Ethical Questions in Housing Market Support

A Fortune story in CNNMoney.com, “Housing quagmire: Is it time to remove relief?” raises the usual questions about the wisdom of supporting the housing market, along with interesting new questions. If the housing market is, as many economists believe, 10 to 20 percent above a sustainable price level, is it ethical to provide special encouragement for people to buy houses now?

The few who are buying homes now might likely be overpaying for them.

Then, after prices fall, these borrowers and their banks might fall into the exact same problems that are causing so many foreclosures and bank failures already. A quote in the story from Dean Baker:

“We’re just putting more people in the trap,” Baker says of government policies that basically encourage people to buy or stay in homes beyond their budget. “I don’t feel good that we’re finding more suckers.”

There is no question that housing market support has some short-term benefits for communities and the banking system. Having more occupied houses means fewer unoccupied houses for criminals to exploit, and that’s good for communities. At least 50 banks that might have failed this year won’t go under till next year because of the short-term effects of propping up the housing market.

But if these benefits are coming at the expense of more bank failures in the future, and more consumers lured into the financial trap of an underwater mortgage, is it really ethical to continue the programs that create them? It is a difficult question to answer because we don’t know the exact proportions of these effects relative to each other, and no one can say the exact degree to which the value of any given house will decline from here.

A point to consider, however, is that it is financially natural for the value of a house to decline over time. People who have taken advantage of the appreciation of the value of their homes have had the advantage of demographics, but in normal times, houses depreciate. Things wear out and break down. The insulation or security that seemed adequate when the house was built is inadequate decades later. Most houses built in the last century will be demolished or rebuilt at some point in this century — their value will diminish to zero, or near zero.

And this is without even considering the possibility that the cost of building a house could decline because of technological advances. We tend to discount that possibility because it has never happened in our lifetimes. But it will surely happen someday, probably within the next 30 years, and when new houses are less expensive to build, this reduces the market value of all houses. If the economy or the financial system is built on the assumption that technology will never reduce the cost of a house, then it is just setting itself up for an unpleasant collapse at some unknown time in the future.

Ready for a Disaster in Hurricane Season

Tropical Storm Earl was upgraded to hurricane status late yesterday and is expected to strengthen into a major hurricane by tomorrow morning. The hurricane will brush past Puerto Rico with at least gusty winds and flooding rain. By Friday, the hurricane could come on shore somewhere in the northeastern United States. Based on the current forecast track, that could be anywhere from North Carolina northward, including the possibility of crossing my location in Pennsylvania.

The Northeast hasn’t had a direct hurricane hit for a while, so the forecast for this new hurricane might serve to remind people what it means to be prepared for a disaster. For any disaster, this includes having drinkable water and food on hand, and perhaps batteries and fuel for driving. NOAA has a page of specific suggestions when there is a chance of a hurricane.

One simple action that can easily be done four days in advance is storing some water. For many people, this is as simple as filling several bottles with tap water. It’s something that you can easily do on any ordinary day, but that you may not be able to do after a disaster strikes. We can’t control and can’t always predict which way a hurricane will go, but there are things we can do to minimize the harm it may cause.

Become a Scientist for $1

One dollar. That’s what it costs to become a scientist now.

Or, anyway, that’s now the price of a scientific calculator. Yes, they are now sold in stores that don’t charge more than a dollar for anything.

Despite the low price, the $1 scientific calculator is not a trivial tool. You can do real science with it. It does the mathematical computations involved in ordinary scientific questions and experiments, not to mention the exercises of college-level courses in math, science, and finance.

For years, this kind of math was done mostly with pen and paper. It could take days just to add up the results of a simple biology experiment, and more days to double-check the answer. Simpler computations could be approximated on a slide rule, an analog device based on a slider with marks on it, used mainly for multiplying and dividing. Computers came along, but access to computers was a substantial obstacle at first, and the cost, size, and power requirements of computers remain an obstacle in some places — if you’re out in the field, or sitting in a classroom. Scientific calculators under $100 arrived in the 1970s and revolutionized science. Among other things, studies based on observations from decades earlier could finally be completed in a cost-effective way.

I have a feeling that the $1 price for the scientific calculator may have equally important consequences — not so much for professional scientists, for whom a price of $100 or $50 already wasn’t particularly a financial barrier, but perhaps in other, unexpected areas.

TV in Counterprogramming

When it comes to the battle between television and the Internet for supremacy in video programming, TV is throwing in the towel.

I knew it would come to this eventually, and one sign of the decline of television was the “As Seen on YouTube” logo I saw splashed across an advertisement last month. “As Seen on TV” is already morphing into its online version.

Another sign of this is the recent cancellation of the startling new series Breakthrough with Tony Robbins after just two episodes. It wasn’t canceled because the audience was small — at over 3 million, it was large enough by the standards of a summer replacement miniseries. No, it was canceled because TV executives thought it was too similar to video programming that is available online.

That means that TV has been reduced to counterprogramming — trying to draw an audience with programming that isn’t available online. The idea of counterprogramming has been around as long as television has. One of the best examples is the figure skating broadcasts that occur at the same time as professional football games. Football is popular, so a channel that can’t show football on the day of a big football game will show something that will appeal to people who don’t like football. That’s the idea of counterprogramming. But now, the entire television schedule is counterprogramming.

Probably the entire Breakthrough with Tony Robbins miniseries will be shown somewhere on television — but as a rerun. For the moment, for the next week at least, you can see the series online, on Hulu, with additional related programming on a separate web site. It is almost as if television said to the Internet, “Here, you take this series. We know when we’re beaten.”

It is not just television that is hurting from the availability of free video programming on the Internet. The movie rental business has fallen on hard times, with Blockbuster expected to file for bankruptcy in September, and Netflix at risk of losing its slim profit margin any day now as its customer base erodes.

This Week in Bank Failures

After the flurry of bank failures last weekend, there were none reported tonight. It seems likely that there will be none again next weekend, which is an extended holiday weekend. There was, however, more talk this week about the possibility of European banks buying a few more large banks in the United States.

Even before the large banks went into their decline in 2006, several were foreign-owned, and that number has been increasing. It might seem like good business for a bank to sell itself to a foreign bank, but it will not help the political fortunes of the large banks collectively if they come to be seen as mostly foreign-owned, and it will take only two or three more big transactions before consumers and the media will start to make that generalization.

One Year After the Flu: Keep Washing Your Hands

It was one year ago today that a flu pandemic was hitting its peak in the United States, the country most affected, and a chorus of experts was pleading with people to wash their hands regularly.

And not just hands, but faces, clothes, and most of all, hand-contact surfaces such as door knobs and hand rails.

When the H1N1 virus first appeared, I had predicted that modern hygiene practices would make a flu pandemic impossible. And while public health experts did ultimately classify H1N1 flu as a pandemic, it was not anything like the pandemic the experts were anticipating. The virus popped up in only a small fraction of communities.

