Month: December 2013

An old proverb says that the road to hell is paved with good intentions. Saul Bellow played a riff on that proverb and came up with the idea of the Good Intentions Paving Company. The projects of this enterprise are always well-meant, but when those projects turn out to have undesired costs and tradeoffs and side-effects, the company leaders sincerely believe that none of the blame can possibly attach to them. After all, their intentions were good!

Joseph Epstein points a number of recent projects of the Good Intentions Paving Company in his op-ed in the Wall Street Journal yesterday (December 30, behind a firewall unless you have a subscription). He writes: \”I first heard the phrase \”Good Intentions Paving Co.\” from the lips of Saul Bellow, though I cannot recall to what exactly he applied it.\” My own quick and dirty search found one time when Bellow used the term in print, in a short letter to Philip Roth dated January 7, 1984, that was reprinted with other letters from Bellow in a New Yorker article of April 26, 2010. Bellow gave an interview to People magazine that was turned into a criticism of Roth, which Bellow had not intended. So Bellow wrote a note of apology:

\”I thought to do some good by giving an interview to People, which was exceedingly foolish of me. I asked Aaron [Asher] to tell you that the Good Intentions Paving Company had fucked up again. The young interviewer turned my opinions inside out, cut out the praises and made it all sound like disavowal, denunciation and excommunication. Well, we\’re both used to this kind of thing, and beyond shock. In agreeing to take the call and make a statement I was simply muddle-headed. … Please accept my regrets and apologies, also my best wishes. I\’m afraid there\’s nothing we can do about the journalists; we can only hope that they will die off as the deerflies do towards the end of August.\”

The Good Intentions Paving Company is of course a bipartisan operation, and Epstein offers a range of examples.

\’Tis the season of re-gifting, and so I make bold to pass along this list of 15 of the most popular posts of 2013 at this website, at least one from each month, in reverse chronological order. Of course, I encourage you to spend your holidays surfing the rest of the archives; after all, unless your personal interests are perfectly aligned with pageview popularity (and isn\’t that a frightening thought?), you are likely to find other posts of interest, too.

•  \”Ultra-Low Interest Rates: Who Wins? Who Loses?\”  December 4, 2013. 
• \”Unavoidable Realities of Insurance: Health Care Edition,\” November 15, 2013.
• \”The Global Wealth Distribution,\”  November 15, 2013. 
• \”The Poverty Rate: Income and Consumption Estimates,\” September 20, 2013. 
• \”Breaking Down the Falling Labor Share of U.S. Income,\” September 9, 2013.
• \”The Myth Behind the Origins of Summer Vacation,\” August 28, 2013. 
• \”U.S. Higher Education Enrollments, Falling Behind,\” July 29, 2013. 
• \”The Soaring Number of $100 Bills,\” June 10, 2013. 
• \”Labor\’s Share Falling, Everywhere,\” June 6, 2013.
• \”Spending on America\’s Pets,\” May 21, 2013. 
• \”Job Polarization by Skill Level,\” April 25, 2013. 
• \”Is Intellectual Property a Misnomer?\” March 29, 2013. 
• \”Reusable Grocery Bags Can Kill (Unless Washed),\” February 7, 2013. 
• \”Head Start is Failing its Test,\” January 29, 2013. 
• \”Does Income Bring Happiness?\” January 23, 2013.

International tourism is an underappreciated global industry. Total international tourist trips now top 1 billion per year and $1 trillion in receipts, according to the UN World Tourism Organization, in its \”Tourism Highlights: 2013 Edition:\” \”Despite occasional shocks, international tourist arrivals have shown virtually uninterrupted growth – from 25 million in 1950, to 278 million in 1980, 528 million in 1995, and 1,035 million in 2012. … International tourism receipts reached US$ 1,075 billion worldwide in 2012, up from US$ 1,042 billion in 2011.\”

International tourism is rising quickly, and projected to hit 1.8 billion by 2030. Most of that gain is coming from emerging economies. The UNWTO writes: \”The market share of emerging economies increased from 30% in 1980 to 47% in 2012, and is expected to reach 57% by 2030, equivalent to
over one billion international tourist arrivals. … China became the number one source market in the world in 2012, spending US$ 102 billion on international tourism.\”

Of course, the U.S. is at a geographic disadvantage in the international tourism statistics, because as a large country with an ocean on either side, and bordering only two other countries, it\’s not likely to get the same number of international tourists, as, say, smaller European countries where you can drive. To take a not entirely hypothetical example, a beleaguered Minnesotan freezing his toes off in near-zero weather who is thinking about a trip to Florida or Arizona is not counted as an international tourist, but a Swede or German thinking about visiting Greece or the south of France would be an international tourist. Most tourists visit in their own region. Here are the UNWTO stats on the countries with the largest arrivals of international tourists.

