Technology, Environment, and the Future of Natural Gas

Natural gas has long been one of the leading domestic energy sources for the U.S. economy. For a while, in the 1980s, it fell to third place behind oil and coal, but production is now on the rise again. By the end of 2009, natural gas was in a near-tie with coal for the lead in U.S. energy production.

Technology has been a major factor behind increased production of natural gas. In recent years, it has become practical to produce gas from "unconventional" sources once thought too expensive to tap. These include methane from coal beds, gas from shale formations, "tight gas" from other hard rock formations, and gas from extremely deep wells. Gas from unconventional sources now accounts for almost half of current production, and an even greater share of reserves.

There have been new developments on the demand side of the market, as well. One of them is an increased demand for low-carbon fuels. (Oil produces 37 percent more carbon per Btu than does natural gas, and coal 77 percent more.) Concerns about climate change have already led to increased incentives and regulations that encourage use of natural gas. If a comprehensive cap-and-trade scheme for carbon ever passes the Congress, natural gas will receive another big demand-side boost. Natural gas is not an environmental cure-all, however. Production from unconventional sources can have adverse environmental impacts of its own, including disposal of drilling wastes and ground water contamination.

On balance, the future of natural gas looks bright. The U.S. Energy Information Agency foresees an increasing role for gas over the next three decades.

Developments in the natural gas market make a good illustration of basic supply and demand concepts for your principles of economics course. To download a free set of PowerPoint slides on this topic, follow this link. If you find this material useful, please post a comment.

In GDP Data, Signs of Healthy Structural Change

Advance US GDP data for fourth quarter of 2009 were released at the end of January. They indicate that the economy grew at a brisk 5.7 percent annual rate, up from 2.2 percent in the third quarter. Even better news, behind the headline growth rate there were some signs of healthy structural change.

One such sign was continued strong growth of exports. Imports also grew, but the net export gap, as a percentage of GDP, remained much narrower than it was during the boom of the early 2000s. Many economists have pointed to unsustainable global trade imbalances, including both US current account deficits and Chinese surpluses, as one cause of the recent crisis. It would be good for global macroeconomic stability if these imbalances were to remain more moderate as the world economy recovers.

A second sign of welcome structural change was an uptick in the personal saving rate. During the housing bubble, personal savings had fallen to extremely low levels, as households went on a credit binge and borrowed heavily against home equity. Overstretched household finances are often cited as another cause of the crisis. True, at this point in the business cycle, some observers would welcome a spurt of consumption-led growth to further speed short-term recovery of GDP. However, stronger household balance sheets are arguably more important for long-run macroeconomic health.

Finally, government purchases of goods and services, as a percent of GDP, showed a small decrease in the fourth quarter of 2009. That may come as a surprise to anyone who has turned on the TV and listened to politicians and pundits carrying on about runaway growth of government. The explanation is that the nation's budget problems (which remain very real) do not stem from growth of government consumption expenditures and investment. Instead, they arise largely from continued imbalances between tax revenues and transfer payments, which do not show up in the GDP numbers. The larger problem of fiscal imbalances will be the subject of a later posting, after the President's budget message is sent to Congress.

Follow this link for a free set of PowerPoint slides showing highlights of the Q409 GDP data. If you find these slides useful in your economics classes, please give me some feedback in the form of a comment on this posting, or an e-mail.

Deflation Threat Recedes: "It" Didn't Happen Here

December 2009 inflation data showed the U.S. Consumer Price Index rising at an annual rate of 2.7 percent over the preceding 12 months. After several months of negative numbers earlier in the year, it appears that the threat of deflation has receded.

Just a few months ago, some economists were more pessimistic. When the economy enters a severe recession, conventional monetary policy can lose effectiveness. As interest rates fall to near-zero, banks tend to accumulate excess reserves. At the same time, velocity may slow down. As a result, the link between monetary policy instruments and GDP weakens, and the central bank finds itself "pushing on a string."

