California's Prop 23 and the "big oil money" campaign – outspent 3 to 1

I believe the phrase… stupid is as stupid does.. is the proper term..
California in its stupidity failed… Time to cut off the welfare from the FED and let them learn the hard way….

Re green dream: Just checked the cost of electricity – it has been said that the Danes pay the most on the planet, and my google search ended up with 25 Eurocent a kWh for Denmark. Germany a close second with 22. Next year we’ll be at 24 in Germany, and given the growth of PV in Germany i expect us to take the crown from Denmark in 2012. Maybe California wants to enter the race to the top?

Perhaps the people of California just want clean air, and water. It did win by 60% to 40%.
Maybe, they’re looking back at 2008 when coal jumped from $30.00 ton to $140.00 (before settling back to $60.00/ton,) and figuring that maybe that was a portent of the future.
Could be they noticed that non-polluting wind, and solar is getting steadily cheaper, and fossil fuels are on a long-term uptrend.
Maybe they really are, “thinking of the Grand-kids.”

Bill Gates gave $700,000 to the No on Prop 23 campaign:
http://cal-access.sos.ca.gov/Campaign/Committees/Detail.aspx?id=1272754&view=late2
The others can be found here:
http://cal-access.sos.ca.gov/Campaign/Measures/Detail.aspx?id=1324800&session=2009
Not sure why Gates gave but he is getting chummy with his fellow billionaires over charity giving so they may have convinced him to toss in some spare change.

Bill D ,
Yeah , but as Ron White says , ” You can’t fix stupid .”

I do not pretend to be au fait with US politics let alone its details but there is an interesting article up at NC watch, listed on this board, but I cannot link, which points out that it is prop 26 which passed and requires a two thirds majority to raise taxes and fees that may actually derail 23.
If true no doubt the whole thing will end up in the courts for some years: and may never even see the light of day again. Who knows?
Kindest Regards

I thought the more interesting vote was the one against legalising marijuana. Looks like the hippies voted it down in order to avoid another tax increase. A bit like proposition 26. Anyway, the marijuana proposition seems to have got them out to vote blue and green. Quite smart, really.

From Kum Dollison on November 5, 2010 at 7:22 pm:

Maybe they really are, “thinking of the Grand-kids.”

This is what is the stupidest part of the Green Progressive agenda. Fight Global Warming based on the Precautionary Principal, do all these things “for the grandchildren” “just in case.” While saddling them with real debts, local and national, that will doom those grandchildren to economic mediocrity and lower standards of living than otherwise. Indeed, currently they’re “saving” those grandchildren while screwing up their future and that of their grandchildren’s grandchildren as well. They’re doing many decades worth of serious real economic harm to avert what sure looks like nothing more than a possible long-term nuisance.
This ain’t making the kiddies wear bicycle helmets to protect them in an accident. What they have done and want to do is cutting off their legs to keep them from ever being on a bicycle thus making sure they don’t have the possibility of an accident.
If they really think those following them will be so pathetic they’ll be unable to withstand the challenges of the possible negative effects of global warming so they must remove that possible problem for the sake of those descendants, how can they be so sanguine about leaving them such very real economic hardships?
Heck, why are the young people who are most passionate about fighting global warming, mainly because they don’t want their own futures messed up, most willing to support exorbitant social spending and ruinous “green initiatives” that will haunt them for their entire working lives, even when we “old geezers” will be hitting up these young whippersnappers for our federally-guaranteed retirement funds? They’ll be paying the lion’s share for this “progress” they want, not us!

This is California we’re talking about. They think they’re smarter. So they go for green things thinking they’re doing it because they’re smarter. How many businesses moving out of California will it take before they stop this stupidity? When the pain of their stupid actions hurts them in the pocket book more then they want it too they’ll suddenly find a new way to be smarter.

Re dirty energy. The phrase, as used by the pro-AB 32 folks I’ve met, means gasoline, diesel, and heavy fuel oil burned by ships.
Their plan, as explained to me, is to eliminate petroleum-powered vehicles in California in favor of electric vehicles. That one move would eliminate “dirty” oil refineries, the stinking vapors from gasoline stations, plus the mega-tons of NOx and particulate emissions from cars and trucks and buses. They claim that NOx causes low-level ozone, and that causes asthma especially in children.
There is only one problem with their plan. There are no adequate electric vehicles. This does not deter them, in fact, it is part of the basis for their green jobs claims. Apparently, thousands of Silicon Valley companies and their genius employees are working feverishly to develop the light-weight but ultra-powerful batteries that will be required for the millions of cars and trucks and buses that are on the roads in California.
I know, however, that those who are working in that field flunked basic physics. Fifteen pounds of gasoline weighs about 78 pounds, perhaps 90 pounds total when one includes the weight of the gasoline tank. Those fifteen gallons will propel a car 450 miles, if the car achieves 30 miles per gallon. We are a long, long way from achieving a battery that will propel a 4-passenger car 450 miles, even by granting it more weight from replacing the heavy gasoline engine with lighter-weight electric motors on the wheels. It seems that I read that the Chevrolet Volt will proceed about 40 miles on its battery. But then, that “dirty” gasoline engine kicks in to run a generator that provides electricity to the electric motors.
Moving a fully loaded 80,000 pound semi-tractor-trailer rig at 70 miles per hour, or a bit slower if it must cross the Sierra mountains at Donner Pass on I-80, using electric power from batteries is simply not possible with today’s batteries. The pass is at an elevation of 7,085 feet above sea level. An awful lot of energy is required to move an 80,000 pound load over a vertical distance of almost a mile and one-half. The battery that can do that is still a dream.

As long as it’s money that belonged to someone else, they could care less.
The state motto needs to be amended to “Eureka! There be lemmings here”

Too bad Mr. Rogers was unable to convince his CEO (Thomas Werner). Mr. Werner gave the Anti 23 campaigners $25,000:
ttp://cal-access.ss.ca.gov/Campaign/Committees/Detail.aspx?id=1324059&session=2009&view=late1
Burns me up. I’m about to have American Vision Solar do an installation on my roof, and they use Sun Power panels. Hate to think they can use my money against the public interest. Same with my AMAT stock. Of course you’re helping subsidize this propaganda yourself–PGE donated $250,000. And Sempra was in for a bundle…
Strange how some of the same folk who have been loudly complaining about the Supreme Court’s lifting limits on corporate contributions are suddenly quiet. I can hear the crickets….

Stick the ‘h’ on the beginning of my link above and it will work.

We seem to be living in a mix of George Orwell and Ayn Rand world futures.
It is far worse than they thought.

@davidmhoffer says:
November 6, 2010 at 12:05 am
You got that right – well said!

For years we in Scotland have dreamed of something that was euphemistically called “silicon glen” and for years we’ve had stupid politicians pouring money into useless schemes including renewables with the inevitable result that we’ve got no economic benefit for all that wasted money.
Well finally its good to see that some other idiotic region is going to “lead the world” going nowhere and perhaps just a few of those jobs from silicon valley will finally come our way?

Kev-in-UK essentially says:
California, seems to me that it is the ‘Dumb Blonde’ state!
Never truer words have been said. I have lived here for 40+ years and this is exactly what I have been thinking. Not sure how to overcome it until you make every one that took the irrational green “line” to drink kool- aid laced with peroxide bubbling in it. I’m feeling mighty low right now.
I apologize for everyone equipped for rational thought for the latest episode and may you permit me to just shake my head back and forth a while until I see a way out of this.

davidmhoffer says:
November 6, 2010 at 12:05 am
“I have to ask exactly what do these people think “money” is? Sure it is a means of exchanging goods and services, I think most people understand that. But it is a “means”. What does money actually represent (albeit indirectly) that enables it to be the means by which goods and services can be exchanged? Answer: Energy.”
No, money actually represents human labour, including human labour invested in the form of capital. Energy is merely one of the tools or resources employed by that labour and capital, and like any other resource is itself obtained by the application of labour and capital. The ratio of output value to energy input is not fixed. In a free market they will tend to be roughly proportional, as a consequence of the market process of minimising the sum of the factor costs. You can make the same good in numerous ways – with more labour, or less energy, or more material, or less equipment – so you increase or decrease each factor in turn until the overall cost is minimised and the marginal cost of each factor is the same. If government interferes by means of taxes, subsidies or regulatory impositions, the market is forced away from that optimum and economic efficiency suffers, but the effect is a second order one: doubling the cost of energy will not double the cost of goods or halve standards of living, because the energy is only one relatively minor factor of production; a loss ~5% would be more typical.

Sadly this is, for the most part, a study on what enslaved (indentured servitude?Better?) people do: argue and debate at a lower level of understanding than where the crux of the issue lies (no pun intended). The goal in all of this, IMHO, is that the money keeps moving. Expanding. To create debt. Think about it.
We are seeing governments hype and continue the AGW meme in a time when the GMT is falling, and the good science is pointing to natural variation. Practically everyone agrees we’re heading for colder decades in the future (well, not the CAGW crowd of course, not yet anyway)…and the push continues. Why?
Because when once we’ve gone down the “we’re all gonna burn!” road far enough it sets up the “owners”, (i.e. the Fed, World Bank, etc.) to blithely turn around and say, “we’re all gonna freeze!”, as if none of this warming ever happened.
The technology to, warm the planet (in the near future), must be reversed from our current level to cool the planet, as ineffective and useless as it is. Will this increase costs to people again? Of course it will. Crops will die in the coming freeze, new food sources sought, and monies printed, etc, etc. And where does all this money end up? Right back where it started…in the coffers of the “owners”.
The government is a front-man, a lackey, and this is NOT a conspiracy: it is just how the system is set up. To deal with the incredible amount of debt we’ve racked up (globally) new markets must be created, and when they fail another MUST take its place; the money keeps flowing, expanding, ebb & flow from the source (the Fed here in the states) and back to the source.
Many of those here at WUWT have seen this coming for awhile: recall the recent Bildeburger agenda? Global Cooling being listed amoung the topics to be discussed. Well go figure, they’re already making plans for the turnaround. Expect to see more grants and more research funding, and more shoddy ‘post normal’ psuedo-science.
I must be in a funk today, ususally I’m not this pessimistic. Nothing changes until the system changes, or it crashes. The former will happen when the people (us: the people on the treadmill) make it happen, or the later when the megalomaniacs at the top over-step their bounds and they make it crash. Any takers on which will happen first?

If anyone wants to to see how really bad it is getting in California because of Big Green and Big Bureaucracy, do a google on the San Diego County General Plan Update.
The unelected Commissars have deemed it necessary to stop all growth in the rural two-thirds of the County and allow what little growth they find acceptable to occur only where they happen to live near the coast. It’s anti-car, anti-growth, anti-business, anti-development, and a crime against liberty.
It’s a bureaucratic atrocity and it if becomes law, which could happen as early as this coming week, I’m leaving California for good.