It may not be possible for a classic flu pandemic to develop when most people are washing their hands regularly. Yet no one knows where or when the next flu virus will appear. Probably the majority of new flu viruses never become known to scientists because they are washed away before they infect significant numbers of people.

Even though there isn’t any global flu warning this year, please continue to wash your hands. Wash hand-contact surfaces at least as often as you clean tables and floors. From everything we know, this kind of action may be what it will take to stop the next flu epidemic.

Oversupply of Milk Leads to Softening of Ice Cream Prices

This year’s oversupply of milk, which is being produced in record quantities in spite of falling demand, has led to record-high cheese inventories, as much of the leftover milk is made into cheese. It is also, now, leading to a reduction in ice cream prices. In my local supermarket, ice cream prices have fallen about one third from their peak of the last two years. This means the price for a carton of ice cream is similar to what it was before the spike in prices a few years ago. That doesn’t mean the price for ice cream is low again, though; cartons contain one fourth less now.

Are the lower prices driving up consumption of ice cream? Maybe a little, but I couldn’t find any hard evidence to verify that. And it’s not as if prices are low. From the consumer’s perspective, prices have gone from shockingly high to merely uncomfortably high. A consumer who goes to the ice cream freezer looking to see if ice cream prices are low again will be disappointed again. But more likely, most people who were shocked by recent ice cream prices are not even checking that section of the supermarket anymore.

Even if consumers were to start eating 25 percent more ice cream, which seems unlikely, the increase would have little effect on the global milk supply, which seems certain to remain in excess until governments take steps to reduce milk production.

In the United States, ironically, there is a move in the opposite direction, with two senators introducing a measure that would create national milk price supports. If passed, which seems unlikely, this would surely lead to a substantial increase in milk production, a tragic outcome that would lead perhaps a fourth of milk production to go unsold and create, for the first time, a national black market in milk.

The Next Manufactured Financial Crisis

I’ve said from the start that Greece is not really in any trouble, and that the financial distress surrounding Greek sovereign debt is mainly a problem in the international financial system. The government in Greece has shown itself willing to make adjustments, even ones that go against the country’s recent political culture, to keep things going. The popular rebellion that was supposed to overthrow the Greek government and throw the country into anarchy this summer — that according to Wall Street observers — never materialized. The economic slowdown in Greece is leading to a mass exodus of foreign workers in the service sector, a misfortune for the workers involved, but not in the long run a disadvantage for the country of Greece.

The reason you can be confident in Greece’s future is that policymakers have set their sights on getting the most basic things in the economy right first. This will result in a stable economy where growth comes easily, even if it does not look like that right now.

Greece’s financial reputation has been so diminished that it will be forced to accelerate payments on its national debt, and though that will be uncomfortable, it also will not create a lasting disadvantage for the country.

The important thing to note is how easily speculators created a financial crisis around Greece. It makes you wonder who they might target next. Will it be Ireland, or Spain . . . or California, or the United States? Any government body with high debt and institutional constraints makes an easy target for Wall Street and the international financial community to take down — but doesn’t that scenario describe the United States better than any other country? The United States has the largest national debt of any country, and it has a government in gridlock, with one party determined to block any measure that comes before them. Worse, the United States, unlike Greece, has not focused on stabilizing the framework of the economy — at least not yet. The U.S. economy is more top-heavy than it was three years ago, making it easy for any number of small players, including ones from other countries around the world, to rattle the whole economy.

This is one of the reasons why the economic stimulus idea has run its course for the moment. The U.S. government cannot borrow more, and lacks the political consensus that it would take to fund economic measures in any other way. Stimulus was the wrong idea in the first place. The focus should be on the institutional reforms that are so desperately needed to stabilize the economy. But if Congress is unable to take up those measures now, I am sure they will find a way to do so if the United States becomes Wall Street’s next target.

Music As Money Laundering

A BBC News story brings up the subject of recorded music as a form of money laundering. The story provides few details, but says 12 people have been arrested and charged in a scheme that revolved around recorded music:

A gang is alleged to have created about 20 songs and uploaded them to be sold on the iTunes and Amazon online sites.

The group planned to collect royalties from their songs. That part sounds innocent enough, but according to the allegation, the group never intended to sell the songs to the public. Instead, the focus was on stolen credit cards as the source of sales for the songs. In addition, four of the 12 defendants are charged only with money laundering.

Recorded music has always been a plausible, if inefficient, form of money laundering. The owner of a small record label could send people with cash into record stores to buy the label’s latest album release. A third of this money would come back to the record label in wholesale payments for the records — too small a fraction, perhaps, to be a serious form of money laundering, but it would have two additional advantages. It brought back LPs that could be sold all over again, in new shrink wrap. At the same time, the bogus sales might improve the chart position of the record, perhaps bringing it more recognition. No one really knows how much a part of the early record business this was, though there are enough stories to say that it happened every day.

Online digital venues for music, though, typically bring at least half of the retail revenue back to the record label. This brings them within the traditional efficiency range of money laundering. It also makes them an attractive target for fraud. There are stories about iPhone apps being “sold” primarily through stolen credit cards and guessed passwords. And now, this story about the same thing happening in music. At the same time, musical ability is no longer needed to create passable music recordings. Anyone who is willing to tinker with music software for a few days can create something new that sounds like it is meant to be a record.

Online money laundering will never catch on in a big way because every transaction can be traced, at least partly. Then again, the group that was arrested last weekend in England is alleged to have managed $1 million in bogus sales prior to their arrests. Most money laundering schemes involve sums in the thousands, not the millions, so perhaps a lot of online money laundering is going on already without it being detected.

Companies involved in digital distribution don’t want any part in fraud and money laundering, of course, but they can hardly become paranoid about every content creator that comes out of nowhere to sell 5,000 downloads. These days, that pattern would describe the average band, author, or software developer. If there are any online metrics that could be used to separate the bogus products from the legitimate ones, they aren’t obvious to me.

This may be one of the puzzles of modern times. Most people would agree that a more financially efficient distribution system, in which a significant fraction of the money spent on music goes to the musicians who created it, is an improvement. Yet it brings with it the challenge of identifying, in a new arena, money laundering and other abuses of the system.

Fewer Restaurants As Spending Remains Low

If you think you’re seeing more vacant restaurants than ever, it’s not your imagination. Restaurants open and close every year, but they are more likely to close when a recession drags on and on.

A Los Angeles Times story on restaurants in financial distress notes the declining number of restaurants in California — with 2 percent fewer than last year — and nationally — 1 percent fewer. It is rare for the number of restaurants to actually decline in a recession, but much larger declines are possible over the next two years. The story notes that many restaurants are barely hanging on, hoping for things to turn around soon, while the turnaround for the national economy may still be two years away.