But it\’s important to note that when international tourists come to the United States, it is a form of exporting: that is, in both cases U.S. producers receive income from foreign buyers. A McKinsey Global Institute report a couple of years ago looked at opportunities in different sectors for job creation and noted: \”[T]o reach the high-job-growth scenario, the United States needs to retake lost ground in global tourism. … In particular, the United States is not getting its share of tourism from a rising global middle class. More Chinese tourists visit France than the United States, for example.\”

The U.S. Travel Association is the leading industry trade group for promoting the U.S. tourism industry. Earlier this year, it put out \”Gateway to Jobs and Growth: Creating a Better Traveler Entry Process.\” The emphasis of the report is to point out ways that the process for long-haul international tourists entering the U.S. could be streamlines, while still respecting security needs. But along the way, the report also tosses out some facts about international tourist in the U.S. economy:

\”Between 2000 and 2012, the number of long-haul worldwide travelers  increased by 78.8 million.  During that time, the U.S. share of global long-haul  travel fell from 17 percent in 2000 to just 12.9 percent in 2012. The bottom line: Tens of millions of new travelers went somewhere other than the U.S.\” If U.S. international tourism had kept pace with the international trends, it would have meant an extra 100 million tourists over the last decade or so. The report also notes:

\”International visitors to the U.S. – especially from overseas – stay longer and spend more money than domestic travelers. One particularly important trend in  the global travel market is the boom in travel from the rapidly expanding middle  and upper classes of the emerging economies in the developing world, countries  like Brazil, Russia, India and China (BRIC). While overseas visitors, on average, spend nearly $4,500 per person per trip, visitors from China and Brazil spend much more: $5,200 for Brazil and $6,000 for China.  Several of the BRIC countries have shown major passenger increases to the U.S. in recent years (2007–2012), including China (271%), Brazil (180%) and India (28%). These statistics show the importance of the BRIC countries and other emerging markets to global travel growth. Increasing international travel has helped make travel the nation’s largest service  export. In economic terms, international travel is counted as an export because dollars come into the country in the same way as they do when foreigners buy American cars, grain or software. Every 33 overseas visitors who travel to America support one U.S. job.\”

Most of the federal budget is spent paying benefits in the so-called \”mandatory\” programs, where rules are set that (unless or until the rules are changed!) require payments to be made to people meeting certain conditions. But part of the budget is \”discretionary\” spending on items where the government decides how much to spend each year, and in turn, a portion of that discretionary spending is about investments. The Congressional Budget Office gives an overview of \”Federal Investment\” in a recent report.

Here\’s an overview of the spending side of the federal budget. The main examples of mandatory programs are Social Security, Medicare, and Medicaid, but other benefits programs like food stamps or unemployment insurance are also included.  My main focus here is on the non-defense investment programs. While it\’s true that a few decades back, defense-related research and development often led to civilian products, the more common pattern in the last couple of decades has been that technology advances first in the civilian sector, and then the defense organizations find ways to apply that technology.

Over the last couple of decades, defense-related investment has dropped off as a share of GDP. Defense investment is about two-thirds physical capital, like weapons and equipment, and about one-third research and development. Nondefense investment dropped some in the 1980s, and stayed low until the burst of fiscal stimulus spending in 2009.

There are three main areas of nondefense federal investment: research and development, education, and physical capital. Physical capital is mainly related to transportation, including both infrastructure and equipment.

Within the category of federal R&D investment, you can see that the main area of growth has been in R&D related to health. In contrast, R&D related to science, space and technology dropped off in the 1960s and 1970s. And R&D in energy, for all the hoopla about environmental and national security issues related to energy use, dropped off in the 1980s and has only recently rebounded a bit.

Within the category of education and training investment, back in the 1980s federal spending on K-12 education, higher ed, and training and employment were roughly equal. Now, K-12 is out ahead, closely followed by higher ed, with training and employment lagging behind. Of course, it\’s important to remember that the overwhelming majority of K-12 and higher ed spending in the U.S. happens at the state and local level, not the federal level.

Finally, here\’s a a figure on transportation infrastructure investment, showing that overall spending in this area has fallen as a share of GDP, and a greater share of this investment is happening at the state and local level, rather than the federal level.

