Big news, maybe very big, in alternative energy sources

I have taken to calling my beliefs on the future of energy sources "weird energy." Why? Because the sources I am most interested in seem to violate the Second Law of Thermodynamics. Notice: this is so inviolable, we capitalize it. But they don't.

Why am I so interested in other energy sources? The obvious reason is a quest for zero carbon intensity, so getting rid of the big greenhouse gas. The other one is that the correlation between energy consumption and economic output, no matter how you measure it, and probably no matter when in history you look, is so tight that you could hang wallpaper by it. Some folks think I am weird because of this but, ya' know, data are data when used wisely. And this is really important.

Why think about "weird" sources? Minimally, because none of the current clean alternatives are cheap enough to really matter. They may get there, but if there are cheaper sources that work, why not go for them, even if they seem to violate physical laws. Beyond that, the energy potentials for these sources are difficult to logically digest, they are enormous, and should have enormous effects on economic systems.

With that, this week an independent group of physicists published the results of three series of tests starting in September last year and concluding in March this year on the so-called E-Cat of Andrea Rossi, an Italian entrepreneur.

The big news from the report, found here, is with the most conservative assumptions, the device produces over extended periods a minimum of an order-of-magnitude more energy ouput than is input or can be explained by any known chemical process. This is very conservative.

How conservative? The most eye-opening story is the first test in September 2012. The independent scientists did not have any participation from Rossi or his people; on their own they (accidentally) drove the device to failure in a fairly spectacular manner: the inner steel container of the device melted; the melting point of steel is ~ 1470 C. An outer ceramic container also melted. Ceramics have a melting point of ~ 2000 C. The active component producing this energy is a card-deck size core with powdered nickel, hydrogen, and some unspecified catalyst. No conceivable set of chemicals can produce such a chemical reaction, so something else is going on.

I won't go into theory here, as there are many and none which are yet sufficient. I will say this report has caught the attention of a wide group of skeptics who are properly evaluating the result.

Here is an image of the device about to destruct:

I believe the image on the left is from a thermal camera.

If this result holds, and Rossi successfully commercializes the device, the world will change dramatically. Possibly soon.

I will continue to use this space for updates that are significant.

Sweden’s 30 years of income redistribution

By David Ruccio

"Sweden, which has long been the shining example for liberal economists of what we should be aiming for, seems to be losing its luster.

That’s because the growth in Swedish inequality between 1985 and the late 2000s was the largest among all OECD countries, increasing by one third.

Sweden has seen the steepest increase in inequality over 15 years amongst the 34 OECD nations, with disparities rising at four times the pace of the United States, the think tank said.

Once the darling of the political left, heavy state control and wealth distribution through high taxes and generous benefits gave the country’s have-nots an enviable standard of living at the expense of the wealthiest members of society.

Although still one of the most equal countries in the world, the last two decades have seen a marked change. Market reforms have helped the economy become one of Europe’s best performers but this has Swedes wondering if their love affair with state welfare was coming to an end.

The real tipping point came in 2006 when the centre-right government swept to power, bringing an end to a Social Democratic era which stretched for most of the 20th century.

Swedes had grown increasingly weary of their high taxes and with more jobs going overseas, the new government laid out a plan to fine-tune the old welfare system. It slashed income taxes, sold state assets and tried to make it pay to work.

Spending on welfare benefits such as pensions, unemployment and incapacity assistance has fallen by almost a third to 13 percent of GDP from the early nineties, putting Sweden only just above the 11 percent OECD average.h

At the other end of the spectrum, tax changes and housing market reforms have made the rich richer.

Since the mid-80s, income from savings, private pensions or rentals, jumped 10 percent for the richest fifth of the population while falling one percent for the poorest 20 percent."

Read the rest here.

Who pays the taxes?

Not corporations that's for sure (for more go here). Corporate taxes are less than a third of what they used to be in the early 1950s, when that Socialist, Eisenhower, was the president.

