Biofuel scam

UPDATE (11 Feb 2014): This article has been substantially revised since initial posting.

One popular idea for addressing energy security, energy "independence," and the trade balance, is biofuels.

The idea is to use modern farming technology to grow sugars that can be converted to fuel for modified car engines, or even biomass energy (e.g., growing plants to be burned for electric energy; the carbon released will be sequestered by plants being grown for more fuel).¹ The carbon released in biofuels, likewise, is supposedly captured by the process of renewing them. A major dilemma, however, has been the energy return on energy invested (EROEI) of biofuels in non-tropical regions.²  If EROEI is less than 1, then even very high market prices for gasoline/diesel fuels will not make biofuels economically viable: the energy deficit has to come from somewhere--most likely, the gasoline or diesel the fuel was supposed to replace in the first place.  If the EROEI is greater than 1, but not by much, then erosion and other emissions will more than offset any greenhouse gas reductions from the enterprise.³

In "The Clean Energy Scam," author Michael Grunwald reports on the disastrous impact the biofuel sector has had on the Brazilian rainforest.

Time: But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

Backed by billions in investment capital, this alarming phenomenon is replicating itself around the world. Indonesia has bulldozed and burned so much wilderness to grow palm oil trees for biodiesel that its ranking among the world's top carbon emitters has surged from 21st to third according to a report by Wetlands International. Malaysia is converting forests into palm oil farms so rapidly that it's running out of uncultivated land. But most of the damage created by biofuels will be less direct and less obvious. In Brazil, for instance, only a tiny portion of the Amazon is being torn down to grow the sugarcane that fuels most Brazilian cars. More deforestation results from a chain reaction so vast it's subtle: U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon. It's the remorseless economics of commodities markets. "The price of soybeans goes up," laments Sandro Menezes, a biologist with Conservation International in Brazil, "and the forest comes down."

Deforestation accounts for 20% of all current carbon emissions. So unless the world can eliminate emissions from all other sources--cars, power plants, factories, even flatulent cows--it needs to reduce deforestation or risk an environmental catastrophe. That means limiting the expansion of agriculture, a daunting task as the world's population keeps expanding.

It's difficult to to make this connection obvious, especially given the amazingly pervasive greenwashing of biofuels by investors like BP.

The Problem with "Energy Independence"

Ever since the Nixon Administration (and the Arab Oil Embargo of 1973), US leaders have paid lip service to the goal of "energy independence." The concept is willfully vague, in part because ambiguous goals are easier to meet than explicit ones; but one metric of energy dependence might be the share of transport fuels that have to be imported. So, for example, if most transport was powered by domestically-produced electricity, it would be all right if a country imported most of its crude oil since its crude oil consumption played a small economic role anyway.

That's obviously not the case for the United States.

Oil is an extremely important economic input in the US industrial system and will remain so for a long time to come. This is widely recognized, so a lot of advocates for energy independence have called for either increasing domestic production, or else for subsidizing energy substitutes like biofuels.

Increasing domestic production is a motivation behind long-standing tax subsidies for producers, such as the oil depletion allowance.⁴ This subsidy is quite expensive and consists of a huge subsidy to investors for exploration (especially on federal lands). It has had the effect of increasing the rate of US oil extraction above market levels, meaning that tax policy has stimulated oil depletion of US territory. If nothing had been done, then presumably oil would have been slightly costlier, and the USA would have greater reserves than it actually does. Very likely it would have developed an economy less dependent on cheap oil, and today we would consume less and have more.

In other words, the pursuit of energy independence has, in practice, meant a commitment to more oil of US provenance now, at the expense of more oil in the future. It's meant cheaper oil, but higher taxes, meaning that the US government has intervened elsewhere--just as it did with agriculture--to support prices made artificially low by exploration subsidies. At the pump, oil is taxed less than it is in other industrial countries, but Americans pay higher taxes to subsidize exploration and recovery (since the oil companies pay hardly any taxes, and they can get substantial rebates from the US government just for depleting the government's own oil). This has resulted in greater oil dependency, leading to a secular trend--over long periods of time--to costlier oil, more imports (as domestic output exhausted the low-hanging fruit).

One could argue that the quest for "energy independence" has been amazingly void of serious public discussion. It's a bromide that no one takes seriously.

This is far from unusual, incidentally. Many countries have policies that, taken altogether, are astonishingly perverse. But that's not the point.

The point is that "energy independence" has never been taken seriously by its proponent, other than as a scheme to get more perverse and destructive policies. It can be used to contrive "successful" arguments, or rationales, for "green" subsidies that actually make environmental problems worse. If the object is merely to replace imports of energy with anything, however costly, then "energy independence" is an insidious folly. If the object is to mitigate an actual problem with national accounts, or with environmental impact, then a serious discussion of costs and benefits is far more likely to ensue.

