Monthly Archives: October 2009

Governed by Callous Children

Peggy Noonan sums up many of the fundamental problems we’re facing: “We’re Governed by Callous Children”

How many of the folks running the White House or Congress ever had to dip into the credit card to meet a payroll, or sign personally to guarantee a small business loan, or gone for months or years without a payday for themselves in order to meet their business obligations to employees, customers or suppliers? How many of them have even the remotest clue at all about what really it really takes to produce the prosperity, luxury and ease that they have enjoyed in America their entire lives?

If our leaders decide to grow up, they might be well advised to consider the thoughts in Guy Sorman’s article “How to Liberate the Economy” and focus on creating freedom in our society rather than shallow illusions of security.


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A Serious Solution For Energy Policy

Below is an article I recently published in the current issue of the Northeast Sun, the journal of the Northeast Sustainable Energy Association. The article analyzes the Waxman-Markey bill in the House. The same core flaws are also in the recently proposed Kerry-Boxer Senate bill.  The article also describes the Inglis, Flake and Lipinski legislation – a real solution to our energy challenges:

A Serious Solution For Energy Policy

Every president since Richard Nixon has proclaimed energy policy a national priority. They have all failed to provide any lasting solutions.

We are headed toward failure again. The Waxman Markey American Clean Energy and Security Act (ACESA) passed by the House of Representatives could set back real solutions to our energy problems by decades, while exacerbating economic problems facing our country.

What matters is not intentions but results. Despite the rhetoric, ACESA won’t reduce carbon emission in a meaningful way or create what clean energy solutions need to be successful – a real price on the “economic externalities” of our fossil fuel addiction.

The American Clean Energy and Security Act Has Major Problems:

1)  The Carbon Cap Is Ineffective

The core of the ACESA is a new derivatives market for government permits to emit greenhouse gasses, along with offsets, which provide credit for activities such as planting trees or protecting forests, which mitigate impacts of emissions.

Scientists argue the carbon caps in ACESA are too low to impact climate change, while economists and practical observers suggest they are so subject to manipulation they are unenforceable. By allowing billions of tons of unverifiable offsets, many from international sources, no carbon emission reduction would even begin in the United States for at least a decade if all the offsets provided in the congressional bill were utilized.

2) New Derivatives Market Threatens The Economy

The Financial Times quotes US Commodities Future Trading Commissioner Bart Chilton predicting carbon markets would become “the biggest of any derivatives product in the next four to five years.”

ACESA credits and offsets create a volatile multi-trillion dollar carbon derivatives market that could impact financial markets much like the recent crash in mortgage-backed derivatives. The inclusion of unverifiable international offsets makes markets harder to understand or regulate, inviting market manipulation and fraud.

In the Friends of the Earth report “Subprime Carbon”, Michelle Chan cautions: “today speculators do the majority of carbon trading, and they will continue to dominate as carbon-trading markets grow.”

Unlike existing SOx and NOx emission trading markets, with limited sets of players and clear rules, the proposed carbon markets promise pay for impossible to verify assets to unlimited numbers of players.

In a CNBC video, “The Carbon Challenge”, former Vermont Governor Howard Dean declares, “I am terrified of a Bernie Madoff in the cap and trade business who is selling stuff that doesn’t exist.”

3) ACESA Is The Largest Corporate Welfare Program In History

Their campaign position paper declares: “Barack Obama and Joe Biden’s cap and trade system will require all pollution credits to be auctioned. A 100% auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.”

Waxman Markey gives away 85% of the permits for free

In his March Congressional testimony White House Budget Director Peter Orszag said: “If you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States.”

While creating a huge derivatives market for Wall Street, ACESA gives billions in free carbon credits and offsets to coal companies, oil refiners and the utility industry. In “The Cap-and-Trade Giveaway”, Alan Viard suggests: “under a system of free permit allocation, the stockholders of companies that receive free permits would receive windfall gains. A cap and trade system with freely allocated permits is equivalent to a carbon tax in which the tax revenue is given to stockholders.”

In a report on cap and trade, the Congressional Budget Office estimated that some recipients of free credits could see their market capitalization double or triple instantly.

Harvard economist Greg Mankiw succinctly blogged: “Cap and trade = Carbon tax + Corporate welfare.”

