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Can Finance Save the Wolves?

Blog Post | Conservation & Biodiversity

Can Finance Save the Wolves?

Economics informs us that unsolvable societal disputes don’t have to become political wrestling matches.

Most people have quite the dire view of finance and markets. Unscrupulous bankers and pompous hedge funds place unsound bets on obscure and risky investments; greedy businessmen jack prices and fire workers at the first sight of recessions caused by their own avarice. Money rules the world, goes the trope. But that also means that financial incentives have the power to align behavior more powerfully than most appeals to morals, kindness, or the good of the community.

Yale University finance professor William Goetzmann opens his book Money Changes Everything: How Finance Made Civilization Possible with the observation that “finance is the story of a technology: a way of doing things. Like other technologies, it developed through innovations that improved efficiency. It is not intrinsically good or bad.” Markets, especially those for financial assets and property, are a way to rearrange reality’s unavoidable risks, benefits, and payoffs; they are “by, for, and about people’s lives.”

One fascinating way that modern financial engineering helps make the world a better place is through counterintuitive payments, such as in global forestry. Making money by chopping down trees is a model that everyone understands—get chainsaws and harvesters, hire some laborers, chop trees, and sell the wood for profit.

Another way is to make money by not chopping down trees, courtesy of resourceful financiers and carbon sequestration markets. In efforts to reduce their carbon emissions, major corporations routinely pay forest owners to keep more trees in the ground for longer. This “negative logging” is made possible by financial flows from those who want more trees to those who manage them.

In 2021, the World Bank paid nine districts in Mozambique’s Zambézia province for keeping forests intact. When in power, Brazil’s ex-president Jair Bolsonaro routinely tried to shake down the international community for cash payments in exchange for not deforesting the Amazon. Think what you will of this controversial political figure and his policies, but the economic mechanism his government proposed here was sound – rich Westerners want flourishing rainforests and an end to global deforestation, and poor farmers and loggers want to use economically unproductive land to better their standards of living. A deal naturally presented itself.

Well-structured financial payments can also solve another pickle that routinely devolves into political mudslinging: wildlife. City-dwellers often have a romanticized view of nature and ecologic systems, like the idea of healthy wolf populations. Ranchers and pastoralists who bear the visible costs of livestock killed usually have a different view. Cue unsolvable political showdowns.

In Sweden, where ecological concerns usually reign supreme, rural constituents and an anti-wolf lobby have recently gotten the upper hand. This summer, the government announced that it wanted to reduce the already inbred and endangered wolf population by half. The policy is based on no scientific evidence whatsoever. It is a political measure to reduce concentrated economic damages among a loud constituency.

It seems that only one group can be satisfied. The groups who favor more wolves and those favoring fewer can’t both have their way. When management over common-pool resources devolves into political disputes, policy usually pinballs between various interests as they wrestle control over the political apparatus.

Finance and Markets Can Align Mutually Incompatible Interests

Economics informs us that unsolvable societal disputes don’t have to become political wrestling matches. Instead, we need financial instruments and payoffs that have city-dwellers paying rural communities for the unavoidable death caused by having thriving predator populations.

If city-dwellers’ desire to have large or growing wolf populations in their countries is genuine, they should be willing to pay extra for cattle meat sourced from wolf territories, the livestock most at risk for wolf attacks.

Ecologic systems, like economic systems, are dynamic – changes to them don’t impact just one thing. When wolves return to areas where they were hunted to extinction during the 20th century, they unfortunately attack livestock or domestic animals. But they also keep the population of boars, deer, or elk in check, which reduce the damage to agriculture and gardens, cars, and people. Insurance companies could play a role by supporting conservation efforts for large predators—or offer reduced premiums for customers that do—since more wolves means fewer and/or more skittish deer and elk, which dramatically reduce vehicle collisions with wildlife.

Another way to achieve the same reshuffling of economic value is to have (generally wealthier) city-dwellers pay lavishly for ecotourism trips into areas where wolves are plentiful—like these projects in Spain’s Sierra de la Culebra. Some of the revenue streams should make it back to shepherds losing livestock to attacks or farmers who can credibly show the presence of wolves on their grounds (say, through wildlife cameras capturing their movements).

