A Climate of Skepticism

Last Friday our school’s head invited a speaker to address the student body on climate change and environmental activism. This well-intentioned young man presented a video that consisted of excerpts from Al Gore's film An Inconvenient Truth along with cute animations that highlighted the “excesses” of Western society (such as the aggregation of private property), followed by Utopian promises of a “green tomorrow.”

This young man was adamant… “The earth has a fever,” capitalism, free-markets, social injustice and meat are at the root of the problem but, working together, we can do something about it before it’s too late! I thought about his message and although I could challenge his positions on any number of different levels I am having the hardest time accepting his underlying premise… that human-caused global warming is leading to disastrous, but reversible, planetary consequences.

Why? Well, I am skeptical of global warming alarmism simply because even though global CO₂ levels have continued to slowly rise predicted global warming rates have not been observed. In fact, since 1998, we have experienced a global cooling trend. Take it back a little further and other data indicate no net warming for the past sixty-eight years.

The Atmosphere. If you take a look at the temperature record as measured by satellite and radiosonde (weather balloons) as opposed to just surface temperatures you will see that we have gone through nearly two decades without any warming of the upper troposphere. There are no climate models that predict an absence of warming for nearly twenty years.

The Oceans. Then we look at the oceans since water is a very efficient heat sink. The Argo Project is a huge global array of more than 3,000 free-drifting profiling buoys that measure the temperature and salinity of the upper 2,000m of the world's oceans. First deployed in 2003, Argo now gives us continuous monitoring of the upper ocean with all data being relayed and made publicly available within hours after collection. Result? No net warming of the oceans has been observed in the first six years of the program measurements.

The Polar Ice Caps. Another prediction was that the polar ice caps would melt as CO₂ levels rose to produce accelerated warming (you remember… that image of Al Gore’s hapless polar bear struggling to climb onto a melting ice flow). But again, satellite observations have shown no net change for more than thirty years.

In September of 2007 there was an observed anomaly. The Arctic ice cap lost nearly 25% of its normal pack. The global warming proponents said this was finally hard evidence of climate catastrophe to come. But just one year later 12% of that icepack had recovered and by September of 2009, one year later, there was another 12% increase so that the ice loss of 2007 in the northern polar regions has all but fully recovered.

An interesting thing about global climate change is that its effects should be global. So even though there was some ice loss in the Northern Hemisphere there was a corresponding increase in the Southern Hemisphere. Just three weeks after that Northern minimum of September 2007 there was an ice cover maximum recorded in the Southern Hemisphere. And last year, there was less of a summer ice-melt in the Antarctic than has been measured in thirty years of satellite observations.

Hurricane Seasons. We have been told by the IPCC, Al Gore, and others that we could expect to see an increase in hurricane activity… not just in the number of hurricanes but also in their intensity as global temperatures increased. Again, this has not been observed. In 2005 the Gulf Coast was hammered by hurricane Katrina. New Orleans, a city built largely below sea level, was flooded when the levees failed. We were told that storms like this would become more common. Four years later we have witnessed some of the quietest hurricane seasons in memory. OK, now without resorting to Google, can you even name another hurricane since Katrina?

Settled Science. When my biology or physics students do a lab they propose a hypothesis… an educated guess. When their observations fail to agree with their hypothesis my students are taught to keep an open mind and question if the hypothesis was flawed or maybe there was something wrong with the experiment or perhaps with their data collection methods. Could there have been other factors that were affecting their observations that were unaccounted for? What they are taught not to do is declare “this is settled science” and call their hypothesis a fact.

So is dangerous anthropogenic global warming “settled science?” Hardly. Is there room for skepticism? Absolutely! And yet climate change alarmists attack skeptics with an almost religious, unthinking fervor. They are referred to as “deniers” and demonized. In the old days the words “apostates or heretics” would have been appropriate for those who expressed doubts and challenged the established orthodoxy. They point to the “consensus of a thousand scientists” the way zealots point to the harmonious chanting of a priestly class. They say climate systems dynamics are too complicated and too difficult to explain to the average person much the way that we are told religious texts carry hidden meanings and that dogma must not be questioned by the faithful lest they risk the damnation of their immortal souls.