Budgets are an expression of priorities. The priority of the federal government is clearly about paying benefits, not about investing in the future. As far as I know, no one disagrees on the need for investing in the future of the U.S. economy. But when push comes to shove, federal investment spending is just hanging on, not expanding. Of course, each individual investment should be evaluated on a cold cost-benefit basis. But is it really the case that there is no cost-benefit argument for higher research and development spending on science and technology and on energy? No cost-benefit argument for higher federal spending on training and employment programs at a time when unemployment has been high and wages for low-skilled workers have been lagging? No cost benefit argument for more spending on transportation  infrastructure at a time when so many roads, bridges, airports, and seaports are overcrowded and physically wearing out? My sense is that in many of these areas, the federal government has for decades been pulled toward paying benefits in the present, rather than seeking out ways to invest in future growth.

The Federal Reserve reached its 100th anniversary this year, which can be both a time for thinking about what has happened, or for thinking about what might have been.

If you would like an overview of the substantial shifts and changes in the Federal Reserve over time, a useful starting point is a symposium in the Fall 2013 issue of the Journal of Economic Perspectives. For example, Ben Bernanke writes about the history of the Fed with an emphasis on five \”great\” episodes: \”the Great Experiment of the Federal Reserve’s founding, the Great Depression, the Great Inflation and subsequent disinflation, the Great Moderation, and the recent Great Recession.\” Gary Gorton and Andrew Metrick look at \”The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort.\”  Julio Rotemberg considers the goals and tactics that the Federal Reserve has used over time in seeking to ameliorate swings of the business cycle. Barry Eichengreen looks at when the Fed has acted because of concerns over international consequences, and predicts that the international dimension of monetary policy will play a larger role for the Fed in the future. Full disclosure: As usual, all JEP papers are freely available on-line, courtesy of the American Economic Association. My job as Managing Editor of the JEP has been paying the household bills since 1986.)

But if you are looking for what is in some way an even bigger-picture discussion of the Fed, the November 2013 issue of Cato Unbound tackles the issue: Was the Fed a mistake? the main essay is written by Gerald P. O\’Driscoll, and then comments follow from Lawrence White, Scott Sumner, and Jerry Jordan.  O\’Driscoll summarizes a theme that runs through the essays this way: \”The 19th century economic journalist and Economist editor Walter Bagehot thought it would have been better if the Bank of England had never been created. In Lombard Street, Bagehot argued that a decentralized system of many banks of approximately equal size would have been preferable. … Bagehot’s famous dictum that Bank of England must lend freely at penalty interest rates in times of panic was a second-best solution to a problem caused by centralizing reserves in that institution.
Having said that, Bagehot argued that, once created, it was not possible to abolish central banking.\”
Similarly, O\’Driscoll argues that while certain banking reforms were needed back in 1913, the creation of a central bank was a mistake–albeit a mistake that it may not now be possible to reverse.

What does the case against the Fed look like?

For substantial portions of the Fed\’s history, its main role has been to help the federal government borrow: obvious examples include during and after World War I, during and after World War II, and during and after the Great Recession. Indeed, O\’Driscoll argues that one main reason for the creation of central banks is that they enable high levels of government borrowing, which then impose later economic costs.

At other times in Fed history, its actions have contributed to sometimes quite severe swings in business cycles. For example, misguided Fed policies probably contributed to the large business cycle swings of the 1920s; to the Great Depression of the early 1930s and the steep recession of 1937-38; to the \”stagflation\” combination of inflation and recession in the 1970s; and to the climate of overborrowing that created fertile soil for the Great Recession. By O\’Driscoll\’s reckoning, the Fed has had about 30 years out of its first century when it wasn\’t either just a mechanism for high government borrowing or wasn\’t enacting deeply misguided policies: the 1950s, and the period from the mid-1980s to the mid-2000s.

In short, this indictment runs, it is at a minimum not obvious from the historical record that the Fed has offered more benefits than costs. Of course, a natural response to this charge to say something like: \”Well, I just can\’t imagine not having a central bank. Everyone who\’s anyone has a central bank.\” But a lack of imagination in thinking about alternative monetary institutions is not much of a defense of the current central banking institutions.

O\’Driscoll argues that a modern banking system does need constraints, so that the banks don\’t run amok in overborrowing and create financial instability. He suggests a commodity standard, like a gold standard, as such a constraint. My own sense is that a modern central bank–that is, not the Fed as it existed in the 1920s and 1930s–is clearly preferable to a commodity standard. Moreover, in the extraordinarily complex world of modern finance, I don\’t think a commodity standard would be anywhere close to a sufficient level of financial regulation.