4) ACESA Undermines EPA Authority And Successful Policy At The Regional, State And Local Level

ACESA eliminates EPA’s existing authorization to regulate greenhouse gas emissions under the Clean Air Act and prohibits successful state and regional programs like the Regional Greenhouse Gas Initiative. It imposes federal control over matters like building codes, traditionally the constitutional purview of the states.

Successful state Renewable Energy Portfolio Standards (RPS) are complicated by ACESA. The minimum compliance payments in the proposed Federal RPS are too low to spur markets for renewables.  And ACESA allows technologies like waste incineration to compete in renewable energy credit markets with real renewables

5) Massive ACESA Financial And Regulatory Interventions Delay Real Solutions

Along with cap and trade, ACESA involves hundreds of new regulatory and economic prescriptions, distorting markets based on political calculus and favoring entrenched interests. In a guise of offsetting higher consumer prices, billions of dollars of carbon credits are free to utility companies, undermining competitive energy markets. ACESA further encourages failures like corn-based ethanol, disrupting agricultural markets while providing no net energy or environmental benefit. Regulatory provisions micromanage virtually every sector of the economy, stifling innovation.

6) ACESA Fails In Pricing “Economic Externalities” Of Our Fossil Fuel Dependence

The Wall Street Journal quotes President Obama saying in March: “If you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work — or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for.”

By giving away 85% of carbon credits, establishing ineffective carbon caps and allowing offsets, ACESA doesn’t provide price feedback in energy markets and in the economy generally that are essential for making clean energy cost-competitive.

Volatile price swings undermine investor ability to put a predictable value on alternatives to incumbent energy systems. The speculative derivatives markets inherent in ACESA encourage volatility. The Wall Street Journal reported 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.”

7) ACESA Undermines Political Viability Of Real Solutions

In a presentation at Dartmouth College, NASA climate scientist James Hansen declared: “Cap and trade is not going to work……in Europe it has been completely ineffective.” His conclusion is confirmed by reports of European governments proposing new carbon taxes, effectively acknowledging the failure of their cap and trade program.

In their Philadelphia Enquirer editorial “Cap-and-Trade Does More Harm Than Good”, environmental attorneys Laurie Williams and Allan Zabel state:  “The Waxman-Markey approach would not only guarantee a decades-long failure in the United States; it would also undermine U.S. credibility in international negotiations on climate change.”

Ex-Secretary of State George Shultz, speaking to the International Association for Energy Economics suggested of Waxman Markey: “it is going to be so obviously corrupt it is going to discredit the whole idea.” Having negotiated the Montreal Protocol, the most successful international environmental treaty in history, Shultz suggests a straight carbon tax would give the US far more credibility in negotiating climate treaties.

Greenpeace summarizes: “the Waxman-Markey bill sets emission reduction targets far lower than science demands, then undermines even those targets with massive offsets. The giveaways and preferences in the bill will actually spur a new generation of nuclear and coal-fired power plants to the detriment of real energy solutions. To support such a bill is to abandon the real leadership that is called for at this pivotal moment in history.”

ACESA will inevitably increase costs throughout our economy, but does not provide effective mechanisms for average people to cover those costs.  With all of these problems and no credible prospect of meeting its stated goals, if we allow ACESA to pass, it could be decades before voters trust Congress to attempt any meaningful solution to our fossil fuel addiction.

What An Effective Solution Would Look Like – Revenue Neutral Carbon Tax

On January 26, President Obama made his first major policy address on energy. He described our energy challenge clearly: “At a time of such great challenge for America, 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.”

A simple carbon tax addresses all the challenges President Obama cites. And if implemented in a revenue neutral manner by replacing payroll taxes or providing direct rebates to all citizens, a carbon tax also addresses the serious economic problems we are facing.

Strong price signals from a carbon tax would shift markets and do not require the risks and inefficiencies of excessive regulation or huge speculative derivatives markets Today we tax work and productive investment while encouraging waste and pollution with subsidies and tax breaks for oil, coal and other entrenched industries. It’s time to think rationally about using this powerful lever of government to discourage what we don’t want, like wasting energy, while encouraging work, job creation and sensible investment.