In Scandinavia, these conflicts become overwhelmingly political not only out of a lack of financial engineering but also because most compensation schemes are run by bureaucrats and financed by taxpayers. Vultures circle around political payouts as well as fresh carcasses.

Modeling by Anders Skonhoft at the Norwegian University of Science and Technology suggests that ex-ante payments for predator presence yield better outcomes than ex-post reimbursement of livestock damages. This is the animal husbandry equivalent to paying for not cutting down trees.

In the 1990s, the Swedish government introduced such an ex-ante scheme for the Sámi population and the reindeer they manage. Sámi herders routinely lose some 20 percent of their animals to carnivore attacks every year. By tying reimbursement to the presence of lynx and wolverine offspring rather than exact reindeer attacks, the scheme turns those most posed to disapprove of predators into their greatest defenders.

With the introduction of ecotourism in Africa and the Amazon, the same financial incentives have flipped loggers and poachers into guides, the enemies of predators becoming their greatest protectors. On a larger scale, the right financial structures—payouts, markets, and assets—can align the interest of unsolvable political enemies.

Blog Post | Infrastructure & Transportation

For the Time It Took to Get One Mile in 1980, You Get 2.29 Today

The time price per mile has fallen by 54 percent.

The top-selling car in 1980 was the Oldsmobile Cutlass. Gas mileage on this vehicle averaged 20 miles per gallon (17 city/23 highway). By 2023, the Honda CR-V claimed the title as the most popular two-wheel drive vehicle. The CR-V reported mileage at 31 miles per gallon (28 city/34 highway). This represents an increase of 55 percent over this 43-year period. Mileage has been increasing at a compound rate of around 1 percent a year.

Back in 1980, gasoline was selling for $1.19 per gallon, and blue-collar hourly compensation (wages and benefits) was $9.12 per hour. This indicates a time price rate of around 7.83 minutes per gallon.

Today, gasoline is selling for around $3.37 per gallon, and blue-collar hourly compensation (wages and benefits) is up to $36.50 per hour, indicating a rate of around 5.54 minutes per gallon. While the nominal price of a gallon of gasoline has increased by 183 percent, the time price has dropped by 29 percent.

But how much does it cost to travel a mile? That depends on the time price of gasoline and the car’s mileage. In 1980, at 20 miles per gallon, the time price per mile on the Cutlass would be around 23.5 seconds. By 2023, with the CR-V getting 31 miles per gallon, the time price per mile would be around 10.7 seconds. The time price per mile has decreased by 54 percent.

You can look at mileage from the perspective of how many miles you get per minute of time. The 1980 Cutlass gave you 2.55 miles per minute of your time, while the 2023 CR-V gives you 5.6 miles. Gas mileage abundance from your time perspective has increase by 119 percent. For the time it took to get one mile in 1980, you get 2.29 miles today.

There are other differences to consider. The National Automobile Dealers Association reports the price of a new Cutlass in 1980 at $6,735. At $9.12 per hour, it would take a blue-collar worker 738 hours to own this new car. Honda listed the 2023 CR-V for $28,410. At $36.50 per hour, it would take the blue-collar worker 778 hours to buy one. So, while the time price of the top-selling car has increased by 5 percent, the mileage, safety, reliability, and comfort have all increased by much more.

Yes, nominal gas prices are higher than 1980, but it’s not the money that counts; it’s your time. Time prices are the true prices.

A version of this article was published at Gale Winds on 11/14/2023.

The Washington Post | Housing

Alexandria Ends Single-Family-Only Zoning

“Alexandria lawmakers voted unanimously early Wednesday to eliminate single-family-only zoning in this Northern Virginia city, a functionally limited but symbolic and controversial move that opens the door for the construction of buildings with as many as four units in any residential neighborhood.”

From The Washington Post.

Bloomberg | Energy & Natural Resources

Battery Maker Develops Futuristic Cobalt-Free Cell for Electric Cars

“Swedish battery maker Northvolt AB has developed its first sodium-ion product, a technology that could cut reliance on scarce raw materials and lay the foundation for the company’s next generation of electric-car batteries.