I see Google were in the forefront financing opposition to Prop 23.
Blatant hypocrisy –
i.e Funding the fight against Prop 23 while driving their Toyota Pious’s to their corporate 767?
In revenge – I’m trying the new Blekko “slashtag” search engine. You can use slashes to reduce irrelevancy and introduce dates etc – and, best of all, everytime you use it you’re draining a nanolitre of aviation fuel from the Googlejet

Kum:
“Kadaka, This has nothing to do with “global warming.” I’ve said from the start that global warming was a crock. I’m looking at it from an economic, and “future cost of fuel” standpoint (as well as a “pollution in general” view.)”
ECON 101:
Price takes into consideration all future expectations of supply as perceived by the market, amongst many other things. Price is driven by supply, demand and all types of risk, (the biggest one quickly becoming political). Ergo, if the cost of utilizing coal, hydro, gas, etc. for energy is less than renewables skip the renewables. The sun and wind will be there for all intents and purposes, forever. Will we ever run out of oil? Coal? Probably not. I expect the price will rise to a point where it is not worth while pursuing these resources. I expect we have barely tapped the creative resources of the human mind (despite our educational system’s constant attempts to limit it into submissive following) so I can’t imagine substitutes will not be found.
Clean air is a noble goal. However, that is not what we are talking about when it comes to CO2 reduction. It is not a pollutant. So let’s have a debate about pollution reduction and not the phantom menace called CO2.
With respect to that, IMHO, the level of clean air we’ve obtained is more than acceptable, especially in California. I happen to believe we’ve reduced the level of air pollution in North America where any additional resources put into it has such low marginal rates of return on life enjoyment, it is far better to put resources into other life pursuits.
I’m an adamant lover of nature but recognize I come home to a lovely house built out of what nature provided; wood, brick, stone, dry wall, etc. etc. Are we to deny others that opportunity? What is pollution? IMHO, it extends far beyond what is in the air. Cutting down our forests to put up inefficient, economic unsustainable, rent seeker pleasing windmills and solar panels and lay vast amounts of power lines to me is pollution.
By using carbon based fuels, we utilize the energy which packs the most punch with the smallest physical footprint. Most of that footprint will be temporary. You can go to reclaimed parts of the oil sands project and walk through beautiful new growth forests. Many mines and all oil is underground. Yes, there are risks including collapsed mines and oil spills. However, the benefits achieved on the backs of those resources vastly outstrips the associated costs. Gulf oil spill cost billions. Benefits received from Gulf oil worth TRILLIONS, if not more.
The opponents of 23 attacked pollution. Prop 23 was not about pollution. It was about improving the life of the vast number of Californians and the vast number of Californians are going to experience a lower standard of living because of the efforts of rent seekers such as Khosla and Doerr, and watermelon control freaks.
We are a long, long way from running out of natural resources. The prices say so. A lack of understanding of a basic economics just helped contribute to significant chunk of opportunity stolen from my 2 lovely nieces who live in L.A.
I’ve started encouraging my sister/bro in law to move out of there. California is going broke and they should not stick around to go over the abyss with them. It is a made in California problem and I truly hope the rest of the country forces them to come up with a made in California solution. No bail out.

For a jones … and anyone else interested in the potential effects of (the passed) Proposition 26 on AB32 (connected with the defeated Prop 23) you can see the exact language of Prop 26 here:
http://voterguide.sos.ca.gov/propositions/26/
just click on “Text of the Proposed Law” in left part of the page
Here is another interesting review of Prop 26:
http://www.lao.ca.gov/ballot/2010/26_11_2010.aspx
Finally, this gives some information on the Prop 26 For and Against Donors – can’t vouch for the accuracy on this one, but if accurate than very interesting. Inverse ratio to Prop 23.
http://www.ballotpedia.org/wiki/index.php/California_Proposition_26,_Supermajority_Vote_to_Pass_New_Taxes_and_Fees_(2010)

Fascinating comments, all. One of the best on this blog.
The idea of renewable energy being cheaper – someday – has a bit of truth, and a bit of alarmism to it, as I see it. Consider that one of the oldest forms of renewable energy is hydroelectric power, where rain is collected and stored behind a large dam (typically 200 feet high or higher), then the water is passed through a turbine-generator to produce power. Even older are the water-wheels that provided power for all sorts of processes.
The point is that electricity produced from a hydroelectric plant is very, very cheap, once the dam and generating station are paid off. Coal, oil, natural gas, even nuclear power cannot compete with hydroelectric costs. The greenies have a dream in which their solar, or wind, or waves, or whatever, do the same as hydroelectric has.
It’s not going to happen, of course, because they miss the fundamental fact: hydroelectric power has built-in storage for all the energy. The lake behind the dam is the storage, and provides the necessary ingredient to allow power production even when there has been no rain for weeks. Solar cannot do that. Wind-power cannot do that. Wave power cannot do that. Tidal power cannot do that. Storage systems for electricity from renewables do exist, but they are very, very expensive.
The alarmism aspect requires fossil fuels’ prices to escalate dramatically. This is not likely, of course, as there are hundreds of years of reserves of coal, oil, and natural gas. More oil and natural gas are discovered each year. Thus, greenies are counting on fossil fuel price to escalate, at which point their renewable power plants will be cheaper than power from fossil fuels. This may happen someday, but not anytime soon. Certainly there is no reason to build renewables today.

bubbagyro you missed Roger’s point which was that wind and solar are not practical because of the lack of a cost effective storage medium. Period.
As for your objection to building hydro dams because of the environmental impact due to humans being “ubiquitus”, I find this laughable. “Environmentalists” daily propose draconian limits on CO2 production while quietly ignoring the fact that a low energy economy can’t sustain the global population, sentencing billions to death by starvation. Even the “mild” cutbacks some less strident activists are demanding would have major impacts on billions of people.
But ask a few people to move so that a hydro dam can be built and suddenly its impossible?
Ha!

@bubbagyro, re hydroelectric.
Hydroelectric dams were almost never built for the primary purpose of generating power. The primary purpose was to eliminate destructive flooding that caused many deaths and property destruction. Hydroelectric generation was simply included because the energy source was there, waiting to be tapped. Thus, the ecological damage argument fails – such dams preserved the landscape, not ruined it.
And, in fact, most large hydroelectric dams were built many decades or a century ago. There are relatively few rivers left in the world where a large hydroelectric dam can be built. There are some, but not many. Recently, of course, China completed a huge hydroelectric project known as the Three Gorges Dam, and it was also built to prevent the destructive flooding. Hydroelectric is an added benefit.

“No, money actually represents human labour, including human labour invested in the form of capital. Energy is merely one of the tools or resources employed by that labour and capital, ”
No, I think the original poster had it right. Human labor is a TYPE of energy, but labor itself is not the determining factor of price and value.
It’s not hard to imagine a scenario where a future will require virtually no human labor, but intense energy expenditure to craft a product. The price of that item will not be $0. Human energy vs machine energy… they’re interchangable. Value is a measure of how hard it is to get from a starting point to the sales point, which includes base costs and energy costs (including human labor and/or design.)

@Kum Dollison
No. They’re morons in a broke state buoyed by under the table federal bailouts that have kept the state afloat the last two years, delaying the inevitable reckoning. That money is about to dry up and several million people are going to have to vote with their feet.

I was born in Calif, my mother was born in Calif, my grandmother was born in Calif, my maternal great grandparents were immigrants to Calif in the 1870s. I am 63. Recently, in this past decade, I managed to ochestrate the sale of all ancestral family property, including my own home of the prior 18 years in silicon valley, and then my family and I moved to Nevada. I would encourage others to do likewise.
We still own some property in California but our presence and interest has been significantly reduced. I am sorry to see the direction that Calif continues to pursue and I wish them all the best but hope they don’t tax us just the same. Perhaps it could be sold to China or Mexico or both.

mike sphar says on November 6, 2010 at 2:23 pm
I was born in Calif, my mother was born in Calif, my grandmother was born in Calif, my maternal great grandparents were immigrants to Calif in the 1870s. I am 63. Recently, in this past decade, I managed to ochestrate the sale of all ancestral family property, including my own home of the prior 18 years in silicon valley, and then my family and I moved to Nevada. I would encourage others to do likewise.
Sounds like a good idea if I could find someone who wants embedded Linux Kernel and or storage experience there …

BBk says:
November 6, 2010 at 1:36 pm
“No, I think the original poster had it right. Human labor is a TYPE of energy, but labor itself is not the determining factor of price and value.”
You are confusing value with cost. The determining factor of value is how much human beings want the good – that is, the magnitude of the expected satisfactions it provides. The determining factor of cost is how much human beings have to be paid to produce the good – that is, the magnitude of their aversion to the labour and waiting (that is, deferred satisfactions) its production entails. As an economic resource or capital, energy is itself created by human labour and waiting; it is that which determines its cost. The same is true for every other factor of production.

I commute daily through Altamont Pass, still billed as the largest concentration of wind turbines in the world. Beyond the fact that many of the turbines are broken, lacking maintenance, or are otherwise non-fuctional, my view from my train seat has often led me to ponder, what will we do when all energy is mandated to be “green”. (What color is an electron, anyway?)
Storage of renewable energy is not a small problem, or a medium problem, or even a large problem. It is THE problem with renewables. We are talking about alternating current. There are no batteries to store alternating current. Not now and not in the foreseeable future. The pumping of water uphill into reservoirs, cracking water in hydrogen and oxygen, converting AC to DC and storing the power in batteries will work on a small scale, but not a large scale. Without viable storage, renewables are untenable for a modern, mechanized society. Period.
Here is why. From my seat on the train I have seen the outlines of those windmills standing immobile in the dark, under a 1,500′ thick layer of what we call tule fog. The wind speed is zero (0) miles per hour. And yes, I can recall periods of time when that fog didn’t lift for weeks. Any attempt to discuss power needs without the reality of understanding the pitfalls of putting all of our eggs into the renewable basket is folly indeed.
At some point adults will have to begin to discuss rationally the difference between air pollution and carbon dioxide. To stand against polluting our water and yet not take the stance that humans are not part of nature and have a natural territory that extends to every corner of the globe. To stop accepting the canard that we are running out of oil and begin to use some of the recoverable oil that Dr Kovarik, (among others), (http://www.runet.edu/~wkovarik/oil/2worldoil.mideast.html) lists at 397.9 billion barrels for the North American continent without accepting the terrible pollution that is rampant in Europe and Asia. To start talking rationally about developing nuclear power as the true green energy source and stop taking our science from movies like the now ancient China Syndrome. To use nuclear with real safeguards so that another careless technician doesn’t fry the control wiring in a nuclear reactor as happened at Three Mile Island. False dichotomies are the tools of politicians and activists that will impoverish us all if we don’t stop allowing others to define terms and determine the rules by which we will go to battle over critical ideas.
Remember this! All real wealth is mined from, pumped from, or grown in the earth. All else is an outgrowth of those activities. And when the only alternatives for mining or pumping are presented as pollute or don’t produce we will get nothing but a lower and lower standard of living with higher and higher taxes as the government continues to spend our hard earned wealth on pipe dreams and the green factory de jour.
Enough said. My family has been here in California for five generations, but my hope for sanity returning to our once great state diminishes with every election where the desires of those who live in 2% of the state control what the rest of us have to put up with.