But there is also no reason to expect that the Fed will stand still in its goals and tactics. The history of the Fed over the last 100 years shows lots of change and evolution over time. Back as recently as 1994, for example, the Federal Open Market Committee just took actions to adjust the federal funds interest rate, but did not release any statement explaining why. Of course, the Fed has also shown a high capacity for innovation (for better or worse!) during the Great Recession and since then, by announcing that a policy of near-zero interest rates would be sustained into the future and through its quantitative easing policies of buying Treasury debt and mortgage-backed securities directly. I don\’t expect the Fed to be abolished. But I wouldn\’t be surprised if the Fed in a decade or two is operating in substantially new and different ways.

\”[A]s I have always held it little Short of criminality to anticipate evils I will allow it to be a good comfortable road untill I am compelled to beleive otherwise.\” 

\”I crossed a Deep holler and assended a part of the plain elivated much higher than where I first viewed the above Mountains; from this point I beheld the Rocky Mountains for the first time with certainty, I could only discover a fiew of the most elivated points above the horizon, the most remarkable of which by my pocket compas I found bore S. 60 W. those points of the rocky Mountain were covered with Snow and the Sun Shown on it in such a manner as to give me a most plain and satisfactory view. whilst I viewed these mountains I felt a secret pleasure in finding myself so near the head of the heretofore conceived boundless Missouri; but when I reflected on the difficulties which this snowey barrier would most probably throw in my way to the Pacific Ocean, and the sufferings and hardships of my self and part in them, it in some measure counter ballanced the joy I had felt in the first moments in which I gazed on them; but as I have always held it little Short of criminality to anticipate evils I will allow it to be a good comfortable road untill I am compelled to beleive otherwise.\”

I\’m not much of a spiritual person, perhaps even less so than your average economist. But I do think that it is easy to spend an inordinate amount of one\’s time counting up problems and slights and injustices, past, present and future. In comparison, it requires (at least for me) some discipline and effort to count one\’s blessings. But the blessings matter more. I hope this holiday season and the year to come can feel like a good comfortable road for you.

If carbon capture and storage could be accomplished at a reasonable cost–and that \”if\” is absolutely enormous–the implications for the question of climate change are extraordinary. At least some of any needed reduction in emissions could happen while still burning fossil fuels. The Australian-based Global CCS Institute describes the potential and the issues facing carbon capture and storage in its annual report, The Global Status of CCS–2013. For the record, this Institute was established in 2009 with initial funding from the government of Australia, and its members \”include national governments, global corporations, small companies, environmental non-government organisations, research bodies and universities.\” It seems to me a bit of a cheerleader for the potential of carbon capture and storage approaches, but it still offers a useful overview of where the technology stands at present. 

The report envisions a future in which CCS technology would account for perhaps 15% of reduced carbon emissions by 2050, compared with the baseline that would otherwise exist. The argument is that if carbon emissions are going to be cut, then CCS technology will be cost-effective compared with some of the other options. The report argues (citations omitted): 

\”CCS has strong potential to be cost competitive in a low–carbon future. The International Energy Agency (IEA) has estimated that the exclusion of CCS as a technology option in the electricity sector alone would increase mitigation costs by around US$2 trillion by 2050. This is because many alternatives to CCS as a low–emissions technology in the electricity sector are more expensive. …
Beyond the electricity sector, it is unlikely that energy–related and process CO2 emissions can be eliminated without CCS. This is because CCS is the only large–scale technology available to make deep emissions cuts in several industrial sectors (such as iron and steel and cement). Industrial sector emissions account for more than 20 per cent of current global CO2 emissions. It follows that the widespread deployment of CCS in the power and industrial sectors in the coming decades is imperative to achieving a low–carbon energy future at least cost.\”

I tend to think of carbon capture and storage as a largely unproven technology. Here, the report dances a delicate line. It argues on one hand that the basics of CCS are well-understood. But it also argues that very large changes are needed if CCS is to be a major player in future carbon reductions. Here\’s a sample of the encouraging discussion:

\”CCS is often mistakenly perceived as an unproven or experimental technology. In reality, the technology is generally well understood and has been used for decades at a large scale in certain applications. For example:

• large–scale CO2 separation is undertaken as a matter of routine in gas processing and many industrial processes

• CO2 pipelines are an established technology, on land and under the sea

• large–scale injection and geological storage of CO2 has been safely performed in saline reservoirs for more than 15 years, and in oil and gas reservoirs for decades.