The cell has a ‘best-in-class’ energy density of more than 160 watt-hours per kilogram, and was made without any lithium, nickel, cobalt or graphite, the company said Tuesday. While the first sodium-ion cells are designed primarily for energy storage, coming generations may be able to deliver higher energy density for electric mobility.”

From Bloomberg.

Blog Post | Infrastructure & Transportation

The Race to the Sky: How Competition Pushes Humanity Forward

Cities could still be growing quickly upward, but regulations are limiting their growth.

“I would give the greatest sunset in the world for one sight of New York’s skyline.”

—Ayn Rand, The Fountainhead

The story of how the Empire State Building came to dominate Manhattan’s skyline—defeating 40 Wall Street and the Chrysler Building for the title of the tallest building in the world—is an illustration of the power of competition and innovation.

In 1929, the successful businessman George Ohrstrom hired architect H. Craig Severance to design 40 Wall Street. Severance was a well-known architect in New York City and together with William van Alen had built amazing constructions, such as the Bainbridge Building on W. 57th Street and the Prudence Building at 331 Madison Avenue. Van Alen was an innovator and a revolutionary who often challenged the classical and Renaissance styles that had influenced most American cities since the beginning of the 20th century. He often ran into problems with clients who rejected his modern styles. Severance, worried about losing clients, decided that he no longer needed Van Alen’s partnership, and they ended their business relationship in 1924. In 1929, Walter Chrysler hired Van Alen to design a monument to his name, the Chrysler Building.

Competition Incentivized Innovation

In April 1929, Severance learned that his former partner was designing a structure of 809 feet. Ohrstrom and Severance, worried about falling behind, announced that they would add two additional floors to their original design so that 40 Wall Street would end up with a total height of 840 feet. That same year, Empire State Inc., led by former General Motors executive John Jakob Raskob, entered the race—putting pressure on Severance and Van Alen. To keep pace with the other two projects, architectural firm Shreve, Lamb & Harmon and builders Starrett Brothers & Eken accelerated the construction process. According to architectural historian Carol Willis, the framework of the Empire State Building rose four and a half stories per week due to an A-team design approach in which architects, builders, and engineers collaborated closely with each other.

Troubled by both Severance and the Empire State project, Van Alen designed the famous chrome-steel art deco crown for the top of the Chrysler Building and a sphere to stand on top of the crown. The sphere was built inside the crown, hidden from the public, and it was never announced to the press or explicitly mentioned. On the other hand, Severance modified his design one more time and asked permission to add a lantern and a flagpole at the top of the tower, increasing the height by 50 feet. Severance planned to have 40 Wall Street reach the 900-foot mark to secure its place as the tallest building in the world.

On October 23, 1929, the sphere of the Chrysler Building was lifted from the inside of the crown, reaching 1,046 feet and surpassing the final height of 927 feet of 40 Wall Street. The crash of Wall Street on October 28 distracted the press from the trick played by Van Alen, and it was not reported immediately. When Severance found out, it was too late to change his design—40 Wall Street held the title for one month from its opening in the first week of May 1930 to the opening of the Chrysler Building on May 27. The Chrysler Building held the title for only 11 months until the Empire State Building was completed in 1931 and became the new tallest building.

Regulations Limit Us

The Empire State Building held the title of tallest building in the world for 40 years, and it was built in only one year and 45 days. Bryan Caplan, professor of economics at George Mason University, believes that excessive restrictions slow construction today. Regulations such as height restrictions prevent cities from going up. Humanity now has better technology than in the time of New York’s race to the sky, but getting permits to build upward is extremely difficult. Excessive restrictions also generate artificial scarcity, which is slowing the growth of cities and making it difficult (and expensive) to live in them. Cities could grow upward, but regulations limit their growth.

However, we continue to see competition in many industries; technology companies fighting for the dominance of artificial intelligence are creating better and more efficient tools. The race between SpaceX, Blue Origin, and Virgin Galactic is improving the development of innovative technologies. Soon we might even have commercial flights to the moon. History has shown that when brilliant minds have freedom to compete, humanity moves forward.