Paul Birch;
Omigosh, where do I even begin? You are confusing theory and practice. I guess the only option is to go through your points.
PB;
First, this isn’t necessarily true. A few hundred yards from where I normally buy my petrol is a garage selling it for about 6p/litre more (a 5% difference). This is typical of the range of prices, for essentially the same product, across the Island. It has been like this for as long as I can remember; the competition among these suppliers is surprisingly weak. I have often wondered why people whom I know frequent these more expensive establishments; the fact is, they do; observation trumps theory.>>
Emperical evidence suggests otherwise, your observation is anecdotal. In multiple studies (sorry no links, been a couple of decades since I was involved in this industry) if there are three gas stations at a single intersection, and one of them is 1 cent less than the other two, that gas station will get between 60 and 75 percent of the business. Put in a no left turn sign that makes it inconvenient to access that station and almost 100% of what the other two stations lost comes right back. Your example is “several hundred yards”. I’ve forgotten the stats on distance but the result of the study was that some retailers like Husky in Canada embarked on a strategy of locating their stations in isolation and charge higher prices versus the traditional strategy of locating in the highest traffic intersections which is how we got to three,sometimes four gas stations at one intersection.
BP;
Second, the effect of a local increase in the price of one factor of production is not to increase the price of the local product by that amount; it is to drive down the cost of the other factors to the point at which the price is approximately as competitive as before. Specifically, an increase in the cost of energy in California will tend to reduce Californian wages and rents by an amount sufficient to bring the final cost back down to near the original figure. The economic loss will not (in this example) show up as higher prices for Californian goods, but as less disposable income for Californian consumers.>>
I was quite clear that the consequence would be less money in the pockets of the producers of value as they cut profits to remain competitive. But that doesn’t mean the cost comes down to the original figure. It means that goods produced outside of California are by default more competitive pricewise than goods produced inside of California. Now you have Californians with less money to spend, and they are more likely to spend it on imported goods that are lower cost than localy produced goods, and exports also fall because your goods are burdened with an artificialy high cost that makes them uncompetitive. You’ve heard of “win win”? This is “lose lose lose”.
BP;
You are still cherry-picking those industries – extractive and transport – in which the cost of energy is most significant, and even then omitting the cost contribution of numerous other factors, especially the cost of capital or borrowing, and taxes.>>
Manufacturing; energy intensive. Transportation; energy intensive. Construction; energy intensive. Farming; energy intensive. Commercial fishing; energy intensive. What, pray tell, is NOT energy intensive? Retail? MASSIVELY energy intensive, they depend on manufacturing and transportation or they are out of business. Entertainment? LOL. They only exist if the energy intensive industries are thriving and producing disposable income. Information technology? Well I suppose those computers save a lot of labour and time, but have you seen the power draw on a large data centre? Telecomm? HIGHLY energy intensive. You don’t get dial tone by magic, thars electrons in them thar wires. Service industry? Debatable I suppose, but the service industry is like entertainment. No extra cash, no dinner out. Insurance? OK, maybe I’ll give you that one, and banking too. But make a list of the largest employers by industry and you’ll find that the bulk of the jobs are in energy intensive activity.
PB;
The ~5% figure is for the whole of the economy. It is confirmed by actual experience; energy costs have doubled (and more than doubled) for political reasons on more than one occasion (such as the OPEC oil crises of the 70′s and in the periods after the Gulf Wars). This has indeed been blamed for recessions, in which economic output has fallen; but by how much? Around 5% at the depths of the crunch. Businesses adapt to higher energy costs.>>
Sorry, but NOT! You can’t claim that energy costs doubling on a TEMPORARY basis caused a recession AND that business adapts. The energy costs came back down in both cases and the economy recovered in both cases. Nothing to do with adaptation. If you worked in an energy intensive industry you would know that senior management stays awake at night trying to come up with ways to reduce fuel and electric bills NO MATTER IF THE PRICE IS HIGH OR LOW! Business is ALWAYS evolving to reduce costs.
And now the clincher. Theory meets practice. In your two examples above, world wide energy costs rose and the world wide economy tanked. Key words being “world wide”. Everyone got hit with the sudden rise in costs at the same time. So no jurisdiction had a competitive advantage over any other. But what we’re talking about now is increased costs based not on world wide markets, but on artificial constructs through legislation. The only way this can result in a “world wide” economic slump of 5% is if it is implemented world wide. Will China go along? Russia? India? Texas? New Hampshire? Zimbabwe? Iran? Taiwan? Singapore? Pakistan? It will require an awful lot of ammunition and an awful lot of lives to get anywhere near world wide adoption.
So it isn’t -5%. It is those that “don’t” +50% and those that “do” -50%. You want to live your life at -50%, go ahead. Just don’t drag me with you. And for the sake of humanity, don’t drag China and Russia either. They still got nukes which provide a rather interesting method of saying “go to h***”.

davidmhoffer says:
November 6, 2010 at 8:53 pm
“Omigosh, where do I even begin? You are confusing theory and practice.”
No, I’m not. Like many of the people on this forum, you are evidently inflicted with catastrophism. You see something that could be a problem, but fail to appreciate how people and economies will adapt. You see one side of the issue, but not the other. This is endemic in economics: the question of “what is seen, and what is not seen”. Those who expect one bad policy decision to sink California are almost as misguided as those who believe in the catastrophism of AGW. They will both be sadly disappointed.
“Emperical evidence suggests otherwise, your observation is anecdotal. ”
My observation is a fact. That single observation is all that is necessary to disprove the theory that petrol prices cannot remain significantly different in the same locality. Whatever you wish to believe, it is a fact that some suppliers (such as supermarkets) compete strongly with each other on price – but others do not. Presumably, customers are obtaining some other satisfaction from those other suppliers; one possibility, which would be relevant to the California question, would be the satisfaction of supporting local businesses.
“Your example is “several hundred yards”. ”
That’s several hundred yards on the main road just before reaching Tesco’s. Easy access to both of them – almost identically so. Lots of other, somewhat less clear-cut, examples across the Island.
“It means that goods produced outside of California are by default more competitive pricewise than goods produced inside of California.”
Do try to think it through! If that were the case systematically, then businesses would prefer not to produce goods in California with those higher costs. Thus there would be less demand for land and labour in California than before. Thus rents and wages in California would fall. They would fall until the local and imported products were once more competitive. The precise mix would not in general be the same as before, because energy does not contribute the same proportion of the factor costs to all products. If any factor cost increases, there will be a shift in favour of those economic goods which use less of that factor.
Competitiveness is a matter of the relative costs of particular goods; it is not mathematically possible for one economy to be absolutely more “competitive” than another. This is the Law of Comparative Advantage.
” energy intensive…. ”
Look at the aggregate cost of energy as a fraction of GDP. It’s typically around 10%. Some places higher, some lower. It tends to be lower for more advanced economies, which have a higher proportion of quarternary or service industries. A figure at hand for the UK some years ago was 5.6%. I’d expect California to be higher than that (say 10%). So if you double the cost of energy, you add 10% to aggregate costs without adaptation. Because of the mathematics of costs on the margin, the effect after adaptation will tend to be about half as great, that is ~5%. The price of energy is nothing like as important in the economy as you imagine.
“You can’t claim that energy costs doubling on a TEMPORARY basis caused a recession AND that business adapts. ”
The worst effect of the price hike was the immediate one, before any major adaptation could take place. Even that was not great (~5%). Factory output prices did not double, nor anything like it. After a year or two, as business adapted, the economy quickly recovered, even though energy prices continued high for years after.
“Business is ALWAYS evolving to reduce costs.”
But the optimum usage of the various factors of production depends upon the relative (not absolute) costs of those factors. If one factor increases in cost relative to the others, businesses will use less of that factor and more of the others. That is how businesses, labourers and consumers adapt to changes in factor costs.

davidmhoffer and Paul Birch, thanks for the great discussion. Regarding the hydro dam, I agree with in part with Roger Sowell. I live on the Shenandoah and have watched a few floods. There is a benefit to the silt deposited and many native plants flourish the following year. But as for my own interests, I would much much rather give up my flood plain to a retention area and relocate my more valuable native plants in my own maintained areas. The giant black walnut in my neighbor’s flood plain will have to be turned into a lot of veneer: nature loses, cabinetry gains.
As it works now, plants benefit the most in floods, not animals. In last January’s flood I watched a number of critter emerge from hibernation in 35-40 F temperatures to face the water on diminishing islands. I also know that the natural bedrock dams and the indian-built weirs are, without a doubt, the best fishing spots.

