Thursday, October 31, 2019

Have US markets become less free?

NYU economist Thomas Philippon has a new book (summarized here) out examining how a variety of goods have become more expensive in the US than in other countries at the same level of economic development.  Examples include airfares, cellphones, and internet access.  These goods were cheaper in the US than overseas twenty years ago, so what happened?

Philippon blames using monopoly power in the US and a growing commitment to free markets overseas.  The time needed to open a new business in France has shrunk from 53 days to 4.  Most US households face no more than two choices for internet service whereas consumers in France have five or more.  Philippon estimates that growing monopoly power in the US costs consumers roughly $300 a month.

Tuesday, October 29, 2019

Can economics explain the blackouts in California?

Power companies in California have cut off customers in an effort to prevent forest fires.  Typically we see power outages in places like Iraq or Venezuela, so why is this happening in a state with a relatively high standard of living.  I have seen five explanations that make some sense to me (see Tyler Cowan's recent column for another perspective):

1.  Climate change has increased the number and severity of forest fires:  I am no climate scientist, but this makes some sense.
2.  More people are living in housing that was built in areas with high fire risk: And if the risk is not priced properly by insurance markets, we could have a classic case of an externality where the true costs of building in these areas are underestimated.  Result: too many homes in places where they should not be.
3.  California has imposed so many constraints on utilities that they lack the resources to deal with fire prevention:  WSJ points out a number of green energy mandates along with difficulties in raising electricity prices (which are already among the highest in the nation, perhaps due in some part to the green energy mandates).
4.  A whole lot of trees would have to be cut down to mitigate the fire risk: This raises additional regulatory constraints, not to mention the cost.
5.  Liability for fires has shifted to power companies: This means they compare the cost of fire liability to the lost revenue from customers; guess which these numbers is a lot bigger than the other?

A sixth explanation cannot be totally discounted: executives at PG&E may very well be cut from the same cloth as those at Boeing, Facebook and Volkswagen in terms of the weight they have given to social responsibility.  NYT seems to think so and provides provocative evidence.

What's the way out?  Something will have to be done to spread the cost of updating PG&E equipment and cutting down gazillions of trees across a broad customer base, including areas not served by PG&E and areas not in any danger of fire risk.  I predict some combination of a rate increase and state-guaranteed bonds, but I would not be surprised if the state of California takes over PG&E.