Note also, that Payroll taxes, that are regressive, have also increased over time. The poor and the middle class actually pay for their own retirement. No 'handouts' there. And the decrease in corporate taxes is more or less matched by the increase in Payroll taxes. Tax the poor, not corporations, that has been the rule.

Liquidity preference and effective demand

Reading The Battle of Bretton Woods, by Benn Steil, an interesting book with some problems associated to its conventional economics analysis, I was struck by the following phrase: "Keynes had struggled for years ... to induce a compelling theoretical cause for his burning belief that investment could, even under flexible prices, fail to harmonize savings in a way that would maximize aggregate income. ... It was the concept of ´liquidity preference,' or the idea that people might choose to hoard inert cash rather than consume or invest the fruits of their labor."

It is improtant to remember how Keynes himself suggested he developed Liquidity Preference, to put Steil's argument in perspective. Keynes says in his "Alternative Theories of the Rate of Interest" (1937, p. 250; subscription required) that:

"the initial novelty [in his General Theory] lies in my maintaining that it is not the rate of interest, but the level of incomes which ensures equality between saving and investment. The arguments which lead up to this initial conclusion are independent of my subsequent theory of the rate of interest, and in fact I reached it before I had reached the latter theory."

In other words, the central idea of the GT is effective demand (investment determines savings through the multiplier) and liquidity preference is more or less an afterthought, developed to deal with the fact that by eliminating the Loanable Funds Theory he had left "the rate of interest in the air" (ibid.). Further, note that the situation in which "people might hoard cash," corresponds to the so-called Liquidity Trap.

In other words, when everybody expects that in the future the rate of interest will increase, and prices of bonds will collapse, and hence there would be windfall losses, there might be an absolute demand for liquidity [in spite of Krugman, not the case now]. What did Keynes have to say about the liquidity trap? In chapter 15 Keynes tells us ‘after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute … [b]ut … I know of no example of it hitherto’ (Keynes, 1936, p. 207). In other words, a downward rigidity of the rate of interest, while possible in theory, was not in practice the cause of unemployment for him, and certainly it was not the "compelling theoretical cause for his burning belief that investment could fail to harmonize savings in a way that would maximize aggregate income."

There are several other issues with the book, which I'll discuss in other posts.

Economists and austerity errors

By Srinivas Raghavendra

Sir, – The famously infamous spreadsheet error by economists Carmen Reinhart and Kenneth Rogoff (Martin Wolf, Business, April 24th) and the subsequent debate on austerity has rightly or wrongly brought forth one important issue: the sensitivity of techniques, tools and methods that economists use to analyse economic data have immense consequences for economic policy.

The Massachusetts economists’ study that replicated the original Reinhart and Rogoff’s paper argues that in addition to the coding error they have also uncovered a non-standard weighting scheme and selective exclusion of available data, and they show that taking all these into account leads to the conclusion that the average GDP growth for countries with public-debt-to-GDP ratio of over 90 per cent is actually 2.2 per cent and not -0.1 per cent as estimated by Reinhart and Rogoff.

Read the rest here.

The Second Industrial Divide and the Third Industrial Revolution

According to Chris Anderson, the editor of Wired, in his recent book Makers: “the word desktop is being added to industrial machinery, with equally mind-blowing effect. Desktop 3-D printing. Desktop computer-controlled routing, milling, and machining. Desktop laser cutting. Desktop computer-controlled embroidering, weaving, and quilting. Even desktop 3-D scanning, or 'reality capture,' digitizing the physical world. Desktop fabrication is leading to full-on desktop manufacturing.” The idea is a bit like the old (relatively speaking) book by Michael Piore and Charles Sabel on The Second Industrial Divide, which suggested that flexible specialization was making mass production obsolete.

The idea is that desktop manufacturing is creating the conditions for mass market for niche products, as he says, bringing down the barriers to entry in many sectors. There is a bit of wishful thinking in the book (not done yet, but will report back at the end), but one should note that the author nails the importance of manufacturing for development. In his words: “any country, if it wants to stay strong, must have a manufacturing base. Even today, about a quarter of the U.S. economy consists of the manufacturing of physical goods. When you include their distribution and sale in retail outlets, you’re talking about closer to three-quarters of the economy. A service economy is all well and good, but eliminate manufacturing and you’re a nation of bankers, burger flippers, and tour guides. Software and information industries get all the press, but they employ just a small percentage of the population.”

