I have a role in the upcoming play "Mr. Richardson Was Jesse James,"* was because my friend is such a good tech person and will be doing tech work through the two-week period of the London Fringe Festival.

It's a clear example of what economists call "comparative advantage". He's a better actor and a better tech person than I am, but he can't do everything, so I get some opportunities. He's absolutely better than I am at both (economists call this an absolute advantage) but comparatively he's better at doing tech work. That's his comparative advantage. And my comparative advantage is at acting, even though he could well be a better actor than I am.

Scarcity of his time, means he must choose how to use his time; he can't do both acting and tech work. So he chooses to do the one at which he has a comparative advantage. And so do I.

I know I'm not the best economist in the world, not the best writer, not the best actor, not the best horn player, not the best sportscaster, etc. But I have had comparative advantages in some of these things at various times in my life, meaning I've always been able to enjoy doing them. And as I age some more, it seems altogether reasonable that my comparative advantage will shift to something else.

And that's what trade and exchange are all about -- exploring and adapting to shifting comparative advantages.

*"Mr. Richardson was Jesse James", a play about the summer Jesse James may have spent in Princeton, Ontario.

London Fringe Festival
SHOW DATES AT THE PALACE THEATRE:
Wed June 1st: 6:30pm
Fri June 3rd: 8:00pm
Sun June 5th: 1:30pm
Tues June 7th: 9:30pm
Thurs June 9th: 6:30pm
Sat June 11th: 2:00pm

 

Real vs. Nominal Interest Rates

We recently had a meeting with the people who manage our pension funds. It was this meeting that spurred me to write this post.

I was told that if our portfolio earns 3.8% per year, we'll be in excellent shape. They went on to tell us that 3.8% seemed like a reasonable expectation for a conservative portfolio like ours.

First of all, I'm not convinced that 3.8% is a reasonable expectation. I'm not sure interest rates will go that high again for quite some time.

More important though is that if rates of return on very conservative portfolios do go up to 3.8%/yr, it will be because of inflation and inflationary expectations.

Interest rates are and have been low for the past few years because people don't expect much inflation. If and when inflationary expectations increase, then interest rates will rise: lenders will demand higher rates to compensate for the lost purchasing power of the money being repaid, and borrowers will be willing to pay higher rates because they want to borrow to buy now to beat expected price increases. 

The impact of inflationary expectations on interest rates has been known for a long time. It was probably first made clear by Irving Fisher with the following equation. In words,

The nominal (or actual, stated) rate of interest = the expected rate of inflation plus the real rate of interest (which is what the nominal interest rate would be in the absence of any inflation):

In notation,

i_N = E(%ΔP) + i_R

It looks as if the real rate of interest these days is somewhere between 1.5% and 2%, meaning that a rate of return of 3.8% would be consistent with an expected rate of inflation around 1.5-2% as well.

If so, then to say we'll be okay must also take into account the rate of inflation. To say our monthly withdrawals of $X will last Y years at 3.8% without accounting for inflation would be a mistake.

Either expected inflation must be used to adjust the $X withdrawals, or the calculations should use a lower rate of return, more in keeping with the expected real interest rate, say down around 2%/yr.

 

Plastic Bags

I generally like plastic bags for many uses, and I have written about them before.

• Are Plastic Bags Our Enemy?
• What Is the Price Elasticity of Demand for Plastic Grocery Bags?

But it disturbs me that so many people are so careless and/or thoughtless about using and disposing of plastic bags.

Today Ms Eclectic and I walked down to listen to the birds along the river and had a delightful stroll. One jarring note, though, was all the plastic bags that had been trapped by the weeds and bushes as the river subsided after its spring highs:

 

Sweden, Denmark, and Sanders' Socialism

Yesterday Jack sent me this piece. Everyone who holds up Scandinavian countries as some sort of big-gubmnt ideal needs to think about these points.