I’ve enjoyed the discussion between Davidmhoffer and Paul Birch. I would categorise it as an argument between and economist and a management accountant. My vote goes to David.
The idea that by observing motorists going into gas stations that charge 5p/ltr more than the one down the road, somehow refutes the theory that raising prices will cost sales is not credible for a number of reasons. Firstly, certain outlets, such as Tesco, offer gas discount vouchers to shoppers spending more than a certain amount. Secondly, a sample must be of sufficient size to remove random variation effects. Thirdly, if a few pence increase would make no difference, why are many arguing that a 2.5 percent increase in VAT will have a severe impact on the economy?
If one can cite anecdotal evidence as ‘fact’, I can say that personally I make a mental note of the price of petrol at every station and will always go to the cheapest. I will go to Tesco’s (which is not the cheapest) if I have a 5p/ltr discount voucher, otherwise I go elsewhere.

davidmhoffer says:
November 7, 2010 at 7:55 am
“Good lord, you’ve just accused me of being an alarmist.”
Then do you accept that AB32 will have only a minor damaging effect on California’s economy – on the order of a few percent? Or do you persist in claiming that it will cause it to crash by ~50%? If the latter, then this is certainly alarmist.
“My point about the gas stations stands. Gas stations work very hard to differentiate themselves.”
Your point does not stand. It is flatly untrue to contend that sharp differences in prices cannot be sustained. For a variety of reasons, they often can. Local and political preferences are among those differentiating influences; and such will certainly come into play here. A differential increase in energy costs in California will lead to Californian businesses promoting other aspects of their products or services – such as their extra “greenness” – which will offset, and in some cases eliminate and even reverse, any fall in market share that would otherwise eventuate from their higher prices. To whatever extent this occurs, it will also offset the reduction in Californian rents and wages that would otherwise result.
Any change in business conditions will benefit some businesses and hurt others; not every business will successfully adapt to higher Californian energy prices; some will go bankrupt; some will leave the state. But others will flourish. Firms whose total energy costs subject to increase (including their indirect energy costs in the goods and services they buy) are a smaller fraction of their total costs than average will see a competitive benefit; their rents and wages bills will fall (or increase less than they otherwise would have done) by more than their energy bills rise. Some of those firms who would otherwise have gone bankrupt will now survive. Some new start-ups will be discourages; others will be encouraged. The net effect will be a less energy-intensive economy in which the average standard of living is modestly – not drastically – reduced.
“There’s no substitute for energy like there is for plywood. Oh, you can look at your processes and choose to get rid of less energy efficient equipment and replace it with more energy efficient equipment, BUT SO CAN YOUR COMPETITION! Every options YOU have to “adapt” your competition ALSO has. So when one jurisdiction introduces a measure which artificialy raises energy costs, you are having a major impact on the competitiveness of those businesses.”
Shouting doesn’t make you right. Energy is neither more nor less substitutable at the margin than plywood. If your competitors have lower costs for one factor of production, and you have lower costs for another, then your optimal production processes are different from theirs. If California has higher costs for energy, it will have lower costs for rents and wages, because Californians will be less well off. If California has higher costs for energy, it will have a comparative disadvantage in more energy-intensive industries and a comparative advantage in less energy-intensive industries. The economic mix will adjust to reflect that.
“Suppose you’re building a sky scraper and you put out a tender for $100 million in steel beams that must meet a specific specification. Suppose that due to energy prices doubling, this gives just a 1% increase in price to the steel mill in California. That’s a differential of $1 million. No order.”
But the Californian steel mill now has cheaper labour and rents. It does not have to increase it’s price by 1%. It may even be able to reduce its price. Now, if the trades unions have enough power to prevent the firm cutting wages, even in the face of bankruptcy, then the firm will likely go under; the Californian wages bill will fall even further. Californian irms which now have a comparative advantage will replace steel mills in the Californian economy.

“”””” Kum Dollison says:
November 5, 2010 at 9:34 pm
Kadaka, This has nothing to do with “global warming.” I’ve said from the start that global warming was a crock. I’m looking at it from an economic, and “future cost of fuel” standpoint (as well as a “pollution in general” view.)
I simply think it makes sense to start preparing for the escalation in the cost of fossil fuels that is on the horizon. “””””
Well I am just waiting for the first solar panel that puts out plastics, and cosmetics, and fertilizers, and agri-chemicals as well as free clean green renewable alternative energies.
I can remember when “oil” was priced at $2 per barrel, and people sitting on huge deposits of oil shale, were predicting that if oil ever got to $6 per barrel, that they would be making a bundle off their shale oil.
Well oil did go to $6 per barrel, and the oil shale folks siad if oil ever got to $11 per barrel, that they would be making a bundle off their shale oil.
Well oil is now close to $87 per barrel, and nobody is yet making a killing off shale oil.
Likewise, as the price of crude oil or other fossil fuels rises; so too will the cost of making solar panels; so they will never gain an economic edge either.
Saturday night I had a long chat with a friend who works fo Solyndra; the Obama sanctified solar panel manufacturer in Fremont CA. They are just about finished burning through the last of the $577M taxpayer funded expansion loan; and instead of hiring a whole bunch of new green job workers in California; now protected by the AB-32 Carbon Tax umbrealla, they in fact will be laying off 1000 workers, and are closing one of their plants.
He says the problem is NOT that they don’t have sales; they do to dummies like schools; who wouldn’t know an efficient solar panel if they tripped over it; and other taxpayer funded institutions who don’t care how inefficient it is, or how much it costs.
He says the problem is the cost of making their panels; they need to get that down. Howcome; it costs them nothing now, because the taxpoayers paid for their manufacturing plant; so where’s the cost ? Hey the way you cut costs is to get rid of people doing unnecessary things. So there aren’t going to be an influx of green jobs; not here in the USA and California; not anywhere else either; althought what jobs there are will be someplace else. I’ve seen estimates by reputable economists who say there will be 50 jobs lost in petroleum or other fossil fuel industries; for each possible new green job.
One in eight people (formerly working people) in California, now has no job; and not likely to get one here. California currently borrows $40M EACH AND EVERY DAY ! to pay for unemployment benefits; for unemployed workers.
But it has a welfare system that gives people debit cards that they can use instead of money. If they use the card at a grocery store for example; the card machine has a special button (screen menu) for them to push; it tells the machine whether they are buying food; or CASH.
If they push “food”, they can’t get beer or wine or liquor; or cigarettes either. But if they press the CASH button; then they can use the cash to buy all those things; and then go to the local Pot Clinic to buy their medicinal marijuana.
This really is a great State to live in; even Mother Gaia, doesn’t have anything that works as well as the State of California.
I guess the Marxists were expecting Nancy Pelosi to hang on the the House Speakership; and then bail out California next Congress. Ain’t gonna happen ! And Californians voted this future for themselves; and Governor Moonbeam to give it to them.
Well I first wrote about this problem some 40-45 years ago. (NO I didn’t say I was the first to write about it.).
The problem is that in any free market, the ultimate bottom line cost is simply the sum of all the energies associated with the entire enterprise; raw materials, processing equipment; workers to operate all of the system; literally everything that goes into producing the end result.
It takes a lot of energy to produce solar cell panels; and that energy is NOT being produced from OTHER solar cell panels; it is being produced from fossil fuels; and as the price of fossil fuels goes up; the price of solar cells will go right along with it in lockstep; solar cells will never get ahead; the technology just takes too much damn energy to compete with fossil fuels.
The way to prove the efficacy of ANY alternative energy system; is simply to use the energy output of such a system; plus all the raw materials in the universe in their natural state; and nothing else, to simply build a duplicate of that system. Don’t forget, that includes the entire life cycles of all of the personell required to build and operate the system; you have to get those people and their lives from scratch; because everybody else already is busy doing something else; so they aren’t available to be a part of your system. Gee you have to raise and educate their children too.
That’s why shale oil has never taken over from Arabian crude. If another energy source could do that; it already would have done so; you have to asterisk Nuclear Power; because it basically is banned by political fiat.
T.J. Rogers, is the CEO of Cyprus Semiconductor, a successful producer of niche products (some very nice niches too). He basically went from school to AMI; a no longer existing Si-Valley MOS company; and he was the inventor of the V-MOS proces.
Vertical MOS, where the structures were laid out on the steeply sloped walls of Vee troughs, and inverted pyramids etched into the silicon suface with highly anisotropic etches. The morning that he gave his paper on VMOS to an IEEE symposium on Electron Devices (pretty sure that’s what it was), I actually had breakfast with him and a couple of other now unknown folks at the hotel where the convention was. His paper was highly anticipated; but of course nobody could have known the part he would eventually play in the semi-business, as one of its smartest businessmen; quite apart from his engineering skills.
VMOS ended up not being an easy way to go; but it did teach a lot of good basic solid state technology ideas. And TJ is a big part of SunPower Systems, which is one of the better solar technology compaies; with among the very top if not the best solar conversion efficiency.
The soalr cell problem is not a problem of cost; althopugh that is a problem. Even if soalr cells were free; truly zero cost; maybe they grow on trees; the real cost is the cost of all the real estate it takes to set them up on. It is an area limited energy source established by Mother Gaia’s strict allowance of just 1 kW per square metre of interception area.
So the only thing that matters with a solar panel is its conversion efficiency from air mass one solar insolation to AC on the grid; all the rest of it is just window dressing.
But Rogers knows that Sunpower will be successful providing local power to places where the real estate is already committed; like parking lots, and building or home roofs. Unfortunately; building codes do not reflect (no pun intended) the solar energy collectibility of building construction.
So dream on all you free clean green renewable alternative energy fans; but don’t forget to put a fence around your system so that nothing but sunlight can get in and contaminate your economics. And also good luck on providing the petro-chemicals products that currently come from that dirty “big oil”.

davidmhoffer says:
November 8, 2010 at 7:50 pm
Paul Birch says: Then do you accept that AB32 will have only a minor damaging effect on California’s economy – on the order of a few percent? Or do you persist in claiming that it will cause it to crash by ~50%? If the latter, then this is certainly alarmist. >>
“I said neither. I haven’t read AB32 and I don’t have an estimate in regard to its effects.”
This is disingenuous. You and others on this thread have been supporting the notion that the defeat of proposition 23 will mean a large hike in energy prices to Californian businesses, and that this will have a disastrous effect on the economy. Are you now admitting that (i) it will not increase energy costs by a large factor, or (ii) if it does the effect on the economy will be modest, or (iii) you just don’t know?
“You construed a doubling of energy costs as having “only” a -5% impact the economy. I pointed out that this is true ONLY if the doubling of costs effects all businesses equally.”
And I pointed out that you are wrong. It is true even though businesses are affected differently. The total contribution of energy costs to the economy is 10% or less – too small to have the drastic effects you imagine even before the economy adapts to the shift in factor costs.
“There’s not one single thing that a company in California can do to improve their “greenness” that a company in Texas can’t.”
The Californian company gets “greenness” automatically by virtue of the governmentally imposed greenness of Californian energy; the Texan company cannot follow suit because it is indelibly tarred with the dirty energy of Texas.
PB; Firms whose total energy costs subject to increase (including their indirect energy costs in the goods and services they buy) are a smaller fraction of their total costs than average will see a competitive benefit; their rents and wages bills will fall>>
“Oh good grief. Let’s go back to the steel mill example. They have an enormous capital investment in plant and equipment amortized over 20 or 30 years. ”
On which they pay rent. It makes little difference economically whether or not they own it, or lease it. If they own it, they are their own tenants; the notional rent they pay falls along with the actual rent paid to other landlords. As landlords, they receive less rent (or profit) than previously. As consumers, they are worse off. It doesn’t matter whether the source of consumer income is rents, profits, interest, dividends or wages; they will all take a hit of approximately the same magnitude.
“The welder who can make $60/hr in Texas isn’t going to hang around in California for a $30/hr wage.”
The reduction in his wage rate would only be around 5% (trades union manipulations aside). Very few people will move to Texas for the sake of $3/hr. Some people will move, of course; preferentially those whose income comes from more energy-intensive industries. Some people will move the other way too; preferentially, those whose income comes from less energy-intensive industries. This effect will parallel the movement of firms in and out of the state as the economic mix adjusts to the change in relative factor costs.
“Are you serious? Well why only double energy costs then? How about quadruple? Quintuple? OK, let’s really turbo charge the economy, let’s increase energy by 1,000 times. ”
Are you serious? Doubling energy costs will damage the economy to the tune of around 5%. This is much more modest than the 50% you seem to think would result, but it is still a loss. Quadrupling energy costs would reduce net economic output by ~10%. A thousand-fold hike gets us into non-linear territory, but could be expected to reduce standards of living in the long term by something like a factor of 7 (sqrt(1+1000×5%)).
“Suppose that the price of gasoline and all other energy sources doubled today. Hands up all of you who would be encouraged to start a new business or expand an existing one because of that. Hang on PB, I’m counting…. Uhm, zero.”
You still seem determined to ignore all the other factor costs that will decrease in consequence. Rents, wages and opportunity costs will fall. Your start-up can hire staff at lower wages, lease premises at lower rates, while many of the other things you might have done with your time and money are now less attractive or unavailable (for example, you may have been made redundant from an energy-intensive business that is down-sizing). If your operation requires significantly less energy than the Californian average, then it will comes out ahead. People do and will start such firms, even in the depths of recession or energy crisis.
“Uhm, what less energy intensive industries would these be?”
It doesn’t matter. It is a mathematically inevitable that half of the economy will be less energy intensive than average. Such businesses may lose revenue – because almost everyone will be slightly worse off – but they will still have a comparative advantage.
“Incredible. First you claim that doubling energy costs will shrink the over all economy by only 5%, and now you are claiming that energy intensive industries like steel mills may wind up with lower costs?”
You are making the assumption that steel mills are more energy intensive than average – that is, that their energy costs are a greater proportion of their total factor costs than in the rest of the economy. If they are highly unionised, this may not be true; labour costs may dominate. The tendency to outsource this industry to third world countries suggests that this may be the case – but I don’t have any hard figures, and don’t really care. My argument is a macro-economic one that does not depend on the particulars of individual industries or businesses.
“You’ve truly lost it. You’re claiming that the worse your economy gets, the more competitive it will be.”
In common with 99% of pundits, lobbyists and politicians, you do not understand the Law of Comparative Advantage. Go away and study it. Economies are not more or less competitive than another overall; they are more competitive in some areas and less competitive in others. To have a comparative advantage in one good says nothing about whether you are better or worse off than your competitors; it says only that you are better at producing that good than you are at producing some other good.

