Month: November 2013

It may seem obvious that walking is environmentally friendlier than driving. But as Richard B. McKenzie explains in \”Why Walking to Work Can be More Polluting Than Driving to Work,\” written as this week\’s featured article for the Library of Economics and Liberty weblog, one can make a plausible argument to the contrary.

Consider the choice between walking a mile and driving a mile. Walking a mile burns about 200 additional calories, which need to be replaced. McKenzie then looks back into the food supply chain. Only about 13% of the energy used in the production and distribution of food actually ends up as part of the calories that are actually in food. In addition, about one-third to one-half of the calories in the food that is produced are lost somewhere in the chain of production. McKenzie then adds:

Moreover, the human body is also not very efficient at converting the potential energy in the food it consumes into useful work: Only about 15 percent of the potential energy in food eaten goes into activities such as walking, as well as maintaining all bodily functions. This means that the energy that the human body actually converts into work is meager percentage-wise—something on the order of 1.3 percent of the fossil fuel energy that is used along the entire length of the food-supply chain. …

Derek Dunn-Rankin, a professor of engineering at the University of California, Irvine and an avid environmentalist, computes that a 180-pound person walking one mile to and from work at a pace of two miles per hour will burn 200 calories above the 2,000 calories burned each day to maintain the body\’s basic metabolism. However, the production of those 200 calories in food takes fifteen to twenty times as much energy in the form of fossil fuels. This means that driving a high fuel economy car (40 miles per gallon) will use, in fossil fuel energy, only about two-thirds to one half the energy that the person uses in replacing the calories expended on walks. (Heavier walkers use even more energy when they walk and when they replace the greater calories they expend in moving their weight.) Energy use and pollution do not have a one-to-one correspondence, which causes Dunn-Rankin to conclude, \”My bottom line would be that walking can be 1.5 to 2 times more polluting than driving (if you use a high mileage car). If you use a monster car, you are better off walking always.\”

Of course, this conclusion is a broad average. If you drive an especially huge and polluting car, then walking will be more environmentally friendly than driving. My guess is that if the calories you eat don\’t involve meat, or are less processed, then refueling from your walk will have a smaller environmental effect. But with those reservations duly noted, by all means walk that mile for your own personal health, instead of driving. But be aware that if you are the sort of person who drives a car with high fuel efficiency and who eats a full range of supermarket and restaurant food, then a decision to walk when running your errands or visiting the neighborhood may be putting your personal health ahead of a cleaner environment.

On June 24, 2009, President Obama signed into law the \”cash for clunkers\” act. The idea was that if people traded in an older and less fuel-efficient car, they could receive a voucher for $3,500 or $4,500 to be put toward the purchase of a new and more fuel efficient car. The program had two goals in mind: 1) stimulating the economy by encouraging people to buy new cars; and 2) reducing auto emissions as people used newer cars that had better pollution-control equipment and were  fuel-efficient cars. The program handed out $2.85 billion in vouchers in July and August 2009. How did it work? Ted Gayer and Emily Parker tackle that question in \”Cash for Clunkers: An Evaluation of the Car Allowance Rebate System.\” The more readable \”Policy Brief\” version of their analysis is here; the more detailed background paper is here. Short take: Having the government hand out vouchers for buying new cars was not a cost-effective program.

CARS (that is, Car Allowance Rebate System) did encourage people to buy cars during the two months it was in operation. Here\’s a figure showing monthly car sales. The gray band is the recession. The red band is the actual cash-for-clunkers program. Clearly, there\’s a boost when the program was in operation, but just as clearly, there\’s no particular deviation from the long-run trend.