Williams and Zabel suggest: “While cap-and-trade-and-offsets will enrich special interests and delay the transition away from fossil fuels, carbon fees with monthly rebates could be the centerpiece of an affordable, equitable, rapid transition to a clean-energy future.”

Waxman Markey is not the only energy bill in Congress.

Representatives Inglis (R-SC), Flake (R- AZ) and Lipinski (D-IL) worked across party lines proposing H.R. 2380, The Raise Wages, Cut Carbon Act of 2009. Their bill puts inescapable prices on carbon emission immediately that are far greater then the EPA and Congressional Budget Office estimate Waxman-Markey will provide ten years from now. Instead of Waxman Markey’s hundreds of billions of dollars in corporate welfare, H.R. 2380 would reduce regressive payroll taxes while providing increases to people receiving social security to directly offset the economic impacts of the tax. Congressman Inglis’ suggests website “By reducing payroll taxes and taxing carbon dioxide, we can turn an environmental fix into a decisive, economy-expanding national security fix.”

The Miami Herald reports that that H.R. 2380, “would initially impose a tax of $15 a ton of carbon dioxide on the producers and distributors of gasoline, natural gas and coal, with the tax rising to $100 a ton over three decades.” Such clear policy signals allow businesses throughout the economy to plan effectively and make long-term investments.

Inglis, Flake and Lipinski propose that, “the tax applies to fossil fuels as they enter the economy: at the mine mouth, the oil refinery and the natural gas pipeline. This upstream application of the tax will make it easy to implement and reduce administrative costs.” They suggest, “consistently applying the same tax to all domestic and imported products will keep this border adjustment in compliance with existing WTO agreements.” And they are willing to take political risk and treat voters honestly, publicly predicting that customers of coal-fired utilities would see cost increases of 83.5% in the first year.

In “Show Us The Ball”, Thomas Freidman reports that: “Representative John B. Larson, chairman of the House Democratic Caucus, circulated a draft of a similar bill that would impose a per-unit tax on the carbon-dioxide content of fossil fuels, beginning at a rate of $15 per metric ton of CO2 and increasing by $10 each year. The bill sets a goal, rather than a cap, on emissions at 80 % below 2005 levels by 2050, and if the goal for the first five years is not met, the tax automatically increases by an additional $5 per metric ton. The bill implements a fee on carbon-intensive imports, as well, to press China to follow suit. Larson would use most of the income to reduce people’s payroll taxes.”

Revenue neutral carbon tax solutions offer a rational market oriented solution by putting a real price on carbon emission. They are favored by the vast majority of economists on all sides of the political spectrum. By effectively discouraging petroleum use, such taxes address our trade imbalances and enhance our national security interests while stimulating markets for clean energy, energy efficiency and fuel-efficient vehicles. Plus, these taxes are good economic policy, reducing the penalties on work and job creation in regressive payroll taxes.

We need to dependably get the “economic externalities” of fossil fuels accounted for directly in the real economy. A simple carbon tax is the most effective way to do that.

Make Sure The Senate Hears Us

Willem Buiter, former chief economist of the European Bank for Reconstruction and Development, summarizes the political challenges in “Carbon Offsets: Open House for Waste, Fraud and Corruption. He notes that politicians “prefer cap and trade because it hides/obscures the fact that for it to work, it must be equivalent to a tax; however, it does not look like a tax and will not show up in conventional tax burden calculations. Also… you can hand out the credits free of charge to your friends (including the heavy historical polluters).…The amounts of money involved are vast and the opportunities for graft, bribery and corruption limitless.

Before suggesting Waxman Markey is about the best we can expect from Congress, in “Just Do It”, Thomas Friedman summarizes the bill well: “It is too weak in key areas and way too complicated in others. A simple, straightforward carbon tax would have made much more sense than this Rube Goldberg contraption. It is pathetic that we couldn’t do better. It is appalling that so much had to be given away to polluters. It stinks. It’s a mess.”

NESEA members are practical idealists. We cannot settle for ACESA as the best Congress can do. We cannot accept politically expedient “solutions” that we know are bound to fail. If we support legislation that does far more harm than good, then we become part of the problem, rather than part of the solution.

