Kiesling On Thinking About Complex Systems And Economic Liberty

Lynne Kiesling recently wrote a great overview of the elegant complexity and beauty of self organizing free markets. Read it here.

Encouraging Jobs That Make Things

Back in April, Stephen Moore wrote about the fundamental economic challenge facing our nation. His title and subtitle explain the core issues:

We’ve Become a Nation of Takers, Not Makers
More Americans work for the government than in manufacturing, farming, fishing, forestry, mining and utilities combined.

It isn’t just government. I’ve been told that here in Rhode Island there are more people working in nonprofit organizations than for profit businesses.  We should also consider all the folks collecting social security, welfare or one form or another of government support, as well as all the businesses that subsist on government contracts and subsidies. And numerous private sector jobs are obviously questionable in terms of adding fundamental value to our society.  It is truly amazing how many folks our society has to support that aren’t engaged at all in producing the goods we all consume relative to those who do help grow and make things.

Of course our domestic makers don’t do it alone. Makers in other countries are providing most of the manufactured goods we consume in the US as well as many of the raw materials. And we are paying for it all with massive unsustainable levels of private and public debt that will eventually have to be repaid through our own productivity as a society.

We live in an interconnected global economy and as a nation we have to produce goods and services for trade in order to pay for the goods and services we import and consume.  Because our nation consumes so much more than we produce, we are experiencing unfortunate realities like real wages stagnating for the last forty years and declining recently.

I do not mean these comments to question or negate the value of the work of people who work in government, in non-profits or in industries outside those that directly produce the goods we consume. Nor do I suggest that we should be less compassionate to retired folks or others who depend on government support. These days I am working in the heavily subsidized field of solar energy and would definitely have to be counted as a taker myself when it comes to our national balance of trade.

We need to recognize that our economy is in the worse crisis since the 1930′s because the path we have been on is completely unrealistic and unsustainable.  We have to be more self sufficient as a nation and create more value for export. We can’t possibly keep borrowing to fund consumption without increasing our production. We simply can’t afford to support so many people in our society who don’t help make all the stuff we consume.  If we want a healthy economy, we need far more makers.

Moore’s comments on productivity are particularly important. His conclusion might be help point the way toward meaningful solutions in the unemployment debate that politicians in Washington are poised to enter next week:

President Obama says we have to retool our economy to “win the future.” The only way to do that is to grow the economy that makes things, not the sector that takes things.

What Is Ownership In The 21st Century?

I have recently been thinking a lot about an issue that I have been unable to frame adequately in written form in several attempts over the last twenty years.

This big issue is lurking in the background of my proposal for reforming tax policy and any serious discussion regarding the sustainability of our current economic situation. It is the same fundamental issue lurking behind the polarization of our current politics.

That core issue is the question of appropriately defining “ownership” for the 21st Century.

Some examples of complicated issues related to appropriately framing the questions and definitions of ownership:

What are the current ownership rights and interests of our kids, grandkids and those many future generations from now? Who best represents them and how? How are those interests appropriately valued today? For instance who really owns fossil fuels and the right to extract them and set prices on stuff that has taken millions of years to form and, at least for today, represent the most critical resources for a modern economy.

As Peter Barnes asked in starting the Sky Trust - who owns the sky and the climate? What “fees” are appropriate for despoiling them? How do the rights of coal power plant owners, as an example, interface with the emerging ownership rights to the sky that Barnes alludes to? How does that relationship change the rules of our economy?

What are the ownership rights, responsibilities and liabilities of nuclear plant owners who create radioactive wastes and extreme toxins that lasts thousands of years with no place to safely or legally dispose of them? Similar though perhaps not as extreme questions can be asked of many other industries.

In a complex modern global economy, how do ownership rights in “the commons” cross boundaries of national sovereignty as well as boundaries of time?

In his book, “Companies We Keep”, my friend John Abrams addresses the question: who owns our work and what does that mean both for workers and their employers?

The tea party folks are really asking in large part fundamentally ownership questions: What claim does the government appropriately and legitimately have on the fruits of a person’s own labor or investment. If the government can effectively claim ownership to what others produce, what responsibilities on government come with such claims?

There are many divisive questions of how ownership is allocated and whether currently established systems of  establishing ownership are always appropriate. The list could go on exploring the complicated web of relationships that get defined by a presumed shared understanding of ownership interests. But the fundamental question of defining ownership is rarely examined explicitly in a manner that can help answer some of the more divisive and complicated issues of our times.

Slavery, the ownership of other people, was an accepted organizing principle of society for thousands of years, until relatively suddenly, evolving moral understanding and huge social disruptions determined that it wasn’t at all acceptable. Today we face similarly profound questions regarding long held but largely unexamined presumptions of ownership. Beginnings of the moral explorations of some of those presumptions are starting to emerge as drivers of current social divides in our country.

In my view, as both a moral and practical matter, we need to explore how we can best preserve and enhance the vigor, rigor, accountability and incentives of a market economy as the appropriate answers to fundamental questions about ownership evolve and emerge for the 21st century.

What is ownership really and what rights, privileges, responsibilities and protections legitimately come with ownership? Big  questions that I have been pondering and struggling with for decades.

The Emperical Truth About The Economy

Several of my “progressive” friends sent me links to Robert Reich’s recent entertaining video proclamation of “The Truth About The Economy” . In it he suggests that all our nations fiscal problems stem from the Bush tax cuts and the resulting shift of political influence going to wealthy individuals. He implies the obvious cure for those problems being simply more taxes on the wealthy.