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Notes

1. For an introduction to the concept of "biomass" as a source of electricity generation, see Zia Haq, "Biomass for Electricity Generation," US Department of Energy: Energy Information Administration Annual Energy Outlook (Dec 2001--accessed 11 Feb 2014)



2. For estimates of EROEI for various energy sources, some options are: Dana Visalli, "Getting a decent return on your energy investment," Resilience blog (12 Apr 2006). Unfortunately, this article does not examine biofuels in detail; it merely introduces the concept of EROEI. One study of Brazilian cane sugar ethanol is Edward Smeets, Martin Junginger, André Faaij, Arnaldo Walter, & Paulo Dolzan, "Sustainability of Brazilian bio-ethanol", Copernicus Institute--Utrecht University  (Aug 2006), whose findings are summarized in Robert Rapier, "Report: Brazilian Ethanol is Sustainable," The Oil Drum blog (6 Oct 2006).  I will freely admit that I have not read the entire 135-page report and am wholly reliant on the summary in The Oil Drum.  Rapier concludes that an estimated EROEI of 8.3(or more) is valid for Brazilian sugar cane.
   
   Rapier helpfully includes analysis of soil erosion from corn versus sugar cane; Brazilian cane has an erosion rate of about 1.24 t/ha/yr, compared to US corn erosion of 12 t/ha/yr. So even if the EROEI were sharply increased in corn ethanol, this would have a disastrous impact on North American land fertility.
   
   Estimates of EROEI for corn ethanol in the USA seem to range from 0.9 to 1.65; see Roel Hammerschlag, "Ethanol’s Energy Return on Investment: A Survey of the Literature 1990−Present" in Environmental Science & Technology, 2006, 40 (6), pp 1744–1750. The lower estimate factors in the costs of farm machinery.


3. For those interested in the subject, there are several issues. Suppose (for sake of discussion) the EROEI for some ethanol cycle is 2. This means for every joule of energy used to produce the fuel, 2 joules worth of energy are "created" (technically, the energy is not created at all, but captured from sunlight by photosynthesis).  That particular sector will consume energy equivalent to its entire output for the rest of the economy, since half of its output--or equivalent--will need to be plowed back into the production process. Even the most optimistic estimates of corn biofuels suggest an EROEI much less than 2 in North America.  "In theory," this would be sustainable, if goofy--if the only environmental impact were greenhouse gas emissions from direct consumption of fuel.


4. The oil depletion allowance is an exceptionally sweeping tax exemption that allows many profitable oil companies to avoid most taxes. The method of assessing it was changed (supposedly removing some of the oil companies' tax advantages) in 1975, but in fact it was merely re-arranged. The oil depletion allowance was created in 1926 and has survived, and even become more baroque with time. David C. Johnston, Daniel Johnston, Introduction to Oil Company Financial Analysis, PennWell Books (2006), p.67ff. For analysis, see Gary Zatzman & Rafiqul Islam, Economics of Intangibles, Nova Publishers (2007), p.179ff. One does not need to accept Zatzman's and Islam's overall ideological conception to benefit from their explanation of the financial returns accruing from the oil depletion allowance.

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Sources & Additional Reading

Michael Grunwald, "The Clean Energy Scam," Time (27 Mar 2008) (via LunchoverIP, Bruno Giussani)

US Energy Information Administration website--extremely valuable source of data for energy price history, global consumption, and so on.

Developmental State

A developmental state is one in which the authorities (included foreign aid agencies) favor the development of alternative business sectors. Reasons may include:

1. the businesses in which the country is strong do not employ remotely enough people (because of the production function existing for those businesses);
2. the businesses in which the country is strong include a small number of markets for which output and prices are too vulnerable for stable monetary management;
3. the businesses in existence are extractive, and therefore discourage the development of national loyalties, a professional class, or a viable state.

Developmental states are extremely commonplace, and typically refer to a function of the national government, rather than a specific country. For example, the early federal government of the USA had a cluster of policies known as the "American system,"¹ whose purpose was to liberate the nation from economic dependence on Great Britain, stimulate a balanced economy, and prevent the recurrence of depression. It differed from French dirigisme in the sense that the Federalist/Whig policies focused on altering market conditions within the USA, as opposed to supplanting the market itself.

Chalmers Johnson defines the [capitalist] developmental state thus:

The communist-type command economy characteristically retains all ownership and control in the hands of the state, whereas the capitalist developmental state (CDs) rests on genuine private ownership of property but indirect state control of economic decisions. The CDS is infinitely more efficient than its communist rival, but not as efficient as the ideal market economy with perfect competition.
(pp.45-46)

Johnson, whose writing really opened up the controversy over"economic revisionism," argued that countries such as Japan, Germany, Korea, and Taiwan flourished economically as developmental states, i.e., by rejecting the orthodox model of economic growth and adopting various schemes of growth management. Japan's economic growth was managed mainly through the Ministry of International Trade and Industry (MITI), but also through the Ministry of Finance (MoF), which managed the city banks and long term capital banks. Germany relied on different instruments during different phases of its recent history, but the most enduring and pervasive approach was through the cartel, which authorized price cooperation and higher profits, in exchange for fulfilling state objectives. Another Northern European form of developmentalism was the commissioning of entire industries, such as railroads and heavy shipping.²

