The Economics of Space Exploration

NOTE: Cross-posted to Getting There From Here.

Humanity's destiny is to spread out, first building orbital habitats, then colonizing other bodies within our solar system, and finally spreading out to other star systems. This isn't something I believe. It's not a matter of faith. It's a fact.

You know how I know? Because I have studied economics.

"Wait, what does economics have to do with space exploration (other than the fact that exploring space costs an arm and a leg)?" you might be saying. Exploration—of any type—is all about economics.

When European explorers crossed the Atlantic in the 15th and 16th centuries, they weren't coming to the Americas in search of scientific knowledge, or to meet the locals. They were trying to develop more efficient routes to Asia to beat their trade competition. They were looking for gold and other resources to exploit to enrich their own countries back home.

And, in the end, they did. Europe as a whole grew richer because of the exploration of the Americas. And in America, over time, the population grew and became wealthier as well, in some areas even surpassing the wealth of the Europeans.

Economics is not a zero-sum game, especially when you can explore and gain access to new sources of raw materials. What that means is that investments in exploration almost always pay off economically (maybe not always as intended, but they usually do pay off).

Here on Earth, we have a fixed amount of resources (actually, our resources grow infinitesimally larger due to cosmic debris constantly being deposited, but it's such a small amount as to be negligible), but a rapidly growing population. What that means is that when resources start to grow scarce (as may be happening soon with oil, uranium, platinum, seafood, and others) the amount available per person drops. If you consider resources as a form of wealth, then a fixed amount of available resources and a growing population combine to mean that the average wealth level is dropping over time.

If you consider land as one of those resources (as economists generally do), then the amount of available land per person is dwindling even more rapidly, as water levels are rising and erosion is eating away at land area (although, to be fair, there will be a lot more usable land available in Canada, Russia, Scandinavia, Greenland, and Antarctica before too much longer). Crowding is becoming a major problem, and finding solutions here on Earth (short of starvation, disease, wars, or genocide) is difficult.

Throughout history, we solved this problem by developing new forms of resources through exploration. We found new lands and new sources of metals, woods, and fossil fuels. We explored the depths of the oceans for food resources and oil. We developed new power sources such as nuclear power through scientific exploration. But we're running out of places on Earth to explore; we're running out of new sources of raw materials to exploit. In our quest to produce more resources and feed more people, we're damaging our environment and driving other species to extinction at an alarming rate.

But all we have to do is look up to the heavens, and our problems will be solved. I'm not talking about religion; I'm talking about the quadrillions of dollars in raw materials that are floating around in our solar system near Earth's orbit. Beyond that, there is literally an infinite amount of raw materials, not to mention room to spread out so that we're not crowding each other so much. All we have to do is make the investment in exploration.

But it's not going to be governments that do it. Spain did not send the Armada out across the Atlantic Ocean looking for more efficient routes to China and India. It contracted out with private explorers and reaped the benefits of their success. Once the private explorers have proved the viability, governments in Europe took advantage and began to spread and reap the economic benefits. But the real economic beneficiaries were the private companies that threw resources into both the Caribbean Sea and the Indian Ocean—such as the Dutch East and West Indies Companies, and the British East and West Indies Companies. There are numerous other examples throughout history of private explorations for economic gain (take Marco Polo's expedition, for example).

For that reason, I don't believe that governments will lead the way in colonizing the Moon or Mars or Venus or other celestial bodies. That's not to say they don't have a role, just the same as Queen Isabela's funding of Christopher Columbus' expeditions paved the way for centuries of European economic development.

We've got a long way to go to Get There From Here, but I know that we'll get there eventually.

The So-Called Recovery

I'm worried about the economy. Every day I see things that tell me that the economy is "bouncing back". I know that we're in a "jobless recoverey". But I'm concerned.

Mind you, I'm not worried that our economy is not growing fast enough. Nor am I worried that our economic growth will not be sustained.

My worries are in a different area altogether. I'm worried about the fact that our economy is growing at all.

