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

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.