Monthly Archives: April 2009

The End Of The Special Interest State

In “The Coming of the Fourth American Republic”, James DeLong suggests that ” The Special Interest State that has shaped American life for 70 years is dying”. He offers an interesting exploration of what will emerge next.

He is generally hopeful and optimistic, but does note that in the previous two major upheavals in our country’s history “the nation made a fundamental political transition peacefully on one occasion, and only with appalling bloodshed on another.” He goes on to note that “it is hard to buy ammunition these days because the dealers’ shelves are bare.”

With their extraordinary attempts to restore an economic reality that seems unlikely to be restored in its previous form, one has to wonder if President Obama and his political and economic teams recognize what a truly historic moment we are living through and what an incredible demand for real leadership rests on their shoulders. So far it does not seem that they do.


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World’s Largest Derivatives Market – Subprime Carbon

Nathan Martin calls attention to the worlds largest derivatives market in the Carbon Cap and Trade system. He links to a great CNBC video on “The Carbon Challenge”, in which former Governor and DNC Chairman Howard Dean declares “I am terrified of a Bernie Madoff in the Cap and Trade business who is selling stuff that doesn’t exist”.

Let me be clear that I believe effective energy and carbon policy is the single most urgent and important matter for government to address. I fully agree with President Obama when he suggested on January 26 that ” no single issue is as fundamental to our future as energy. America’s dependence on oil is one of the most serious threats that our nation has faced. It bankrolls dictators, pays for nuclear proliferation and funds both sides of our struggle against terrorism. It puts the American people at the mercy of shifting gas prices, stifles innovation, and sets back our ability to compete.”

The problem is that his proposed solution – creating a Cap and Trade Carbon Derivatives market is a bad idea. Its another huge hand out to Wall Street rather than a clear, effective and transparent solution to the problems the President cites. What is really needed is a large very straight forward carbon tax. And such a tax should be coupled directly with an equal economy stimulating reduction of regressive taxes on employment or perhaps a simple cash payment to citizens such as that Alaska provided for all its citizens for years from the taxes it imposed on oil exports.

Michelle Chan, director of Friends of the Earth Green Investments and  author of a FOE report called “Subprime Carbon“, cautions that there are already 130 Wall Street funded climate change lobbyists in Washington. According to her report, “today speculators do the majority of carbon trading, and they will continue to dominate as carbon-trading markets grow.” The report further suggests that “unfortunately, the federal cap and trade proposals put forth so far would create a system that poses almost identical challenges as those in the mortgage-lending industry.”

According to Carbon Offsets Daily, the chairwoman of the Senate Energy and Natural Resources Committee’s energy subcommittee, Sen. Maria Cantwell, D-Wash has suggested that “I have serious concerns about how a cap-and-trade program might allow Wall Street to distort a carbon market for its own profits,”

In a recent presentation at Dartmouth College, famous NASA climate scientist James Hansen was unambiguous in declaring “Cap and Trade is Not Going to work……in Europe it has been completely ineffective.” He instead advocates a major carbon tax sufficient to give every American a several thousand dollar a year direct cash rebate, making his proposal the most progressive form of taxation.

Unlike the successful SOx and NOx trading markets, with limited sets of players and trading opportunities, along with relatively straight forward rules, the proposed carbon markets promise to measure and pay for all manner of hard to quantify “carbon offsets” and huge numbers of players.

US Commodities Future Trading Commissioner Bart Chilton is quoted by the Financial Times as predicting carbon markets would become ” the biggest of any derivatives product in the next four to five years. And that would of course mean overtaking T-bills [Treasury] and any contract that is out there right now.”

The real challenge is not just one of carbon market regulation, as most of government folks seem to see as a solution to the challenges posed by this staggeringly huge new derivatives market. Some of the most fundamental premises and definitions in the proposed carbon markets allow  hard to value and potentially questionable “offsets” that leave lots of room for abuse and manipulation.