The late Carl Sagan once said, “extraordinary claims require extraordinary evidence.” I don’t propose to raise the bar that high. I simply ask that the global warming proponents match their predictions to observations. In other words, if the local TV weatherman always predicts rain, every now and then it should rain! Until then, I will choose to remain a skeptic.

It Takes Green To Be Green

I just moved into a condominium with an active and very involved home owners association. The condominium complex is a little over four years old and since its inception it has been committed to the practice of “green and sustainable living,” a self-ennobling, if a bit vague, ethos.

Every year the HOA (home owners association) conducts a line-item budget review and this year I happened to notice an $11,000 payment for a “solar loan.” Three years ago, the community decided to promote the use of alternative energy sources and reduce its dependence on electrical energy provided by the local utility, Pacific Gas and Electric. So the HOA board approved the acquisition of a bank of solar panels that would provide electricity for the community common house as well as lighting for all the outdoor common areas like parking lots, car ports and walkways. There was also the hope that by producing a net surplus of electricity that the meter would begin to run backwards and yield a little bit of revenue.

Curious, I asked what the details of the solar investment were. A member of the finance committee said that the cost of the solar panels plus installation was a bit over $100,000 and this was after any applicable subsidies, tax credits or rebates. The current solar loan carries a 6% (variable) interest rate. Next, I asked when the anticipated breakeven* would be. The committee member said he wasn’t sure. That made me even more curious and so I poked around further. I asked what we were spending on electricity prior to the installation of the solar panels. Copies of the utility bills revealed an average monthly expenditure of $833.

OK… now for some back-of-a-napkin breakeven analysis. First the assumptions, a 6% annual increase in energy costs and a (steady but unrealistic) 6% interest rate for the remaining 10 years of the loan. There is no adjustment for inflation. Also, the opportunity costs of what else you could have done with that money are not factored into this brief analysis.

So what’s the “net net?” Well, it will take forty-six years before this condominium community sees breakeven. It’s unlikely that anyone living in this community today will ever see a savings on their already high HOA dues. Forty-six years even is far longer than the anticipated life of the solar panels themselves.

I mentioned this number to a couple of members of the association’s finance committee. One told me that no real cost-benefit analysis was done prior to the decision to move ahead with purchase and when he sent out an email to all indicating that the system would cost far more than we would ever save he was chided by some for being “negative” and not in keeping with the values of the community. Another finance committee member said it didn’t matter because “we wanted to invest in this emerging alternative energy technology.”

Solar has been around for a long time. It’s not a new technology. The reason it is still “emerging” is because unless it is heavily subsidized by government or unless the cost of conventional energy sources skyrocket (due to market forces or fiscal policy), there is no way that it makes any financial sense to install solar arrays, windmills or a host of other alternative energy sources.

What my community wanted to do was to make a statement, a statement of support for, and a commitment to “investment in sustainable green energy.” Unfortunately they unwittingly made another statement… that with “investments” like this only the wealthy can afford to be green.

Wouldn’t You Really Rather Have a Buick? (Made in China)

It was reported last week that ailing auto giant, General Motors, is considering the importation of thousands of lower-cost cars manufactured at GM plants in China for sale to the North American market. This ‘rumored’ proposal has created a firestorm of controversy and opposition from the United Auto Workers [US labor union, ed.] and created a significant political problem for the Obama administration since it has provided more than $15.4 billion in loans to the company in an effort to prop up its struggling operations and preserve more than 90,000 US jobs at current levels of compensation and benefits. “GM should not be taking taxpayers' money simply to finance the outsourcing of jobs to other countries," wrote Alan Reuther, the union's Washington lobbyist, in a letter to U.S. lawmakers.

GM, on the other hand, has been under a lot of fire, and for years. They have been harshly criticized for not paying attention to the evolving auto market that has been demanding high quality, fuel efficient cars… a demand satisfied by the Japanese [especially Honda and Toyota] and now too, the Korean auto makers.

A common mantra for the criticism has been that GM is very good at producing exactly the wrong cars at precisely the right time… except perhaps in China where, surprisingly, its Buick brand is well regarded.

GM executives will not comment directly on these reports, saying only that they generally do not speculate on future product strategies beyond what has been publicly released at auto shows. But let’s think this through from an economist’s perspective. So what do we know?