If only things were that simple.

I fully agree with his implication of the need to get special interest money out of politics. Even more important is the need to get politics out of being so thoroughly enmeshed in our economy, an area where I suspect Professor Reich may not agree with me.

Looking at the numbers, it is highly unlikely that increased taxation would realistically bring in the revenues need to match federal spending that is now at its highest level as a percentage of GDP since World War II.

In 2000 Federal spending was $2,290 billion with revenues of $2,593 billion and on Dec 28, 2000 President Clinton proudly proclaimed the entire federal debt would be eliminated by 2010.  Instead, by 2010, thanks to the wild spending binges of both Presidents Bush and Obama, spending was up to $3,618 billion, and revenues are only at $2,118 billion.

But tax cuts don’t appear to be the problem. The Bush tax cuts were fully in effect in 2007, when federal revenues were at $2,709 billion, well ahead of the 2000 numbers. Revenues are down now mostly because of the nasty recession we are still in despite economists proclamations to the contrary.

On the revenue side, income tax accounts for approximately 45% of federal revenue, while payroll taxes for social security, medicare and unemployment insurance accounts for another 36%. Corporate taxes, already the second highest in the world, only accounted for about 12% of federal revenue in 2008.

According to the National Taxpayers Union, in 2008 the Top 1% of income earners paid 38.02% of all federal income taxes. the top 10% of earners paid 58.72% of all income taxes while the bottom 50% of earners paid only 2.7% or income taxes.  Perhaps these proportions are unfair and the rich should pay much more. From a perspective of social justice, perhaps the tax system should be overtly used to confiscate and redistribute wealth to provide a more level economic playing field. That kind of policy doesn’t seem to be something the nation will reach clear consensus on any time soon.

Rather than raising tax rates, simplifying the tax code and eliminating the staggering abundance of loopholes that allow many very profitable companies and high income people to pay little or no taxes at all, would seem a much better and more generally supported avenue toward increasing both revenues and fairness. It would also help minimize the economic distortions and corruption inherent in government subsidies through obscure special interest tax deals.

From a strictly economic perspective, the real problem with our federal budget is on the spending side more than the revenue side. Federal spending is now about 25% of GDP, significantly higher than the historic average of about 20% since 1960.

Who would seriously suggest that the government was significantly too small or spending levels inadequate at the end of the Clinton administration? Yet its grown 58% from 2000 to 2010 and continues to grow. In the mean time  incomes for most people in the private sector have stagnated.

Bottom line – no matter how the big spenders like Robert Reich, Paul Krugman or President Obama like to spin things, the serious problem we have with the nation’s budget is a spending problem. While perhaps additional revenues should be considered, there is no way the nations fiscal problems will be solved until spending is dramatically reduced.

Jay Amrose published an interesting article contrasting Texas vs California  public policies and resulting job creation, fiscal condition and economic performance over the last decade. Texas created 730,000 jobs over the last decade while California lost 600,000 jobs. Separately, the federal reserve reports that since 2009 thirty-eight percent of all jobs created in the US were in Texas. For those concerned with social justice, as Ambrose suggests: “nothing helps the poor like jobs”. For what it is worth, Texas also leads the nation in renewable energy development and outperforms California on  educational standardized test scores, both areas that California’s activist government aspires to lead and succeed. California meanwhile faces massive unsustainable deficits in budgets that even Governor Jerry Brown describes as fantasies.

Historic evidence from both here in the US and elsewhere throughout the world suggest that at a certain point increasing tax rates actually leads to declining government revenue and economic performance.  The California vs Texas example seems to confirm that trend.

Europe seems to be finally facing the hard realities of unsustainable government spending as the risks of sovereign default by Portugal, Ireland, Italy, Spain and Greece are forcing governments throughout the continent to slash spending.

Professors Krugman and Reich have won all sorts of prestigious awards, degrees and professional positions and apparently some people still buy their arguments for even more of the Keynesian economic voodoo that has worsened and prolonged economic problems in every instance it has ever  been tried. But for most folks, even in the socialist governments of Europe, their arguments are seeming pretty tired.

Rather than accelerating the same ideological agenda that is primarily responsible for causing our current economic  problems, perhaps we should consider empirical evidence to determine what public policies will help the economy. Despite all the incumbent advantages California had and still has, the contrast in economic performance between California and Texas over the last decade provides a pretty good case study for what kind of policies actually work and which are just long worn academic fantasies. At some point perhaps even professors Krugman and Reich will have to notice.

Lomberg on Sustainability

Bjorn Lomborg is often disparaged by environmentalists for questioning what in my view have generally been very questionable public policy prescriptions that environmental advocacy groups have promoted around the issue of climate change.  In a recent Newsweek article, Lomberg takes a great shot at properly defining the concept of sustainability.  He quotes the UN Brundtland report defining sustainable development:

“meets the needs of the present without compromising the ability of future generations to meet their own needs.”

He suggests:

The measure of success, then, is whether or not we give future generations the same opportunities that we have had.

Lomberg goes on to define sustainable solutions in terms of economic opportunities, educational opportunities and technological opportunities that we provide for future generations. After outlining progress the world has made over the last century or so he suggests:

Rather than celebrating this amazing progress, many find it distasteful. Instead of acknowledging and learning from it, we bathe ourselves in guilt, fretting about our supposed unsustainable lives.

At the end of the article he concludes:

We forget too easily that innovation and ingenuity have solved most major problems in the past. Living sustainably means learning the lessons from history. And chief among those is that the best legacy we can leave our descendants is to ensure that they are prosperous enough to respond resiliently to the unknown challenges ahead.