Bloomberg reports that “under a cap-and-trade system, the federal government would set an overall ceiling, or cap, on greenhouse gas emissions. The cap would be divided into billions of emission permits, each conferring the right to emit the equivalent of one metric ton of carbon dioxide.” It goes on to state that in the administration’s budget plan, President Obama proposed to “auction all credits for carbon-dioxide emissions, raising at least $646 billion from 2012 to 2019 that would be used for a tax cut”.

But already some members of Congress are proposing to simply  give “free allowance allocation to the utility sector of 40 percent, consistent with the sector’s share of CO2 emissions.”  It would be interesting to track utility company campaign contributions relative to the supporters of this proposal.

Inevitably both at its inception and in inevitable continual tweaking of the rules, these kinds of artificially created markets will be subject to continual political pressure and manipulation.

The Bloomberg article reports that Jeffry Sterba, a former chairman of the Edison Electric Institute and the chairman of a major utility, pressed for free credits to utilities. He suggested that free permits for utilities are necessary because cutting greenhouse gases “will be costly and raise electricity prices substantially.” But the “problem” Sterba cites is precisely what is needed for clean solutions like solar, wind and other renewable energy resources to compete economically in the market and actually start addressing climate concerns in a serious way.

The theoretical benefit of Cap and Trade over a straight Carbon Tax like that proposed here and the Raise Wages, Cut Carbon Act proposed by Congressman Bob Inglis, is that Cap and Trade theoretically sets strict limits to carbon output, while Carbon Taxes very simply raise the price of carbon emitting activities and assumes that market forces in the real economy will provide appropriate carbon emission reductions.

The lack of clarity in the Cap and Trade Carbon markets could create the kinds of wild swings seen in Europe. The Wall Street Journal reports that in Europe, “prices for carbon permits have whipsawed from a high of 30 euros a ton to a low of 2 euros a ton.”

To address concerns about speculation, volatility and “cheating”, the Center for Clean Air Policy and several Democrats in Congress are calling for a “Safe Cap-and-Trade” with prices for carbon permits heavily regulated. Their faith in regulators overseeing unnecessarily complex government mandated  market interventions is typical of the divergence in thinking of those favoring Free Markets vs Intervention.

Most businesses and business oriented organizations generally favor a straight forward carbon tax, especially an economically beneficial and revenue neutral carbon tax offset by taxes on productive activity like job creation. With the “economic externalities” of fossil fuels more fairly accounted for with a straight forward tax, non carbon emitting solutions can compete more fairly in the real economy. With long term clarity and predictability on the price of carbon emission in the real economy provided by a clear and simple carbon tax, both businesses emitting carbon and those offering alternatives can plan around predictable real markets in the real economy.

The Carbon Tax Center offers a good summary of Carbon Tax vs. Cap and Trade.

Giving them the benefit of the doubt regarding regarding their good intentions, the thing the good government folks don’t seem to understand is that putting a price on carbon emission through a simple, clear straight forward tax will have a far more beneficial  impact on real carbon emissions in the real economy by spurring innovative solutions.  The creation of an artificial mandated market subject to endless regulatory manipulation and speculation that nobody can really trust can’t possibly reach the goal of carbon emission reduction nearly as well. What Governor Dean is most concerned with – “selling stuff that doesn’t exist” – pretty much sums up the very definition of mandated offset markets. It seems to me that in their insistence on the chimera of specific assured carbon emissions levels and theoretical predictability on future CO2 levels in the atmosphere, well intentioned environmentalists and politicians are paving the next road to financial hell with unintended consequences of their good intentions.

And with proposals like simply handing free carbon credits to the utility sector which is reported by the legislation’s own sponsors to be producing 40% of US carbon emissions, Cap and Trade would be ineffective in its intended mission right out of the gate.

A cynical view is that government folks really just want to impose a tax that doesn’t look like a tax and another way to give massive handouts to their friends.