GM is rapidly running out of cash. It faces a June 1^st deadline to restructure itself or go into Chapter 11 bankruptcy [where the company is protected from its creditors while it reorganizes under a judge’s supervision. Ed.] And GM has asked for another $11.6 billion in bailout funds to stay afloat. That would bring the total to more than $27 billion in ‘taxpayer’ funding.

There is a lot of truth to the criticism that GM has not done a good job in offering the kinds of cars that people want in the North American market, and when fuel prices climb sales of GM’s leading, profit generating products, like pickup trucks and SUVs decline. That’s a no-win formula.

So after reading the tea leaves of the auto markets GM decides to beef up its fuel-efficient lower-cost entry level offerings in the US by sourcing cars offshore from its Chinese assembly plants. The howls of protest are still echoing through the halls of Congress.

Why is GM considering such a bold and maybe too-late initiative, at least by GM standards? Well GM is at a crossroads… the ‘brink’ might be a more accurate term. They are days away from bankruptcy and management needs to find ways to cut costs and offer competitive cars that people want to buy. If they don’t, then the company, as we know it, will dissolve into insolvency… a memory of another once-great American corporation.

The cost of US labor for the domestic automakers is among the highest in the world. The typical hourly cost for a UAW worker in a GM plant is more than $73 per hour including all benefits. The same kind of worker in a US Toyota plant costs $48. That’s 34% less. In China that average auto assembly line worker earns a little more than $2 for the same hour of work![1]

It doesn’t take a vast storehouse of business sense to understand that sourcing from more competitive labor offerings overseas is an essential component in GM’s strategy for its return to profitability and indeed, its very survival.

Unintended Consequences

So here’s the scenario… Asian auto manufacturers see a huge market in North America. It’s pretty obvious to everyone that with the economy on the ropes, gasoline prices climbing steadily upward and the continuing political instability in the Middle East the market is demanding lower cost fuel efficient vehicles. But not everyone is welcoming these ‘econoboxes’ with open arms. The ‘big three’ car companies, the UAW and their congressional allies see these cars for what they are… a ‘threat to American jobs.’

If these Asian brands gain any more ‘traction’ they will continue to erode the market share of the domestic auto makers. So they and the union appeal to Congress. There’s debate back and forth as to what type of ‘protection’ they can offer Detroit. It’s clear to them that the Asian car makers have an ‘unfair’ advantage in that they pay their workers far less in the way of wages and benefits. So how is it considered ‘fair’ competition when the playing field is so clearly tilted towards the offshore brands? If US jobs are lost to Asian workers then US votes are lost too. Many in Congress are swayed by the demagoguery and they mull a response that includes the imposition of heavy tariffs [import taxes, Ed.] on these cheap but reliable imported cars.

Clearly alarmed, these Asian car companies decide that they can’t afford to fuel a protracted trade-war with the US. After all, their entire goal is to carve out market share, not to be crushed by the weight of the 800 lb. congressional gorilla. So they rethink their strategy. Rather than compete with GM, Ford and Chrysler by end-running them with sturdy and cheap alternatives at the low-profit end of the market they decide to improve their quality, broaden their product lines and move upscale into the mainstream of the US car business. In other words, the plan is to take on the domestic giants head-on and beat them at their own game.

This scenario was played out nearly forty years ago. The Asian car makers were Toyota, Honda, and Datsun [now Nissan]. The cars included the Civic and Accord, the Corolla and the Camry, the Sentra and the Maxima. It even included whole new luxury brands like Lexus, Infiniti and Accura. The strategy proved to be wildly successful.

So the threats and the reality of protectionism, the erecting of artificial barriers to competition and trade by legislative fiat backfired big time. It not only deprived the American consumer of the freedom of choice to select from multiple product alternatives when shopping for a car it pushed ‘Japan Inc.’ to create Lexuses from Corollas… a huge unintended consequence that has directly led to the near and maybe eventual demise of the domestic auto industry as we know it. And guess what… it’s happening all over again.

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[1] Although Chinese labor is cheap by US, European and Japanese standards the cost of assembling a car in China is not as cheap as you would suspect since the cost of parts and raw materials are very high.