Paul Birch;
You were at first informative and interesting to discuss this issue with, but you’ve descended into cirular reasoning, deflection, misdirection, and your statements reflect either a willful intention to deceive are a complete lack of understanding of basic business issues. Some of your comments fall into the “that’s not right, that’s not even wrong” category. When pressed for specifics you retreat into arm waving about macro economics and complain about people who don’t understand the “Law of Comparitive Advantage”.
Contrary to the thoughts of an earlier commentor, I am not a management accountant. I’m a salesman. Do you know what I sell? If you looked at the list of products that customers buy from me you would think that I sell a variety of leading edge high technology products. That’s not what I sell. What I sell is competitive advantage, risk mitigation, increased efficiency and quality improvement. The products I sell are a means to an end. In order to be effective at selling them, I have to understand my customer’s business and their position in the market relative to their competitors. I need to understand their structure and processes to determine financial outcomes of various changes to their business. I have to understand their accounting procedures, how they differentiate between capital and operating expenses, and figure out of a proposed change will affect some departments negatively rather than positively due to the accounting procedures used to disburse costs within the organization. I have to understand their products, how they are designed and produced, and where they may be able to improve their competitive position and profitability through the use of the products I sell. If I can’t make the ROI case to the CFO, the technical case to the design team, and the operational case to the front line workers, then no deal, no commission, no new shoes for the kids. I’ve been doing this for 30 years, my customers range from telcos to aerospace contractors to forest industry to governments from municipal to federal, to universities and private research institutions to the movie industry (special effects). You want me to study the Law of Comparitive Advantage? I have studied it for 30 years. I’ve written more business cases than most MBA’s study in their lifetime. I’ve helped customers with low energy costs compete against companies with high energy costs, and I’ve done the opposite, helped companies with high energy costs compete against ones with lower costs. I’ve even advised (informaly) two provincial governments with very low land, and labour costs on how to approach large corporations and entice them to invest or relocate. So I won’t bother reading your prescious “Law of Comparative Advantage” because I’ve lived it in the trenches for 30 years, I can go toe to toe with an economist on the topic (and have) and if the audience is ivory tower academics, I do OK. But fill it with CFO’s, CEO’s, VP of Sales, Marketing, Engineering, Human Resources, Quality Control and I will mop the floor every time. So Mr Paul Birch, I suggest you find the opportunity to engage with the real world and discover how reality works.
PB; Are you now admitting that (i) it will not increase energy costs by a large factor, or (ii) if it does the effect on the economy will be modest, or (iii) you just don’t know?
You argued that doubling enery costs world wide only shrank the world economy by 5%, and then attempted to construe a similar shrinkage if California did it in isolation. My point being that if onlyu California is burdened by doubling the cost of energy, then the loss of economic activity to other juridictions will be much more than 5%. In your “world energy costs doubled” scenario, the high energy jobs have no where to flee to, in an isolated jurisdiction they do. That’s macro economics.
PB; The total contribution of energy costs to the economy is 10% or less – too small to have the drastic effects you imagine even before the economy adapts to the shift in factor costs.>>
Your lack of business experience is blatant. Businesses make decisions based on revenue and PROFIT MARGIN. Some industries range as high as 50% or more, but these are rare. Most are in the 10 to 20% range and you would be shocked how much of industry lives under 5%. So your energy costs are “only” 10%, double them and your profit margin may go from +5 to -5.
PB; The Californian company gets “greenness” automatically by virtue of the governmentally imposed greenness of Californian energy;
Odd. I keep getting these RFP’s asking for green initiatives as part of the selection criteria. I just skip that section because I know it is there for show. They’ll buy the proposal that gives them the best bang for their buck.
>>It makes little difference economically whether or not they own it, or lease it.
Well if they own it, they spent the money and can’t recover it because they would be selling at a loss. If they lease it, they are locked into the lease. So BULL.
PB; The reduction in his wage rate would only be around 5% (trades union manipulations aside). Very few people will move to Texas for the sake of $3/hr. >>
Yes true, if your numbers were right. But they’re not. The lowest cost labour, land, and energy costs in western Canada is Manitoba. The highest is Alberta. There’s no apprentiship program for welders in Manitoba. Why? Not enough journeyman welders to support it. Welders make $18-$28 per hour in Manitoba, and in Alberta $40 to $100. And that’s why there aren’t enough welders left in Manitoba to run an apprentice program. This is the real world bud, not a text book.
PB; Are you serious? Doubling energy costs will damage the economy to the tune of around 5%.>>
You continue to cite a number based on WORLD economic damage from energy costs doubling and pretent that it is the same for a single jurisdiction doing it in isolation. That’s and outright lie.
>>You still seem determined to ignore all the other factor costs that will decrease in consequence. Rents, wages and opportunity costs will fall.>>
You can’t damage something and get more back than the damage done. Even macro economists will tell you that.
PB;but I don’t have any hard figures, and don’t really care. >>
There is precisely your program. No business experience, no hard numbers, and you don’t care. You’ve made up your mind and will not be swayed by facts, you refuse to even look at them. Are you a climate scientist too?
PB; My argument is a macro-economic one that does not depend on the particulars of individual industries or businesses.>>
Your argument is buffoonery spouted by someone who clearly has no experience or understanding of macro-economics and how changes affect individual businesses. They aren’t two things. They are part of each other.
PB; In common with 99% of pundits, lobbyists and politicians, you do not understand the Law of Comparative Advantage. Go away and study it. >>
The last refuge of the ivory tower theorist is to denounce the education level of the opponent and tell them to go read a book. Guess what, I’ve read the books. I could clobber you by using the studies and facts in them. Instead I tried to show you how the real world works, because that is more relevant top most people. I was unaware when I began that you understand neither the economic theories you claim to have studied, nor the real facts on the ground issues, and your ability to follow a logic chain seems also impaired. The best you can do is “I don’t have hard numbers and I don’t care because it is you who doesn’t understand them”.
Pathetic.

Paul Birch and DavidMHoffer seems to be engaged in a “my dick is bigger than your dick” contest where Paul Birch had the last say on November 10, 2010 at 4:52 am:

How many times do I have to repeat the blindingly obvious? Doubling Californian energy costs will damage the Californian economy – but by ~5% not 50%. The economy is not “get[ting] more back than the damage done”. But part of the damage is that rents, wages and opportunity costs will fall.

While I suspect that Paul Birch is correct on this point I invite him to come and live in California because the energy cost increases are simply the last straw … the bureaucratic classes, who are totally unproductive, have heaped cost upon cost on us and things are simply going downhill now.

davidmhoffer says:
November 10, 2010 at 9:01 am
Paul Birch;
I take your point that a hike in Californian costs alone is a little different. However, that only strengthens my case, since there is then an additional means of adaptation that would not be available if costs had risen worldwide:>>
“What this comes down to Paul is that you live in a fantasy world where increasing costs in one jurisdiction provides a “means of adaptation”. This is nothing but marketing spin. You are trying to claim that increased energy costs resulting in falling land values and falling labour rates provide a “means of adaptation” that will result in “comparative advantage”. ”
No, I am not. The additional means of adaptation that arises when a factor cost changes differentially between economies, as distinct from rising equally in all, is an arbitrage of factor costs between those economies, by concentrating industries where they have the comparative advantage. Comparative advantage arises from differences in factor cost ratios between persons, groups or economies.
The lower land and labour rates will reduce capital and operating expenses, so business cases constrained by those factors rather than energy costs become viable. In your mind there is some portion of the economy that will be comprised of start up companies and existing companies changing their products and services to take advantage of those lower land and labour costs. You’ve got it in your head that these new business models producing goods and services based on lower capital and labour costs will significantly off set those lost due to higher energy costs. Thus, by raising energy costs in California, you envision a metamorphasis from the current economic mix to a new economic mix in which the businesses predicated on those lower costs have a “comparative advantage” to jurisdictions with higher land and labour costs, and that this emerged because raising energy costs provided for a “means of adaptation”.
“In a jursidiction with falling land and labour rates, it ought to be blindingly obvious to anyone with an ounce of sense that economic activity which is intrinsincly predicated on low energy consumption and whose major input costs are land and labour will have a “comparitive advantage” over other juridictions with higher land and labout costs, despite the lower energy costs available to them.”
That’s just what I’m saying. If energy costs are high in California, compared to other places, California can expect to have a comparative advantage in less energy-intensive and more land-and-labour-intensive industries.
“What is the most efficient way of increasing value? Answer; Energy.”
Efficient in what way? If you mean physical efficiency (useful work out over energy in), then, no. Using more energy is typically less efficient (driving a truck faster means greater loss from air resistance). However, if you mean economically efficient (which would be the more useful approach) then the answer is not “energy” but “all factors of production”. Because at the economic optimum, which efficient producers approach, all the factors have the same marginal contribution to production. A reduction in the cost of any of them by the same amount has the same value. A reduction in the cost of any of them by the same percentage has a value proportional to that factor’s share of total costs. In advanced economies, energy costs do not comprise more than a modest share of total costs (~5-10%), so they are less important than eg. labour costs.
“Why anyone would want to transform their economy from high value to low value and paint it as some sort of positive process is beyond me.”
And it is beyond me how you can possibly read Doubling Californian energy costs will damage the Californian economy as “painting it as a positive process”!
“The highest standards of living in every single country in the world are directly correlated to the highest energy consumption. The lowest standards of living in the world are directly correlated to the lowest energy consumption.””
Not really. Most Western countries have seen rising standards of living with falling per capita energy consumptions, over the past few decades.
“If your theory were true, then the fastest growing economies in the world would be those with the lowest land and labour rates. ”
Complete non-sequitur. Growth is driven primarily by the rate of capital formation versus consumption; this capital should also, of course, be allocated efficiently, that is, preferentially towards those industries in which the economy has a comparative advantage; which industries those might be is secondary, and will usually have little impact on the growth rate achieved. However, since capital imports boost growth rates above those that domestic savings alone can provide, and since investors tend to prefer to invest in low wage economies, for low factor costs, it is indeed generally the lowest wage economies that show the highest growth rates (so long as the regulatory climate is favourable there).