It would be great if environmentalists could celebrate and learn from our long legacy of creative solutions rather than continually viewing the world as a zero sum game.  Lomberg is right. The path to a sustainable future is not through excessive environmental regulation or redefining the fundamental rules of our economy, but rather through economic prosperity, educational opportunity, technological progress, peace and the fair rational enforcement of the rule of law.

GM Was Profitable For Who?

While some commentators are heralding Government Motors recent announcement of a profitable quarter, Megan McArdle runs the numbers on the government’s investment, the political calculus and the likely ultimate major loss for tax payers.

What lesson, exactly, are we supposed to learn from this “success”? What question did it answer? “Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?”  I don’t think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM’s 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable.  The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy.  We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks.

And in doing the deal that they did to bail out general Motors and the auto workers union, the government broke all the rules of bankruptcy, favoring political considerations over creditors, market stability and the rule of law.

At the Wall Street Journal, David Skeel outlines not just the losses but the violations of law involved in the special bankruptcy proceedings dictated by the federal czar in charge of the auto bailouts at the expense of creditors and the unintended consequences may be the most expensive part of this crazy kind of policy.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

Some politicians may celebrate the news of GMs first quarterly profit in years. But surely GM’s prior investors aren’t celebrating. Nor are the bondholders or investors that got screwed in the political manipulation of the bankruptcy process. Nor should the tax payers that McArdle suggests will be facing a $20 to $25 billion overall loss.

Nobody should be celebrating these “profits”. The uncertainty that this kind of political manipulation of the economy creates is precisely why most businesses are reluctant to invest and banks are reluctant to lend. If business can no longer depend on the rule of law, our nation is no longer a safe or rational place to invest.

 

Facing The Harsh Reality Of Our Unsustainable Status Quo

Not since Hitler offered his solution to the despair of the great depression has civilized society faced such clear signs of serious danger.  Unlike that era, in which complex problems could be somewhat simplified in a focus on the persona of an evil man, the problems the world face today reflect the accumulated irresponsibility of a short sighted world view that has predominated modern culture for generations. Simple answers of good and evil don’t suffice. The harsh reality of historic flagrant irresponsibility is coming to a crescendo.

The tyrannical stability in the Middle East, that has under girded the western world’s dependency on cheap petroleum for decades, is being reconciled with the aspirations for freedom that our foreign policy rhetoric has encouraged, as the entire mid-east explodes with demands for legitimate governance and a just economy. As we launch yet another war in a Muslim country, the conflicted history of our “national interest” becomes increasingly clear, while the future of the petroleum supply to which our society is addicted becomes increasingly murky.

At the same time, the economic crises in Europe and America escalate with the risk of municipal, state and national insolvency increasing around the world. Large European financial institutions are lining up for more bailouts, while the ever more political power and wealth is concentrated in the “too big to fail” banks in the US.  The Federal Reserve is desperately propping up the bond market with irresponsible levels of  “Quantitative Easing” that will inevitably lead to high inflation, a significant increase in interest rates and greater challenges in funding future US treasury debt. The Fed also continues to accumulate the risk of the speculative endeavors of Wall Street as liabilities for the federal tax payers.

Meanwhile in congress, Democratic Party “leaders” argue the federal government should be spending $1.6 trillion more than it takes in, while the Republican “leaders” condemn the Democrats irresponsibility arguing we should only be burdening our children with $1,5 trillion in additional unsustainable annual debts to support the short term spending they can’t get under control.

With the recent earthquake and tsunami, the fantasy of safe nuclear power has been exposed, as the Fukushima nuclear disaster unfolds in the most technologically advanced and emergency prepared nation in the world.

Reading the news, there seems to be so many serious problems all at once and one has to wonder why there seems to be so few responsible leaders insisting on credible solutions.

Government spending can’t exceed revenues for long. Promising entitlements without realistic means of paying for them is neither kind or compassionate, but rather foolishly cruel and irresponsible, since those promises can’t be kept.  Merely calling it “investment” does not turn unsustainable spending into anything other than what it is.  True investments have realistically profitable projected returns. Unless someone can show how their suggested “investments” will provide significant financial returns and reduce the need for future taxes and spending, we should insist on a balanced budget every year, through reduced spending or increased taxation. We can’t afford more empty promises for a postponed mythical future responsibility based on unrealistic projections.

In a little over a hundred years, we have burned through about half the world’s petroleum and other fossil fuels reserves that have taken hundreds of millions of years to form. Do the math. How sustainable could that be? Even if fossil fuel reserves end up being many times those known today, we cannot pretend that future generations will benefit from the luxuries our generation has enjoyed through wastefully burning through so much of the world’s richest concentrated sources of energy. Our society can no longer allow energy companies to value these resources at the mere cost of extracting them from the ground, or even less with the insane subsidies that governments provide. We have to consider the value to society these stored resources represent and include that value in pricing the use of fossil fuels. What’s the right price? Hard to say. But if it will take another hundred million years to replace them, that price sure should be a heck of a lot higher than it is today. And the value shouldn’t go entirely to a few companies just because they have a permit to mine or drill.

Resources that have taken hundreds of millions of years to form should be treated as an annuity for society to be valued in a manner that accrues to many future generations. Like the massive debt being incurred to support our excessive government spending today, the waste of fossil fuels at unjustifiable and unsustainable low prices represents blatant theft from our children.