Developmentalism was embraced wholeheartedly by the northern German states, particularly after the formation of the Zollverein (customs union; 1834). In Austria/Austria-Hungary, the main element was protectionism; in Prussia and the German Empire (1870-1918), protectionism played a relatively minor role, and was supplemented by the creation of the Navy and a dynamic chemicals industry.³ However, one of the most spectacular cases of developmentalism in a modern European state was Finland.⁴

The opposite of developmentalism is not laissez-faire, but colonial underdevelopment. At least in theory, a country with an idealized market economy will accumulate capital based on the optimal trade-offs between present and future consumption. This is likely to slow down as certain industries that have already developed enjoy a permanent premium in ROI, which is, nonetheless, subject to diminishing marginal returns (Swan-Solow Classical Growth Theory). On the other hand, underdevelopment is a process in which development is actually reversed.

[Andre Gunder Frank] wrote of underdevelopment as an historical process which was causally related to the 'pattern of evolution' of developed, industrial societies. In one part of the world, the North, the process whereby producers were separated from their means of production was matched by one in which they were reabsorbed and reintegrated in the production process as proletarian wage-workers.⁵

In other words, underdevelopment is a process in which capital accumulation in the colonial metropole leads to the loss of domestic ownership over the means of production. When this happens, increased productivity in the colony does not lead to increased income for the people who live there, since the business enterprise is foreign-owned and its profits flow abroad. Since the residual gains to the colony consist only of wages paid to workers in the exporting industry, and since those wages must pay for imports from the metropole (with its monopoly on exports to the colony), it logically follows that the terms of trade for the colony must get progressively worse. Locally-owned resources, such as land and water, can be bought with derisory amounts of the foreign currency (because the local currency will be worth almost nothing).

Under colonial rule, this is exactly what happened to the nations of Africa and South Asia (and, to a lesser degree, Latin America). An obscure process to people living in the Developed North, it was very easily understood and observed by the peoples of the South. Idealistic leaders who had guided their countries to independence in the mid-20th century perceived the need for a developmental policy.⁶ In a few cases, such as the Republic of Korea, Singapore, and Malaysia, such policy has been an unqualified success. In other cases, such as Chile (since 1990), Costa Rica, and Uruguay, developmentalism has mainly targeted general social indicators, such as infant mortality, literacy, and so on. In such countries, disappointing long-run economic growth may jeopardize political support for developmentalism.

Abuses of the Developmental State

Furthermore, the developmental state may had undergone a political upheaval that repudiates the old order; in that case, it may require a developmental policy for the revolutionary government to be strategically tenable. In some cases, the objects of nationalism, national defense, and ideological ascendancy may be so strong they lead to disastrous developmental policies, such those of the Democratic People's Republic of Korea (DPRK); more commonly, the effects merely depress economic growth. An example is the policy of many governments to develop flagship industries such as auto production. For developing nations like Indonesia, the production of autos is really an inappropriate use of scarce resources, and in fact the Astra conglomerate took up the enterprise as part of an elaborate scam on behalf of Gen. Suharto's family.⁷

Supporters of a laissez-faire minimalist state approach have argued that Suharto is the norm; even notable success stories, such as Singapore, Taiwan, and Korea have paid high prices in political freedom (or simply enjoyed peculiar advantages, such as Cold War alliances with Washington). Part of the problem, however, is that the propensity for corruption and extortion is a deeper problem than one related to economic policy choices. Haiti is not a mess because since administrators succumbed to the false promise of developmentalism; it's a mess because it suffers from retarded civil society and a predatory comprador class, which foreign powers have been all too eager to utilize.
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NOTES:

1. Here, "American System" refers to a series of proposals made by Alexander Hamilton and endorsed by, inter alia, Henry Clay and H. Charles Carey. It included federal (hence, "American," in the sense of "all-American" or "all-Union") improvements on interstate roads, canals, and seaways; protectionism, as a deliberate policy of import substitution; and direct federal involvement in the creation of the financial infrastructure. For a summary of the views of H.Charles Carey, see "Henry Charles Carey, 1793-1879," CEPA History of Economic Thought. The Wikipedia entry for this is especially good.
   
   See also Alexander Johnston & James Albert Woodburn, American Political History, 1763-1876 (complete text online) G.P. Putnam's Sons (1913); XVII: "The American System: Internal Improvements and the Tariff," p.341.
   
   The phrase "American System" is a bit overused, and was subsequently used to refer to the concept of line manufacturing, in which items are fabricated from inventories of identical parts assembled by specialized workers.