The two best examples of restaurants in decline cited in the Los Angeles Times were local steakhouse chains. Are steakhouses specifically in decline? I found some hints of that: many reports of steakhouses closing in beef country, foreclosure of a parking garage that serves customers of a Chicago steakhouse, and in Baltimore, a famous steakhouse facing a foreclosure auction next month. There is no question that consumers are spending less on steaks, but there are reasons why steakhouses might not be the first restaurants to close. They sell big-ticket items — a steak might cost twice the price of a comparable restaurant entree. At the same time, their labor costs are low. Steaks, like hamburgers, are cooked by unskilled workers who may have only an hour or two of training.

Meanwhile there are reports of all kinds of restaurants closing for every reason you can imagine, along with a similar number of reports of restaurants opening. Many of the restaurants closing now had opened just this year, or last year, but that is the normal pattern in the restaurant business. It takes a big push to launch a new restaurant, and no one, it seems, can predict in advance which ventures or locations will succeed.

Somewhere Inside the Egg System

When times are tight, taking a risk on the food you eat doesn’t seem like such a good idea.

This thought comes up because of the ongoing egg recall, which now has expanded to two factories, 24 brands, 480 million eggs, as authorities try to get a handle on a widespread salmonella epidemic that officially has affected thousands of people (considering the low reporting rate with salmonella, the actual number may be approaching 1 million). It‘s that third number that tends to amaze people — 480 million contaminated eggs would, in theory, be enough to sicken everyone in North America. I wish people would pay more attention to the second number. How can eggs from one factory be sold under so many different brands? The troubling answer is that, with most brands of eggs, the brand doesn’t tell you a thing about where the eggs came from. Names like Hillandale Farms, Farm Fresh, and Mountain Dairy are designed to make you imagine that the eggs are coming from a specific farm, and that isn’t really true. All these brands really tell you, if you want to know the truth, is that you are getting eggs from the egg system — from the inside of some egg factory somewhere in the country.

The news media is still calling these egg production facilities “farms,” but when you see the big, tall, blocky concrete building with fluorescent lights, conveyor belts, smokestack, and the constant whir of machinery, “farm” is not the word that comes to mind. And the reason the egg factories want to be known as farms has to do with disease. When you picture chickens running around a barnyard, you’re imagining chickens that possibly have a chance of living a healthy life. The actual scene, with millions of chickens packed into tight quarters in a building that produces so much feces you can smell it from a mile away, makes disease inevitable. Ordinarily, the chickens’ diseases aren’t readily transmitted to the eggs, but the weaker the chickens are, the weaker the egg shells are, and the less protection they provide.

The salmonella epidemic and egg recall are, appropriately, getting widespread attention in the news, and inevitably, some people will react by deciding that eating eggs is not so important. And of course, eggs aren’t important in a nutritional sense. Eggs are high in protein and fat and otherwise nutritionally unimpressive. Most people eat too much protein and fat even without eating eggs, so they won’t lose anything by skipping the eggs. Nor are eggs cheap. Even without adding in the cost of a possible illness, eggs cost a lot for something that is mostly water, fat, and protein. Eggs can never be cheaper than bread, because to get one egg out of a chicken, a factory has to feed the chicken more than enough grain to make a loaf of bread.

Of course, most people won’t react to the news, and many will take their chances and eat the eggs that have been recalled. The number of eggs recalled, 480 million, is only theoretical anyway. Realistically, the vast majority of the eggs listed in the recall, which goes back through months of production, were already consumed or discarded before the initial recall was announced. And realistically, only a small fraction of the recalled eggs that are in home refrigerators will be returned. Even people who try to check the eggs could make mistakes — it’s not that easy to match up code numbers and Julian dates. And realistically, less than half of the high-risk eggs out there are covered by the recall. And realistically, the investigation is not likely to produce a meaningful reform in the way egg factories work. So if some people are taking the salmonella epidemic as an indictment of the whole egg system, that is not an unreasonable response.

This Week in Bank Failures

The lull in bank failures, with regulators closing just two small Chicago banks in the last two weekends, ended tonight. Eight banks failed in California, Florida, Virginia, and, again, in Chicago.

It was the bank in Chicago that provides the big story tonight. ShoreBank was closed, and its deposits transferred to a new bank, Urban Partnership Bank. Urban Partnership bank is also acquiring the loan portfolio of the failed bank.

ShoreBank had $1.5 billion in deposits and 15 locations. The bank had been limping along for more than a year, and there were reports since last month of a deal in the works, involving the bank’s interim management and a combination of charitable and Wall Street funding, and it appears that formula is what led to the creation of the new bank.

ShoreBank’s focus on loans for low-income housing might have protected it from the subprime mortgage crisis, but the bank made large numbers of loans for houses that were more suburban in character during the housing boom, and those loans got the bank into trouble. High unemployment then weakened its core business. Roughly $100 million in new capital from Wall Street earlier this year wasn’t enough to save the bank, which needed about $250 billion more to give itself a fresh start. The bank had applied for $75 million in TARP money, but would have needed to raise the rest of the money itself to qualify.

Instead, the FDIC will take a loss estimated at $368 million for the bank closing.

The four banks that failed in California tonight were, combined, slightly larger than ShoreBank in financial terms. The largest was Los Padres Bank, with 11 locations along the central California coast, along with 3 in Arizona, and $771 million in deposits. The bank had been operating under a cease-and-desist order since October, followed by a prompt corrective action order with a July deadline. It had sold its Kansas City operations at the end of last year to improve its balance sheet, and had been looking to make other deals to improve its financial condition. It reported losses of about $55 million in 2008–2009, but was breaking even so far this year.

Pacific Western Bank is acquiring the deposits and assets. Pacific Western already had 68 locations in southern California.

Farther north, Sonoma Valley Bank was closed. It had three locations and $255 million in assets. Westamerica Bank is acquiring the deposits and assets.

Two banks failed in the northern half of the Central Valley: Butte Community Bank, with 14 locations and $471 million in deposits, and Pacific State Bank, with 9 locations and $279 million in deposits.

Dutch-owned local competitor Rabobank is acquiring the deposits and assets of both failed banks, paying a 4.05 percent premium for the deposits of Butte Community Bank.

The two small Florida banks that failed tonight had $200 million in deposits and 5 locations between them. They were Independent National Bank and Community National Bank At Bartow. CenterState Bank of Florida is acquiring the deposits and assets.

A very small bank failed in Virginia. Imperial Savings and Loan Association, in Martinsville, had $10 million in deposits. River Community Bank is acquiring the deposits and assets.

The Death of the McMansion

Today in the Fear of Nothing blog I react to a CNBC story about the death of the McMansion and a trend toward smaller house sizes. This trend also means the age of stuff is winding down.