Say Cheese! A Lesson In Creative Destruction

Photography is one of my hobbies. At one time it even used to generate a modest secondary income. But it was never about money, it was always about the joy of picture taking that kept me motivated to carry a camera almost everywhere I went. I can remember taking long drives up the coast or spending the day at the zoo carrying my 35mm SLR ready for any picture taking opportunity. “Burning film” was an understatement.

Since I didn’t have a color darkroom part of the ritual after a day’s shooting was gathering the rolls of 35mm film and driving to the little yellow kiosk that stood in the middle of the strip-mall parking lot. Two or three days later I would return to collect the fruits of my labors… chunky envelopes filled with prints. Candy! The next step was to park the car and sort through the prints to see which ones “came out.” The convenience of the neighborhood FotoMat was unbeatable. The kiosks were everywhere. Turnaround time was measured in days not weeks, and the print quality was acceptable for most standard sized prints. At the time, the only thing that was more convenient was the Polaroid camera that carried its own processing lab in the camera body. These were very cool alternatives to the point-and-shoots but limited in what they could do. They complimented the 35mm camera but were never really a substitute.

A few years later came another innovation… the one-hour automated photo lab. Now you could take you film to the lab, and miracle of miracles, your prints, are delivered in one hour. Gradually, the little yellow kiosks began to disappear… not immediately, but gradually. It seems that photographers wanted more than photo processing and printing services. They wanted the satisfaction of seeing their prints while the memories of the events were still fresh… not in days but minutes. So one technological innovation began to displace, then replace, the photo lab kiosk. Still the underlying film-based technology was essentially unchanged. The real revolution was right around the corner.

Enter the 1990’s and the digital still camera. The expression, “did it come out,” was no longer heard since both the casual snap shooter and the pro had the ability to get instant feedback on their pictures. The chances of a botching a shot were greatly reduced and the percentage of acceptable pictures sky-rocketed. Best of all, the digital photographer now had the choice to print art pieces on inexpensive ink-jet printers with terrific results, to view and edit their shots on their computer’s display or even share them with the whole world by uploading the photo files to a social networking site. This represented a fundamental shift in photography. Then in 2001, when the quality of the digital image surpassed that of film, the last nail was driven into the coffin of film-based photography now reduced to a declining niche.

Fast forward eight years. I haven’t seen a FotoMat in years. My Nikon N90s 35mm SLR is gathering dust in my closet. Film sales continue their steep decline. Polaroid is an empty shell of its former self, a licensed brand name only. Kodak, Fuji, Agfa and Ilford all had to change their core business models in order to survive. Yes, the one-hour photo labs are still around as photo departments in drug stores and Wal-Mart but mainly just to print digital images.

This is an example of the sometimes painful process of creative destruction when innovation, in response to, and fueled by, market demand, sweeps away old industries thereby creating new opportunities and growth.

Everyday Economics

Economic thinking is not limited to the classroom, the boardroom or the business pages. At least it shouldn’t be!

My wife and I just returned from a trip to Italy. When recounting our travels to a friend we happened to mention that two of the hotels we stayed in were actually quite old. The first was originally constructed as a monastery that dated back to the 11^th century. The second was a wealthy merchant’s home located just outside the beautiful walled city of Siena. It was built in the middle 1300’s. Imagine that… sleeping in a room that was nearly one thousand years old! Our friend was taken aback and remarked, “They really knew how to build houses back then. Not like today.” She continued with certainty and conviction, “Today they want the buildings to fall apart quickly so they can be replaced. It’s planned obsolescence.”

Later at dinner another friend happened to mention that she wasn’t feeling well due to severe seasonal allergies and other medical issues. She told us that her insurance company would pay for a prescription of the potent steroid, Prednisone, but not a more targeted and expensive medication that could cost upwards of $600 per month. The drug was not in their formulary. I asked her if she had considered other sources to fill her medication such as Wal-Mart since they are well-known for their aggressive low pricing in prescription drugs, just like everything else they sell. She said firmly, “No. I have an issue with Wal-Mart. I won’t shop there.” Since she had not indicated being poorly treated at a Wal-mart in the past I imagined that it must have been some social or political bias. Regardless, I added, “If they carry your prescription drug you may be able to save hundreds of dollars by having it filled there.” Her eyes widened… she said, “Really? I guess should give them a call.”

Both these statements resonated with me at a fundamental level. Let’s examine the first.