2. The literature on developmentalism in Europe is amazingly chaotic. Few, if any works exist on the general phenomena of developmentalism in non-Communist states, unless we count Ha-Joon Chang's Bad Samaritans (Bloomsbury Press, 2008; mainly an indictment of World Bank/IMF policies towards underdeveloped countries). Instead, one is stuck with monographs on the history of specific industries in specific countries. For example, buried in Jürgen Kocka's Industrial Culture and Bourgeois Society: Business, Labor, and Bureaucracy in Modern Germany, Berghahn Books (1999), there is the following reference to developmentalism in Bismarckian Prussia:

   Consequently, strong and efficient public administration played an important role in the process of economic, social, and political modernization in Prussia and in other German states during the early nineteenth century. This role was in part helpful and in part harmful to economic growth. Industrialization was started and continued partly under governmental supervision, partly with limited administrative help, mostly under strong bureaucratic influences...
   
   There were many channels through which bureaucratic patterns spread to the factory system and its management. Various amalgamations and interdependencies between governmental agencies and civil servants, on the one hand, and early enterprise, on the other, continued after the mercantilist period. Prussian civil servants acted as entrepreneurs, and the government continued to run some enterprises, especially in mining (until the 1860's), and later in the railroad sector. Civil servants played a leading role in the system of technical and industrial education begun in the 1820s and also in early scientific and industrial associations. Engineering expertise was concentrated in the Prussian technical administrative branches and military men where hired by private entrepreneurs who paid higher salaries than the government...
   [p.28-29]

   In regards to the commissioning of a national railroad network and mining, see Hajo Holborn, A History of Modern Germany, Princeton University Press (1982): p.11-12; additional discussion of the ideas and influence of Friedrich List appears later in the same chapter.


3. For a brief discussion of the role of the German developmental state in the creation of a chemicals industry, see Ernst Homburg, A. S. Travis, & Harm G. Schröter, The Chemical Industry in Europe, 1850-1914, Springer (1998) p.99ff. Mostly the Federal Republic of Germany (1949-present) has been regarded as averse to state developmentalism, but

   The Weakest tradition of State interventionism is clearly to be found in West Germany—although the picture is much more complex than is sometimes supposed, In the first place, there is a surprisingly big public industrial sector in the Federal Republic. The State has a 25 percent or more stake in some 130 companies with over 800 subsidiaries and these include industrial giants such as Salzgitter, Viag, and Saarbergwerke (with majority stakes), Veba and Volkswagen. Secondly, Bonn has never hesitated to use tariffs and quotas to protect industries such as ship-building, coal mining, textiles, food-processing, aircraft, and metal production. Third, the State has poured subsidies into industry in the shape of cheap loans, guarantees, special depreciation allowances, tax privileges, anti-pollution grants, research and development aid.

   See Yves Meny, Vincent Wright, Martin Rhodes, The Politics of Steel, Walter de Gruyter (1987), p.41


4. Markku Kuisma & Kari-Erik Micheisen, "Nationalism and Industrial Development in Finland" , Business and Economic History Second Series, Volume Twenty-one (1992).

   A committee set up by private business associations in 1913... recommended, first, that Finnish companies that exported goods should form cartels to minimize domestic competition, and second, that the government should take strict measures to protect domestic industries (iron and steel, textiles, food stuffs) from foreign competition. In the midst of the political chaos, the Finnish government quickly introduced a new economic policy based on these two recommendations...
   
   In addition, Parliament passed laws prohibiting foreign enterprises from purchasing or owning land, forests, hydro power resources or mineral ore deposits. New tariff regulations and tax reductions were introduced which gave domestic industries almost total protection against foreign competition... Cartels also promoted the increase of exports by establishing broad networks of sales branches in major European, North and South American, and Asian cities. In addition, Finnish export cartels collaborated with other Scandinavian paper and timber cartels, for instance with Scannews and Scankraft.
   
   The new economic policies were highly successful. The volume of
   Finnish industrial production increased at almost 8% annually during the
   interwar period.

   Similar policies, albeit less extreme, were adopted by other Scandinavian countries.


5. Michael Cowen & Robert W. Shenton, Doctrines of Development, Routledge (1996), p.57-58.


6. In some cases, such as the Arab Middle East, this was conveniently impossible thanks to the political arrangements prevailing at independence. Much of the conflict that raged in the period 1954-1990 was directly linked to this problem. As developmentalism took hold, conservative/obscurantist opposition took the form of Deobandi or Salafist movements (see Import Substitution, nt.1). In other cases, such as the Philippines, the terms under which independence was granted made developmentalism difficult and unpopular (e.g., the Bell Trade Act of 1946). In still other cases, such as Congo-Kinshasa, independence was essentially thwarted by Western intelligence agencies, and rule persisted through surrogates like Mobutu Sesse-Seko (r.1963-1994). Other interesting cases include Haiti and Madagascar.