That sounds crazy, right? Maybe. But our economy has been artificially propped up for so long, that continuing to do so bothers me. I guess that anything artificial about our economy bothers me, because I'm a fan of fundementals. And what do I see when I look at just the fundementals?

I see weakness. Not in comparison to any other national econonmy, mind you. The economy of the United States is still in good shape, if you look at a snapshot comparison to any other national economy. We produce more than anyone in the world. In fact, more than twice as much.

It's the trends that concern me. Our economy is shrinking or stagnating, while the economy of China (not to mention several other countries) is growing. Is that what bothers me? Am I worried that China's economy is going to become larger than ours?

Nope. That doesn't bother me. In fact, since China has more than four times the human resources of the United States, I would expect—all things being equal—that China's economy will surpass ours within the next decade. And that doesn't bother me.

So what does bother me? Well, regular readers of this blog—if there are any—know that I believe in freedom of information, and that if information does not flow freely, the economy—no matter its trappings—is not a free economy.

With that in mind, I point out that I have said before that our (the United States) economy is in great need of correction. What I'm saying now is that what we've done so far is not nearly enough. Our economy is bouncing back, and that's what bothers me.

You can only artificially push something up so far before it collapses, and that's where the U.S. economy is. Not because of the strength of the economy (which, I'll admit, has surprised me during this recession) but because of the lack of weakness in this economy. Yes, I've studied it (insofar as someone without a Ph.D. in economics can) and it frightens me.

Right now, I can buy a plasma television at a reasonable price because the dollar is artificially strong against pretty much every currency in the world.. This is the case because foreign governments are buying dollars in order to keep the dollar strong. If you're China, why do you want the dollar to be strong relative to the Yuan?

Because a dollar that is strong relative to the Yuan means that dollars will be spent to purchase goods (plasma televisions, etc.) that are denominated in Yuan instead of goods that are sold in dollars. As a result of the artificial strength of the dollar, goods are being made in other countries and manufacturing jobs are leaving the U.S.

OPEC has been considering for a couple of years now plans to stop traiding oil in dollars and move to other currencies. Why would that be important to them (and you)?

It's important to OPEC because if they trade in other currencies—say, the Chinese Yuan—the dollar can lose value relative to the Yuan without affecting how many Yuan OPEC is bringing in with each sale (actually, there would be an effect, because oil would be more expensive to people spending dollars, so demand for oil would drop a small amount, putting downward pressure on the price).

And that brings us to you. Because if oil is traded in Yuan the the Yuan strengthens relative to the dollar (which looks, to me and you like a weak dollar) then our price for oil (and, thus, gasoline) goes up. Very few people in the U.S. want to pay more for gasoline, but that's our future.

What's worse is that foreign governments which have been buying dollars as a reserve currency—with the intent of keeping the dollar strong so that Americans can easily buy goods made in their countries—will start to unload their dollars. It'll start slowly, as they determine that European, Chinese, Indian, Russian, and Brazilian citizens can buy their goods, too, and start increasing their holdings of currencies from those nations.

And once it starts, there will be more downward pressure on the dollar, lowering its value. And when those countries' central banks see their currency reserves (currently more than $6 trillion for just the top ten largest holders of dollars) dwindling in value, they will increase the pace at which they try to exchange them, accelerating the decline. In fact, when and if this happens it will actually cause the dollar's value to be artificially lower than it should be.

A dollar with lower value sounds like a bad thing, because a strong dollar is a symbol of the power of the United States. And it is a bad thing, in some ways, because anything you buy that has to be imported (like gasoline or that big plasma television) will become more expensive. Items made in the U.S. will become cheaper to foreign buyers, which means that they will start to purchase more goods made in this country. That will mean more jobs, but more demand also means higher prices for those goods in dollars (even with higher prices for the goods in dollars, the weakness of the dollar means that it will cost fewer rupees to purchase the item) which means inflation.

