Gareth Vaughan on the challenge of energy transitions, whether the Fed's inflation fight is over, a consumer watchdog's AI warning, commuting to work by plane & the fall of Sam Bankman-Fried

This Top 5 comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

In today’s NZ Herald …. https://t.co/wNTLdVh1IX Rod Emmerson’s cartoons: Week of June 12 - 18 pic.twitter.com/1IZUcNKr7d

— Rod Emmerson (@rodemmerson) June 14, 2023

1) The Great Depression and energy transition.

On Friday Parliamentary Commissioner for the Environment Simon Upton issued a report he commissioned on the economics of four future electricity system pathways for New Zealand as we move to wean ourselves off fossil fuels.

The task and challenges are big with Upton noting; "The coming energy transition represents a once in a generation opportunity to establish a low carbon, affordable and secure electricity system for decades to come." 

We live in interesting times.

History offers some interesting tales of previous energy transitions and the upheavals they can cause. For example, a new paper from Christopher Kennedy of the University of Victoria in Canada looks into the Great Depression from the perspective of it being "a painful episode in the socio-technological transition from a coal/railroad regime to one based on hydrocarbons, motor vehicles, and electricity."

Here's Kennedy's conclusion from an article in the Journal of Industrial Ecology.

This paper has presented a hypothesis that the Great Depression can be understood as a critical period in the energy transition from coal to hydrocarbons. The Depression was long and hard because it entailed breaking the deeply entrenched hegemony of railroads in the US economy.

The strength of railroads as an incumbent socio-technological regime in 1929 has been shown by several findings. The railroads accounted for almost a quarter of non-residential capital stock. They were responsible for supplying between 70% and 76% of US energy in 1929; and 69% of energy used for capital formation.

The decline of the railroads began with stagnating investment in the 1920s. This may have partially been due to the regulation by the ICC, but competition with new competing oil-based technologies was likely also a factor. The discovery of large quantities of oil in the US Southwest from 1927 onward, added further encouragement to investments in oil-based technologies, as we saw from data on motor vehicles and tractors.

The timing of the Great Crash of October 1929, corresponding with drastic cuts in oil prices and announcement of certainty in oil supplies—following discovery of huge oilfields—fits the overall hypothesis. There was potential for a transition in energy regime—and oil surpassed coal for ground transportation in 1931—but the coal/railroad regime was strongly entrenched. Close to half of refined petroleum still relied on railroads to get to market—and unlike natural gas, which was less developed, petroleum was only a minor energy source (∼7%) in the processes of capital formation.

This paper opens up many potential avenues for future research. Further biophysical economic analysis of other nations during the Great Depression, and the revival of US railroads during WWII is warranted. More broadly, as the world wrestles with transitioning from fossil fuels to renewable energy, we need far better ways of understanding the role of energy in economies. Further research in industrial ecology and ecological economics bridging from transition theory to macroeconomics is needed, building upon works such as: Fischer-Kowalski (2011), Foxon (2017), Hamilton (2003), and Kennedy (2022a), amongst others.

2) Is the Fed's inflation fight over?

In this article for The Conversation, Ryan Herzog, Associate Professor of Economics at Gonzaga University, suggests the Federal Reserve's fight against inflation could be over. Herzog argues that US inflation is lower than it appears to be.

While the data shows inflation remains well above the Fed’s target of around 2%, there’s good reason to believe that it will continue to fall regardless of what the Fed does.

Shelter, a measure of the cost of owning or renting a home, is the largest component of the consumer price index, accounting for more than one-third of the total. In its latest report, the Bureau of Labor Statistics reported shelter costs rose 8% from a year ago. After stripping that out, inflation was up just 2.1%.

The thing is, the data reported by the bureau doesn’t reflect the reality of what’s happening in the current housing market.

The Bureau of Labor Statistics relies on a survey that gauges rental prices from 50,000 leases, many of which were signed during the rental bubble in 2021 and 2022. A better measure of current market rents is the Zillow Observed Rent Index. That index suggests rates are declining – rents rose 4.8% year over year in May, aligning with pre-pandemic rates.

Comparing the two measures suggests the official consumer price index data lags behind the market by four to six months. Using current rents would put inflation much closer to where the Fed wants it to be. Jason Furman, former chair of the government’s Council of Economic Advisors, created a modified version of core inflation – which uses a market-based measure of shelter prices – at 2.6%.

3) US consumer watchdog's AI warning for the financial system & housing market. 

You can't read, watch or listen to any media at the moment without seeing a story about AI, or artificial intelligence. In this one from Bloomberg, Rohit Chopra, Director of the US Consumer Financial Protection Bureau, expresses some concerns about how AI could impact finance and the housing market.

“It creates a situation where if we don’t use the laws we have on the books today effectively, we will see a faster uptick in fraud, we will see more exclusion and discrimination, and frankly, less accuracy in the system when it comes to home appraisals and so much more,” Chopra told the Senate Banking Committee. “We have to focus on how big tech and AI will transform banking.”

In Washington, regulators and lawmakers have yet to put out a comprehensive plan for how to deal with the disruptive capacity of AI tools. Backers say the technology has the power to improve efficiency and lives, while critics warn of unknown consequences. 

4) Commuting to work by plane to avoid paying a high rent.

CNBC has a story about Sophia Celentano, a 21-year-old who commutes to her summer internship in New Jersey from her parent’s house in South Carolina by plane once a week. Apparently it's all about avoiding paying expensive New York rent. 

“I didn’t think twice about it,” Celentano, a rising senior at the University of Virginia, tells CNBC Make It.

Super-commuting, which the Census Bureau loosely defines as traveling “long distances” by air, rail, car or bus to work — usually 90 minutes or more each way — has become more popular since the Covid-19 pandemic hit. Companies adopted hybrid work models, and people fled major cities.

Even some college students are on board. “I really wanted to prioritize my happiness and well-being this summer, and to do that, I wanted to mostly be in Charleston with my family,” says Celentano.

The intern’s super-commuting routine helps her save thousands of dollars, too. 

Apparently she's saving about US$200 a week.

Celentano’s internship is 10 weeks long. She’ll spend about $2,250, saving at least $2,000 this summer — or $200 per week — she estimates.

There's no mention whether Celentano has any concerns about her carbon footprint. But she is able to use her time in the airport for her TikTok and YouTube posts...

5) The fall of Sam Bankman-Fried.

I heartily recommend the Bloomberg podcast; Spellcaster: The Fall of Sam Bankman-Fried. It's a cracking story well told.

Bankman-Fried was the founder of the now collapsed cryptocurrency exchange FTX, once valued at US$32 billion. He was arrested in the Bahamas last year and extradited to the US where Bankman-Fried faces Department of Justice charges alleging the likes of wire fraud, securities fraud, conspiracy to commit money laundering and conspiracy to violate campaign finance laws.

Here's the teaser for the podcast.

When nerdy gamer Sam Bankman-Fried rocketed to fame as the world’s richest 29-year-old, he pledged to donate his billions to good causes. But when Sam's crypto exchange FTX collapsed, billions of dollars went missing, and Sam was in handcuffs, those who knew him were left wondering — who was Sam really? A well-meaning billionaire who made a mistake? Or a calculated con man? From Wondery and Bloomberg, the makers of The Shrink Next Door, comes a new story of incredible wealth, betrayal, and what happens when “doing good” goes really, really, bad.