7. Suharto seized power in a coup in September 1965, and launched a massacre of political opponents that may have killed about one million. It is generally understood that he was assisted by the CIA, and not only targeted ethnic Chinese and Communists, but also rival factions in the Indonesian military. One of the sleaziest despots of the 20th century, he developed a vast commercial empire through family seats on the boards of companies like Astra International. See "Dad, Can I Have the Keys to Indonesia's Auto Industry?" BusinessWeek (18 Nov 1996). For a general overview of the Suharto family, see "All in the Family," Time (CNN 1999).

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SOURCES & ADDITIONAL READING:

Bruce G. Carruthers & Sarah L. Babb, Economy/society: Markets, Meanings, and Social Structure, Pine Forge Press (1999)


Louis Ferleger & William Lazonick, "The Managerial Revolution and the Developmental State: The Case of U.S. Agriculture" , Business and Economic History Volume Twenty-two, no. 1 (Fall 1993)

Alexander Hamilton , "Excerpts of the Report on Manufactures"; "Report on Public Credit"; "Argument in Favor of the National Bank" (Via Wikipedia )

Chalmers A. Johnson, Japan, who Governs? The Rise of the Developmental State, W. W. Norton & Company (1994); also, "Odyssey of a Concept" (p.33) in Meredith Woo-Cumings (editor) The Developmental State, Cornell University Press (1999).

Markku Kuisma & Kari-Erik Micheisen, "Nationalism and Industrial Development in Finland" , Business and Economic History Second Series, Volume Twenty-one (1992)

William Mass & Hideaki Miyajima, "The Organization of the Developmental State: Fostering Private Capabilities and the Roots of the Japanese 'Miracle'" , Business and Economic History Volume Twenty-two, no. 1 (Fall 1993)

C. H. Tzeng, "Understanding Economic Development in Modern China: The Interplay among the State, the Market, and the Social Sector" , Business and Economic History Volume 3, (2005)

Maki Umemura, "The Interplay between Entrepreneurial Initiative and Government Policy: The Shaping of the Japanese Pharmaceutical Industry since 1945" , Business and Economic History Volume 5, (2007)

The Gold Standard-3

(The Gold Standard 1 | 2 )

Some technical details

In Part 1, I proposed some definitions of gold exchange standard (GXS) versus gold standard. A more nuanced breakdown follows (Officer, 2008):

In principle, a country can choose among four kinds of international gold standards -- the pure coin and mixed standards, already mentioned, a gold-bullion standard, and a gold- exchange standard. Under a gold-bullion standard, gold coin neither circulates as money nor is it used as commercial-bank reserves, and the government does not coin gold. The monetary authority (Treasury or central bank) stands ready to transact with private parties, buying or selling gold bars (usable only for import or export, not as domestic currency) for its notes, and generally a minimum size of transaction is specified. For example, in 1925 1931 the Bank of England was on the bullion standard and would sell gold bars only in the minimum amount of 400 fine (pure) ounces, approximately £1699 or $8269. Finally, the monetary authority of a country on a gold-exchange standard buys and sells not gold in any form but rather gold- convertible foreign exchange, that is, the currency of a country that itself is on the gold coin or bullion standard.

During the two previous posts on the gold standard, I did not use this distinction, and feel some regret about it. Instead, I used "gold standard" to mean any financial system in which gold or gold substitutes are the sole form of legal tender; and I used GSX to mean any system in which gold is used as a benchmark of value (i.e., what Officer refers to as a "bullion standard" as well as a true "gold exchange standard").

As I mentioned regarding the Canadian bullion standard (1926-1931), regulations of bullion export were often invoked in times of crisis in order to prevent liquidity crises for vulnerable national treasuries. But even countries on the "gold coin" standard, such as the USA (1879-1917), France (1878-1914), and UK (1821-1914) had other ways of managing gold supplies.

There are costs of importing or exporting gold. These costs include freight, insurance, handling (packing and cartage), interest on money committed to the transaction, risk premium (compensation for risk), normal profit, any deviation of purchase or sale price from the mint price, possibly mint charges, and possibly abrasion (wearing out or removal of gold content of coin -- should the coin be sold abroad by weight or as bullion).

"Mint parity" is the ratio of one currency to another in terms of gold weight; so, for example, the UK pound sterling was worth $4.8665635, when expressed as comparative gold weight content. At the time, gold points were defined as the rates produced by buying gold in one country and selling it in another; more precisely, as the point...

... at which it would be as cheap for a person in one country who has to discharge an indebtedness to a creditor in another country, to do so by sending gold as by buying and remitting bills, As regards any particular country, there will be a point at which gold will be likely to leave it, and a point at which gold will be likely to come to it. Given the mint par between the currency units of two countries and the cost of sending gold, the gold points will be found by deducting the latter from the former for the outward gold point, and adding it thereto for the inward gold point.
The Banker's Magazine, vol.80, no.741 (Dec 1905), p.715

The above periodical helpfully takes the example of France and Britain: the pound sterling was then at a mint parity of 25.2213 francs; it cost about 7-10 centimes per sovereign (i.e., gold £1 coin), so the outward gold point is 25.15-25.12 and the inward gold point is 25.32. For purposes of international comparison, the cost of importing gold from the UK to France is .2776%. According to Officer's latter-day studies, this gold point was closer to 10.2 centimes, or .4063%.