Paul Birch;
Efficient in what way? If you mean physical efficiency (useful work out over energy in), then, no. Using more energy is typically less efficient (driving a truck faster means greater loss from air resistance). However, if you mean economically efficient (which would be the more useful approach) then the answer is not “energy” but “all factors of production”.
Paul Birch:
No, I am not. The additional means of adaptation that arises when a factor cost changes differentially between economies, as distinct from rising equally in all, is an arbitrage of factor costs between those economies, by concentrating industries where they have the comparative advantage. Comparative advantage arises from differences in factor cost ratios between persons, groups or economies.
Paul Birch;
“Most Western countries have seen rising standards of living with falling per capita energy consumptions, over the past few decades.”
Paul Birch;
——————
Sir,
I will begin by explaining the laws of physics to you in terms of energy consumption of a truck travelling at increased speeds, I will then explain to you the proper considerations to take into account when interpreting the loss of mechanical efficiency in terms of economic value, and I will close by providing a proper explanation of macro economics in regard to the matter of rising energy costs in an isolated economic zone. I’ve provided you with real world examples, logical explanations, referenced studies, provided you with my background and experience on these matters, yet you persist in throwing around terms out of text books, claiming that my examples are of single companies and not representative of the over all economic issues, and all the while refusing to provide any real world examples of your own, failing to reference any broad studies of consumer or business behaviour to support your position, and argue your case solely on the basis of theoretical language. Fine. If it is physics and economic theory you want, so shall ye recieve.
1. Impact on energy efficiency due to increased truck speed.
Air resistance increases with the square of the velocity. A truck travelling 100 km/hr that increases its speed to 110km/hr will encounter an increase in energy lost due to friction with air of 21%. In addition, engine efficiency is by design at maximum in the expected normal operating speed. In the case of a long haul truck, this is in general between 95 and 105 km/hr, so increasing speed to 110 km/hr will as a general rule reduce engine efficiency by some amount. Co-efficient of friction in terms of moving parts such as bearings, differentials, and suspension system will remain constant, but heat generation will rise and wear rates will also increase requiring more frequent maintenance if the speed increase is continued as a general operating practice. For any long haul of a given distance, frequency of refuling stops will increase as a consequence of reduced fuel efficiency. This also is a negative impact on energy efficiency as reducing from highway speed to a full stop dissipated the energy stored as momentum and the acceleration back to highway speed after refueling requires that momentum to be restored over a speed and gearing range that is in most cases the least efficient load range of the engine. As tractor, trailer, drive train, and driving skills all vary, a reasonable range assumed for a long haul truck increasing speed from 100km/hr to 110km/hr is an increase in fuel consumed for a given distance of between 30% and 60% more than would have been consumed at 100km/hr over the same distance.
2. Impact on economic value due to increased truck speed
The decreased energy efficiency required to operate the truck at higher speeds does not imply a corresponding loss of profits. Off sets such as money saved due to paying for fewer hours of driver time are minor and in economic terms inconsequential. There are several economic factors that are time and labour related which are material.
Moving 100,000 pounds of freight across a long distance of several hundred miles or more can be accomplished by a very large number of labourers each carrying a small amount of freight, or by a single truck with a single driver and a considerable fuel expense. The total energy consumed by the truck however is a fraction of the energy consumed by the labourer’s to accomplish the same task as they must provide the energy to move themselves as well as the freight, and they weigh collectively far more than the truck itself. If they work for nothing but food, the cost would still be higher than that of the truck, driver, and fuel. But it is not total or relative consumption of energy for a given task that is germaine to establishing economic value of speed. The factor with most influence on economic value in terms of delivering large amounts of freight over long distances is time. As the labourers physicaly cannot move the freight at speeds anywhere near 100km/hr, let alone 110km/hr, the combination of truck, driver and fuel consumption provides delivery in a time frame that cannot be accomplished by labourers not matter what their number. The economic value of delivery in a reduced time frame is dependant on factors such as the cargo and how the cargo’s value is impacted by time. A load of live cattle loses weight over time spent on the truck. As cattle are sold by weight at destination, the additional fuel consumption due to a speed increase from 100km/hr to 110km/hr over a long distance is in general a net positive value to the seller. Other types of cargo may be even more time sensitive. A load of bananas delivered over a long distance may arrive at peak ripeness at 110km/hr, but be a complete loss at 100km/hr. Some would argue additional factors such as contractual obligations and penalties in regard to late delivery, but these are contractual business issues rather than economic ones. In economies predicated on JIT (Just In Time) inventory systems common in the manufacturing sector however, the contractual obligation and penalty for late delivery may be driven by the over efficiency of the supply chain. In a JIT implementation cash flow is reduced and results in a one time conversion from inventory to capital retention by eliminating inventory at all levels possible. This is driven by a system designed such that issue of an order for goods required is delayed to the last possible moment to still recieve the goods just as they are required by the manufacturing process. The conversion of inventory cost to capital asset and reduction in long term carrying costs and warehouse costs require supply of goods on tight time frames that may be enabled by higher speeds provided that the value of the reduced delivery time exceeds that of the additional fuel costs. In the manufacturing sector JIT is in common adoption world wide (though maturity varies) and this should be considered an economic construct impacted by time despite the fact that it is created by business methodology.
Lessons – a) fuel consumption enables results that are physicaly impossible to achieve via labour, b) in many cases where it is possible to achieve a given result by both labour and fuel consumption, the total energy used will still be lower in the case of fuel and c) depending on a variety of factors, a reduction in fuel efficiency in order to reduce a time requirement may result in a positive net impact to profitability of the supplier, and in the case of a managed supply chain, the over all chain itself may achieve an increase in efficiency due to time reduction despite the decrease in fuel efficiency. While the example is illustrated in terms of a long haul truck, the economic factors that derive value on a time basis from the increased use of energy at lower efficiencies that shorten time frames is applicable in multiple industries.
3. The total amount of currency in circulation is a small fraction of the revenue generated by the sale of goods and services on an annual basis. In order for the economy to function, any given unit of currency (dollar, pound, ruble, etc) must be used multiple times on average. While a specific “dollar” may rest in a bank account or inside a mattress for decades, other “dollars” might be spent and spent again hundreds or thousands of times in a year. This is why we refer to the amount of money in “circulation” in the first place. This is an important concept to understand in order to evaluate economic activity and the impact to economic activity in terms of change to factors that impact cost structure. As an example, governments are expected to provide certain services and construct certain infrastructures to serve the populace and enable commerce. (This is not a discussion of what services they should or shouldn’t supply, it is only a discussion of the expectation and resulting economic considerations). These services and infrastructures can only be supplied through taxation. (Some would argue that debt is an alternative to taxation but this is a fallacy. Debt is just taxation delayed in time). The theoretical goal of government is to extract as much tax revenue as required for the services and infrastructure at the lowest possible impact to the economy. The concept of money in circulation requires therefor a balance in terms of consumption taxes and income taxes. If tax revenue was exlcusively consumption based, high income earners capable of saving large portions of their income would pay a disproportionaly small percentage of their income in comparison to the percentage paid by low income earners. Further, this kind of taxation provides a financial reward for putting money in a bank account or mattress in terms of reduced taxation, and each dollar saved in this fashion takes that amount of currency out of general circulation. A tax regime exclusively based on income creates a different problem. While low income earners have no choice but to spend the bulk of their income on food and shelter, high income earners and businesses have large percentages of their income available for investment. While investing puts money back into circulation and generates economic activity, from an accounting perspective reinvestmant of profits (for businesses in particular) can result in increased equity while maintaining a net zero income. While some would argue that this can be controlled through regulatory regimes and required accounting procedures, these are legal and business constructs, not economic factors. From the perspective of taxation and economic factors, the reinvestment of profits results in reduced net income which shifts the burden of taxation to those in low income brackets. To extract any given amount of taxation from the economy at minimal impact to the economy requires therefor a mix of taxation methodologies, the balancing of which is not an exact science.
With these concepts in mind, we can now proceed to consider the macro-economic impact of changing any given cost factor on economic activity. Your opening premise Mr Birch was a claim that doubling energy costs in California would only reduce economic output by about 5%, and you justified this number with reference to a 5% reduction in global economic output due to price fluctuation of similar scale on global markets resulting in a reduction in global economic activity of that amount. You went on to argue that doubling energy costs in California are only in the range of 5% of total costs, and that at least some of any economic output lost would be reclaimed due to lower labour and land costs enabling a competitive advantage for economic activity based on low energy consumption activities. Following are the proper macro-economic constructs that describe the impact of doubling energy costs in California. These are presented using as a base line the reduction in global economic output of 5% in response to the doubling of energy costs. The accuracy of that number is immaterial. It simply provides a baseline from which to extrapolate economic impacts relative to the base line.
1. In a global economy, fluctuation of any given cost factor is distributed reasonably equally across the globe. Value propositions determined by local economic mix may dictate that impact to output has a larger variation in some geographical locations than others, but geographies with similar industrial and commercial complexes are affected reasonably equally and as a consequence no change in competitive advantage results. However, when a similar fluctuation occurs and is restricted to a given economic or geographic zone, that zone incurrs a competitive disadvantage driven by revenue loss to lower cost providors, and flight of local providors to lower cost zones and geographies. This filters through the impacted economic zone out of proportion to the same factor fluctuating on a global scale, and is magnified due to the reduction of currency being circulated in the region as each “dollar” removed from the local economy and transferred to a different geography reduces economic output by the number of times that unit of currency would have been “spent” on average on an annual basis. Macro economic principles require, therefor, that if a doubling of energy costs on a global scale results in a reduction of global economic activity of 5%, that a fair estimate of a fluctuation of the same amount restricted to a specific economic zone defined as California will have a much larger impact than 5%.
2. The estimation of energy costs being only 5% of total costs does not produce a mechanism by which macro economic impacts of a change in energy costs can be extrapolated in terms of competitive disadvantage. There are many types of cost factor, but for the purpose of understanding impact to competitive position of an economic zone in general or a business sector in particular of a change in any given factor such as energy costs, we may generalize costs into two broad categories. These are “fixed” costs and “operating costs”. If two competing geographies with similar structures are at no particular competitive advantage to one another, they will have similar fixed and operating costs. If one geography suffers a doubling of costs in terms of an operating cost factor such as energy, they will be operating at a competitive disadvantage proportional, not the the change in fixed costs, but to the change in operating costs. In energy intensive industries, operating costs may be comprised of energy costs that are 30% or more of operating costs while still only 5% of total costs. As competitive advantage is dictated more by operating cost than fixed cost, the impact of doubling an operational cost factor that is only 5% of total costs will result in a change of competitive position that is considerably larger than 5%. In addition, as in the example regarding the truck, there are time based (and other) economic results that cannot be achieved at all by the use of labour instead of fuel, and for tasks that can be accomplished by labour, the net energy expended may exceed considerably that of fuel and mechanization regardless of it being expended less efficiently in return for time based benefits. Macro economics dictates that a given geographic zone negatively impacted by a change in operating costs will lose economic acitivity out of proportion to the total cost structure. The argument that the consequence of reducing economic activity results in lower land and labour rates that enable low energy commercial activity in that zone to be established with a comparative cost advantage is a misunderstanding of macro economics and circulation of currency. The reduction in economic output of energy intensive industry results in a loss of revenue and flight of the businesses themselves to other jurisdictions. Each dollar that exits the geography in this manner is magnified in terms of total economic output as the amount of currency in circulation is reduced and the negative effects filter through the economic zone. The reduced labour and land costs do provide opportunity for establishment of new businesses predicated on low energy usage, but establishing these is restricted both by the loss of currency to other jurisdictions, and constraints placed on the local economic actors to raise capital for investments as a consequence of their asset based (land and equipment) being devalued substantially. In circumstances where the devaluation results in the assets collectively falling in value below the total debt held against them (across all assets and all debts, not a given asset like a house and a given debt like the mortgage on the house. The reference here is to the debt/equity position across the zone as a whole) then the ability of local commercial interests to raise capital becomes so constrained that the financial system as a whole may collaps without outside intervention. This may occur as deliberate intervention by outside parties acting on the basis of political will, but privately held funds cannot be injected into an economy in this condition without bankruptcy proceedings that put the assets back on the market to be purchased at very low rates by outside investors. In summary, a change in 5% of total cost will have a much larger consequence in terms of competitive position than the number would suggest.
3. The proposition that a reduction in economic output due to the doubling of energy costs would in turn reduce land and labour costs, which in turn provide an environment conducive to the emergence of low energy industries with a comparitive cost advantage compared to economic zones which have not incurred increased energy costs is a fair explanation of a macro economic construct, but it is incomplete. The flight of capital and revenue to neighbouring jurisdictions also results in an increase in their economic activity which in turn boosts their labour and land costs, further improving the comparitive economic advantage of the high energy cost zone’s emerging low energy industry. This is not, however, properly expressed as new activity that replaces in whole or in part the economic activity lost in energy intensive businesses. In order to properly express the macro economic effects of a change to a single factor such as energy costs doubling, we need to regard the current economic state as “equilibrium” and extrapolate effects in terms of both time and establishment of a new “equilibrium”. The equilibrium proposed originaly was that energy costs doubling would establish a new economic equilibrium point only 5% lower than the current equilibrium point. As already discussed, using the base line established, macro economics requires that a doubling of cost to an operating system factor in a geographicaly defined zone will have a much larger effect than 5%. But let us also understand how this new equilibrium point is reached as a function of time.
The initial reaction in any given economic zone to a sudden change in any single factor is very small. This is due to another macro economic principle best described as momentum. As in physics, a body in motion tends to stay in motion. The same is true for economic activity. On the day the change becomes public, nothing changes a whole lot. The “average” gas tank is half full, the average worker gets up and goes to work, the average business opens its doors and ships goods to its customers. The companies that were going to go bankrupt that day still go bankrupt, and the companies that were going to start their new business that day still start their business. But as gas tanks empty and energy intensive businesses begin losing business due to their competitive disadvantage, the degradation of economic output starts to increase in pace with less money in circulation and the loss of equity restricting the ability to raise capital making it worse. At some point the reduction in land and labour costs will in theory enable new businesses with costs predicated on land and labour to be established with a comparitive advantage over low energy cost high land/labour cost zones. The same theory dictates that failure of the financial system before that takes place is also a possibility. Assuming that the new equilibrium point (which based on the proposed base line will be a reduction in economic output well in excess of 5%) is not sufficiently drastic to collapse the financial system, it cannot be thought of as new economic activities with a comparative cost advantage. The better description is to consider two processes in time that result in the new equilibrium point. The energy intensive industries are at first not affected at all, but their competitive position is affected instantly. The business lost translates into lay offs and transfers to other economic zones that progresses at increasing rates, peaks, and then progresses at slower and slower rates. Depending on a variety of factors, the peak may come in a matter of days, years, or decades, but as a rule of thumb, another concepts in physics, the time constant applies. The peak in degredation will define the total time frame in which the degradation occurs, and will be three to five times in total the amount of time from the change in the factor to the peak of degradation. The new businesses predicated on a comparative cost advantage due to lower land and labour costs cannot start to be established until those factors fall, and that does not occur until after the peak degradation point of the energy intensive sector. From a macro economic perspective, momentum works both ways. Just as momentum keeps business as usual for a period of time after the change becomes public, the lack of momentum prevents any instantaneous establishment of a new market sector. The first activity is relatively small, and as momentum builds the number of new jobs created picks up speed, peaks, and then levels off as those new market segments saturate their own markets. At some point the decreasing economic activity from the disadvantaged industry reached near zero and the growth of the new market segments also reaches near zero. If one were able to put the net effect on a graph, it would look like the curve of a ski slope. Pretty flat on top, increasingly rapid descent, followed by another levelling off.
So put all that in your theoretical fantasy economy that exists only on the pages of what ever poorly designed text book you read or course you took and smoke it. The fumes may jar the fuzzy logic that pervades your brain into a reboot that can then comprehend reality. Perhaps you’ll even read a text book or take a course that isn’t a complete waste of your time and gives you a proper founding in economic principles as well as hardcore business issues.
But then again, perhaps you should just go ahead and double the cost of energy in California like you said. Yup, I think that’s a great idea. Hey, its “only” 5% of the total cost, and it will “only” result in a 5% decrease in economic output, you’ve read all about macro economics, you understand Ricardo’s law and I don’t, you understand comparitive cost advantage due to changing ratios of fixed and operating costs and I don’t, so I think you must be right and I think you should do it.
I could use a cheap house close to the beach for winter vacations and the decreased land values will make that practical for me. The injection of my money into your economy will help capitalize new low energy commerce at low labour rates.
For example, you could be my pool boy. I’ll give you an hour every day to read a proper economics book and pay you in crackers.