One LED Light Bulb

The next time you go to buy light bulbs, you might find LED light bulbs for sale. At least five manufacturers have promised to have products in stores before the end of the year, and there must be others I have not heard about yet. LED light bulbs will be in stores not because they suddenly exist, but because the price is falling below $50, the point at which consumers will start to take them seriously.

An LED light bulb might save you $300 or $1,000 in electricity over its 40-year lifetime compared to a traditional incandescent light bulb. That might make it sound like a great investment. On the other hand, with a price between $20 and $50, it will surely be the most expensive light bulb you have ever purchased.

So buy just one. Put it in the room where the lights are on for hours every day, such as the kitchen or bathroom. Or get one that is only half as bright (at a lower price) and use it to light your desk or the TV room, where you don’t need so much light.

Buy just one because if you replace a light that is on for hours every day, you get the fastest return on your investment. In 5,000 hours, an LED 60-watt replacement light bulb will use about $6 of electricity where an actual 60-watt bulb (with two replacements) would use about $45. That is roughly your payback period, depending on how much you pay for the light bulb and how much you pay for electricity. If there is a light you use for 6 hours a day, the payback period could be 2 1/2 years, making the LED light bulb a very good investment in financial terms. But other light bulbs are on 2 hours a day or less. The payback period is longer. A long-term investment in those light bulbs isn’t such a good investment — not till prices fall quite a bit more.

And prices will fall. The other side of the financial calculation for LED light bulbs is that the price will fall and the efficiency will improve. The price of a 60-watt equivalent white LED array fell from $800 five years ago to $80 at the beginning of this year, and there is every reason to expect that prices will fall some more. LED light bulbs are expected to last about 40 years. No one really knows, but the red LEDs from the 1970s are still working with little sign of decline. This makes LEDs a long-term investment. It’s risky to buy them all at once, especially now when your payback period is more than two years. The people who replaced all their light bulbs with CFLs two years ago wasted their money, when compared to their laggard friends getting twice the energy efficiency by buying this year’s LEDs. CFLs are thought to last 10 years or longer (I still haven’t used one up, so I don’t really know how long they last), and it’s hard to just throw them away less than one third through their useful life. But anyone who replaces all their lights with LEDs this year will face that same situation around 2016 — and this year’s LEDs may last until 2050. You reduce the risk of getting stuck with the wrong investment by averaging out the investment over a period of time, and this logic applies to lighting too.

If you want to wait till next year, I won’t argue with that. But if you want to find out what it’s like to spend about $30 and reduce your electric bill by about $1 a month, go ahead and buy one LED light bulb, and start saving money now.

Lawsuit Creates a Chilling Effect on Oracle

There’s no question that Oracle’s lawsuit against Google will have a chilling effect on Java development. But will it have a similar effect on Oracle development? If it does, even to a slight extent, the suit could be a turning point for Oracle’s fortunes.

The Google Java lawsuit is a tricky business to begin with, as it appears on the surface that Google has licenses for everything it is doing with Java. If there is anything improper in what Google has done, it will have to be established by some tricky line-drawing from Oracle as it prosecutes its case. The significant thing about this is that it depends on legal distinctions that the average corporate information technology manager won’t understand.

One of the ironies of this case, from Google’s point of view, is that it will surely spend more money defending its case in court than it will cost to redo its entire project without any Java components. Indeed, it may end up having to pay for both — a waste, from a management bean-counting point of view. It’s the kind of waste that makes managers call other managers into conference rooms to ask, “Why were we using Java in the first place?” And of course, lots of software engineers are asking the same thing about Google at this point: “No, seriously. A major corporation that knows a few things about software was actually trying to develop a mission-critical project in Java?”

I’ve written elsewhere about the perils of using legacy software as a foundation for creating something new, so I don’t need to belabor that point here. The more interesting point has to do with the comparison between Java and Oracle’s big-money software, the Oracle database. Like Java, Oracle is basically useless by itself. The reason large corporations fork over billions of dollars for Oracle is to run their custom applications in the Oracle environment. In other words, their way of relating to Oracle is very similar to the way Google relates to Java.

And now Oracle is taking Google to court. Is this the beginning of a new business model at Oracle, in which it selectively files suits against its software users to try to collect more money? No one knows, of course, but if you are a manager making decisions about what software to spend tens of millions of dollars on, do you want to take that chance?

The automatic reaction to this situation is to say that all this doesn’t matter, that the Google situation isn’t going to affect any Oracle projects. And when projects that might have used Oracle go ahead with a different approach, the managers involved will say, it wouldn’t have made any sense to use Oracle on the project anyway. But the fact is, Oracle is used for lots of projects where it doesn’t make sense, just as engineers are scratching their heads trying to figure out why Google is using Java. If Oracle loses just a fraction of that segment of corporate IT, it will be a big monetary loss for the company.

And I don’t see any way to avoid that result. Some people have said there must have been ongoing negotiations between Oracle and Google, and Oracle decided to file a suit in order to add some intimidation to its negotiating position. The problem with intimidation, though, as Robert J. Ringer told us years ago, is that people will just go away. If you’re an intimidator, people start avoiding you. And for those who think this rule doesn’t apply in the corporate IT world, I can only point to the example of SCO, and how quickly it killed off Unix. In 2001, Unix was the standard by which operating systems were measured. It took just a few SCO lawsuits (along with thousands of cease-and-desist letters) and just a few years to find Unix not only dead, but discredited in court, shown to be mostly copied from its competitors. Let’s not forget that that episode is a big part of the reason why Oracle finds itself owning Java. Java was invented by Sun, which was essentially a Unix company. When Unix fell out of favor, Sun couldn’t find a way to make money. In the end, Sun was bought out by Oracle for less than the value of Java. Now, this pattern may be repeating itself.

Life’s Too Short to Live In Your Own House

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Photo: mcclouds

The actual brochure I received in the mail read, “Life’s too short to clean your own house.” It’s a message that might sound appealing, but if finding time to clean all the rooms in your house is a challenge, it’s probably because you’re not spending much time in those rooms — and in that case, why even have those rooms? The logical next step has you asking, why have a house? That’s the point I wanted to make with the advertising parody shown here.

This is more than just a joke. Financial stresses and time constraints are finding more people than ever asking, “Why did we buy this stupid house?” That’s a chorus never before heard in the history of the United States, and it points to an architectural sea change that will reshape not just our homes, but our cities.

Housing values have fallen hardest in the outer suburbs of cities, as more people find the fuel costs and time costs of a long commute untenable. Combine commuting, real estate taxes, and mortgage interest with all the obligations of operating a house, from interior design to repairs, and a couple could easily be spending 2,000 hours a year, the equivalent of a full-time job, just on their house.