There are currently 12 operational large–scale CCS projects around the world, which have the capacity to prevent 25 million tonnes a year (Mtpa) of CO2 from reaching the atmosphere. The key technical challenge for widespread CCS deployment is the integration of component technologies into successful large–scale demonstration projects in new applications such as power generation and additional industrial processes.\”

There\’s a lengthy discussion of the large-scale projects that exist, and others that might be considered. There is also a lengthy discussion of various hurdles that need to be overcome. Here are some examples:

\”More than 90 per cent of the overall cost of CCS can be driven by expenses related to the capture process. … There is a variety of R&D programs focused on developing new and more cost-effective capture technologies. For example, the US DOE’s National Energy Technology Laboratory (NETL) has R&D programs designed to explore new solvents, membranes, and sorbents that could be used for CO2 capture. These programs focus strongly on developing technologies at the bench scale, and then funding their transition through to pilot scale.\”

\”For CCS to meet the longer term climate challenge of restricting global warming to less than 2°C, the estimated magnitude of the CO2 transportation infrastructure that will need to be built in the coming 30–40 years is 100 times larger than currently operating CO2 pipeline networks.\”

\”[T]here is an urgent need for policies and funded programs that encourage the exploration and appraisal of significant CO2 storage capacity.\”

\”Between 2008 and 2012, \’policy leader\’ governments committed more than US$22 billion in direct funding to large–scale CCS demonstration projects. … In late 2009, the scale of funding support being considered globally exceeded US$30 billion. However, as the global financial crisis deepened, some funding mechanisms were cancelled before they could be legislated … To date, not all of the available funding has been taken up. In several jurisdictions, some of the funding is no longer available due to legislative limits or changing government priorities. In some situations, the value of available government commitments has decreased due to the structure of funding mechanism or the funding is difficult to access due to the design of programs. In total, funding commitments have been reduced by more than US$7 billion …\”

In short, carbon capture and storage technology needs lots of basic research on the technologies for capturing carbon, and on the infrastructure for transporting it, and for where it would be stored. Meanwhile, funding commitments are dropping. The report sums up the situation this way:

\”CCS is at something of a crossroads. For those immersed in a highly challenging environment with often slow-moving funding and policy commitments, it would be very easy to put the commercial deployment of CCS in the ‘too difficult’ basket. However, for those with an eye to the very real challenges of creating a sustainable low–carbon energy future, the commercial deployment of CCS is non-negotiable. The value proposition for CCS does exist, but it is complex and challenging to communicate …\” 

I finished the report feeling that the hurdles in front of carbon capture and storage becoming commercially viable were every bit as large as I had previously thought, if not larger. But there is some interesting work happening: a report in the December 2013 of Scientific American described some research in which carbon dioxide is injected into underground basalt formations, where minerals would interact with the carbon dioxide to turn the carbon into a solid–thus eliminating any risk it might leak out in the future.  The risk of adverse climate change scenarios from higher carbon emissions is substantial enough that no possible solutions, even partial solutions, should be neglected.

As so many of us pass through airports at this time of year, contemplate the Transportation Safety Administration. The politics of creating the TSA were straightforward. The terrorist attacks of September 11, 2001, occurred. By November 2001, the Aviation and Transportation Security Act was passed into law, creating the TSA. This looks like a classic example of that old benighted syllogism of public policy: \”Something must be done. Here is something. Therefore, it must be done.\” Chris Edwards reviews the history and makes the case for \”Privatizing the Transportation Security Administration\” (Cato Institute, Policy Analysis No. 742, November 19, 2013).

\”TSA’s main activity is operating security screening at more than 450 commercial airports across the nation. The agency also runs the Federal Air Marshal Service (FAMS), analyzes intelligence data, and oversees the security of rail, transit, highways, and pipelines. TSA has 62,000 employees and an annual budget in 2013 of $7.9 billion.\” 

No other high-income country has put airport screening under central government control. Edwards writes: \”More than 80 percent of Europe’s commercial airports use private screening companies, including those in Britain, France, Germany, and Spain. The other airports in Europe use their own in-house security, but no major country in Europe uses the national government’s aviation bureaucracy for screening. Europe’s airports moved to private contracting during the 1980s and 1990s after numerous hijackings and terrorist threats, and it has worked very well. Canada also uses private screening companies at its commercial airports, and some airports also use private firms for general airport security. After 9/11, the government created the Canadian Air Transport Security Authority, which oversees screening at the country’s 89 commercial airports.136 But the
screening itself is carried out by three expert private firms—G4S, Garda, and Securitas—which are each responsible for a group of particular Canadian airports.\”

There\’s an old but useful rule for deciding when a certain desired activity should be carried out by government itself or instead if the government should pay others to do it: \”Government should steer, not row.\” Or to put it another way, do I feel more secure in a situation where undercover government inspectors are continually testing private airport security companies, who know they are likely to lose their contract if they fail to perform? Or in a situation where I\’m depending on one branch of government to inspect the security efforts of another branch of government, with all the inter-bureaucratic incentives not to embarrass each other, and where no one in a position of authority is going to lose their job or their annual bonus if security fails to perform?

