Keeping jobs at home

Senator Obama’s acceptance speech last night was certainly very good, and I would assume that it improves his chances of winning the election. But like all politicians, he is quite likely promising more than anyone can possibly deliver.

For example, his promise to keep more jobs at home plays well with working people who have seen their jobs outsourced overseas, but ignores the economics that drives that outsourcing. Companies outsource overseas because they can produce products more cheaply overseas. They need to produce cheaper products because if they don’t they will be priced out of the market and be out of business. The reason rust belt steel plants all closed was because they were priced out of the market by overseas steel plants that were able to produce steel at less cost. We could, of course, have put up trade barriers and kept that steel out of the USA to save the US steel plants, but then (a) things we made with domestic steel would be too high-priced to sell on the export market, and (b) we would be paying far more for our own automobiles and appliances and other things made of steel. The same logic applies for all kinds of other products. People complain about WalMart buying overseas, but they flock to WalMart stores precisely because those overseas products are more affordable than domestic products. You can’t have it both ways at once!

Realistically what is happening on the world market is that lower-skill, lower-paying jobs are moving to countries with lower wages, leaving the higher-skill, higher-paying jobs in the developed world. This has two effects, both good in the long-term:

(1) in the less developed world, the inflow of capital and jobs and factories over a period of years raises the skill level and the wages of those workforces, which helps them move out of poverty and into the developed world. In fact, it is by far the most effective foreign aid we can give, and a number of once-poor Pacific-rim nations now have highly-skilled workforces, and the jobs they bring, precisely because of this effect.

(2) the higher-skill jobs that stay in the developed world pay better, better supporting the expanded lifestyle that people in the developed world expect. In addition, the higher-skill jobs tend to leverage capital better. That is, they are more efficient at converting work-hours to income and profit.

The catch-22, of course, is that domestic workers need to be willing and able to acquire the higher level of skills needed to compete for the higher-paying jobs that remain in the developed world. Engineers and scientists and computer programmers and technicians of various sorts all make better money than assembly line workers and hamburger flippers, but they had to be willing and able to acquire better skills first. Which is why the exceptionally poor quality of our public educational system is a real long-term threat to our nation’s economy.

So I understand the Democratic Party’s need to promise to keep more jobs at home, because it speaks to their political base, and because it bespeaks a humane outlook. But in reality it is the wrong focus – the right focus would be to do what is required to better train and retrain our workers so that they can get the higher-paying, higher-skill jobs that remain here.

Of course, there always remains a pool of people who, for one reason or another, simply can’t acquire the higher level of skills needed to do well in our society. They may lack the mental ability, or the work discipline, or the cultural drive, or the social skills needed to master more difficult jobs. In a simpler world there were almost always less skilled jobs available for them. In our more complex, more technological world there aren’t many of those jobs left. Even a ditch-digger these days has a skilled job operating a complex, $250,000 piece of machinery. How a technological society like ours should deal with those unable to master the technology is one of the critical unsolved social problems of our day.

The T. Boone Pickens Plan

If you haven’t already run across it, may I suggest you go to the T. Boone Pickens website at http://www.pickensplan.com/theplan/ and see what this oil billionaire is proposing as a solution to our energy problems. I’ve done a little preliminary checking, and find that his numbers are real and his proposal quite reasonable.

What is really interesting is that he is acutely conscious of how slowly the federal government moves, even in crisis, and how many vested interests have to be overcome to change our energy picture, and he has turned to the internet to build popular support for his proposals and motivate the politicians. Activist politics has clearly taken a new direction with the internet.

As he points out, it would take on the order of a trillion dollars to build a wind farm in the middle of the nation that could produce a significant proportion of our energy, but since we spend three-quarters of a trillion dollars on oil every year (most of that money going to nations that aren’t particularly our friends), it’s not an unreasonable investment. And his proposal to convert US automobiles to natural gas (of which we have plenty) is far easier and faster to achieve that the hydrogen-based proposals the government is currently funding, and far more efficient than the corn-based ethanol the government is currently subsidizing.

Michelle Obama

I have been listening to Michelle Obama’s speech this first night of the Democratic Convention. It’s interesting. I never trusted Hillary Clinton – however hard she tried, she always sounded like a politician saying whatever she thought her audience wanted to hear. Michelle is different. I could vote for her if she were running, precisely because she doesn’t sound like a politician – she sounds like a real person saying what she really believes.

Maybe that’s what appeals to me about McCain (whether in the end I vote for him or not) – he doesn’t seem afraid to say what he thinks, even if that isn’t what his audience wants to hear – like when he told Iowa farmers recently that he thought it was wrong to provide government subsidies to divert corn to ethanol production.

Maybe it’s just that I keep hoping that someday we will get a real statesman (or stateswoman) for a president, instead of a party politician.

The truth about “Big Oil”

H.L. Mencken said "For every problem, there is a solution that is simple, elegant, and wrong." I think of this quotation every time I hear a politician thunder on about the obscene profits supposedly being made by oil companies at our expense, and propose yet again to levy a “windfall profits tax” on them.