As for the chimera of safe inexpensive nuclear power, the evolving mess in Fukushima is once again highlighting the sheer lunacy of using such dangerous technology for producing electricity. After decades of research and compromise focused on Yucca mountain as the sole depository in the nation for nuclear waste, in order to garner the political support of Harry Reid for some short term policy initiatives, President Obama ended consideration of the Yucca Mountain project, abandoning the only option for nuclear waste disposal the US has ever seriously considered. Now and for the foreseeable future, like the waste causing problems at Fukushima, our nuclear waste is accumulating in temporary pools at nuclear power plants around the country, with no plan at all for what to do with materials that even nuclear proponents agree will be highly dangerous for thousands of years. Those waste pools, like the reactors themselves, remain attractive targets for terrorists and some will be casualties in the next not quite adequately predicted natural disaster or the inevitable accident caused by human error, aging equipment or some other unexpected factor. Even if nukes weren’t dangerous on their own, nuclear power is the perfect cover and  materials resource for the proliferation of weapons of mass destruction, both for rouge nations and terrorist organizations.

Perhaps the thing most crazy about nuclear power is that the nuclear industry is not remotely cost effective, so the federal government continues to subsidize nukes in all sorts of overt as well as indirect ways.  With the Price Anderson Act, the government absolves this most dangerous industry in the world from the need to cover its own liabilities with insurance in the manner that every other US business does. Without Price Anderson’s unjustifiably shielding an entire industry from responsibility for its real liabilities, no insurer would insure the industry, no investor would give nuclear power even the slightest consideration and the existing nuclear plants would be shut down instantly. No private investor considers nuclear power without the other huge subsidy of giant loan guarantees from the federal government. Meanwhile the nuclear industry’s research and development is funded almost entirely by tax payers.

As the federal government allows fossil fuels that took hundreds of millions of years to form to be squandered in a geological blink of the eye, while it subsidizes a nuclear industry that proliferates nuclear weapons, terrorist targets and the most toxic and radioactive byproducts known to science, we are told that solar and wind energy are not economically competitive. But wind and solar are actually very affordable and low cost in any sensible economic calculation that accounts for the real costs and values of the alternatives. While we squander billions in subsidies to fossil fuels and nuclear power while risking our credibility, the financial viability of our government and the lives of our brave troops in overseas wars to protect this Kafkaesque status-quo, we are told putting a real price on all these “economic externalizes” of our current unsustainable system is just impossible.

We are rapidly approaching the time we have to face the harsh reality that rather than sensible policy solutions that we are told are politically impossible,  it is in fact sustaining our current insane paths in energy and finance that is actually going to be impossible to justify or sustain.

How have these blatant and cruel abuses of our own children come to be accepted conventional public policy? Irresponsible politics is simply failing us. Unless we make some hard choices and real changes, our children face a future of deprivation, economic collapse and armed conflict throughout the world. Politicians who continue to believe they can spout empty platitudes while postponing hard decisions until after their next elections don’t deserve any consideration at all for re-election. The hard problems our nation and our world face need serious solutions now.

The politician that gets my vote is the one who is willing to develop a credible plan to repeal the Price Anderson Act, shut down the nuclear power industry, put a serious tax on fossil fuels while removing taxes on work and productive investment, end the wars and close most our over seas military bases, completely balances the federal budget, break up the “too big to fail banks” and make serious realistic reform to the unsustainable false promises that Social Security, Medicare, Medicaid and other social programs represent.

Hard stuff? – You bet. Disruptive? – No question. Can it all happen over night? – No way. But we have to start these hard conversations and address these hard policy questions in a credible manner – Now.

My college aged kids think I am an unrealistic  idealist for even suggesting such radical changes, even while agreeing that they make more sense than the current status quo. But it is increasingly clear to me that if my generation doesn’t act with some self constraint, their generation and my grandchildren will suffer a very diminished future.

There is a fundamental priority coded in the DNA of all life that creates opportunity for the next generation and for the future of the species. The selfish abandon with which we squander resources today and burden our children’s future has become like a cancer of immoral irresponsibility in our society. It is as if we have lost hold of the most basic premise and purpose of life itself.

We need to rediscover and commit to our moral obligation to future generations and make some very hard decisions as a nation. All sides need to just stop the political grandstanding and get serious. We need real leaders offering courageous calls for meaningful change.

Another Rational Tax Option

Controversial as the proposals in it are, I got generally positive feedback from the recent publication of “A New Tax Policy for the 21^st Century”.

The most productive suggestion was from my friend Bill Stillinger, who suggested that along with taxing fossil fuels, we should also be taxing financial transactions. That got me thinking about an article I read in the Wall Street Journal, “Derivatives – Trading Tally: $700 Trillion (or so)”, which suggests that the global financial derivatives market has a nominal valuation on the order of $700 trillion with an annual turnover of $3.7 quadrillion. Numbers like that will make your head spin.

For perspective, at Market Watch, Paul Farrell suggested some numbers back in early 2008 to get a sense of how big these derivatives market numbers really are:

U.S. annual gross domestic product is about $15 trillion

World’s GDPs for all nations is approximately $50 trillion

Total value of world’s stock and bond markets is more than $100 trillion.

Farrell also quotes Warren Buffett from his Berkshire Hathaway Annual shareholder letter back in 2002 with some prescient wisdom on derivatives markets:

“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Note that Buffett recognized the danger well before the financial collapse of 2008 precipitated by the collapse of the mortgage derivatives market.