In 2002, Ben Bernanke, then a newly-appointed Fed governor, dealt with these issues in a speech entitled "Deflation: Making Sure 'It' Doesn't Happen Here." In the speech, he proposed that if a threat of deflation ever did loom, the Fed could maintain effectiveness of monetary policy by taking unconventional actions, including buying longer-term securities and extending loans to financial institutions outside the commercial banking system. He was confident that if the Fed was bold enough to use all the tools at its disposal, "It"--Japanese-style sustained deflation--could not happen in the United States.

Now that the Fed appears to have saved us from the threat of deflation, it must turn its attention to finding an "exit strategy" for reabsorbing the massive quantity of liquidity it has injected into the financial system. Already, the Fed has begun to unwind some of its positions, but bank reserves are still extraordinarily high. More work remains to be done to make sure the economy does not come out of recession straight into inflation.

Click here to download a free set of PowerPoint slides that show the lastest inflation data and highlights of monetary policy over the last two years. If you find them useful in your economics course, please post a comment or send me an e-mail. I'd like to know how you use this material, and what you'd like to see next.

Are Pay-for-Delay Drug Deals Anticompetitive?

In January, the Federal Trade Commission published a new study claiming that so-called pay-for-delay drug deals are costing consumers $3.5 billion per year.

Pay-for-delay drug deals are, in large part, an unintended consequence of the Hatch-Waxman Act of 1984, which was intended to allow earlier market entry for generic drugs. Under certain conditions, Hatch-Waxman allows generic drug makers to begin selling their products before the patent on the brand-name drug expires. However, producers of generics who attempt to use this early-entry mechanism are sometimes sued by the brand-name producer. Often, the suits never come to trial. Instead, a pay-for-delay deal is reached in which the maker of the brand-name drug pays a large sum to the generic manufacturer, in return for which the latter agrees to stay out of the market. The FTC calculates that the average delay achieved by such deals is 17 months.

Pay-for-delay deals are profitable for both companies if the payment is smaller than the profit that would potentially be lost by the brand-name manufacturer, but greater than the potential profit earned by the generic producer. Both elementary economic theory and empirical evidence suggest that this condition will often be satisfied. It is equally clear that consumers are the losers when such deals are reached.

The legal status of pay-for-delay deals is murky. In the early years after passage of Hatch-Waxman, they were considered anticompetitive per se, and very few such deals were made. Then, beginning in 2005, federal appeals courts determined that the deals were legal, after all. The number of such deals increased rapidly.

Now there is a push to end pay-for-delay deals once and for all. They are under attack both by the Federal Trade Commission and the Antitrust Division of the Justice Department. In addition, the House version of the omnibus health care bill currently under consideration by Congress would outlaw pay-for-delay. The Senate version does not include this language. (The final fate of the legislation is not yet known as this is written.)

To download a free set of PowerPoint slides that explain the pay-for-delay controversy, follow this link. The slides include a simple graphical model that can be used as a classroom example in your principles of microeconomics course. If you find the slides useful, please post a comment, or send me an e-mail.

2009: A Bad Year for Jobs, but Some Light at the End of the Tunnel

2009 Was a bad year for the U.S. job market. Unemployment hit a peak rate of 10.1 percent in October, and barely edged down to 10.0 percent in November and December. There was a glimmer of hope when 4,000 payroll jobs were added in November, but payroll employment declined again in December, by 85,000 jobs.

Some observers were heartened by the fact that unemployment did not rise to its previous post-World War II peak of 10.8 percent, recorded in December 1982. A more significant ray of light at the end of the tunnel was the fact that the rate of job loss slowed dramatically toward the end of the year, compared with monthly losses in the hundreds of thousands in earlier quaters.

Looking beneath the headline unemployment and payroll numbers, it was harder to find good news. The structure of unemployment by duration worsened significantly. By year's end, nearly 40 percent of the unemployed had been out of work six months or more. Long spells of unemployment are considered especially damaging since they may lead to a loss of job skills.