At one time, Sweden, a small nation, had the fourth-largest economy in the world. That was in 1970. Twenty-five years later, the economy had tumbled to 14th and the private sector stopped creating jobs, according to Organization for Economic Cooperation and Development data. This wasn’t caused by Sanders’ demonic duo of capitalism and free markets. It was caused by the very policies he idolizes.

“Sweden got rich first with free trade and an open economy, before we had the big government,” Swedish economist Johan Norberg explains ...

“In the 1950s, Sweden was already one of the world’s richest countries, and back then, taxes were lower in Sweden than in the United States.”

It was only after that, says Norberg, “did we start expanding the government dramatically.” ...

“It all ended in a terrible crisis.”

As we have noted before, Sweden has been repealing its welfare state post-crisis. Norberg says the country has become “successful again, but only after a new reform period, with more deregulation and free trade than in other countries.” Taxes have been cut, school vouchers allocated, and the pension system partially privatized as Sweden distances itself from its welfare-state past.

Norberg’s rebuke of Sanders — he never calls him by name, but it’s clear who he has in mind — is reminiscent of  Danish Prime Minister Lars Lokke Rasmussen, who said he had enough of Sanders slurring his country with the “socialist” label.

Sanders needs more lessons such as these, because he simply doesn’t know what he’s continuously spouting off about. Yet he’s been invited to the Vatican to talk about building a “moral economy,” as if he’s an authority on that subject. Simply put, there’s nothing moral about the economic system Sanders favors — it destroys jobs and snuffs out opportunities to rise higher. What was the Vatican thinking when it extended the offer?

The Vatican was being no less obtuse than Sanders’ American supporters, though, because what they are advocating are policies that in the end will create a terrible crisis in this country.

I have written before that if you care about the potentially poor of the future as well as the poor of today, you tend to favour economic policies that promote economic growth. As Tyler Cowen once opined, "Economic growth is the best anti-poverty programme there is."

Gubmnt, Climate Change, and Cronyism

Former student, Gerry Nicholls, is very witty. I've enjoyed reading things he writes for years. Here's a brilliant example. The conclusion:

Sure, I get the concept in theory: government-subsidized companies will invent something amazingly innovative and environmentally friendly, such as machines that run on the warmth generated by Trudeau’s “Sunny ways”.

Yet, the sad truth of economics is that companies which rely on government handouts are usually only good at innovating one thing: new ways to get government hand outs. [emphasis added]

So you see, for all our sakes we better hope the climate change alarmists are wrong or else we’ve had it.

It’s not that I’m not a “climate change denier” so much as I’m a “government competence denier.”

Too bad Gerry hasn't learned that the correct spelling is "gubmnt".

One Way to Deal With Some Aspects of Income Inequality: Promote Competition the major cause of monopoly is gubmnt

Former student David Henderson makes this point clearly in a recent post at EconLog. He points out that many of the people in the top 1% are professionals whose positions are protected by laws that restrict entry and keep out the competition. Quoting Jonathan Rothwell, he notes,

For lawyers, doctors, and dentists-- three of the most over-represented occupations in the top 1 percent--state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the "professional" job tasks for less pay....

Proportion of lawyers in the top 1 percent? 15 percent....[EE: Shakespeare comes to mind]...

Proportion of physicians and surgeons in the top 1 percent? 31 percent. ...

Proportion of dentists in the top 1 percent? 21 percent.

Please check either David's post or Rothwell's paper for explanation and details.

I might be tempted to add tenured university professors to the group. I know tenure isn't explicitly a statutory provision, but it has similar effects. I hope David will consider including them/us in his forthcoming research.

Interestingly, it isn't raw, nasty, big-corporation monopoly that David is talking about; it's monopolies created by gubmnt, particularly barriers to competition in the professions.

As Harold Demsetz once wrote many years ago [paraphrased from memory], "the major cause of monopoly is government."