Its hard to get a sense of how much of the global derivatives market involves US transactions or at least US parties to transactions. But if we had a tiny tax on the nominal value of derivatives transactions, and as a wild guess presume that a US party is on one side or another of about one quarter of the worlds financial derivatives transactions, we could replace every current source of government revenue with a tax on such financial transactions of less than a quarter of one percent. If we included every other form of financial transaction including stock and bond trades, bank transactions, etc. then the tax could be lower.

Perhaps nominal value isn’t the right metric to tax. Farrell suggests:

Also, keep in mind that while the $516 trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”

(Note that Farrell was writing three years ago and the derivatives markets have apparently added another $200 trillion or so in deals since being responsible for the market crash of 2008 – which should probably tell us something about true effectiveness of the so called financial market reforms Congress has put in place.)

Perhaps it is the actual cash value of transactions backing these deals that should be taxed at a higher rate. The fundamental point is that such transactions don’t appear to be providing much public good in their current formulation relative to the huge public risks and problems they entail. We should tax them both to garner some public value and to discourage risky and unproductive financial speculation.

I’d be glad to have a small tax on my credit card transactions and mortgage payments, if by doing so we could replace the counterproductive drag on our economy that our current tax system entails and help discourage some of the speculative churning of the financial derivatives market. Rather than having the vast majority of transactions merely enriching bankers and traders, it would be great to have the nation gain some actual value from Wall Street.

Shifting away from taxing productive work and investment and instead taxing waste and unproductive activities can take many forms. Combining the fossil fuel taxes suggested in “A New Tax Policy for the 21^st Century” with a very small financial transactions tax could likely pay all the costs of government, wipe out the federal deficit and return us to a prosperous economy with lower energy prices than Europe and no other forms of taxation.

Discouraging the speculation and risk that Warren Buffett clearly recognized the derivatives markets both represent and encourage, would also be a worthy goal of public tax policy.

Significant change is inevitable.  Our current government funding model is clearly not sustainable. The politics of enacting change like this will be a serious challenge. But we should at least begin debating sensible and fundamental changes to get our economy  and our society back on track.

A New Tax Policy for the 21st Century

The following was recently published in the Spring 2011 Issue of Northeast Sun, the journal of the Northeast Sustainable Energy Association.

A New Tax Policy for the 21st Century

Let’s revitalize the US economy by replacing all federal revenues with a simple energy tax

America needs new answers regarding energy, economics and the environment. There are no real solutions on the table. And everybody knows it.

One radically simple proposal could work: Replace all federal government revenue with a simple energy tax. That may sound impossible. But it is a far more realistic approach to the problems our country faces than the pseudo-solutions that make their way through Congress these days.

This idea could inspire and appeal to Americans across the political spectrum while igniting an unprecedented era of economic prosperity. Along with radically reducing energy waste and pollution, it could release our society from the burdens and economic distortions of our current tax system, make our economy vastly more efficient and our industries far more competitive internationally, and provide the security of greater energy independence.

The numbers work

According to the US Energy Information Agency, in 2009 our country consumed about 18.8 million (18,771,400) barrels of petroleum a day, the equivalent of more than 287 billion (287,765,562,000) gallons of petroleum a year.

The Congressional Budget Office reports that all federal revenues for fiscal year 2010 were about  $2.2 trillion ($2,162,000,000,000). That includes all individual income tax, corporate income tax, investment taxes, social security tax, disability insurance, hospital insurance, unemployment insurance, excise taxes, fees, energy and transportation taxes, and every other form of federal government revenue other than debt.

Doing the math, if we replaced every source of government revenue with a tax on petroleum, that tax would be only $7.51 per gallon. And if you add the average mid-December 2010 cost of premium gasoline of $2.85 a gallon (before taxes), the total price on gasoline and other petroleum products would average about $10.36 per gallon.

That isn’t a whole lot more than average prices for premium gas in Europe in mid-December 2010, as reported by the US Energy Information Agency: Belgium, $7.42; France, $7.15; Germany, $7.39; Italy, $7.19; Netherlands, $7.93; UK, $7.31. And those countries are burdened with massive taxes on top of high energy prices.

Along with paying far more for petroleum, in 2009 Europeans paid about twice what Americans paid for natural gas and coal. If our federal energy taxes roughly doubled the price of both the billion-plus short tons of coal and the 23 trillion cubic feet of natural gas we consume each year, that could partially offset and reduce taxes on petroleum, leaving our overall level cost of energy around the same as Europeans currently pay—while replacing all other forms of government revenue completely.

To keep American industry competitive, the feds should also collect a tariff on goods from countries that don’t implement similar levels of taxation on energy. That unilateral action would do far more to spur responsible energy policy worldwide than well-intentioned but unenforceable international treaties. At the same time it could further reduce energy taxes or help offset the federal budget deficit.

Most sensible people would favor the opportunity to adopt a European level of energy prices in exchange for no government interference with business revenues and personal income: no IRS, no income taxes, no payroll taxes, no business taxes, no inheritance taxes, no government fees.

The obvious pushback

Many will argue that high price signals will encourage energy conservation and alternative energy resources, thus putting government revenues at risk.

Radically reducing energy waste and pollution is one of the fundamental benefits of this proposal.  Reducing the need for military adventures and compromised foreign policy to secure oil are other intended benefits. With the Congressional Budget Office reporting that federal expenditures are now more than twice what was spent in the year 2000, most Americans are also ready to see the excesses of government spending and intrusions into the economy constrained.

As the idea of tax shifting is taken seriously and refined, we can likely find consensus to tax other wasteful or counterproductive activities. With a shift to rational taxation, we can balance our federal budget and pay down our out-of-control federal debt, while more appropriately aligned market forces improve our lives and the environment.