Indeed, it looks as if the main effect of the program was that some of the people who were thinking about buying a car in the next few months anyway accelerated their purchase, so the sustained effect was minimal. Gayer and Parker write that the \”CARS program led to approximately 380,000 additional vehicle sales during the time of the program. This number represents the number of vehicles sales that would not have occurred during this time period without the CARS program. The existing evidence also suggests that these sales were pulled forward from sales that would have occurred otherwise in the future. Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.\”

What does this mean in terms of jobs? The additional spending can be linked to 2,000 to 3,000 extra jobs during and right after the bill. Gayer and Parker put this in context using estimates from the Congressional Budget Office about cost-per-job-saved of various policy steps taken during the recession. As many readers know, the details of these job-saved estimates can be controversial. But the bottom line is that if you are using federal spending to save jobs, cash-for-clunkers is a highly ineffective way of doing so.

What about on the environmental side? About 700,000 cars were purchased with the cash-for-clunkers vouchers, which is less than 1% of the total cars in the United States. Moreover, most of these cars would have been purchased in the next few months, even without the program. So the potential environmental gains are a modest speed-up in the purchase of cars with better fuel efficiency and pollution-control equipment. Gayer and Parker write: \”Overall, the average fuel economy of the vehicles traded in under the CARS program was 15.7 miles per gallon and that of new vehicles purchased under the program was 24.9 miles per gallon.\”

The social cost of carbon emissions is again a controversial topic, but the current US government estimate is a cost of $38 per ton; that is, a method of reducing carbon emissions that costs less than $38/ton is a good deal for society, but a method of reducing carbon emissions that costs more than $38/ton is a poor deal. Even if one has qualms about the specific number, even the most ardent environmentalists should prefer methods of reducing carbon emissions at the lowest cost–because more carbon will be reduced in that way. By this standard, cash-for-clunkers wasn\’t as bad as some alternatives, but neither was it cost-effective. Here\’s some context on cost-per-ton of reduced carbon emissions from Gayer and Parker:

Gayer and Parker also write: \”Note that these estimates of the reduction in gasoline consumption and emissions do not account for the energy consumed by prematurely disposing of used vehicles and the manufacturing of additional vehicles due to the CARS program, which would offset some of the program’s environmental benefits.\”

So to sum up: The taxpayer-funded cash-for-clunkers program was not a cost-effective way of job creation or helping the environment. Indeed, the main benefits probably went to those who were already thinking about a new car and were in a financial position to proceed immediately with buying one. Not surprisingly, those who used the taxpayer-funded cash-for-clunkers vouchers were usually people with above average-incomes.

I should say up front that I know little about financial investment strategies; indeed, all of my retirement assets are in various Vanguard no-load passively managed index funds. But after watching the financial sector jolt the U.S. economy both in recession that followed the dot-com boom of the 1990s and in the more recent Great Recession, I do spend a little more time looking at broad financial indexes than I used to. Here\’s what\’s called the Shiller P/E ratio. A P/E ratio looks at the total price of stocks compared with the earnings of companies, and thus gives a sense of how the stock market is being valued.  If you calculate a price/earnings ratio using annual data, then in a dismal economic year like 2008 when profits are very low, the P/E ratio will spike dramatically. To avoid these somewhat meaningless short-term spikes, the Shiller P/E ratio looks the current price of stocks divided by the average profit levels over the previous 10 years, so that it is less influenced by economic conditions this year.

The Shiller P/E is now 24.8. As the figure shows, it is higher than at any time except the peak of the dot-com boom and its aftermath, and Black Tuesday back in 1929 at the front edge of the Great Depression. In other words, when the P/E ratio has reached this level in the past, sometimes it has gone still higher (as in the dot-com boom), but over the last 130 years it has then always fallen back.  

I\’m not the right person to ask about what this means from an investment point of view: as I said, I\’m a boring index-fund investor. (John Hussman, who knows quite a bit about investments, discusses this pattern over at his website. Full disclosure: Many years back at Stanford, John was a teaching assistant for me and had an office down the hall. We are friends who have fallen out of touch.) My broader concern for some time has been that the extremely low interest rate policies that have been pursued by the Federal Reserve and central banks around the world run a risk of pumping up asset bubbles in other markets, which may pop painfully later on. The IMF has expressed similar concerns, along with Raghuram Rahan (a University of Chicago economist now heading India\’s central bank), economists at the Bank of International Settlements, and others. 