And for what? If you spend 10 hours working and commuting, 10 hours sleeping and grooming, and 1 hour watching television, checking e-mail, or talking on the telephone, that leaves possibly three hours in the day during which you might experience your house — but that depends on what else you have to do. On days when you have a shopping trip or an awards show, the house might as well not be there. When there is no time to really use the house, the idea of going without a house to create more time to keep up with life is not merely an idle thought. (This is one of several possible reactions. Read more about the lifestyle questions involved in my other blog, Fear of Nothing.)

The time pressure trend shows no sign of ending, so I expect the movement from suburban houses to well-located, solidly built apartments to accelerate in the next five years. This will either leave significant numbers of suburban houses vacant or drive prices down below anything seen in a generation.

When homeowners hire others to clean their houses and mow their lawns, it is a sign of this trend. If you can bring yourself to admit you don’t have time to clean your house, it is a short step from there to realizing that you don’t have time to own your house. That is a conclusion that millions of homeowners will be arriving at.

The Arctic Ice Cat

NSIDC 2010-08-13

The Arctic sea ice map has formed into a cat face shape again this year. This time, the ice extends more toward Alaska, where much of the thicker ice ended up in March and April, but the ocean is not so cold there, and the melt in the remainder of this month could take much of that away.

The “Arctic Ice Cat” forms because of thin ice in the Arctic Ocean — about a foot thick, too thin to stand up to the Atlantic currents on the right side of the map, the Siberian rivers at the top, or the warmer waters of the southern Arctic on the left side. At the same time, it is just strong enough to hold its own, to triangulate between the Asian and North American islands and hold a somewhat stable position.

The high mobility of the ice around the edges makes shipping tricky. Loose ice tends to blow into the straits of the Northwest Passage and is a threat to pile up against the Siberian coast with little advance warning, potentially pinning a cargo ship there.

Meanwhile, the picture of stability should not provide much reassurance. The ice could be highly stable in this shape, but realistically, it is just barely holding together. It would only take a big summer storm to blow the ice every which way, melting most of it. Or, an unusually warm summer would make the ice so thin that it could pile up on the shore and melt on the beach. There is no sign of either event happening this year, but even so, the Arctic sea ice is on track to repeat the record low extent of 2007.

The Arctic ice cat is a reminder that what used to be a reliable geographical feature, the “Arctic Ice Cap,” now depends on the weather. At this point, no one can say whether the Arctic Ocean will be open for shipping next month — but anyone who is interested can follow the weather reports.

Taking the Crisis Stance Too Far

The Fed “downgraded the U.S. economy” this week.

That was the way one television commentator put it, and that way of looking at it sums up the connection between the Fed’s monetary policy move and the stock market’s reaction.

It almost seems as if the Fed has forgotten that its monetary policy is in a crisis posture. In my opinion, any lending interest rate below 4 percent represents an adaptation to a crisis. Most economists disagree, of course, but there are very few observers who are able to look at interest rates below 1.25 percent and see anything other than a crisis. The difference between 4 percent and 1.25 percent is not as great as it might seem. If you do not want to borrow money at a 4 percent interest rate, then chances are, you do not want to borrow money at all. And the Fed’s target interest rate is not just slightly below this level. It is as low as possible. The Fed’s target interest rate is zero.

And now the Fed says it is easing. It is not lowering interest rates, obviously, but it would if it could. If the Fed is saying that its current monetary posture, already in crisis mode, is not enough to keep the economy going, then how can anyone expect stock traders and portfolio managers to bet on the U.S. economy right now? The Fed understands the economy better than most people making financial decisions, so its opinion carries some weight. It will hardly be surprising now if the stock market retreats by 10 to 15 percent from its recent peak, or if major employers move to accelerate the layoffs that are already on their to-do lists, or for that matter, if rating agencies follow suit and start downgrading government obligations and other financial instruments that depend on the U.S. economy.

This was a blunder on the Fed’s part. Economists may debate whether the monetary action has any impact at all, but there is no doubt that having an important government institution in crisis mode makes everyone uneasy. And there is good reason for being uneasy about extreme monetary easing. The low interest rates have a destabilizing effect, making it more likely that something in the economy will fall over without warning. When the Fed says it’s willing to risk this instability for quite some time to come, and indeed, to add to it, we can only assume that the Fed is extremely worried that the economy is falling apart. Bernanke might as well be running down Wall Street screaming, “Depression coming! Depression coming!” It would be safer, in my opinion, for the Fed to take more of an even-keel approach, speak optimistically, and hope for the best. But I am afraid it is too late for that now.

This Week in Bank Failures

For the first time, a federal court has ruled on an aspect of gotcha banking, and the ruling goes right to the heart of the gotcha approach. The court ruled that Wells Fargo’s efforts to hide fees from its customers made certain fees unlawful. According to the court, the intentional element of surprise in the fees ran counter to the principles of contract law. It ordered the refund of about half a billion dollars in fees going back to 2004. Wells Fargo has said it will appeal the decision.

The ruling wipes out Wells Fargo’s great innovation in gotcha banking, which had to do with recognizing debit card transactions from largest to smallest, instead of the order in which they occurred. This approach resulted in about five times as many overdraft charges. In extreme cases, it could extract more than $1,000 a day in fees from an account that otherwise would not have had an overdraft at all. Many other banks copied Wells Fargo’s overdraft fee technology, so the ruling is significant for the industry as a whole, and may set the stage for similar suits against other banks, and on other fees.

Regardless of the legal outcome, gotcha was never a sustainable business model. Customers who are stung are less likely to look favorably on the bank in the future. Inside the banks, the gotcha model was always looked upon as a stopgap, a way the banks might dig themselves out of the financial hole they were in. And even this may not turn out to be true if the banks are forced to refund many of their ill-gotten gains.

Another Chicago bank failed tonight. Palos Bank and Trust Company, with five locations and $468 million in deposits, was closed by Illinois banking regulators. First Midwest Bank is paying a 1 percent premium for the deposits and is also purchasing the assets.

Palos Bank had been losing money and had little capital left. It kept a low profile for a bank of its size, aside from being the sponsor of a local half-marathon race.

Stagflation and Obsolete Houses

Is it possible to have deflation and rising energy prices at the same time?

Some Wall Street economists say no. The prospect of deflation, they say, will prevent energy prices from rising. 

That, however, is a false confidence caused by forgetting the distinction between the national economy and the world economy. The possibility of deflation may deter price increases, but deflation in one country can have only a limited effect on prices that are set in a global market. 

There is a historical precedent for energy price increases during an otherwise deflationary period. This was the period of 1974–1981 in the United States. The prices of everything that was energy-related went up, while other prices held steady or declined. But energy is a significant component of all manufactured goods, so in general, it was a period of rising prices. At the same time, there was persistently high unemployment — similar to the current situation. In the press, this combination of effects was referred to as stagflation. 