We should begin the tax-shift conversation by recognizing how affordable it could be to align rational revenue policy with sensible market mechanisms that would encourage economic prosperity, job and business growth, broadly shared environmental and clean-energy goals, and the basic principles of personal freedom and liberty that our country was founded upon.

Big changes for big challenges

Minor adjustments to the sclerotic, contradictory patchwork of public policies that have emerged over the decades won’t address the massive challenges that confront our nation. As we face continuing economic stagnation and pass the era of peak oil production, it’s time to get serious about transforming our economy and restoring our economic productivity. We need to rethink the role of government and how we fund it.

It is clear from polls that most Americans are fed up with Congress, the federal government, and politicians from both parties. Everyone hates the complexity, irrationality, and obvious corruption of our tax system, which discourages work, productivity, entrepreneurship, job creation, and almost every other goal and fundamental value that our economy is purported to be based upon.

Think of the productivity gains that would be unleashed if businesses could make decisions based on common sense rather than manipulations of the tax code.

Think of the jobs that would be created if we no longer imposed punishing taxes on working and productive investment, if we eliminated the insane tax subsidies for shifting industrial productivity overseas, and if we eliminated the payroll tax penalties on hiring.

Think of the time, money, and talent that would be freed up if we no longer had to spend countless hours and dollars reporting our personal business to the government. The IRS itself estimates that about 7.75 billion hours of human labor went into completing 2009 tax forms—and that doesn’t include the vast amounts of time and money spent figuring out how to game the system and avoid taxes.

Making the transition

Change this profound couldn’t and shouldn’t happen overnight. We should plan a transition over at least fifteen years, first replacing the most regressive and counterproductive forms of taxation, like payroll taxes, with energy taxes, and then phasing out other forms of taxation while increasing energy taxes. The transition period would give businesses and individuals time to make appropriate plans and investments for the future. The certainty associated with substantial energy taxes would do far more than any other solution being proposed to encourage investment in energy conservation and clean energy.

To minimize the cost, complexity, and impacts of tax collection, energy taxes should be implemented at the wholesale level, at the mine, well, or port of entry. Another technicality that could help ease the transition would be a ratchet mechanism on energy prices. Whenever market forces pushed energy prices up, they would be allowed to rise, but as energy prices declined, energy taxes would rise at a matching rate. This would have the added benefit of discouraging unproductive speculation in energy trading markets.

Change this fundamental would affect every American. Inevitably, the winners and losers will lobby madly to turn a simple idea into the complicated sausage making that is the hallmark of Congress. But if we insist that its simplicity and transparency are critical to its success, perhaps a bold proposition like this could gain enough support to overcome the corrupting influence of lobbyists.

Why tax fossil fuels?

Energy is the lifeblood of a modern economy. The highly concentrated energy available from fossil fuels is a precious resource both for us and for future generations. Unlike metals or other materials that can be readily recycled in a prudent society, once mined and burned, fossil fuels are gone forever. They shouldn’t be squandered but rather husbanded wisely, as higher prices would encourage. Balance of trade deficits, compromised foreign policy, pollution, the cost of military entanglements, and other challenges resulting from our fossil fuel addiction offer clear reasons to focus taxation on fossil fuels. It is far past time to put a fair price on the costs of the traditional energy industry’s “economic externalities.”

Arguably, irreplaceable fossil fuels that have taken millions of years to form should be considered common resources that provide benefits for the common good. Although we begrudgingly accept being forced to pay such taxes today, government funding through the confiscation of the fruits of citizens’ work and investment is actually far less rationally or morally justified.

Finding broad-based consensus

We all need to overcome our fear of sensible change. This proposed tax shift represents a real test for clean-energy advocates, environmentalists, and political liberals, conservatives, and libertarians to all match our rhetoric with good policy solutions. Are conservatives really willing to effectively promote liberty, economic efficiency, and fair free markets? Are liberals able to admit that like so many federal policies they have supported, our convoluted tax system is completely failing to meet their progressive goals? Are libertarians able to admit that there is a role for government and that collecting taxes rationally is better than the corrupt irrational system of taxation we have today? Are environmentalists ready to support policies that are economically sensible? Are clean-energy advocates ready to compete in a fair marketplace rather than begging for government subsidies? Rather than blaming others for our nation’s problems, we all need to focus on finding solutions sensible enough to garner broad support.

Let’s start taxing waste and pollution instead of punishing people for working, creating jobs, and making productive investments.

Let’s try real market-oriented solutions and restore the economic competitiveness our nation enjoyed before every aspect of the economy was micromanaged by the government and manipulated for tax reasons.

Let’s encourage conservation of our limited fossil fuel reserves so we don’t impoverish our children, grandchildren, and planet with our profligate waste.

Let’s fundamentally reform the American economy with a government funding system that doesn’t undermine the most essential ideals and principles of our national heritage.

Let’s support an idea bold enough, simple enough, and compelling enough to actually work.

Idealized Notions And Practical Realities Of Feeding The World

My good friend Robert Leaver has recently been writing about the virtues of various “green” solutions. Many are solutions I also strongly support, like efficient buildings and renewable energy generation.  Robert is a very smart guy. He understands people, organizations and politics far better than most people I have met. He is truly insightful on social matters. But like many folks who are most vocal in arguing for “green” and “sustainable” technology solutions, he has relatively little experience with the technologies he advocates. Like most Americans, he has somewhat limited understanding of the technical challenges of supplying energy, building buildings, growing food or other technological realities of providing for a modern civilization.