In addition to pure security issues, a contracting approach to airport security has other possible benefits. One is that a contracting firm has better incentives to provide friendly and rapid customer service than does a government agency that can\’t be fired. Another is that local control allows more rapid adjustment of schedules across the 450 airports for days and times when demand is high or low, compared with a rule in which all such adjustments need to be cleared with a faraway bureaucracy. Improved methods of providing security–either less time or different equipment–are more likely to emerge from private firms competing for work at airports across the county than from a federal bureaucracy.

Not unexpectedly, Edwards cites a litany of reports that suggest poor management at the TSA. Out of 240 federal agencies, the TSA ranked 232nd in employee satisfaction. A GAO report found large increases in employee misconduct at TSA. A former TSA chief has reported that the agency is \”hopelessly bureaucratic.\” The TSA bought 207 \”puffer\” machines to detect explosives, but then decided they didn\’t  work well and mothballed them. Before TSA bought the full-body scanners, GAO requested that ti do a cost-benefit study, but none was done. In June 2011, a federal judge required that such a study be done, but it still hasn\’t been done. At least one outside study suggests that the machines would fail a cost-benefit analysis quite dramatically.

Maybe we needed more airport screeners in the aftermath of 9/11, although I\’m not familiar with any evidence on the point. But did we need the number of airport security screeners to more than double from 16,000 before the TSA to more than 40,000 immediately after, and 53,000 today?

The 2001 legislation allowed airports to opt out, and five immediately did so–with San Francisco being the largest. Now there are 16 airports that have opted out, and others are applying to do so. There\’s no evidence that the airports which have opted out of the TSA are any less secure. And there aren\’t any airports moving the other direction, from privatized airport security to join up with the TSA. If the TSA can\’t be abolished outright, at least such opt-outs can be allowed and encouraged.

My family always had real Christmas trees when I was growing up. I\’ve always had real trees as an adult. Living in my own little bubble, it thus came as a shock to me to learn that, of the households that have Christmas trees, over 80% use an artificial tree, according to Nielsen survey results commissioned by the American Christmas Tree Association  (which largely represents sellers of artificial trees). But in a holiday season where the focus is often on whether we are naughty or nice, what choice of tree has greater environmental impact?

There seem to be two main studies often quoted on this subject: \”Comparative Life Cycle Assessment (LCA) of Artificial vs. Natural Christmas Tree,\” published by a Montreal-based consulting firm called ellipsos in February 2009, and \”Comparative Life Cycle Assessment of an Artificial Christmas Tree and a Natural Christmas Tree,\” published in November 2010 by a Boston consulting firm called PE Americas on behalf of the aforementioned American Christmas Tree Association.Both studies assume the artificial tree is manufactured in China and transported to North America.  (If readers know of other recent published studies, please send me a link!)

Note: This post first appeared on December 24, 2012. It has been slightly edited.)

Here are some of the main messages I take away from these studies:

1) One artificial tree has greater environmental impact than one natural tree. However, an artificial tree can also be re-used over a number of years. Thus, there is some crossover point, if the artificial tree is used for long enough, that its environmental effect is less than an annual series of trees. For example, the ellipsos study finds that an artificial tree would need to be used for 20 years before its greenhouse gas effects would be less than those of an annual series of natural trees. The PE Americas study offers a wide range of scenarios, and summarizes, but here is the situation \”for the base case when individual car transport distance for tree purchase is 2.5 miles each way. Because the natural tree provides an environmental benefit in terms of Global Warming Potential when landfilled, and Eutrophication Potential when composted or incinerated, there is no number of years one can keep an artificial tree in order to match the natural tree impacts in these cases. …  For all other scenarios, the artificial tree has less impact provided it is kept and reused for a minimum between 2 and 9 years, depending upon the environmental indicator chosen.\”

2) The full analysis needs to look at effects across all the full life-cycle of the tree, whether natural or artificial. This seems to involve the following steps.

• Under what conditions is the tree manufactured or cultivated, with what use of energy, fertilizer, and logging methods? 
• By what combination of transportation mechanisms is the finished tree moved to the home? A substantial share of artificial trees are manufactured in China and then shipped to North America.
• What are the different issues in use of the tree, including use of water and emissions of fumes?
• What is the end-of-life for the tree? For example, the carbon in a natural tree will be stored for some decades if the tree goes into a landfill, but not if if is composted or incinerated.

3) The full analysis also needs to look at a range of possible effects. For example, the PE America study looked at \”global warming potential (carbon footprint), primary energy demand, acidification potential, eutrophication potential, and smog potential.\” Here\’s a figure showing 14 categories of analysis from the ellipsos study, with a comparison between natural and artificial trees on a number of dimensions.