Supposing it were zero? Or, say, something very close to zero? Well, if the US dollar were to sink to (say) 1 basis point below its mint parity with the sovereign, then one could make a fortune buying gold with dollars, exporting the gold to London and selling it to the Royal Mint, then taking the pounds and selling them for dollars. One would immediately buy gold and repeat the process. The amount of money made with each cycle would be tiny, but assuming it could be done in a day or so, one could actually contrive to leverage the operation to massively increase the profitability. Unsurprisingly, the gold point spread with the passage of time, so that such arbitrage became much more difficult. With a gold point of 45 basis points, and a spread of about twice that, there was some modest room for interest rate arbitrage among the major money markets (Vienna, Berlin, London, New York, and Paris).

I skimmed the abstracts of some other papers by Officer on gold point arbitrage. Most of these were unavailable for further study, but a general summary is available via the footnote.¹ Another feature of the global gold standard that Officer examined was the effect of interest rates; when interest rates were markedly different for similar classes of borrowers in different money markets, this also had a major impact on flows of money internationally. If interest rates in London were 3% and in New York were 3.75%, then this stimulated exports of gold to the USA (since holders of pounds would have them physically converted into US dollars, and the US dollar would rise in value). This would increase bank reserves of gold, naturally, allowing an expansion of the money supply (albeit at a higher interest rate than London's), and probable shift of the balance of trade in favor of the UK. The trade balance would reverse the flow, unless some spoke got in the wheel.

In practice, there was a bias toward inflation in boom years; different banking regimes in different countries led to different forms of price instability, so that gold and currency traders sought to arbitrage real interest rates rather than nominal ones. In this way, 19th century securities markets tended to be about as complicated as modern ones; it was just that, instead of the complex derivatives of today, traders had to factor in tangible barriers to the mathematically smooth adjustments of market equilibria.

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Notes

1. These include "Gold-Point Arbitrage and Uncovered Interest Arbitrage under the 1925-1931 Dollar-Sterling Gold Standard," Explorations in Economic History, Volume 30, Issue 1 (January 1993) Pages 98-127; and Monetary standards and exchange rates, Routledge (1997), written with Maria Cristina Marcuzzo and Annalisa Rosselli. For a general summary of Officer's work, see Alan M. Taylor, "Review of Lawrence H. Officer, Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior." EH.Net Economic History Services (20 Mar 1998). The last article IS online and outlines the general thrust of Officer's research on the period of the global gold standard: that the cost of international gold shipments was relatively higher than formerly believed, and formed measurable boundaries of the rational exchange rates; that observed exchange rates moved within these boundaries, and were further restricted by covered interest rate arbitrage; and that weakly efficient markets prevailed under the global gold standard. Critics of the gold standard per se are not likely to be moved by such arguments because they relate to the technical administration of the standard, rather than the monetary policy it imposed.
   
   

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Additional Sources & Reading

Lawrence H. Officer,"Gold Standard". EH.Net Encyclopedia, edited by Robert Whaples (26 March 2008)

What is coltan and what does it have to do with my cell phone?

UPDATE (11 Feb 2014): This article has been substantially revised since initial posting.


"Coltan" is short for columbite-tantalite, a mineral from which niobium (AKA columbium) and tantalum are extracted.  It's a mineral found mainly in Nigeria, Rwanda, Mozambique, Malawi, and Congo-Kinshasa (Democratic Republic of Congo). "Tantalite" is the usual internationally-used name for this mineral, which--depending on the grade--carries different concentrations of either tantalum or niobium.

About Tantalum

Niobium is usually used in the production of high-strength steel alloys, not semiconductors; tantalum is used in the production of cell phones because, as a superconductor, it sharply reduces the amount electricity required.¹ Superalloys account for about a fifth of consumption. Tantalum has an extremely high melting point, 3017° C, and is an excellent conductor.²  It can be made extremely strong for cutting tools, resists corrosion, and can be used to make surface acoustic wave (SAW) filters used in cell phones, etc.  In cell phones it is also used in capacitors and the lenses of cameras.

The Supply

Not all, or even an especially large proportion, of tantalum/niobium comes from Africa; most comes from Australia or South America, and much comes from minerals other than tantalite; however, tantalite is one of the more important ones, commercially (often any commercially significant tantalum-bearing mineral is called "tantalite.")³

Cell Phone Recycling Guide: The legacy of "blood diamonds" is well known, however the fact that a similar arrangement exists to mine coltan (Columbium Tantalum) is lesser known. Tantalum is a superconductor, one of the best on Earth. It is used to coat capacitors to help them create more power from less energy so that your cell phone no longer needs a battery larger than the phone itself. In war torn central Africa, people are forced into modern day slavery to mine this rare element, which is then sold to fund the wars in this region. Recently the majority of Tantalum production has shifted to Australia, however it is a rare element, so decreasing demand helps decrease the likelihood that manufacturers will turn to African supplies.