With respect to buildings and fuel-burning vehicles, energy is a complementary good. Classically, then, when the price of energy increases, we can expect the value of buildings and cars to decrease. This could go on for an extended period of time, as it may take seven to ten years for world oil prices to edge up from their current low levels around $80 to a sustainable level around $250. 

Oil prices have already doubled from their recent lows. This is part of the reason for the continuing decline in home values. In the 1970s, millions of older houses were retrofitted with insulation to make them relevant again. Millions more were torn down. The same thing could happen again, only this time, virtually all houses built to date will need something changed. 

This general decline in the value of houses is one of the signs that has some observers seeing deflation, but it is not really deflation in the classical sense. It is just a reflection of the technological obsolescence of the houses. 

Teacher Bill Limits State Job Losses

Congress today passed a $26 billion package of financial support for states that will prevent about 500,000 layoffs at the state level, mostly of public school teachers. Republicans delayed the bill for four months and nearly succeeded in blocking it. 

It’s worth noting that this bill will be nearly as important in stabilizing the economy as last year’s economic stabilization act was, but at about 1/30 of the price. Partly this is happening because of a more serious mood in Washington, which leads legislators to look for small-scale but highly effective measures to help the economy. Partly it is because this was a Democratic bill, with Republican efforts to load on special tax breaks for wealthy investors rejected early on. 

Despite this measure, a large number of state and local government layoffs are on the way. Some of the teachers’ jobs may be safe, but more cutbacks in police, prisons, public health, child care, tourism, and inspections are unavoidable. These layoffs could still be large enough to leave the U.S. economy with net job losses over the next year. 

Restoring the Feeling of Freedom

In a recent survey, 5 out of 8 U.S. households indicated they were living paycheck to paycheck. I believe it is safe to assume that this is in addition to a smaller number of households, perhaps 1 in 24, that have no paycheck and no regular source of income.

This is a statistic that, in my opinion, rivals the emotional impact of the Great Depression. To be sure, pay cuts were more common in the Great Depression than they have been in the past three years. Still, the largest group of workers then, as now, kept their jobs and kept working. The employment rate never fell below 75 percent during the Great Depression, and the effective employment rate has not yet fallen below 81 percent during the current recession. But people who have remained employed are not unaffected, and based on the survey, about half of fully employed households are also feeling the squeeze.

Economic relief is not on the horizon for workers; rather, more stress is on the way for major employers. In surveys, more businesses anticipate layoffs than new hiring. Emotional relief, then, will have to come from cultural changes that reduce the expectation of spending. People can stop living paycheck to paycheck by foregoing spending that previously seemed mandatory. This has already been happening, of course, with millions of households giving up land-line telephone service, cable television, exercise club memberships, and newspaper and magazine subscriptions. It will take more adjustments of this kind to restore the sense of discretion to consumer spending, along with the feeling of freedom that goes with it.

Golf Decline Continues

U.S. golf courses are closing. This is a trend that goes back to at least 2006, and part of a larger trend in U.S. popular culture away from outdoor sports of all kinds that goes back to 1998. The decline in golf may be accelerating now that the professional sport no longer has any current icons known to the general public.

Locally, I’ve seen the smaller golf courses sold to make room for more office buildings. But elsewhere around the country, former golf courses are going vacant.

Golf course closings are a routine part of the foreclosure process in overbuilt Las Vegas. Lake Las Vegas, a sprawling luxury resort and suburban development, had three golf courses when it fell into bankruptcy in 2008, but emerged from bankruptcy last weekend without any. (After foreclosure, one course closed quickly. The second closed a few months ago, despite efforts by local residents to raise money to pay the water bill. The third, the private club, continues to operate post-foreclosure, but is still not open to the public.) Each of the three courses lost more than $1 million per year after opening.

Another Las Vegas golf course, Stallion Mountain Golf Club, is set to be sold at an FDIC auction a week from now. Investors bought the golf course for $24.5 million in 2006 with a loan from Community Bank of Nevada, but lost so much money on it they turned it over to the bank in 2008. It was closed at that point, and the bank failed a year later. The FDIC has been maintaining the grounds to try to maximize the value of the land at auction, but no one expects the property to sell for more than $5 million now, and it is far from certain that the buyers will operate it as a golf course. This course too was originally part of a set of three golf courses, but the other two were sold off years ago for residential development.

It costs a fortune to operate a grassy golf course in Las Vegas because of the climate, and hot summer weather of Las Vegas has spread across the northern United States this summer, turning the greens brown at most northern golf courses. In normal summer weather, it is a challenge to keep the greens green by watering them every night, but no amount of water would allow the quarter-inch grass of a northern golf course to survive the persistent heat the northern U.S. has seen in the last seven weeks. The brown, parched grass has dimmed the enthusiasm of golfers, cutting into what should be the peak summer revenue at golf courses at the same time that it adds to the expenses. The added stress will surely accelerate the closings of several more golf courses.

It is not just the golf courses that are quiet. The television audience for golf has been declining gradually ever since the phenomenal attention that surrounded Tiger Woods’ first professional season. Recently, the final round at the British Open drew a 2.1 rating, the lowest rating ever for that event and about half of what would previously have been considered a normal television audience for a major golf broadcast. The declining audience, and declining sponsorship money, has meant that some tournaments are no longer on television.

Again, this is part of a larger trend. U.S. TV audiences for auto racing and baseball are also declining fast enough to cause some hand-wringing. Other sports saw this decline sooner: ice hockey and boxing made the transition from major to minor TV sports a decade ago. ESPN, the top U.S. sports channel, has been able to maintain its ratings largely by taking on events, such as the NASCAR series, that have become too small for broadcast television.

Money Laundering Needed for Corporate Political Spending

Now that the U.S. Supreme Court has opened the door for corporations to buy elections, there is a need for a new form of money laundering — so that money can fund political advertising campaigns without anyone being able to trace it back to its source.

Discount chain Target has learned this the hard way. After word got out that it had funded high-profile television advertisements endorsing a culture-war candidate for Minnesota governor, the resulting consumer backlash and investor fears of the effects of a boycott put a damper on the company’s stock value.

Target, which has tried to position itself as a more humane alternative to Walmart, may be more vulnerable than most companies to this kind of disclosure, but other corporate political contributors will not want to take that chance if they can avoid it. U.S.-based and foreign corporations reduce their risk of boycotts and other consequences if their contributions can’t be traced. Meanwhile, foreign governments and organized crime groups wanting to funnel money into political campaigns can now use the corporate loophole to do so as long as they cover their tracks well enough.

Don’t be surprised if most of the political advertising this fall is paid for by fly-by-night organizations with no web site and no office of their own, as apparently is the case with the political fund that Target was supporting. Most of these organizations may shut down and disappear as soon as they have paid their bills following the election, only to be replaced by equally faceless political advertising funds for the next election.