The ellipsos study sums up this way: \”When aggregating the data in damage categories, the results show that the impacts for human health are approximately equivalent for both trees, that the impact for ecosystem quality are much better for the artificial tree, that the impacts for climate change are much better for the natural tree, and that the impacts for resources are better for the natural tree …\”

4) In the context of many other holiday and everyday activities, the environmental effects of the tree are small. The studies offer some comparisons of the environmental effects of the tree compared with the electricity used to light the tree, the driving by a household to pick up the tree, and even the environmental effect of the tree stand.
  
For example, in comparing Primary Energy Demand for the tree and the energy demand for lighting the tree. For an artificial tree, the PE Americas study reports: \”The electricity consumption during use of 400 incandescent Christmas tree lights during one Christmas season is 55% of the overall Primary Energy Demand impact of the unlit artificial tree studied, assuming the worst‐case scenario that the artificial tree is used only one year. For artificial trees kept 5 and 10 years respectively, the PED for using incandescent lights is 2.8 times and 5.5 times that of the artificial tree life cycle.\” For a natural tree: \”The life cycle Primary Energy Demand impact of the natural tree is 1.5 ‐ 3.5 times less (based on the End‐of‐Life scenario) than the use of 400 incandescent Christmas tree lights during one Christmas season.\”

In comparing the environmental effects of driving with those of the tree, ellipsos writes: \”Due to the uncertainties of CO2 sequestration and distance between the point of purchase of the trees and the customer’s house, the environmental impacts of the natural tree can become worse. For instance, customers who travel over 16 km from their house to the store (instead of 5 km) to buy a natural tree would be better off with an artificial tree. … [C]arpooling or biking to work only one to three weeks per year would offset the carbon emissions from both types of Christmas trees.\”

The PE Americas report strikes a similar theme: \”Initially, global warming potential (GWP) for the landfilled natural tree is negative, in other words the life cycle of a landfilled natural tree that is a GWP sink. Therefore, the more natural trees purchased, the greater the environmental global warming benefit (the more negative GWP becomes). However, with increased transport to pick up the natural tree, the overall landfilled natural tree life cycled becomes less negative. When car transport becomes greater than 5 miles (one‐way), the overall life cycle of the natural tree is no longer negative, and there is a positive GWP contribution.\” 

Even the tree stand for a natural tree has an environmental cost that can be considered in the same breath with the costs of a natural tree. PE Americas: \”The tree stand is a significant contributor to the overall impact of the natural tree life cycle with impacts ranging from 3% to 41% depending on the impact category and End‐of‐Life disposal option.\”

I would add that the environment effect of the ornaments on the trees may be as large or greater than the effect of the tree itself. Data from the U.S. Census Bureau shows that America imported $1 billion in Christmas tree ornaments from China (the leading supplier) between January to September 2012, but only $140 million worth of artificial Christmas trees. Thus, spending on ornaments is something like six times as high as spending on trees. The choice of what kind of lights on the tree, or whether to drape the house and front yard with lights, is a more momentous environmental decision than the tree itself.

Of course, these kinds of comparisons don\’t even try to compare the environmental cost of the tree with the cost of the presents under the tree, or the long-distance travel to attend a family gathering. Thus,  the PE Americas study concludes: \”Consumers who wish to celebrate the holidays with a Christmas tree should do so knowing that the overall environmental impacts of both natural and artificial trees are extremely small when compared to other daily activities such as driving a car. Neither natural nor artificial Christmas tree purchases constitute a significant environmental impact within most American lifestyles.\” Similarly, ellipsos writes: \”Although the dilemma between the natural and artificial Christmas trees will continue to surface every year before Christmas, it is now clear from this LCA study that, regardless of the chosen type of tree, the impacts on the environment are negligible compared to other activities, such as car use.\”

Certainly, celebrations at holidays and big events can sometimes be exorbitant and over the top. But the use of a Christmas tree, and the choice between a natural tree or an artificial tree, is a small-scale luxury. If the environmental issue is bothering you, even knowing these facts, make a resolution to use your artificial tree for a few more years, rather than replacing it, or to save some energy in January by driving less or being more vigilant about turning off unneeded lights. Gathering around the tree should be one less reason for moralizing around the holidays, not one more. So celebrate with good cheer and generous moderation.

My mental model of what is exchanged in international trade is getting an attitude adjustment. Traditional discussions of international trade are often based on examples of countries exporting products which are then consumed in other countries: cars, computers, wine, clothing, and so on. But in the modern economy, what is often exported across national borders is an intermediate good, which is then used in production of other intermediate goods and exported again, so that the ultimate product was produced as part of a global supply chain reaching across countries. The collection of essays in Global value chains in a changing world, edited by Deborah K. Elms and Patrick Low, offers a nice overview. The book was published by the World Trade Organization, together with the Fung Global Institute and Nanyang Technological University.