A lot of the moral headaches associated with African tantalite arise from "artisanal mining" (artisanal & small scale mining, or ASM) only a part of which comes from areas controlled by warring militia from Congo-Kinshasa (Democratic Republic of the Congo).  One of the features of the Dodd-Frank Act was a provision requiring companies reporting to the Securities Exchange Commission (SEC) to say whether or not the tantalum they bought came from the conflict region.⁴

Tantalum Market Overview: A major problem with the whole issue of conflict tantalum is the ability to track tantalum back through several stages to its original source. A key element of this is the concept of “bag and tag”, which essentially means identifying tantalum ore at the source of production and providing the means to track it down the chain.

The industry itself has introduced several schemes to address this. One is the Conflict-Free Smelter (CFS) Program, which was developed by the electronics industry to eradicate unethical sources of raw materials from the supply chain. Driven by the Electronics Industry Citizenship Coalition (EICC) and Global e-Sustainability Initiative (GeSI), the CFS Program is being adopted by the automotive, aerospace and other metal-consuming industries and a growing number of tantalum smelters are now certified as conflict-free.

Since originally posting this essay, the locus of concern about "conflict exotics" (i.e, artisanal mining of exotic metals and strategic materials in warzones, usually under duress) has shifted from the DRC to the Central African Republic (CAR).

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Notes

1. "Niobium: Market Outlook"; "Tantalum: Market Outlook," Roskill (accessed 11 Feb 2014)


2. "Tantalum Market Overview," Minor Metals Trade Association (accessed 11 Feb 2014).  The MMTA report mentions:

   For most of the 2000s it was often reported that the majority of the world’s tantalum resources were located in Central Africa and in the Democratic Republic of Congo (DRC) in particular. Towards the end of the decade, however, the Tantalum-Niobium International Study Center, the industry’s principal forum, estimated that some 40% of the most likely global resource base is in Brazil and elsewhere in South America, followed by Australia, with 21%. Central Africa was estimated to account for less than 10%.

   Is this true, or was "artisanally mined" tantalum accounted for as contribution from Brazil?


3. Tantalum - Raw Materials and Processing," from website for Tantalum-Niobium International Study (TIS) Center (Lasne, Belgium--accessed 11 Feb 2014). A major development since originally posting this article was the collapse of demand/prices and some national suppliers in 2009-2012.  


4. See Ken Matthysen & Iain Clarkson, "Gold and diamonds in the Central African Republic: the country’s mining sector, and related social, economic and environmental issues" , ActionAid Nederland and Cordaid (Feb 2013), p.11, for the Dodd-Frank Act disclosure requirements re: tin, tungsten, tantalum, and gold.

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Sources & Additional Reading

"Cell Phone Recycling Guide," Phone Scoop blog (via Textually blog, 19 Jan 2005)



John F. Papp, "Mineral resource of the month: Niobium (Columbium)" (December 2007 accessed 11 Feb 2014); and Larry D. Cunningham, "Mineral Resource of the Month: Tantalum" (August 2004), both from GeoTimes blog. Both discuss the applications for the materials (including substitutes).


"Columbium (Niobium) and Tantalum" , Larry D. Cunningham, USGS (1999)


ADDED 13 Nov: "Mobile phones link to bloody Congo conflict" (Independent.ie, 9 Nov 2008)

Evolving Attitudes toward the Federal Deficit, 1953-2006

"Macroeconomic policy in the 1960s: the causes and consequences of a mistaken revolution"
Christina D. Romer, University of California, Berkeley (September 2007)

The conventional wisdom for students of economics is that, after 1944, the developed economies of North America and Western Europe embraced Keynesian economics: the presumption of full employment was abandoned in economic analysis, as was the idea that "supply creates its own demand." This generally prevailed until the late 1970s, when it was succeeded by monetarism (to 1986) and then Real Business Cycle (RBC) theory, now called Dynamic Stochastic General Equilibrium (DSGE) and very much in vogue in the profession.

Continuing my summary of the conventional wisdom, the notion goes that the period of Keynesian dominance in the USA (at least) was accompanied by heavy reliance on fiscal policy. After 1981, for example, the effect of monetarist policy and massive tax cuts led to a staggering deficit in the federal budget (graph) utterly surpassing anything before or since.¹  Despite the anathemas pronounced against Keynes, most policy ideas are highly distorted versions of Keynesian: the White House typically insists on stimulus packages (now during expansions, to prevent a recession) or else tax cuts (either on ideological grounds or to further stimulate the economy.  Economists have roundly denounced the idea of fiscal policy, but there are still lot of them applauding deregulation and tax cuts
"to create jobs."