One of the “solutions” Robert has recently advocated is “vertical agriculture”, the idea that we should transform our food delivery system by growing food in eight to ten story urban hydroponic “farms”.  For those who focus on urban oriented solutions, this idea is enticing with its promise of delivering fresh locally grown food rather than corporate agribusiness delivering bland bred-for-shipping food products from around the world. It promises to consume far less fuel in food transport. It would arguably provide jobs in the increasingly concentrated urban areas many environmentalists advocate. It would seem to correct many of the challenges of modern agribusiness. Until one more realistically considers engineering, agricultural science, land use, energy use, economics and other practical considerations, vertical urban agriculture is an appealing notion.

Today there are almost seven billion people in the world. In thirty years the population is expected to reach nine billion. Despite the continuing growth in the population, we are feeding a larger proportion of the population than at any time in history. There are very real challenges with our current food supply system. But unfortunately, ungrounded idealized notions won’t address them.

My early work was in agriculture, first as a laborer in a horticultural nursery and later organizing small farmers in SE Massachusetts and Rhode Island to participate in what became the largest farmers market in the region.  I saw clearly from the perspective of real farmers, the harsh realities of the limited growing season and narrow range of crops that make economic sense to grow here in New England.  Keeping land in farms has been hard over the last few decades with all the economic pressure for land uses with higher financial benefits. I also organized community gardens in the late seventies and early eighties, with similar notions of idealism that inspire the urban agriculture advocates today. Even with the abundance of fresh vegetables from June to October, there are very good economic and climatic reasons that New England doesn’t supply a significant portion of its own food. I have been a serious hobby gardener myself and have close friends that farm, so I know a bit about of the challenges of agriculture. There is good reason that despite the best efforts of agriculture, land preservation and environmental advocates, New England farms have continued to disappear. I have immense respect for people who are successful farming.

I spent almost a decade primarily building sunrooms and greenhouses and learned first hand the challenges and costs of building and maintaining such structures and managing the climates of indoor environments suitable for growing. Though I never operated a greenhouse myself, I learned from clients and friends the increased challenges of pest and disease control that greenhouse environments entail.

Having owned and worked on large buildings more recently, I know some of the engineering challenges that taller structures entail. Those challenges would be compounded by the loads imposed by hydroponics proposed for vertical agriculture. Building and conditioning these structures would be expensive. The costs of building, owning and operating such structures would significantly impact the economics of “vertical agriculture”.

As an owner of commercial urban real estate, I also understand some of the economic challenges of urban taxes, insurance, regulations, labor costs and other factors that being in an urban environment would also pose to the economic realities of urban agriculture relative to the impacts of those cost factors in rural environments.

Then there is the generally high labor cost factor of any such concentrated agriculture relative to the highly mechanized systems under which most food is grown today in America.

Should all these practical considerations somehow not prove vertical urban agriculture uncompetitive, one would have to wonder what all the current farm land in the world would be used for. Today food prices are so low that the US government feels the need to subsidize farmers to stay in business and we can dedicate over 40% of our corn crop to making ethanol fuel for transportation. If urban agriculture actually had any real impact and more farmland becomes underutilized, agricultural commodity prices would become even lower, pushing even harder against the economics of the idealized notion of vertical urban agriculture.

The reality, for better or worse, is that the low cost of energy makes food production remarkably efficient and cheap in our current system. Unless we see food and energy costs exponentially higher and the overall economies of urban areas essentially collapse, I cannot envision any scenario where growing food in urban areas makes any real significant impact on the agricultural economy or where urban high rise hydroponic farms could ever be anything other than a grant funded curiosity for technologically and economically unrealistic idealists to celebrate.

The scale of the challenge of providing food for billions of people sometimes seems lost on people that advocate ideas like vertical farming. Driving across our nations heartland, one has to marvel at the vast scale of food production now being managed by less than two percent of our population that is  not only feeding America, but providing one of the few consistent export surpluses for our nation.

My father worked in an industry that many of my environmentalist friends abhor. He started out washing test tubes in a lab and ended up managing worldwide research in agricultural chemicals for Rohm and Hass Company, which during his career was one of the world’s largest chemical manufacturers. When I was a young idealist in the early seventies, Dad’s work inspired my youthful rebellion and my choice to get as degree in environmental science. Back in the day, we had a few fights about his work. Later, I came to appreciate the huge contribution to humanity that he made through his work and have become both very proud of that contribution and somewhat humbled by it.

Apparently, when Dad was a student, he was as fervently idealistic as any environmentalist I ever met.  Hundreds of millions of people were starving in India and China.  He and other idealists like him saw technology as the solution to this and many other serious problems in the world.  The pragmatism that those idealistic technologists brought to their careers in the fifties and sixties saved the lives of millions of people, along with creating many positive technology advances of modern civilization. The wealth and prosperity they created provided the opportunity for many of the social advances we take for granted in the US today. In large part thanks to the “Green Revolution” inspired by Norman Borlaug and supported by modern agricultural practices Dad and many other idealists like him spent their careers on, today India and China have the fastest growing economies in the world and are lifting millions out of poverty.  Now they too are beginning to be able to afford cultural luxuries like environmentalism, that historically most poor societies have not been able to sustain.

Relatively early in his career, Dad developed Dithane, a broad spectrum, low toxicity fungicide that even decades after the expiration of its patents is still a primary tool in helping to control crop diseases and feeding the almost seven billion people that our modern agricultural system feeds every day. Later, he guided his company to produce other solutions to help feed the world.