Broader measures of labor market hardship also worsened. Some observers consider the measure "U-6" to be the best measure of labor market hardship. In addition to workers included in the standard measure (which includes only those who are not working, but actively looking for work), U-6 adds others who suffer from bad labor market conditions. These include discouraged workers and other marginally attached workers, who say they would look for work if they thought any work was available, and also people with part time jobs who say they would prefer to work full time. U-6 rose from 13.5 percent  of the labor force in December 2008 to 17.3 percent in December 2009. Furthermore, U-6 edged slightly higher in November and December, even after the standard measure of unemployment flattened out.

To download a free set of PowerPoint slides summarizing the 2009 employment situation, follow this link. Feel free to cut-and-paste the slides into your lectures, or assign them to your students as independent reading. If you like the slides, please post a comment or send me an e-mail.

Will High Pork Prices Ruin the Holidays?

The supply and demand model is the core of microeconomics. You can never have too many examples in your classroom. Here is a simple example that will help students distinguish between shifts in demand and shifts in supply. As a bonus, the case also illustrates import restrictions, if you want to use it in conjunction with your international trade lectures. The attached PowerPoint slides can either be used as part of a classroom discussion, or printed out (with the answers deleted), and used as a quick quiz.

Pork is a popular dish in Malaysia among those who celebrate the Chinese New Year holidays. (About a quarter of Malaysia’s 28 million people are of Chinese descent.) This year, though, consumers are grumbling at high pork prices, which have reached 7.65 Malaysian ringgits per kilo at the wholesale level (about $1 per pound) . They are blaming anyone they can think of—pork producers, the government, whoever.

What is behind the high prices? Beh Kim Hee, chief of the pork section of the Federation of Livestock Farmers Associations of Malaysia, says it's normal supply and demand. Demand is up because of the holidays. At the same time, the need to upgrade production facilities to meet sanitary standards is raising the cost of production.

Those who blame the government seem to be on to something, as well. The government bans the import of fresh pork from neighboring countries like Vietnam, China, and Thailand, where it is a third or more cheaper. National Pork Sellers Association president Goh Chui Lai has urged the government to end the ban. Not surprisingly, Mr. Beh, the pig farmers’ representative, objects to removal of the ban.

To download your free PowerPoint slides for this item, click here. Source: Based on information from Meat Trade News Daily, December 31, 2009, supplemented by other sources. To view the original news item, follow this link.

Carbon Prices Fall on Copenhagen Results

The principle of revealed preference, a cornerstone of economic thinking, tells us that if you want to know what something is worth, look at how much people are actually willing to pay for it. The cap-and-trade approach illustrates revealed preference in action. It is based on the idea that a tight cap on emissions will induce polluters to pay a relatively high price for carbon permits, thus giving them a substantial incentive to clean up. A more lenient cap, or uncertainty as to how tight the cap will be, will lead to low permit prices and weak incentives to control pollution.

Following this reasoning, the price of carbon permits under the European Union's cap-and-trade system for greenhouse gasses should provide a better measure of the success or failure of the recent Copenhagen conference on climate change (COP-15) than any number of newspaper editorials or political press conferences. Permit prices peaked at about 15 euros per ton as the conference started on December 7, reflecting optimism that the 193 participating countries would reach a relatively strong agreement to follow up on the expiring Kyoto Protocol. However, when the conference ended on December 20 with only the broadest agreement on general principles, permit prices dropped to under 13 euros per ton.

Commenting on the outcome of the conference, business executives most of all deplored the lack of certainty about the future direction of climate change policy. Until they have some indication of how serious governments are about climate change policy, they are likely to delay the huge investments that will be necessary to slow greenhouse gas emissions anywhere close to the targets environmentalists see as necessary.

To download a free set of PowerPoint slides summarizing the results of the Copenhagen conference and their effect on carbon prices, click on this link. If you find the slides useful, please post a comment or send me an e-mail.