New Year's Links

• In the 1960s and 70s, the standard way to do economic analysis was to feed data into a model and then estimate the relevant parameters. For example, based on historical data, economists believed there was a stable tradeoff between unemployment and inflation, i.e., the Phillips curve. Policymakers believed they could exploit the tradeoff by accepting higher inflation in exchange for lower unemployment. However, when oil price shocks in the 1970s generated both inflation as well as rising unemployment, expansionary monetary policy failed to deliver the predicted results. Instead of lower unemployment, the economy experienced “stagflation” of higher inflation combined with high unemployment, suggesting that the historical relationship had broken down. So what happened? Expectations of inflation made workers and firms change their behavior: knowing that inflation was going to be higher in the future, workers demanded higher wages and firms hired fewer workers today. It turns out that a statistical correlation between lower unemployment and higher inflation is not exploitable by policymakers as an intervention, because their policy action induced a different set of behavior by agents. [Arpitrage]
• If breakevens reduce by only 30 percent over the next five years, approximately 60,000 locations currently classified as Tier 2 ($40 to $50 per barrel of oil equivalent [BOE] breakeven) could achieve the same breakevens as today’s Tier 1—less than $40/BOE, in the absence of inflationary pressures. This could increase the overall Tier 1 count by 150 percent. A range of innovations, such as horseshoe wells and other next-generation designs, frac efficiency gains such as trimulfrac, and other novel breakthroughs yet to be developed, could all contribute to this movement, alongside the cost efficiencies coming from expanded scale. [McKinsey]
• There were two areas of good news during the quarter. One is a surprising demonstration of operational discipline, and the other is the company’s expansion opportunities in natural gas. The biggest recent positive is the company’s decision to suspend development of its Lake Charles LNG project. This is a clear example of management exercising discipline in deciding which projects it is willing to pursue. Energy Transfer was unable to secure enough offtake agreements on attractive terms with high-quality global LNG buyers, so it canceled the project. I don’t believe this is how the “old” ET would have behaved. [HFI Research]
• The Texas-Arizona-California corridor becomes the undisputed tech mecca, triggering a land grab unlike anything since the railroad era. Water rights, housing developments, commercial real estate, data centers, AI infrastructure - everything gets bid up to absurd levels by everyone from sovereign funds to family offices to retail FOMO. The border states that were flyover country a decade ago become more expensive than coastal tier-one cities. Arizona water rights trade like Bitcoin in 2021. Someone will get very rich. Most will arrive too late and overpay. [Mojo]
• I know many hiring managers and believe you me the "Charlotte" and "Matthew" resumes are treated very differently from the "Lynneleigh" and "Packston" ones. Not many of these sorts of names in senior management... On the other end of the spectrum, names like "Apple", "River" or "Moon" tend to be from bonhemian upper middle to upper class families. Perhaps they dont have to worry about hiring managers so much! [Reddit]
• I quit my job and returned to Shaker Heights to live with my father as I regrouped and worked on my novel. I was grateful to be back home in the leafy comfort of suburban Cleveland, where I would remain for most of the next thirty years, marrying, buying a house in the suburbs I loved, having kids. I loved living here. It was my home, my people. Living where you grew up, I found, gave you great spiritual capital you could regularly tap into; it gave cohesion to this life. My father was here. I could point out to my kids the ballfields where I’d played Little League. My daily jog through the neighborhood took me past my elementary school. Each time I stepped on the cracked sidewalk slab on Fernway Road, the spot Debbie Shaw kissed me in second grade, I thought of her. [Michael Ruhlman] 
• In 1980, two economists, Sanford Grossman and Joseph Stiglitz, published a paper that challenged the Efficient Market Hypothesis (EMH), an idea that had dominated financial theory for two decades. The EMH held that market prices reflect all available information. If IBM traded at $100, that price encoded everything knowable about the company—its earnings, prospects, management quality, competitive threats. Thousands of informed traders had collectively processed all relevant data and bid the stock to its true value. Grossman and Stiglitz identified a fatal contradiction. If prices already reflect all information, why would anyone spend resources gathering it? Information is costly—you have to collect data, analyse it, and still make decisions under uncertainty. But if the price already tells you everything you need to know, gathering information is irrational. [The Terminalist] 
• A more useful measure of competition would be based on what we’re actually trying to get competition to do, working backwards from the outcomes we want in order to see what the features are of markets that deliver them. Competition works because it rewards businesses that find better ways to serve customers, and punishes ones that overcharge their customers or offer substandard products. If markets are competitive, then businesses that make desirable products at lower cost will grow larger as customers switch to them, putting pressure on their competitors to improve by cutting prices or making better products. They may face the prospect of having to exit the market altogether. In short, we want to measure whether markets are rewarding excellence or sclerosis. It turns out that such a measure exists: what is called the Olley-Pakes decomposition. The decomposition measures whether customers are switching to more productive companies. If productive companies are gaining market share, we might judge that the market is competitive and working well. If they’re not, and more productive businesses are not doing better than less productive ones, something is wrong, and intervention could be necessary. [Works in Progress]
• On the surface, it was reasonable to expect that bigger reactors would be cheaper per unit of electricity generated. For example, the control room and the security fencing should cost approximately the same for a 900 and a 1,300 megawatt reactor. EDF’s own estimates found that, for the same total output, a smaller series of 1,450 megawatt units would be 15 percent cheaper than a larger series of 600 megawatt reactors. But these larger designs brought greater complexity. For example, the 1,300 and 1,450 megawatt reactors needed an extra coolant pump, steam generator, and piping circuit to remove heat safely from the larger reactor core. The engineering work required to integrate these systems did not scale linearly with increased output. [Works in Progress]