One challenge here is that Keynes died in 1946, unable to comment thereafter on the quality of implementation of his ideas.  Academic interpretation of his General Theory was influenced by John Hicks and Alvin Hansen, who developed the IS-LM model used for teaching macroeconomics until quite recently.  Meanwhile, some really good enhancements to the theory, such as the work of A.W. Phillips, were misrepresented by polemicists against Keynesianism (and oversimplified by practitioners).²

I also feel the need to introduce another historical figure, the journalist Abba P. Lerner. Lerner's relevant views were outlined in a short tract, Functional Finance (1943) in which he argued that the true insights of Keynes were far more profound than his disciples were letting on.  In effect, he argued that Keynes had failed to realize the full implications of his own ideas.

Lerner (1943), p.3: The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.

The rest of his ideas follow in the same mold.  Anyone reading Functional Finance will see in it the modern lack of concern for deficit spending or sound money policies.  Lerner is merely concerned with the consequences of tax increases and spending increases on inflation or employment levels.

We now turn to Christina Romer's paper, which is a frontal assault on Abba Lerner.  At first, her paper looks as though it is going to appeal to tradition: she dwells on the fact that, until 1962, the Federal Reserve and the budgetary planners in the White House and Congress took deficits seriously, whereas Kennedy and Johnson did not: for shame!

Romer (2007), p.10: However, the changing attitude toward fiscal discipline seemed to go even further than this. Whereas balancing the budget and retiring the public debt was an objective good for Truman and beneficial to growth for Eisenhower, it seems to have become almost superfluous for policymakers in the 1960s. Indeed, it is nearly impossible to find references in the Economic Reports or Budget Messages of the 1960s to a long-run goal of budget balance. The one exception is the 1963 Economic Report which stated: “The problem is to maintain a relationship between the deficits and surpluses of the various sectors that will permit this balance to be reached at a satisfactory level of economic activity – and without a prolonged succession of government deficits” (p. 74). But even here, it seems clear that maintaining full employment is the key concern, and the commitment to long-run balance feels vague and half-hearted. 

Presidents Kennedy through Ford embraced the idea that tax cuts would pay for themselves by enhanced economic growth, which did not happen (although tax cuts were on very high top marginal rates).

Prof. Romer also applies the same criticism to monetary policy; she analyzes monetary expansion in accordance with the Volcker-Greenspan-Bernanke monetary rule (p.14) and finds it unacceptably lax.

Romer (2007), p.16: The consequences of the economic beliefs and the resulting policy actions in the 1960s and 1970s are well known. Inflation, which was close to 1% at the start of the Kennedy administration in 1961, rose steadily over the decade, ending at over 5%. It then rose even more dramatically in the 1970s. While the effect of the oil price shocks in 1974 and 1978 are quite obvious, modern scholars, such as DeLong (1997) and Barsky and Kilian (2001), have been convincing that monetary expansion and loose policy more generally were the key source of the inflation in these decades. The expansionary bias in both monetary and fiscal policy led to rates of inflation unheard of in peacetime. 

Romer praises Ronald Reagan and Marty Feldstein's stated views that a balanced budget was a long term good, but mysteriously ignores the cynical political exploitation of this view.  It's as if she overlooked the ideological basis of the Conservative Movement, that it was redeemed through faith in sound finance (rather than works--something that would be left to the infidel Clinton to perform).

The main points of her essay are startlingly unsubstantiated. She claims that deficits do have an effect on well-being, but she doesn't explain why or cite conditions that determine when deficits become dangerous (pp. 25-27).  She ignores the ideological convictions and priors of the administrations that submit budgets, as if budget decisions are made by schools of economists, and she cites little more than a hunch that the Great Moderation happened because Fed policies were sound (p.20).  In fact, she speaks approvingly of the new policies, when deficit spending has become far worse than it was in the 1960s. 

Christina Romer may well have a compelling argument for believing that functional finance is the culprit (FWIW, she never mentions the phrase, alluding instead to a James M. Buchanan book that excoriates John M. Keynes). But this paper is not convincing, and I remain convinced that the contents of budget priorities, rather than functional finance, are at the heart of America's financial issues.

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NOTES

1.  One point bears noting: the period 1983-1990 (the recovery phase) featured an aggregate real GDP growth of 38%; that of 1991-2000, 43%.  During the first period, the total public debt grew from 33% of GDP to 53%, while during the second period, it started at 57%, rose to 64% (1994), then declined back to 54%.   In other words, in the 1980s, the rather large expansion of the economy was propelled by an unsustainable and unwholesome explosion of expansionary deficits; in the 1990s, the larger expansion of the economy was accompanied by a net contraction of public debt.
   
   This point must never be forgotten: it's pretty easy to have an impressive economic showing when you allow chronic deficits of  >3% of GDP.  Reducing the deficit and growing the economy is a much more impressive feat.  
2. Phillips is usually accused of positing a simplistic relationship between the rate of inflation and the rate of unemployment.  See A.W. Phillips, "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957" Economica, New Series, Vol. 25, No. 100 (Nov., 1958), pp. 283-299