On the corporate side, look for creative and often fraudulent accounting maneuvers to bury the political spending in budgets for advertising and community outreach, so the spending won’t show up in the corporation’s financial statements.

The risk, though, is that the story gets out and the money is traced back to its sources. No one can spend tens of millions of dollars anywhere without leaving tracks, and the corporate contributors, whether they are criminals or real businesses, may not be as anonymous as they want to be.

I keep mentioning the criminal element because there is no way to draw a clear line between criminal organizations and legitimate businesses. A business corporation can operate for years before the world discovers that it is primarily a front for fraud and other criminal activities, as we saw with Enron and Worldcom. And a criminal organization can set up its own business corporations in a matter of days, when that is needed to move money around. In practice, the recent Supreme Court decision allows unlimited criminal funds from anywhere in the world to be spent on behalf of candidates, and even the candidates will not be able to find out how much money is involved or where it is coming from.

Eventually, of course, this loophole that allows anyone with money to buy a U.S. election has to be closed. In the meantime, we can expect the political discourse in the upcoming elections to take a decidedly commercial and criminal turn.

This Week in Bank Failures

“Who gets the money when a bank fails?” That was the innocent question of one of my friends tonight as I prepared to write about this week’s bank failures. I realized many people must have this question.

The simple answer is that money simply vanishes on the day of a bank failure. Deposit insurance provides replacement money, to an extent, but roughly a third of the money it replaces is actually destroyed.

The law of conservation of matter and energy clearly has made an impression on people, and as most people visualize economic matters, they imagine that a similar law applies here. Common sense supports this view. In a successful commercial transaction, a certain amount of money goes in, and the same amount goes out, in different hands. But that is not a law of science, and not all economic events are perfectly efficient when it comes to money. Money is created and destroyed on a daily basis, but most dramatically in bank failures, where deposits in excess of the insurance limits may simply be wiped clean.

I must hasten to add, however, that more than few banks in history have been set up for the express purpose of funneling money out to other parties, usually disguised as borrowers, and in recent years, usually as real estate developers. These banks were made to fail and are founded on false financial statements, and this possibility is one of the reasons that regulators have to keep a close eye on banks. It is the exception, though, when a bank fails under a cloud of suspicion and a criminal investigation. Most bank failures occur as the simple result of bad decisions or sloppy work. Bank failures can also occur as the result of horrendous economic conditions surrounding the bank — but it is important to note that all the banks in the United States have participated in the same national economy, and more than four out of five will survive the current bank failure cycle.

Observers in the White House and elsewhere who are waiting for a real estate rebound to help bring the banks back may have to wait for years. Fannie Mae revealed in its latest financial statements that it has been selling foreclosed homes at a rate of more than 500 per day, yet its inventory keeps rising. The inventory should easily reach 200,000 by the end of the year and 300,000 at some point early next year. That’s more houses than people own in Washington, DC. And that’s just Fannie Mae.

Nor will this problem, known in banking as REO (real estate owned), improve immediately when the job market improves. In a historically normal job market, the rate of workers moving to new jobs would be 5 to 10 times what it is now, and many of these workers will be moving out of houses with underwater mortgages, where they owe more than the house is worth. If those houses cannot immediately be sold, the banks will end up stuck with them, and though the losses may be smaller, that could end up being a larger number of houses than the banks are dealing with now.

You might imagine that many of these workers moving out of the underwater homes will buy other homes in the cities they move to, but in most cases, they won‘t be able to. New mortgage market rules this month will effectively prohibit anyone whose mortgage failed from taking out a new mortgage for a period of about 7 years. Based on that rule, at least 20 percent of current homeowners will be turned into renters before this is all over.

With banks selling homes as fast as they can, and with more than 20 percent of current homeowners prevented from buying a house the next time they move, it will be impossible for housing prices to remain at their current levels. For banks, this assures that losses will continue.

The one bank failure tonight occurred in Chicago. The two branches of Ravenswood Bank were closed. Northbrook Bank is paying almost a 1 percent premium for the deposits and is also purchasing the assets.

Ravenswood Bank had $270 million in deposits and slightly less than that in assets. Its deposits included campaign funds of former governor Rod Blagojevich, who is currently on trial for racketeering and other political misconduct. If Blagojevich is convicted, prosecutors have indicated that they will ask for the campaign accounts to be forfeited. In case you were wondering, even accounts that are frozen by court order are protected by deposit insurance.

Fructose Metabolism and Cancer

A new experiment that studied cancer cells found results that defy the main competing theories of sugar metabolism. The traditional view of sugar metabolism holds that all sugars are metabolized the same way. A more recent, competing theory says that fructose is metabolized slower than other sugars because most cells cannot metabolize fructose in significant quantities. The new findings do not appear to be consistent with either view.

In the study (“Fructose Induces Transketolase Flux to Promote Pancreatic Cancer Growth,” in Cancer Research) tissues of pancreatic cancer cells in test tubes were fed either glucose or fructose separately. The cancer cells metabolized fructose very differently from glucose, and they grew much faster on fructose, apparently because fructose metabolism spurs the kind of protein synthesis that is essential for cell growth.

The headlines are predictably sensationalist, suggesting that high fructose corn syrup causes cancer, or even that cancer can be cured by avoiding high fructose corn syrup. I should emphasize that the experiment looked at just one form of cancer, and found only that it grew faster when given fructose in isolation. Still, the link between fructose and the growth of cancer cells is an important finding, and it does beg the questions that some news stories are presenting as answers. In particular, to what extent can cancer be avoided or cured by avoiding soft drinks?

The deeper questions, though, have to do with sugar metabolism. The metabolism of fructose is of particular concern because it has gone from being a micronutrient to being a macronutrient within the last century. Since the popularization of high fructose corn syrup in U.S. soft drinks around 1980, millions of people are getting as much as 15 percent of their food energy from fructose, compared to no more than 1 percent in any normal diet of the past.

My own practice, recently, is to limit total sugar consumption at any meal (or at any one time) to no more than 60 grams, with the idea that the fructose load will not exceed 30 grams, and the metabolic effects of a sugar buzz can be avoided. This basically means drinking soft drinks and fruit juice from a 5-ounce juice glass rather than a 12-ounce water glass — a tough idea to get used to. If more can be discovered about fructose metabolism, it may be possible to replace that guideline with something more specific.

Burning Russian Wheat and Higher Prices

Russia is on fire.

The wheat fields, that is. It is the hottest, driest summer ever in western and central Russia, and the dry weather has already ruined about one fifth of the Russian wheat crop. Now fires are popping up and burning some of the wheat fields that had survived to this point.

It makes the situation worse that Russia does not have much experience with this kind of fire. But even if they did, with fires popping up at the rate of 300 per day, firefighters cannot get to all of them, at least not right away.

