Monthly Archives: June 2009

The Slippery Slope Of Crony Capitalism

A very clear explanation of how the government shenanigans in the bank and auto company bailouts is undermining our economy and the rule of law is provided in Peter Schiff’s short article “Property Rights Takes a Hit”, quoted at Nathan’s Economic Edge.

Schiff opens with: “Crony capitalism is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.”

He goes on to predict that the blatant disregard for the rule of law involved in recent govenment economic interventions will inevitably undermine capital investment and turn the US assets and capital markets into risky bets with valuations responding accordingly.

When the Supreme Court chose to allow the White House to  undermine well established contract and bankruptcy law and give massive handouts to Autoworker’s union at the expense of the investments made by the pension funds for Teacher’s and Fireman’s unions, it became clear that we are well on our way down a very slippery slope.  The irony of a decision to steal from one union in order to offer unprecedented handouts to another makes one wonder how such choices will be balanced and made once the fundamental decision to simply ignore the law and violate the constitutional protection of property rights has been reached.

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Filed under Economic Policy, Fundamental Perspectives

Unintended Consequences and Intended Non-Consequences

An informative recent lecture on government intervenion and regulation by Christopher DeMuth is available at Unintended Consequences and Intended Non-Consequence. In this age of overly active government, it is important to recognize how not only ineffective but actually counterproductive most well intended government efforts have proven to be. DeMuth helps explain why that happens.

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Sensible Incentives For Solar Energy

Thanks to a post by Michael Giberson at “Knowledge Problem”, I discovered a great discussion of solar policy initiatives. In “Doing Solar Incentives Right” Tom Conrad provides one of the clearest summaries I have seen yet regarding the advantages and disadvantages of various ways that government policy has been tried to encourage the development of solar energy.

But I don’t fully agree with the conclusions of Conrad’s analysis in a presentation to the recent conference of the American Solar Energy Association, in which he suggests that “in a perfect world” he would like to see a combination of:

“Investment (not production) incentives (ITC, etc.)

Time-of-use pricing (not flat or demand-charge based) (Peak)

Incentives for Distributed installation based on existing T&D infrastructure

Carbon Pricing”

My own strong opinion is that if we really want to see solar reach grid parity soon and want the solar industry grow profitable and sustainable businesses, then near term subsidies should focus on production incentives like Renewable Energy Portfolio Standards,  while the long term (and more politically challenging) answers lie in a combination of:

1) simple, high and universally applied carbon taxes reflecting the “economic externalities” of our fossil fuel addiction.

2) time of use electricity pricing providing real price signals to the market.

3) utility price decoupling that eliminates the perverse incentives for utilities to pump more electricity from centralized generators to consumers and instead pays them to keep the network operating.

4) requirements that utilities pay the cost of infrastructure and information systems upgrades necessary to enable the distributed, multi-directional energy and information flows of the “smart grid” of the future.

It should be noted that this combination of policies does not require direct subsidies, can have neutral impact on government revenues and expenditures and provides universal comprehensive incentives for energy conservation, smart grid solutions and a broad range of distributed generation solutions without the need for the government to pick winners and losers in the race to a sustainable energy future.

It should also be noted that because it will eliminate all the counterproductive  incentives currently embedded in utility regulations, these policies will be generally opposed both by business and consumer groups who would see their current subsidies altered. Long term, such policies would be advantageous for both business and consumers, but unfortunately despite the rhetoric, real legislative politics rarely addresses either long term issues or common sense solutions, especially when they involve substantial change impacting powerful entrenched interest groups like utilities.

There are many reasons it will be very hard politically to enact sensible regulation. Not the least of these challenges is that politicians tend to like policy solutions in which they can support their political supporters or those they perceive to have aligned interests. In a more sensible policy environment, politicians would avoid picking winners and losers and instead create a more sensibly designed economic playing field and  allow economics and market forces sort out the successful solutions.

And it is important to recognize that some of these policies are best implemented at the national level while others require changes in state utility policy. Perhaps the biggest challenge is developing plans at the state level that enact these critical reforms while not putting the leading states at perceived short term economic disadvantages compared to those slower to adopt progressive energy policy.   In the near term holding out for idealized coordinated state and federal policy will be impossible if solutions like solar are to overcome embedded obstacles to the biggest advantages of the technology.

Some practical examples of policy implications are in order. Solar production is c0incident with maximum peak demand and maximum wholesale energy costs, thus making a real time retail electricity pricing environment a critical policy support for the very real economic advantages that solar can offer as an economically competitive generation solution today. Consumer groups wedded to outdated policy solutions will fight against real time pricing for consumers which are not subject to strict utility commission regulation. At the same time, in most states, residential rate payers actually pay more for both electricity  and for transmission and distribution charges than business and industrial users on a unit cost basis and thus subsidize the costs of electricity for those larger users. Businesses will fight against changing those rules and threaten to move to more “business friendly” states.

Even though the combined policies would ultimately reduce and stabilize energy costs for both business and consumers, overcoming existing policy preferences will be politically challenging at best. Thus it is important that state level leaders focus attention at least as much on coordinating regional and nation policy solutions as they do on trying to solve the problems on a state level.

It is important that policy makers think clearly beyond whether to encourage clean energy solutions to thinking much more clearly about how they encourage clean energy if these industries are really going to be sucecssful and create all the new green jobs everyone seems to want. Every policy choice has consequences and as with all policy, many of the consequences can be unintended if not carefully thought through.

The  solar subsidies of the Carter administration did far more net harm than good regarding the long term development of renewable energy. Through their naive overly generous investment subsidies, the Carter policies set back the solar industry by a generation. We should be more thoughtful and careful this time around.

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Filed under Economic Policy, Energy Policy

The Need For Healthy Introspection

We advocates of environmentally responsible economic and technological solutions should consider the possibility that instead of a permanent paradigm shift, what we may be living through could possibly be a green bubble, not unlike the solar bubble of the Carter years, the tech bubble of the late 90s and the recent housing bubble.

That isn’t a politically correct possibility to consider or discuss. But if we are going to be more successful this time around than we were in the seventies, especially at a policy level, we should try to maintain a broad perspective, a healthy level of skepticism and some introspection regarding our efforts and the heavily subsidized success we are experiencing in the “green economy” sectors these days.

George Will has an interesting editorial in the Washington Post “Green With Guilt”. It includes a link to a new TV show I had never heard of before called “The Goode Family which from the clips looks hilarious, though it might hit a few sensitive nerves.

Will suggests in his conclusions that “Reengagement with reality is among the recession’s benefits.” Recent polls show that the American public in general considers Climate Change to be at the bottom of the list of issues they are concerned with and which they think the government should address.

Those of us who want to help create a real paradigm shift to a sustainable future have to engage more clearly in the issues that most people are concerned with and reach beyond preaching to the choir. We need to be clearer regarding how what we do realistically fits in the larger context of the changes all around us, especially the economic changes. To be sustainable, “green” solutions need to compliment and build upon the successful aspects of the legal, economic and social systems that our modern society was built from.

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Filed under Environmentalism, Fundamental Perspectives