So job growth will come back, especially in the manufacture of exports, but we'll have a bunch of inflation to go along with it. The export/import balance will finally start to correct and may even become positive if the dollar weakens enough. Some other much-needed corrections will come during this period, but not if foreign (and domestic) governments continue to intervene in what is supposedly a free market economy.

The longer such interventions—such as artificially strengthening the dollar—continue, the harder will be the collapse when it comes.

This post is already pretty long, so I'll post more later on specific topics where I see intervention being a bad thing.

Mankiw on Obama

Greg Mankiw posted on Sunday about Barack Obama's plan for a windfall tax on oil companies. Not surprisingly, Mankiw seems to be opposed to this (as most reasonable economists would be, I would imagine). But for the sake of argument, let's look at some numbers. Mankiw quotes Obama:

"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."

First, I don't think that oil companies are making out-sized profits. Take the biggest "offender," Exxon Mobil, for instance. While I'm no fan of this company (or of fossil fuels in general) I don't think that Exxon Mobil has engaged in any immoral behavior (amoral, perhaps, but that's not the same thing). People are offended by the size of their $11.68 billion quarterly profit because it seems outrageous. But consider a couple of things:

• That was on sales of more than $138 billion, a profit margin of less than 8.5 percent
• Their pre-tax income was about $22.2 billion, and the taxes they paid for the quarter were about $10.5 billion, giving them a tax rate of more than 47 percent

Should Exxon Mobil be held to a different standard? People are obviously not unhappy with their profit margin, just their total profit. But that total profit is driven by their sales. If you don't want them to make that much money, stop buying what their selling. Supply and demand. But I don't think they should be penalized by having to pay a 75 percent income tax rate because they are providing a product that has such high demand.

Still, I'm looking forward to a time when the powers of Creative Destruction have made the fossil fuels industry obsolete.

Economic Projections for China

Next Big Future has information on economic projections for China. Some of the results are pretty surprising, but I'm not sure how long China can sustain the incredible growth rates.

Biofuels and the Food Supply

CNET News' Green Tech Blog reports on research by clean-energy research firm New Energy Finance that says that oil prices have a bigger impact on food prices than biofuels. And I believe it.

The report also states that changing food patterns around the world (i.e., rising middle classes consuming more meat and less grain), growin gpopulation, rising input costs are impacting food prices.

The report stated that

In grains, during the period from 2004 to April 2008, global dollar prices increased by an average of 168 percent. The rising price of oil accounts for an increase of 32.5 percent and other inputs--such as land and labor costs--contributed 7.4 percent. Dollar depreciation accounts for a further 17.9 percent. Supply and demand imbalances account for the remaining 57.7 percent, with biofuels responsible for up to an 8.1 percent increase in global average grain prices (the impact on U.S. corn was clearly above average). The biggest issues were the failure to improve yields to compensate for global population growth, along with the failure of the Australian harvest.

Biofuels may not be the main culprit in food prices, but given that they will have little or no effect on oil prices they appear to be a waste of resources that could be better spent on something with a greater likelihood of success.

Farmer Ditches Powered Tractor for Mules

The Associated Press reported yesterday on a farmer in Warren County, Tennessee, who had what some may consider an unusual reaction to higher fuel costs: he hitched his tractor rake to a pair of mules instead of using the tractor's engine. The mules cover the fields slower than a petroleum-powered tractor, but apparently the cost of the fuel for the tractor exceeds the cost of feeding and caring for the mules and the cost of the extra time.

Is this the shape of things to come? Are we destined, because of higher fuel costs, to slide back to the Middle Ages? I don't think so, but just the same it may be time to invest in mule- and donkey-futures. Besides, with the terms of the new Farm Bill, farmers in this country should never have to struggle again.

Politics and the Farm Bill

David Brooks of the New York Times posted an editorial online yesterday that talks about actions and power of groups, politics, and the Farm Bill. It's a pretty interesting read, especially in terms of how the current presidential candidates have responded.