Realizing, as US Commodities Future Trading Commissioner Bart Chilton clearly does, that what is being proposed is the worlds largest derivatives game, with the rules all being made up and Wall Street players all heavily engaged in the rule making, one could become even more cynical about the real intended beneficiaries of all this. Hopefully we haven’t already forgotten the hard lessons of the mortgage derivatives fiasco.

In “Is Cap and Trade a Dead Policy Walking?”, Robert Shapiro of the progressive think tank NDN suggests that “after Wall Street’s meltdown, the proposition for another round of the financial merry-go-round that produced the worst economic crisis in our lifetimes seems either very naive or very cynical”. He also suggests that “for years, many politicians and environmental leaders have believed that any kind of tax to deal with climate change would be dead on arrival. That may be changing, especially if the tax is paired up with rebates to take away much of its political sting. More importantly, the costs and lessons of the financial crisis may effectively swamp the prospects for cap-and-trade. If cap-and-trade has become a dead policy walking, those who care deeply about climate change will find that a carbon tax system has become the last, reasonable policy standing”.

The Wall Street Journal article suggests “one possible side effect of the financial-market fallout and concerns about more toxic assets” is  “growing support for a straight carbon tax, rather than a complicated cap-and-trade plan.”

One can only hope we have learned something from the sub-prime mortgage crisis. If we did, Congress would quickly debate and pass the Raise Wages, Cut Carbon Act, but with much higher carbon tax rates than currently proposed, while directly offsetting increased costs of energy from carbon taxes with decreases in payroll taxes, the most regressive form of federal taxation. Alternatively a simple and major rebate to all citizens as proposed by James Hansen would also be a great solution both to the climate and the economic problems we face.

But instead of supporting that kind of effective, progressive and economically rational solution, all indications are that Congress seems headed toward creating the next huge financial derivatives bubble and ultimately the Sub-prime Carbon Crisis. Whether cynical self serving greed  or naive good intentions are ultimately responsible for impending Cap and Trade legislation, the results will likely be the same.

The speculators on Wall Street must be pleased that once again, their servants in Washington are serving them well. And this time they have the environmental community doing their heavy lifting, lobbying and marketing for them.

It is past time to move beyond expedient political horse trading to develop serious solutions to our fossil fuel addiction. We need bold and serious leadership.

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Pretense of Fiscal Responsibility

The Washington Post reported that “President Obama plans to convene his Cabinet for the first time today, and he will order its members to identify a combined $100 million in budget cuts over the next 90 days”.  It should be recalled that these cuts are being sought in the context of a $3.5 trillion federal budget.

Greg Mankiw clarified exactly what that represents in his blog post “Fiscal Responsibility”:

“Just to be clear: $100 million represents .003 percent of $3.5 trillion.

To put those numbers in perspective, imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had be cut? By $3 over the course of the year–approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.”

One has to wonder at the showmanship of such a gesture at a time when federal budgets, deficits and debts are growing so dramatically.  While any effort to cut down on waste is clearly welcome, setting the bar so very low on reduction of waste as a percentage of overall spending, can hardly be considered a serious or credible effort toward fiscal responsibility.

What is perhaps more interesting in Mankiw’s analogy is how clearly it points out what a truly staggering sum $3.5 trillion in spending really is.  I still  think of $100 million as a lot of money. But in comparison to the money being thrown around casually by our government lately, it isn’t even close to a meaningful rounding error.

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The Raise Wages, Cut Carbon Act of 2009

Representative Bob Inglis of South Carolina has introduced the “The Raise Wages, Cut Carbon Act of 2009”

It appears to be about the best energy policy effort I have seen come out of congress ever, other than the fact that his proposed carbon taxes are far too low. Congress should be debating this legislation with a significant increase in the proposed levels of taxation on carbon.

The following is from the Congressman’s summary of the bill:



The economic downturn calls for action to stimulate the economy, such as reducing the amount of taxes taken out of each paycheck.

Our ongoing dependence on foreign oil from hostile nations also calls for action to reduce that dependence and move to fuels of the future.