Tony says:
November 10, 2010 at 2:55 pm
“As for “in the toilet” being an exaggeration – well, I’m speaking as someone who has watched the state fall apart for years, and finally decided to get out. I’ve seen first-hand how crappy the economy is there. I stand behind that phrase as being accurate. I’m sure you will disagree, but then, you and I obviously live in very different worlds.”
Well, I wish you luck with your move, but I suspect that you will find many of the same problems wherever you go. Plus some different problems that hadn’t previously seemed important. Beware the grass is greener syndrome! Perhaps it will indeed be greener for you, but remember that there are still many other people keen to move to California. I’m not one of them, but I know people who are.

davidmhoffer says:
November 10, 2010 at 7:25 pm
“Any factor that increases costs, be they taxes, fees, administrative burden, energy and so on weakens the economy.”…”I said that higher land and labor costs are the result of a strong economy.”
So you don’t see the self contradiction you create across the span of a mere three sentences? It’s not that I don’t understand what you’re *trying* to say, but I am observant enough to know that you’re doing a terrible job of actually saying it.
Must higher land and labor costs really be the sole result of a strong economy? Perhaps you could clarify that higher land and labor costs may also result from a highly regulated market? So a rise/fall in land and labor costs cannot be immediately classified as a strengthening/weakening of the economy – the economy as a whole must be measured in order to make that judgment.

Steve;
Must higher land and labor costs really be the sole result of a strong economy? Perhaps you could clarify that higher land and labor costs may also result from a highly regulated market? So a rise/fall in land and labor costs cannot be immediately classified as a strengthening/weakening of the economy – the economy as a whole must be measured in order to make that judgment.>>
OK, I will try and be more plain. Higher land and labour costs can indeed result from multiple drivers, just as lower land and labour costs can result from multiple drivers. But let’s ensure we understand which drivers are natural and which are artificial.
If the economy were to exist entirely as an unregulated environment subject only to the law of supply and demand, we would have only naturual drivers to consider. Increased economic activity means that businesses need more labourers and more buildings for them to labour in and more warehouses to store inventory. This generates an increased demand for land, which drives the price higher, and an increased demand for labour, which drives labour rates higher. But at the exact same point in time, we have fluctuations in population. If the population is declining, the number of labourers available is shrinking, so demand is increasing from economic growth and supply is decreasing, so we have two factors both driving labour costs up. But since the population is in decline, there is less demand for housing, so the drop in demand for residential land has a negative impact on land prices in opposition to the upward impact of businesses expanding. The net effect could be up, down, or even, but the two factors will tend to cancel each other out to some extent. If we proceed on the assumption that the economic conditions continue to improve, this will trigger a market correction. Since labour rates are being driven up by both increased demand and decreased supply, average income will rise faster than land rates. This attracts immigration into the zone because high paying jobs and reasonable cost housing are available. Now multiply the complexity of that simple scenario by hundreds of factors and you quickly see how complex an economy of any size is. But in general, the largest driver of land prices and labour rates is the health of the local economy.
Artificial factors also have impact. Rent controls for example create artificially low housing costs, making the area more attractive to immigration. But rent controls reduce the profitability of running rental properties, while the costs of building and maintaining them are still subject to the market. If they become unprofitable to build and maintain, then no new ones are built and we now have artificialy low rental rates, but no available properties to rent. This in turn becomes a constraint on immigration. Which means the labour pool doesn’t grow as fast as it would have otherwise which impacts labour rates…. See the complexity of just that ONE articial factor? Now multiple the complexity of all the various tax systems, administrative requirements and so on.
But at days end, artificial interference in the economy is almost always a drag on economic output, and economic output will always be the largest factor in determining the value of land and labour in any given economy. Not the only factor, not even more than half of the total. Just the largest.