Note that this suggests that the U.S. economy, which is ahead in the desktop manufacturing technology (e.g. 3-D printers, used recently to create ... yes, a gun!; 3-D scanners, laser cutters, computer numerical control routers, etc.) is actually still at the forefront of the industrial revolution, in spite of the talk about deindustrialization.

The two meanings of dollarization

This is part of an entry written for the Wiley-Blackwell Encyclopedia of Globalization. From the intro:

The expression of ‘dollarization’ has at least two different meanings. In the narrow sense, it refers to massive currency substitution, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency, more often than not the United States dollar or, in some cases, the euro. Note that currency substitution could be complete and might even imply the elimination of a domestic token. Full dollarization in that sense has taken place in small countries, mostly in Latin America, the Caribbean and the Pacific which are heavily dependent on the United States. Dollarization, in this sense, is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell 1961, p. 661).

In the broader sense, dollarization refers to US hegemony in the world economy as a result of the US dollar being the numeraire currency in international markets. This christens the United States as the premier international monetary authority that regulates and dictates the flows of international financial commitments for global economic activity. Of particular importance in this context is the fact that the key international commodities, including oil, are priced in US dollars in international markets. The former conception of dollarization can be described as dollarization strictu sensu, while the latter as latu sensu dollarization, i.e. not the specific use of the dollar by a country, but by the whole world economy—an international system in which the dollar is de facto a global fiat money (Vernengo, 2006).

Read the rest here.

Tom Palley on Gattopardo economics

New paper by Tom Palley on the failure of economics (mainstream) after the crisis. From the abstract:

Gattopardo constitutes change that keeps things the same. Gattopardo is relevant for understanding the economics profession's response to the financial crash of 2008. This paper explores gattopardo economics as it applies to the issues of the macroeconomics of income distribution; the global financial imbalances; and inflation policy. Gattopardo economics adopts ideas developed by critics of mainstream economics, but it does so in a way that ignores the thrust of the original critique and leaves mainstream analysis unchanged. Gattopardo economics makes change more difficult because it deceives people into thinking change has taken place. By masquerading as change, it crowds-out space for real change. That makes exposing gattopardo economics a matter of vital importance.

The Political Aspects of Unemployment at Seventy

Michal Kalecki’s (1943) classic paper, “Political Aspects of Full Employment” remains surprisingly modern, and its message still is worth revising. If you read and/or watch the current debates on economic policy in the mainstream media you would think that public deficits and debt are the main economic problem ahead. Further, if you look at Obama’s budget proposal, with the offer of reducing payments to social security recipients, you would think that entitlement programs are unsustainable and must be overhauled. On the other hand, the mainstream media is not as vocal on the unemployment problem, and in some quarters the current rate of unemployment, 7.6%, is seen as not too high, and only slightly above full employment, which is put by some at 5.5% (the so-called natural rate).

Read the rest here.

Naming names

Krugman comments on the Ferguson gay-childless Keynes bashing affair, and gives a list of other recent members of the Lunatic Fringe. His list:

1.Robert Barro pointing to the decline in private spending during World War II as evidence that multipliers are small, somehow forgetting rationing and all that.
2.John Cochrane and Eugene Fama confusing accounting identities with causal relationships, and reinventing the Say’s Law fallacy.
3.Robert Lucas misunderstanding Ricardian equivalence.
4.Robert Samuelson and Olli Rehn asserting that Keynes wouldn’t have been a Keynesian given current debt levels, without checking actual British debt in the 1930s (which was much higher than debt now).
5.John Taylor equating Fed policy to hold down interest rates with a price ceiling on, say, apartment rents.

This list could be complemented with the one by Brad DeLong on other authors (which include Mankiw and Schumpeter) who have used similar arguments against Keynesian economics.