Even if you disagree with the science of climate change, everyone agrees that less carbon in the atmosphere would not hurt us. By reducing payroll taxes (employer pays 6.2%, employee pays 6.2% on the first $106,800 of income) and taxing carbon dioxide (something we want less of), we can turn an environmental fix into a decisive, economy-expanding national security fix.

Here’s a plan, proposed by U.S. Rep. Bob Inglis (SC-4). Similar concepts have been advanced by voices across the political spectrum – from President Reagan’s economics advisor Dr. Arthur Laffer to Vice President Al Gore:


  • Lower the payroll tax for employers and employees by an amount equal to a new tax on carbon dioxide.
  • Prospectively increase Social Security benefits to help seniors pay higher energy bills.

In the first year, payroll taxes can be reduced by more than 10%, funded by a carbon tax of $15 per ton that will generate as much as $88.7 billion. The Social Security Trust Fund will not be touched; the swap is handled in the General Fund of the Treasury.


  • The proposed carbon tax starts at $15 per metric ton of CO2 in 2010 and increases to $100 by 2040, adjusted each year for inflation.
  • To provide businesses certainty and the ability to plan, the bill includes a clear schedule of rates.
  • The tax applies to fossil fuels as they enter the economy: at the mine mouth, the oil refinery and the natural gas. This upstream application of the tax will make it easy to implement and reduce administrative costs.


  • In order to accord similar tax treatments to domestic and imported goods, imported products will be subjected to the same U.S. carbon tax.
  • As provided in the Constitution, the tax would be removed from goods destined for export from the U.S. Exporters would qualify for a rebate for the portion of their cost attributable to the carbon tax.
  • Consistently applying the same tax to all domestic and imported products will keep this border adjustment in compliance with existing WTO agreements.


This bill starts with reducing payroll taxes and sending more money home with the American worker. To preserve that principle, the bill requires a Supermajority vote (2/3 votes in both House and Senate) to overturn revenue-neutrality and use carbon tax revenue for any other purpose.


The tax will encourage energy consumers to replace carbon-intensive forms of energy with low- and no-carbon energy alternatives.  Increasing demand for clean energy technologies will improve our environment, reduce our dependence on the politically volatile oil-producing regions of the world, and stimulate our home-grown innovation economy.


With a commitment to reduce labor costs and internalize the cost of carbon in fuels, market forces will unleash innovation because of known costs and predictable returns for new technology. “Green jobs” would emerge from anticipation of cost competitive energy alternatives.

The Raise Wages, Cut Carbon Act of 2009 also leverages the double dividend, pursuing an increase in economic efficiency by reducing taxes on something we want more of (labor and income) and taxing something we want less of (carbon dioxide).

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How To Sell Carbon Taxes

In “Obama’s Economic Mirage”, Robert J Samuelson warns against the president’s social, health care and environmental agenda masquerading as economic policy that is likely to address the current economic problems.  He suggests that it is an illusive pretense that paying more for energy and health care will net more job creation. While arguing green energy policy is not necessarily good economic policy, he does however conclude that “I have long advocated a gasoline tax on national security grounds.”

This position comes to somewhat similar conclusions to the argument Thomas Friedman made in  “Show Us The Ball” in which he suggested that the administration should be pushing a straight forward carbon tax and have the chief spokesman for that policy not be someone from the environmental arena, but rather National Security Adviser General James Jones.

There is consensus in the environmental community the climate change induced by human energy use is an existential threat to humanity. And there is an argument from that quarter that scientific consensus on the issue is unquestionable. But there is inconvenient dissent from that opinion, like the Global Warming Petition Project, which claims it has the signatures of 31, 478 American scientists on a petition that states:

“We urge the United States government to reject the global warming agreement that was written in Kyoto, Japan in December, 1997, and any other similar proposals. The proposed limits on greenhouse gases would harm the environment, hinder the advance of science and technology, and damage the health and welfare of mankind.

There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gasses is causing or will, in the foreseeable future, cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate. Moreover, there is substantial scientific evidence that increases in atmospheric carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the Earth.”