It seems doubtful to me that land costs will decline in California for any reason, including the higher cost of energy, simply because of other factors and the unholy alliance between legislators (our so-called elected representatives) and unionised public employees. All cities and local governments need to keep feeding the ravening maw that unionised public employees represent but sales tax revenues are down, as is the ability of state and local governments to borrow. The only avenue left is fees on land transfers and taxes.
Of course prop 26 will probably prevent them from raising fees and taxes (unless they manage to get it overturned in 2012, but I think the likelihood of that happening with two more years of economic decay having occurred is low), but they can increase land taxes at every transfer. Who cares if the purchase price goes down if the usage taxes go up?

Steve;
Well that’s an odd definition of natural/artificial. Technically everything about economics is artificial, as economics is entirely a product of human intelligence >>
Post was long enough as it was, and brevity results in inaccuracy. What I meant is that governance in terms of establishing currency systems, regulation, law enforcement, shared infrastructure and so on are activities that enable the economy. Just as you suggest, the economy can’t function without them, or at least not as effectively. I was trying to distinguish between “natural” as in the natural factors of supply and demand determining value, and “artificial” as in any interference in the economy that introduces a change to value other than supply and demand. My example of an artificial factor was rent control, which I will expand upon.
In your example, rent control applies to current tenants. When they move out the property can be rented to new tenants at market prices. That’s how most jurisdictions that I am familiar with have done it. There are two outcomes to consider:
1. This still depresses the value of rental properties. How much varies, but a fully rented building with low turn over is of less value than the exact same building if it is half empty and has high turn over. Both are of less value however than a building with no rent control. But consider the effect on renters. If inventory is scarce, landlords can be choosy. The consultant who is doing a one year contract and then leaving town is more attractive to the landlord than the young family who is just starting out and plans to be in one place as long as possible to provide stability for the children. Rent controls create behaviour that is outside supply and demand.
2. Most jurisdictions have had trouble with renters finding ways to circumvent the property being returned to market value upon turn over. Here’s an example from a real jurisdiction. Tom has been in his apartment for 5 years, during which rental rates have doubled. Tom has rent control, so he’s paying half the market rate. Tom wants to move, so he takes an ad out in the local media and soon finds Peter who would like to move in. Tom never moves out on paper. He let’s Peter move in “on paper” by listing him as his new room mate so Peter can get keys, pay the rent, and so on. Of course Tom actually HAS moved out, and he charged Peter 6 months rent paid in cash for the deal. Its called “key money”. The jurisdiction added more and more rules to try and prevent it, and it is in fact illegal, but it is rampant. The deals are in cash so hard to prove.
This is what I mean by an artificial factor, and it has both unintended consequences as well as changing the value from that which would have been established by supply and demand alone.

Paul Birch;
Which sort of efficiency – physical or economic – you meant is not a “complex difficult problem”. Unless, as I suspect, you don’t understand the distinction.>>
They are intertwined as I attempted to explain to you. The truck travelling faster is clearly less efficient in terms of fuel economy, but potentialy more efficient in moving goods economicaly. I could play coy and ask you which you meant but that’s your game not mine.
At days end you claimed that doubling energy costs in California alone would have about the same effect on California’s economy as doubling energy costs globaly would have on the global economy. Macro economics says BULL. Such an increase in a limited zone like California alone would have a magnified effect on California. You claimed that energy is only 5% to 10% of total costs, but in fact it is operating costs that represent the major long term measure of competitive position, and energy costs are frequently 30% or more of operating costs. Macro economics says that the result in loss of competitiveness will correlate closely with the change in operating costs. Lastly you claim that I am ignoring the “benefits” that will accrue to other industries as costs fall and make low energy industries more competitive as a result. I’m not disputing that. I’m saying that the loss of energy intensive jobs will be massive and the emergence of low energy jobs will be minor.
So could you perhaps provide an example of these low energy jobs you expect to emerge? What industries are they in? Here’s the ones you are putting in jeapourdy:
Mining, manufacturing, transportation, farming, construction, tourism, leisure, + all the service industries that support them. According to the govt of California’s web site, that’s several million jobs http://www.labormarketinfo.edd.ca.gov/?pageid=4
What industries do you propose will emerge over the next 50 years after you double energy costs, and how many jobs do you propose they will reasonably create? Include if you will, what you expect the relative wage rates to be. The workers in labour intensive industries earn larger than average wages because the value created by the use of energy makes it economical. How will your low energy industries compare in both numbers and average pay? And no generalizations, no arm waving, no fancy terms. Just the job descriptions and the quantities.

Paul Birch;
“They are intertwined as I attempted to explain to you.”
Not really. They are barely even correlated.
“The truck travelling faster is clearly less efficient in terms of fuel economy, but potentialy more efficient in moving goods economicaly.”
Which is what I said.>>
So they aren’t interelated or even correlated but they are interelated and you said so. Got it.
Paul Birch;
“What is the most efficient way of increasing value?”. I You refuse to say whether you meant physically or economically efficient (or something unguessably different again). >>
Per your own quote, I asked what was the most efficient way of increasing VALUE. I said nothing about increasing efficiency. I even explained that both physical efficiency and economic efficiency are part of a subset of factors that impact value. Yet you keep asking which one I meant when the question I asked clearly meant neither.
Paul Birch;
“At days end you claimed that doubling energy costs in California alone would have about the same effect on California’s economy as doubling energy costs globaly would have on the global economy.”
No, I didn’t. Both would be small (~5% net loss), >>
So you didn’t claim that they would be about the same but you do claim they would both be about 5%. What’s the difference between “about the same” and “both about 5%”?
Paul Birch;
If there were no mobility of labour and capital, the Californian economy would contract less from a local increase in energy cost than from a global one.>>
Congratulations on inventing the economic equivelant to perpetual motion. Local costs go up on some critical factor and all we need do to mitigate effects on the economy is make it against the law for people or capital to move. Yes, we’ll build a wall and put armed gaurds on it and tell people what capital goes where and the guy who runs the system we’ll call “the Stalin” in honour of the historic success of the system.
Paul Birch;
More energy-intensive and less energy-intensive industries each comprise half the economy. By definition. >>
Oh do they? More than what and less than what? Average? There’s no such thing as average. There are 10 houses worth $100K each. Their average price is $100K. There are ten houses, 5 worth $150K and 5 worth $50K. Their average price is $100K. In both scenarios burn down all the houses worth more than $125K. Explain to me how the same number of houses will burn down because both scenarios have the same average?
Paul Birch;
though in California “mining, manufacturing, transportation, farming [and] construction” combined only account for ~32% of the economy. >>
Only 32%. Only 32%. Only 32%. If you say it often enough it makes it sound like about 1/3 of the economy isn’t very much. Only 32%.
Paul Birch;
Jobs are not a benefit; they are a cost. >>
LOL. Coffee up through nose, spatter key board. Sure Paul, they’re not a benefit, they’re a cost. Drag on the economy. My god, if we could get rid of all the jobs think how good our economy would be! OF COURSE they are a cost. ALL costs are part of the economy. You buy things you need (costs) to make things you sell (revenue). You really don’t have the foggiest notion of how business or economic works, do you?
Paul Birch;
I have no idea what the detailed mix of jobs will be in California in fifty years. Nor do you. >>
Perfectly correct. I have, however, listed the industries that will be at a competitive disadvantage due to energy costs increasing. I asked you for examples of industries that will benefit. You even agreed. So name the ones that will benefit. Oh… we can’t predict the future now… we know the harm but we have this theory about the benefits being pretty good, we just have no idea what those might be. But we’re certain they exist. We have faith.
Paul Birch;
We can describe how the market will respond, in general terms, without having to know the unknowable details.>>
I understand. You have faith. Faith and theory. Faith and theory and averages. And all those consumer studies and taxation studies and regulatory impact studies done for the last few decades, on local, regional, federal and global levels, which ALL show that when any significant cost factor is adjusted upward substantially by forces other than supply and demand, the negative effect on the commercial zone with the higher cost is well out of proportion to the change itself.
I is clear that I will never be able to explain why to you. So I will no longer try. But you go on spouting your economic models based on what ever theory you want. Models have no more impact on how the economy actualy works than they do on how the climate works. Reality trumps theory. Most of us don’t have the luxury of choosing our own reality.

An extremely detailed look at impact to the US economy based on carbon pricing at just $10 per ton in isolation of other countries acting. Short, medium and long term growth broken down by sector with low energy industries showing growth in the medium and long term. Note that the positives are dwarfed by the negatives. Note also that this is based on $10/ton which is a tiny fraction of what doubling energy costs would represent:
http://www.rff.org/Documents/Publications/RFF-DP-08-37-ExecutiveSummary.pdf
This study by the government of Canada details expected impacts of carbon pricing at $100/tonne of CO2 again a smaller number than you propose. Scroll down to 8.3.2 to see impact on cdn economy by 2050 if Canada acts alone.
http://www.nrtee-trnee.com/eng/publications/carbon-pricing/carbon-pricing-tech/chapter8-3-carbon-pricing-tech-eng.php
Well there’s two macroeconomic studies commissioned by national governments that show economic impact of acting alone is out of proportion to the imposed price increase. I’m sure that you will come up with some twisted bizarre logic by which these economic studies by economists giving advice to world governments don’t count. I’d point you at studies by the IMF, IEA, EEC and others but I’m just wasting my time. Dropping this thread. Goodbye.

davidmhoffer says:
November 14, 2010 at 7:00 pm
“http://www.nrtee-trnee.com/eng/publications/carbon-pricing/carbon-pricing-tech/chapter8-3-carbon-pricing-tech-eng.php”
More or less the same comments apply – it’s a model forecast by a lobbying group, not empirical evidence, with an order of magnitude larger shock than the previous, so an order of magnitude larger impacts (the proportionality you deny). They say, “Together the forecasts suggest that carbon pricing will not have a large overall impact on the growth of Canada’s economy in the long term”, the worst being a mere 3% fall in standard of living (consumer welfare). Unfortunately, the forecasts use different models for the two scenarios so they cannot be validly compared.