The underlying assumption was that builders today design houses and buildings to deteriorate quickly. Builders today must use a quality of craftsmanship and materials that doesn’t hold up, so that they can be replaced by new buildings… erected, it is assumed, by the same builder at some point in the future.

Now if I was a general contractor and knew this "shady" practice to be true I would have two choices. First, I could keep quiet to perpetuate this scheme. Then I would look for some other way to compete with other builders for new business. Or, I could tell the customer, that my firm will build exactly what the customer wants on time, under budget, and using high quality materials and excellent craftsmanship. I would also state that we, as professional builders, will stand behind our work because our reputation and future business depends on it.

So, if a customer wants to build a monastery that will last a thousand years, and if the budget allows for it, then there are many GC’s who will be able to deliver just that. But that’s a pretty uncommon request since houses made of solid stone, with marble floors and heavy timbers, that are covered by heavy Tuscan tile roofing and adorned with hand painted frescoes would be prohibitively expensive and rejected as being inefficient extravagances. Is it planned obsolescence? In a way, yes it is. But it is the contractor’s client doing the planning and making those choices not the builder.

Then there was the friend with the medical condition.

It seems that she objected to doing business with Wal-mart as a general practice. She never offered a reason why and I never asked. But one thing became clear. She revealed that her objections were quantifiable. They had a dollar threshold. If it meant saving a couple of bucks when shopping for a toaster then her principled stand not to shop at Wal-mart remained steadfast. But when she saw an opportunity to save hundreds of dollars and get exactly the medicine she wanted her objections to shopping at the big box from Arkansas melted like the spring snow.

What do we do with Rudy?

Sooner or later many families have a conversation that they have been avoiding for months, sometimes years. Rudy had always been described as strong and independent. A product of the depression, he was a member of that generation that had endured financial ruin, genocides and world wars with a mixture of stoicism and resolve – an inner strength that everyone looked up to. But lately things were different. Grandpa Rudy, as he was known to the youngest in the family, seemed more and more frail – not surprising for a man in his late eighties. But what really had the family concerned was his forgetfulness. Not just forgetting the occasional name, the date, or odd face, but forgetting to eat, to take his medicine, to dress himself or sometimes, even to bathe. Clearly, despite Rudy’s fierce sense of independence that defined him, he was no longer in a position to safely care for himself but what could the family do? What would the family be willing to do?

This is an all too common scenario in our aging population. Placing an elderly loved one in assisted living is never an easy decision but the deepening recession and the collapse of the housing market has exposed seniors to unprecedented risks and uncertainties that compromise more than their lifestyle and their quality of life... it compromises their safety.

Assisted living costs for elders are not insignificant; ranging from $2,000 to $8,000 per month. Typically, they have been financed by the equity in the elder’s home, either by the outright sale of the property or by the vehicle of the reverse mortgage. But things are different now.

Let’s take our narrative a little further.

The family agrees that Rudy needs to be placed in assisted living. Some careful investigation revealed that the best matched alternatives will cost around $4,000 per month, or at minimum $48,000 per year. Despite a lifetime of hard work, some financial reverses, including the recent tanking of the Dow, have left Rudy in a vulnerable financial position. His savings only amounts to a little more than fourteen months of assisted living costs. Assuming, as we all hope, that Rudy survives longer than fourteen months, he (we?) will need to dip into the equity of his home in order to fund his living expenses.

It’s then that the realization hits everyone gathered around the kitchen table… everyone except Rudy that is. Rudy’s home was valued at a little over $560,000 two years ago. Today, that same home would likely sell for about $320,000. That’s a drop of more than $240,000. The family doesn’t appear to be prepared to accept the reality that $320,000 is the value of the home and not yesterday’s $560,000. “The market will bounce back,” someone says. “Yes, this is a temporary setback,” another agrees. But on one thing there is unspoken unanimity. This is not the time to consider selling Rudy’s home. “After all,” they say, “it’s in Rudy’s best interests to wait until the time is right.” Right? But in the back of some of the minds there is that ugly fleeting notion, like a darting shadow in the corner of the mind’s eye, that the equity in Rudy’s home represents a portion of an assumed inheritance.

“No. This isn’t the time to sell. So, now what do we do with Rudy?”

The recession has many victims. Many are hidden and helpless. Many are as close to us as our aging parents.