Why I Don't Trust Big Gubmnt

Don Boudreaux says it so well in his "Bonus Quotation of the Day [March 22]" from a passage by Paul Krugman and in his rhetorical questions that follow that:

… from page 220 of the 2005 7th edition of Paul Krugman’s and Maurice Obstfeld’s excellent textbook, International Economics: Theory & Policy:

[I]t’s hard to make sense of actual trade policy if you assume that governments are genuinely trying to maximize national welfare.  On the other hand, actual trade policy does make sense if you assume that special-interest groups can buy influence.

Because special-interest groups – cronies – play a significant role in setting and fashioning the details of trade “policy,” shouldn’t we assume that they also play a significant role in setting and fashioning the details of all other policies?  Why are the same politicians who sell out the public welfare when drafting, negotiating over, and voting on trade policy to be trusted to defend the public welfare when, say, drafting, negotiating over, and voting on labor legislation, health-care legislation, immigration policies, tax policies, or foreign policies?  Or campaign-finance ‘reforms’?

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What is Canadian Ketchup?

In recent news, we learned that French's (of mustard fame) indirectly took over the Heinz tomato processing plant in Leamington, Ontario, after Heinz abandoned it. Then Loblaws supermarkets decided not to carry French's ketchup because French's ketchup wasn't eroding Heinz sales, but was "cannibalizing" the sales of Loblaws' own President's Choice brand of ketchup.

There is more to the story though. Apparently French's uses tomatoes grown in the Leamington area and processes those tomatoes into paste. The paste is then shipped to the US, where it is bottled and then shipped back to Canada.

There were nearly 800 employees at the Leamington plant before Heinz shut it down. There are now 240 employees there. Furthermore, French's has said it is looking into opening a ketchup bottling plant in SW Ontario, but it won't be in Leamington.

It’s not known yet where the new bottling plant will be. The obvious choice would be Leamington, Ontario — the heart of southern Ontario’s tomato-growing region, and site of a Heinz bottling plant that closed in 2014.

But French’s president Elliott Penner told Postmedia that Leamington won’t be the site of the new bottling operation.

Highbury Canco took over the old Heinz plant, rescuing some 250 of nearly 800 jobs there, and they are already processing the tomatoes for French’s ketchup. But Penner says Highbury Canco doesn’t have the capacity to bottle the ketchup as well.

Jack's summary:

Many might not have known that French’s version, although using Leamington tomatoes, was bottled in the USA.

Ironically, President’s Choice brand, while bottled in Canada, used American tomatoes!

Protectionism make sense at the local level, but becomes a difficult concept once all these perms and combs are realized.

 

 

1993 Paul Krugman on Gains from International Trade

Too bad this guy [Krugman] seems to have gone off the rails. From Don Boudreaux at Cafe Hayek,

... from pages 120-121 of Paul Krugman’s excellent May 1993 American Economic Review essay “What Do Undergrads Need to Know about Trade?”, as it is reprinted in Krugman’s important 1996 collection, Pop Internationalism (link added):

One of the most popular, enduring misconceptions of practical men is that countries are in competition with each other in the same way that companies in the same business are in competition.  Ricardo already knew better in 1817.  An introductory economics course should drive home to students the point that international trade is not about competition, it is about mutually beneficial exchange.  Even more fundamentally, we should be able to teach students that imports, not exports, are the purpose of trade.  That is, what a country gains from trade is the ability to import things it wants.  Exports are not an objective in and of themselves: the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment.

Indeed.  And, therefore, supporters of that great geyser of cronyism – the U.S. Export-Import Bank – are in reality supporters of increasing the size and weight of the burden that Americans at large must bear to engage in commerce with non-Americans.

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Influence-Peddling. the natural result of big gubmnt

The Premier of Ontario is selling access to her and to top-ranked politicians in the province for thousands of dollars per event. No foolin'. From Andrew Coyne at the National Post,

Another leader caught selling preferential access to the highest bidder might have folded under pressure and abandoned the practice. But there’s a principle at stake here, and Kathleen Wynne is drawing a line in the sand. The principle? A little thing called democracy.