Personally, I have come to believe that human activity is likely having a significant impact on climate, though I question the hyperbolic rhetoric around the issue of climate change.

But I very strongly agree with Samuelson and Friedman that the far stronger argument for the need to significantly increase the price of petroleum is on the grounds of national security.

Taxing carbon on general environmental grounds, in order to slow the waste of dwindling petroleum reserves and mostly on national security grounds all make really good sense.

As a side benefit, carbon taxes also address climate change and by pricing the “economic externalities” of fossil fuels more appropriately in the marketplace, they balance and stabalize the playing field to enable cleaner renewable energy alternatives.

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A Civil Servant Worth Listening To

Check out Elizabeth Warren, Chair of the Congressional Oversight Panel discussing the Treasury Departments handling of the banking crisis. We could use a few more clear thinking people like her in government. Too bad she doesn’t have more power.

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Free Markets vs Intervention

In “Irreconcilable Differences” Barry Liebling suggests that the reason free market advocates and those advocating government intervention can rarely agree  is that “when you drill down, the conflict between conscientious free-marketers and interventionists is not about facts or about what people are likely to do. It is about values”

He goes on to explain that “the core premise supporting the free-market is individual rights. Every person has the right to life, liberty, property, and the pursuit of happiness. This means that all economic exchanges must be by voluntary mutual consent.”

In contrast, he suggest that “the assumption of the interventionist is that society and the state take precedence over the individual. It is the group that counts and has rights. Thus, interventionists focus their attention on ‘social justice'”.

Both by his writing and the publication he writes in, Liebling’s prejudice on the matter is fairly clear. And his presentation a bit unbalanced. But his fundamental argument is true: “Principled free-marketers and interventionists cannot reach consensus because they have incompatible visions about how people should live”.

My sense is that the issue is deeper. And I will clearly reveal my own prejudice toward the free markets perspective.

In my experience, those favoring intervention tend to see the world as a zero sum game, where in order for one party to win, someone else has to lose. Thus differences in wealth are viewed as wealthy individuals depriving others. In regulatory matters they tend to view  private for-profit enterprise as selfish and less worthy than government and non-profit endeavors.  They seem to generally view business and regulatory transactions as one party winning at the expense of the other.

Free market advocates tend to see the world from the win-win perspective of opportunity and creativity, with the overall wealth of society being created and increased by human endeavor and the mutually beneficial transactions of the parties involved. We tend to believe  people generally enter voluntary transactions only if they are mutually beneficial.

Interventionists tend to value control and predictability of outcomes, while free market advocates put higher value on opportunity and creativity.

Interventionists tend to want to limit change and risk, and are willing to change the rules of the economy to preserve stability. Free marketers fundamental premise is that our role in the world is to create positive change and we are more willing to accept the risks to make that happen. But we see an essential need for stable rules of law and economics in order to be able to understand the risks we take in the marketplace and make the long term commitments necessary to see our creative endeavors to fruition.

There are several areas where the two groups can generally find consensus, like the mutual distaste for fraud and crime which Liebling points out. Thus folks on both sides of this divide are angered by the corruption of some of the current economic mess our society is facing. But naturally, one side blames the government while the other blames an under-regulated market, and in a society empowering certain well connected players to rewrite their own rules for the economic game, both sides have some truth to support their positions.

The fundamental differences go deep. This is the root source of most of my political and philosophical differences with my friends in the environmentalist community, many of whom tend to view the world from an interventionist perspective and see the clearly obvious limits on natural resources and ecosystems as insurmountable limits to human endeavor.

I cannot accept where the moral logic of that view ultimately leads, in the need to be brutal in limiting human populations.

My own perspective is that while ecological and natural resource limits are unquestionably very real, it is the unbounded abundance of human creativity which is the truly critical resource in the world. In a world of freedom, peace and stable rule of law, human creativity can overcome the challenges we face.  My biggest problem with excessive government intervention is that ultimately it will lead to conditions that stifle the essential creativity and innovation we need to address the difficult challenges ahead.

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