With the drought and fire damage, Russia will be harvesting much less wheat than usual. Normally, Russia is one of the world’s largest exporters of wheat, but it may not have any more wheat to export this year. Other countries will be looking to buy more wheat from Canada and the United States. The price of wheat will be higher everywhere.

The bad news for farmers whose crops were lost is good news for wheat farmers, everywhere and especially in Russia, who have crops to harvest this year. People who eat wheat products may pay higher prices — but not much higher, because wheat is still not expensive.

Letting the Bush Tax Cuts Expire

The Bush tax cuts are set to expire, and some politicians are surprised to learn that most Americans want to see them go.

They shouldn’t be surprised, because they shouldn’t be so out of touch. The Bush tax cuts were too small to matter for most workers. Most people will not even notice the tax cuts expiring except for the news people talking about it.

I remember when the tax cuts first took effect, and how hard it was to persuade people that they, too, had received a tax cut. We had to put the before and after pay stubs side by side and look at them under a magnifying glass. “You see?” I would say. “These two numbers are different. That one dollar and thirty-eight cents is your share of the tax cuts.” “How do you know how to figure these things out?” people would say in response.

The Wall Street Journal, trying to find the worst-case scenario in the pending tax increase, thought they had found it in the case of a single worker with no children and a salary of $80,000 per year. The paycheck would be $61 smaller. That’s big enough to sting, if you notice it, but also small enough to possibly escape notice. And that’s absolutely the worst case. People who make hundreds of thousands of dollars face larger tax increases, of course, but at that income level, there is little connection between income and lifestyle.

So it’s no wonder that, in recent polls, most voters would go along with the expiration of all of the tax cuts. Some, notably including 40 percent of Republicans, actually want to see a tax increase that goes beyond the expiration of the Bush tax cuts.

What would make more of a difference to the economy, however, would be the repeal of the long-term capital gains tax rate. This was something that Bush had a hand in, but it was mostly done before he took office. The distortions created by this tax gimmick are slowly eating away at the productive capacity of the economy, yet things could quickly get back to normal if all special tax treatment for capital gains, in business and investing at least, were repealed.

Radioactive Fallout, and Nuclear vs. Solar

You have to watch a nuclear power station every minute of every day and night, while it’s operating and while it’s shut down. A solar installation, by contrast, can safely generate electricity without anyone watching it. This, in the long run, may be the best argument for a greater reliance on solar power than nuclear. The result of something going wrong at a nuclear power station can become catastrophic in a matter of minutes, as the world saw at Chernobyl in 1986. The Chernobyl meltdown took weeks to occur, but it passed the point of no return before anyone inside the plant understood what was happening.

How long will it take for the contaminated land around Chernobyl, the site of the planet’s worst radiation release, to return to normal? Probably about another century, according to the latest estimates. A small number of people, believed to be less than 200, are already unofficially squatting on the radioactive land surrounding Chernobyl, and the government is considering a program to start repopulating the area officially. The people who volunteer to move into the area will face lifestyle restrictions and lives shortened by the radioactive minerals in the area. This is a point emphasized by a new wildlife census that shows that animal populations in the area are continuing to decline, presumably from radiation-related illnesses including cancer. Meanwhile, a significant fraction of wild boars in southern Germany are still too radioactive for people to eat, the result of boars eating mushrooms, which concentrate radioactive minerals left behind by the Chernobyl incident. Extrapolating trends since then, boars will continue to be radioactive “for at least the next 50 years,” a German hunting expert told Der Spiegel.

Meanwhile in the United States, electric utilities are seeking new subsidies to build nuclear power stations, on top of the enormous subsidies that the nuclear industry already receives. That would be a poor investment, according to a new North Carolina study, “Solar and Nuclear Costs — The Historic Crossover,” by John O. Blackburn and Sam Cunningham. The study focuses specifically on North Carolina and finds that photovoltaic power generation installed this year in that state costs less, on average, than new nuclear power. The cost for new solar installations in North Carolina are 12–19 cents per kilowatt-hour, compared to 14–18 cents per kilowatt-hour for new nuclear plants being proposed in that state.

The costs for the nuclear plants have to be considered in the light of the history of nuclear power construction in the United States, with most plants running more than double their initial budgets before they go online. Thus, less optimistic estimates say that if the United States builds a new generation of nuclear power stations, consumers can expect to pay about 40 cents per kilowatt-hour for grid electricity, more than double what they will pay if the nuclear plants are not built.

By contrast, consumers and businesses do not pay the utility companies for solar or other renewable electricity they generate for their own use. The cost for this electricity will not include a surcharge to pay for a failed or ill-conceived nuclear experiment. The key point to consider, though, according to the North Carolina study, is the way the cost trends compare. Solar costs have crept down by 5 percent per year, with nuclear generating costs rising at a similar rate, neither trend adjusted for inflation. Of the two, nuclear is necessarily more labor-intensive, so its costs can only continue to rise as long as the trend toward higher wages continues. The labor costs of a solar installation, however, decline as solar panels become more efficient and lighter.

I have already argued that no new nuclear plants should be started anywhere in the world for the simple reason that the nuclear plants already in operation are enough to use up all the nuclear materials we can reasonably hope to find on our planet.

A single new U.S. nuclear power station could easily cost $45 billion — indeed, Washington has already set aside more money than that with the idea of building one new nuclear plant. The same investment in residential solar power could put a rooftop system on every residential building in the country, providing between 5 and 10 percent of residential electricity. Indeed, the cost comparisons argue for keeping the current power plants running for now, while providing essentially all new generating capacity through solar power, mostly from on-building installations. As the price of solar power drops, perhaps as soon as 2020, it will become necessary to start idling and decommissioning the least efficient power plants. This is a scenario the country has never had to consider before — and it is the main reason that Wall Street investors are reluctant to finance any of the proposed power plants that might not come online until late in the 2020s.

The New Supermarket

After two years of delays, the new Wegmans is open. This means that Great Valley has its own supermarket for the first time. It also boosts the chances for the real estate developer to avoid bankruptcy.

It was a frustrating wait for the new supermarket. The building itself was all but finished a year ago. At that point, it was already a year behind schedule, but it couldn’t open. The builder had blocked off all the entrances, as you see in the first photo. The entrance roads were complete at that point except for paving, which the builder didn’t have the money to do. In the photo, you can see the finished supermarket building, ready to open, but essentially being held hostage.

Some kind of back room deal was worked out. The paving was done, the permits issued, and the barriers removed. The supermarket is now open.

The supermarket was finished first because it was the only part of the project that made good economic sense. There is no other supermarket within 2 miles east or west or 5 miles north or south, so this is a spot where a supermarket was eagerly awaited. The other retail stores that are in the plans may eventually be built and opened, but if so, that will just result in the closure of a store somewhere nearby, in an area that already has an excess of retail space. The luxury condos? Maybe in 15 years.