Yes, in good times oil companies make a lot of money, as do many other kinds of companies. In bad times they lose their shirts. With oil at $130+ a barrel, things look good for them now. A decade ago oil was dirt cheap and they were losing their shirts.

The oil business has two problems:

• Investment is highly risky. On land it costs $2-50 million to drill an oil or gas well, depending on how deep it has to go (and most new wells today have to go very deep). Offshore drilling costs are in the range $50-100 million or more per hole. Even with today’s advanced prospecting techniques many holes are “dry holes’, or don’t produce enough to pay for themselves. Production costs are enormous. Offshore rigs can cost $1-2 billion apiece, and can be a total loss after a severe hurricane. Refineries cost around a billion dollars. Pipelines and shipping terminals can cost tens of billions (the Alaskan pipeline cost about $8 billion in 1977 dollars, which is about $28 billion in today’s dollars.)

• Demand is unpredictable. After the 1973 Middle East oil embargo when oil prices skyrocketed, people thought that oil was surely a good investment. Ten years later oil was only at about $29 a barrel and lots of companies in the oil business went under. Now it looks again like investing in oil and gas ought to be a good strategy, but by the time investments in new production capacity is ready to produce (8-15 years), oil demand may well have dropped again, especially if “green” conservation ideas and alternative energy sources get a good deal of investment in the next few years.

In the face of this, why would anyone want to invest in oil and gas production? Well, if the potential profits are high enough, they can attract investment even if the risk is high. That is the case for oil.

If on the other hand the government, with “windfall profits” taxes, sees to it that there are no “obscene profits” in good times like these, that will make investment in this risky area thoroughly unattractive, and as a consequence there will be no incentive to expand the production capacity (oil wells, shipping terminals and pipelines, and refineries), or even maintain the facilities we now have.

In fact, we haven’t built a new oil refinery in this country in 30 years. That’s one of the main things that is constraining the gasoline supply in the U.S. and driving our prices up. And the reason we haven’t built one is that there isn’t sufficient incentive for anyone to risk a billion dollars on such an investment.

Whether politicians simply don’t understand the basics of market economics, or whether they can’t stand to let the truth stand in the way of an appealing political slogan, this proposal to tax the windfall profits of “big oil’ comes up from both parties every time oil prices go up. Strange that when oil has had bad times, they never seem to have felt an urgent need to bail the industry out as they have auto companies and banks.

So the next time you hear a politician try to make cheap points by proposing to heavily tax oil companies, remember H.L. Mencken’s quote, "For every problem, there is a solution that is simple, elegant, and wrong."

UPDATE - 10/31/2008 When this was originally written crude oil prices were approaching $140 a barrel. Now, two months later, crude oil prices have plummeted to about $70 a barrel. This is exactly the sort of instability that makes investment in oil so risky. I rest my case.

Recommended: The Gecko's Foot

Here's an interesting and wonderfully informative book: "The Gecko's Foot" by Peter Forbes. Ever wonder how a Gecko can climb a smooth sheet of glass or hang upside down on the ceiling? It turns out to have to do with the nano-structure of the foot - the structure of the foot pad at the range of 1 millionth to 1 billionth of a meter.

In fact, it turns out lots of very interesting things happen in nature at that scale - lily pads self-clean and insects fly and mollusks make incredibly durable composite shell structures, and........ And we now have a whole generation of scientists and engineers learning from these natural nano-structures and applying them to commercial products -- self-cleaning glass and paint, new tough fibers, new more efficient architectural forms, etc.

Peter Forbes is a good writer, and this is a very readable book.

The complexity of the world

When I look at the natural world I am reminded of Russian matryoshka (nesting) dolls. There are so many layers and layers of complexity in even the simplest-looking thing. Look at a “simple” plant. At our visual level there is already a fairly complex structure of roots, stems and leaves. Look more closely at a leaf and it devolves into complex layers of tissues and veins. Look at the tissues in detail and one sees a whole world of different cell types interacting. Inspect a single cell and one finds within a complex world of membranes, chloroplasts, Golgi bodies, mitochondria, nuclei, and many other structures, all interacting as tiny chemical factories. Look into any of these and a whole world of complex chemical reactions appears as proteins are built or modified and energy is extracted. Study the chemical interactions in detail and one enters a world of assemblies of atoms and electric charges. Break the atoms down and one is in the world of protons and neutrons and electrons. Break these down in turn and one enters the subatomic Alice in Wonderland world of quarks and quantum physics. And no doubt there are layers and layers of complexity yet to be discovered below this level.

What is the significance of all this? Only this: anything we humans think we know about the world is at best an approximation, though perhaps a useful one. The real world is far, far more complex than we can individually comprehend, and probably more complex than the whole human race acting together can ever comprehend, though we have come an amazing way thus far in our attempts.

That ought not to deter us from trying, because we can probably eventually understand at least a useful approximation of the major physical effects that drive the cosmos. But it ought to keep us humble about what we think we know, and always open to the very real possibility that we have got it wrong, in detail if not wholly.