I vividly recall one of the most important lessons Dad ever taught me, though I was too stubborn and ideologically foolish to recognize the value and truth in what he was telling me at the time.  Having studied biological pest control in school, I passionately argued that in his career position, he should refocus research on such solutions. He responded that with the tens of millions of dollars and decade long regulatory gauntlet required for the approval of agricultural pest control products, only very large companies could play in the game and those companies could only afford to consider solutions with billion dollar markets. The huge costs and risks created by very well intended health and environmental protection regulations made it economically impossible to consider solutions that didn’t promise such huge returns.

While those regulations addressed some very real existing and potential problems with agricultural chemicals, an unintended consequence of the regulations was to concentrate influence over agricultural technology in a few large corporations. Despite environmental advocates clear intent to the contrary, those regulations also had the effect of driving the trend toward mono-cropping to maximize the effectiveness of the relatively few solutions that get through the regulatory hurdles. Similar unintended consequences of very well intended policy can be seen in every sector of the economy.

As I came to better appreciate the effective idealism of my father and his generation of technology pioneers, Monsanto, another large chemical company at the time, embraced the criticisms of my fellow environmentalists and recognizing the promise of biotechnology, transformed themselves from a chemical company to a biology company. Monsanto embraced the promise of biological controls that I and other environmentalists had passionately argued for and bet the future of the company on creating biological solutions at sufficient scale to seriously address the worlds need for food while minimizing the use of potentially hazardous chemicals. Through biotechnology, they invented new varieties of crops which both resisted insects and diseases themselves and which were resistant to low toxicity but highly effective herbicides. In return, Monsanto earned the wrath of the environmental community, recently being declared the most evil corporation in the world by many of the politically correct crowd for creating genetically modified food. (Do a Google search for:  Monsanto Evil Corporation)

The current “Green Revolution” of environmentalism is not like the idealistic truly progressive and creative endeavor that Borlaug led. Rather than embracing science, technology, engineering or practical economics, too many environmentalists show little respect for such fundamental building blocks of progress. Too many seem to feel that idealistic good intentions alone are sufficient.

The challenging realities of feeding almost seven billion people seems to be lost on my idealistic friends who argue for economically and technically unrealistic ideas such as vertical urban agriculture. It seems as if the economics and scale of the challenge are sometimes not clear to them. Unfortunately, we can’t feed the world or address the challenges of modern agricultural systems through idealized notions. We need real solutions, both technically and economically suitable for the scale of the challenges at hand.

Fortunately, so far at least, we have been able to feed an increasingly large portion of the worlds increasingly large population an increasingly better diet for decades. And thanks largely to those successes in agriculture, the pressures on population growth are subsiding as people are freed from the drudgery of traditional agriculture to become educated and more prosperous.

According to the USDA in 1900 over 41% of the US workforce was employed on farms, while today only 1,9% of the US workforce provides our food and a substantial surplus for export. Worldwide, over a third of the world’s workforce is still employed in agriculture and related fields, most in poor countries, toiling in inefficient traditional forms of agriculture.

Like vertical farming, traditional peasant agricultural cultures are also idealized by many of my “green” friends. I do not question the good intentions of such idealistic notions. But it is important to realize that the reason that such idealists have the free time and luxury to pay homage to such romanticism is that they don’t have to do that brutally hard work themselves. The efficiencies of modern civilization allows them the luxury to ponder idealized notions like vertical agriculture without the pressures of bothering to consider the practical realities of economics, engineering or agricultural science.

My idealistic friends also decry American jobs lost to China and Indian due to low cost labor and the the intolerable working conditions people in those countries are subjected to. The reality is that the primary reason factory labor in third world countries is so low cost is that most people growing up in traditional third world agricultural communities will do almost anything to escape the grinding poverty, including working in what appear to be miserable factory conditions to those of us living in the developed world.

Idealized notions of agriculture are like too many of the “solutions” promoted by the well-intentioned folks who migrate into politics. Unfortunately history has taught the hard lesson that when good intentions are met by practical realities, reality always wins, yet the bill for the idealized good intentions still always comes due. Perhaps, before allowing people to enter politics, we should demand some real experience in the productive sectors of the economy – growing food, building buildings, creating products or doing some other activity constrained by the practical realities of economics, science and engineering.

We should clearly foster more understanding of science, math, engineering and economics in our educational system, so that even if they don’t work in such realms, all our citizens can more readily sort out the sensible solutions for the future from those ideas that have little hope of becoming practical.

Clearly our agricultural system needs improvement and needs further progress away from its current dependency on high levels of energy and chemical inputs.  But to feed the world, a sustainable agricultural system will need the best solutions modern science has to offer, not just the ones that are most romantically appealing.

I spend much of my time with idealistic friends like Robert. They inspire me to stretch my thinking in new and interesting ways. They are more fun to be around than strictly pragmatic people. Most of the idealists I spend time with are very talented and inspiring professionals in their own realms. Robert’s professional work is bringing people together to find consensus around decisions that they face as an organization or community. I have immense respect for his accomplishment and skill as a facilitator.

Unfortunately, in matters of practical concern, consensus in itself is not adequate unless there are people involved in decisions who are able to inform the discussion with practical experience and guide the consensus in useful and practical directions. As we are now learning as the bill for decades of very unrealistic good intentions are coming due in Washington DC, idealism and good intentions need grounding within the realm of  practicality. Idealism needs to be matched with technical expertise and hard economic discipline to foster real and credible solutions.