The book has 16 chapters, covering various aspects of global supply chains like how to measure the value-added within each country, how to manage these production processes, and how low- and medium-income countries can find a niche for themselves to these production chains. Here, I\’ll focus on the nice overview essay by Richard Baldwin. He begins (references and footnotes omitted for readability, as usual):

\”Global supply chains have transformed the world. They revolutionized development options facing poor nations; now they can join supply chains rather than having to invest decades in building their own. The offshoring of labour-intensive manufacturing stages and the attendant international mobility of technology launched era-defining growth in emerging markets, a change that fosters and is  fostered by domestic policy reform. This reversal of fortunes constitutes perhaps the most momentous global economic  change in the last 100 years.  Global supply chains, however, are themselves rapidly evolving. The change is in  part due to their own impact (income and wage convergence) and in part due to  rapid technological innovations in communication technology, computer integrated  manufacturing and 3D printing.\” 

Baldwin argues that these global supply chains represent a profoundly different form of international trade. In what he calls \”the first great unbundling\”–that is, the growth of world trade from the early 19th century through much of the 20th century–the gains from trade results from cheaper transportation costs combined with innovation, specialization, and economies of scale.The advantages of complexity and scale seemed to be coordinated best when production was clustered in a relatively few places.   The result was that economic activity became clustered: for example, in the global North rather than the global South, and in certain regions and metropolitan areas rather than others.

The \”second great unbundling\” of global supply chains is driven by different factors: declining costs of communication and information technology made it possible to coordinate economic activities happening in many different locations, and the large differences in wages that had built up over the decades across the countries of the world meant that splitting up work could reduce costs. \”Some of the coordination costs are related to communication, so the `coordination glue\’ began to melt from the mid-1980s with ICT’s melding of telecommunications, computers and organizational software. … While technology transfer is an ancient story (gunpowder), ICT facilitated control that reduced the costs and risks of combining developed-economy technology with developing-nation labour.\”  In this form of international trade, economic activity becomes less clustered, and expertise spreads out.

Baldwin describes the result this way: There are “headquarter” economies (whose exports contain relatively little imported intermediates) and “factory” economies (whose exports contain a large
share of imported intermediates). …  The global supply chain is really not very global – it’s regional
… [in] what I call Factory Asia, Factory North America, and Factory Europe.\”

As one measure of these shifting patterns, Baldwin points out that the G-7 economies–the United States, Canada, France, Germany, Italy, Japan, the United Kingdom–represented 20% of global output in 1820, 40% of global output in 1870, and peaked at two-thirds of global output in 1988, but have now fallen back to 50% of global output.

Baldwin also argues: \”Internationalizing supply chains also internationalized the complex two-way flows that used to take place only within factories.\” Thus, decisions about how to invest that used to happen inside plant or perhaps in a certain local region are now decisions about foreign direct investment. Transportation of parts and supplies used to happen inside a company: now much of that transportation is outsourced to logistics companies that provide shipping services. Services like legal and finance that used to happen within a company, and often even within the same building, now often become international transactions. Decisions about how to move intellectual property into the production line used to involve people from neighboring buildings, but now it involves decisions about sharing intellectual property and appropriate training across international borders.

And the political economy of trade changed, too. In the older forms of international trade, there was always a temptation to protect domestic industries by shutting out imports. But in global supply chain trade, there is an incentive to make it ease for imports to arrive as part of the global value chain, and an expectation that other countries will behave in the same way.

This process of global value chains is really just getting underway, and it may turn out to be more of a kaleidoscope of shifting patterns than a unidirectional movement. There will continue to be advantages of proximity to suppliers of inputs and to sources of ultimate demand. On the other side, continuing improvements in information and communications technology will tend to encourage further separation of economic activity, along with the growth of products that are valuable and technology-intensive but are small and have low cost to ship–or in the case of  products like software or certain services, the \”products\” can be shipped electronically at almost zero cost. These forces will vary for different products. They will change with new developments in technology, like computer-guided manufacturing or equipment that can be operated by specialists who are geographically far away (remote surgery, anyone?). The forces will also change according to the ways that areas specialize in different kinds of production.

My sense is that when economic historians 50 or 100 years from now look back at this time period,  our daily policy concerns like the slow recovery from the Great Recession, health care finance, the euro, and others will have faded with time. Instead, the creation of global supply chains and the transformation of global economic patterns, along with what it means for countries and workers, will seem like the defining economic event of our time.