“It’s part of the democratic process,” she said, of the $6,000-a-head cocktail reception and three-course dinner at Toronto’s Four Seasons Hotel scheduled for this Thursday. Organized by a major lobbying firm, it is advertised as a “small event with a limited number of tickets,” allowing for intimate “one-on-one conversations” with the premier, Energy Minister Bob Chiarelli and senior staff. A similar event last month charged $5,000 to speak to Chiarelli and the premier’s chief of staff, Andrew Bevan.

Well, what could be more democratic than that?

This news should surprise no one. When gubmnt controls allocation of scarce resources, firms and individuals have an increased incentive to try to influence how those resources get distributed. It's an inevitable result of big gubmnt. And we certainly have big and growing gubmnt in Ontario.

"People respond to incentives."

Addendum: this cartoon from the Trono Star:

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Energy Storage and the Future

Not even three months ago I wrote,

There is a very good chance that within the next 20 or so years, the electricity storage problem will be licked. Effectively and efficiently.

And now there is news that effective, efficient electricity storage is likely within the next year or two [h/t Jack].

They will have [graphene polymer] batteries for home, mobile, aircraft also produce for bicycles, motorbikes, cars and drones. Grabat has achieved a battery with a range of 800 kilometers and a weight of just 100 kilograms that can be loaded into a conventional outlet only one - third the time required by a lithium-ion-lithium equivalent (which are riding automakers in their electric models). Mario Martinez said in a high-density plug "could be loaded in just five minutes."

I'm always a bit skeptical about such "gee-whiz" announcements, but if this is even close to correct, then keep in mind my other suggestions about the future:

• If so, then within the next 20-30 years [update: or now much sooner?], solar and wind power will be able to overcome their major obstacle: the storage of energy for times when electrical energy is in high demand and for times when production is otherwise not sufficient to satisfy the quantities demanded at the then current prices. Furthermore, once the storage problem is solved so that electricity can be stored at a low cost, there will added innovative activity to produce cheaper and better solar panels and wind-energy sources.
• If so, private uses of solar and wind power will become feasible all over, and not just in North America, but throughout the world.
• If this prediction is right, watch for oil and natural gas prices to sink, not rise.
• If this prediction is right, watch for nuclear energy plants to be re-mothballed.

Sure, some gas and coal-fired electricity plants will have to be kept operational, but that would only be as backups and to handle peak load problems. The bulk of our electricity will be provided via solar and wind energy.

And it won't be because the gubmnts subsidized solar panel installations now; it won't be because gubmnts subsidized hideous and hideously expensive wind farms now. It will be because once the storage problem is solved, buyers will rush into the market and producers will continue to develop better, more efficient products (as they do in EVERY field).

What about autos? There will be more electric cars, more electricity filling stations, and more hybrid cars as people make the transition. The transition will not be immediate and will be costly in some instances. (For example, the building I live in could not add plug-ins except at huge expense). Gasoline and gas-powered vehicles will not disappear, but they will diminish in popularity.

Farm implements and major equipment will be electric, powered from storage batteries that are recharged by electricity generated from solar (mostly) and some wind sources.

Instead of backup gasoline-powered electricity generators, people will keep backup batteries and electrical storage facilities.

Also, however, keep in mind the Ironman's caution, posted in a comment to my earlier post:

 While I'm also hopeful that the energy storage problem for intermittent renewal energy production technologies like wind and solar will be resolved, there's another, bigger challenge that will need to be addressed for these alternative sources of energy to become genuinely practical: energy production density.

To see what I mean, see the attached chart here:

http://i.i.cbsi.com/cnwk.1d/i/tim//2010/05/29/LandUseAndrews.JPG

Which is taken from the following article:

http://www.cnet.com/news/figuring-land-use-into-renewable-energy-equation/

To be practical, the ideal solutions for future renewable energy production would require smaller physical footprints than the sources they would replace. Otherwise, there will always be a requirement for the less desirable sources. Note however that the data doesn't consider the land use that would be required to make either solar or wind-produced energy more viable.