There are two main responses to concerns about the U.S. manufacturing sector: either the changes in manufacturing are mainly part of a long-run structural shift that goes back decades in the U.S. economy and is happening in high-income economies across the world, or there is something new and worrisome happening in the last decade or so.  Robert Z. Lawrence and Lawrence Edwards discuss \”US Employment Deindustrialization: Insights from History and the International Experience,\” written as Policy Brief #PB13-27 for the Peterson Institute for International Economics.  They come down more heavily on the \”long-run structural shift\” side of the argument.

Serious discussion of the U.S. manufacturing sector is based on three claims:

1) If you measure the output of the U.S. manufacturing sector in terms of the value-added in that sector, there is no trend up or down in recent decades. As Lawrence and Edwards write: \”Measured in 2005 dollars, manufacturing share of gross US output was 17.5 percent in 1947 and 17.3 percent in 2005. Between 1947 and 2005 the share averaged 17.3 percent and was essentially trendless …\” Value-added is calculated by taking the total revenues of a firm and then subtracting the value of purchased inputs of goods and services: thus, it includes not only profit but costs of labor and depreciation incurred by the firm itself in the course of production.

2) The number of jobs in manufacturing has fallen over time; in particular, the total number of U.S. manufacturing jobs didn\’t change much in the 1990s, but the U.S. manufacturing sector lost 5.8 million jobs from 2000-2010. However, Lawrence and Edwards point out if you look at the proportion of total U.S. jobs that are in manufacturing, it looks like a straight-line drop over time.

3) The manufacturing sector has a particular importance in any advanced economy. As Lawrence and Edwards write: \”[M]anufacturing activity is strongly associated with economic growth, because manufacturing serves as the fulcrum of supply chains that combine and process raw materials and services to produce goods.1 In addition, the sector is among the most dynamic—accounting for about 70 percent
of US spending on business research and development—and it regularly outstrips the rest of the economy in productivity growth.\”

Taking these factors together, a pattern arises that is familiar across high-income economies. For the U.S. economy, the price of manufactured goods relative to services has been dropping about 2% per year since 1960, driven by the relatively faster gains in productivity in the manufacturing sector. Consumers have increased their purchases of goods relative to service by about 0.5% per year since 1960. Putting these together, the amount spent on goods relative to services by U.S. consumers has been dropping about 1.5% per year since 1960. Thus, it takes fewer workers in U.S. manufacturing to produce the goods that American consumers want to buy, and this would hold true even if there was no international trade.

Lawrence and Edwards readily admit that trade makes a difference to the U.S. manufacturing sector, too. If the U.S. economy didn\’t run large trade deficits, they estimate that U.S. manufacturing jobs would be at a higher level–but such jobs would still be steadily declining over time at about the same rate.

These issues are common across high-income countries. Here\’s a table showing the decline in U.S. manufacturing jobs compared with some other high income countries, and the U.S. experience is about average. Notice that countries like Japan and Germany, which have often had substantial trade surpluses in recent decades, have still experienced a decline in manufacturing jobs.

The drop in the share of consumption represented by goods is also common across these countries.

There are some potential bright spots for U.S. manufacturing. Cheaper energy in the U.S. economy would give the energy-intensive manufacturing sector a boost. A reduced trade deficit and stronger recovery from the Great Recession would help manufacturing jobs. Advances in automation could improve the competitiveness of the U.S. manufacturing industry, although it would also contribute to the long-run decline in jobs. Similarly, wrapping the U.S. manufacturing sector into global supply chains can be a way to preserve U.S. manufacturing expertise–and in the 21st century, being apart from global supply chains in some sectors be an economic death sentence. New high-value, high-technology products may be manufactured in the U.S. economy. But while these steps can help keep manufacturing a lively and important part of the U.S. economy, the long-term decline in manufacturing jobs seems likely to continue.

Finally, here\’s a post from about a year ago on a global manufacturing report from the McKinsey Institute that includes useful figures showing patterns of manufacturing output and jobs over time in different countries.