Political challenges facing a carbon tax are certainly no more formidable than the practical problems with ACESA. It is time to move beyond political horse-trading to a serious solution. Willams and Zabel argue: “Those who favor Waxman-Markey as a political best-case scenario lack faith in the American people.”

We need government policy that makes environmental and economic sense.  Lets call on our Senators to reject Waxman-Markey and implement a simple carbon tax that puts a significant and inescapable price on carbon emissions – right now.


Filed under Best Stuff, Climate Policy, Economic Policy, Energy Policy

Greenspan Gets Real – Break Up The Banks

In “Greenspan Suggests US Should Consider Breaking Up Large Banks” Bloomberg News suggests that both itself and “the Maestro” are coming to recognize and support the obvious solution to our financial crisis. The large Wall Street banks have long ago  become a parasitical force antithetical to the free economy that Greenspan, like most Americans, supports.

U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.

Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.

“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

This is an issue explored here before, perhaps best in thinking about Simon Johnson’s article “The Quiet Coup” and in exploring Greg Mankiw’s suggestions in “The Right Solution For The Banks”

When Greenspan adds his voice to the chorus, it is clear that only the corrupt political control that the large banks enjoy in Washington is keeping them protected from the exercise of all the existing banking and anti-trust regulations that would otherwise demand their power be constrained, their insolvency be recognized and their assetts seized and sold off.

Greenspan’s free market ideals, like my own, are severely compromised by what Simon Johnson, a professor at MIT’s Sloan School of Management and chief economist at the International Monetary Fund during 2007 and 2008 rightly describes as a corrupt oligarchy. The continued impacts of the big Wall Street banks is a core problem in our economy. Rather than subsidizing and protecting them, the Treasury Department should be breaking them up.

Greenspan points out that merely imposing regulatory restraints is not sufficient when institutions become so large that their potential failure threatens the entire world economy.

“I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said.

While Greenspan was typically somewhat obtuse in his remarks, the implications were far more clear than is his norm. Like most Americans, he is realizing it is well past time to break up the big banks if we want to preserve the free market economy our country was built on.

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Responsible Adults Needed On Health Care

David Brooks is on a roll lately. His editorial “The Baucus Conundrum” succinctly summarizes the harsh realities of the health care debate – both the fundamental kinds of reform needed to the system and the clear reality that Congress is moving in exactly the wrong direction in their fundamental approach to the issue.

Brooks is absolutely right when he suggest that:

[the health care] system needs fundamental reform. We need to transition away from a fee-for-service system to one that directs incentives toward better care, not more procedures. We need to move away from the employer-based system, which is eroding year by year. We need to move toward a more transparent system, in which people see the consequences of their choices.

After summarizing good ways the country could get to fundamental reform that encourages transparency, innovation, consumer responsibility and free choice. He also summarizes the fundamental problems with the emerging congressional legislation well:

The real health care choice now is between the status quo and the bill primarily authored by Senator Max Baucus, Democrat of Montana, that is emerging from the Senate Finance Committee.

The Baucus bill centralizes power, in contrast to the free choice approach, which decentralizes it. ……..

It entrenches a flawed system. It creates greater uniformity and rigidity. It redistributes income from the politically disorganized young to the politically organized old. It squeezes people into a Rube Goldberg complex of bureaucracies based on their income level. It will impose huge costs on people as they rise up the income ladder, distorting the whole economy.

The biggest problem is that it will retard innovation. Top-down systems just don’t innovate well, no matter how many Innovation Centers you put in the Department of Health and Human Services. The bill will retard innovation by using monopoly power to squeeze costs. It will also retard innovation by directing resources toward current care (and current voters) and away from future technologies and future beneficiaries.

In the end, Brooks suggests that we do not have a realistic political option of anything rational and sensible, like the bill proposed by Senator Wyden or the kind of real solutions proposed by Whole Foods CEO John Mackey, Harvard Medical School Dean Jeffrey Flier or Atlantic Monthly contributor David Goldhill. He suggests:

At this point people like me could throw up our hands and oppose everything. But that’s not what adulthood is about. In the real world, you often don’t get to choose what your options will be. You have to choose from a few bad options.

He concludes his essay suggesting:

If I were in Congress, I’d figure there’s an 80 percent chance of something like this passing anyway. I might as well get engaged as a provisional supporter to fight to make it better, or at least to fight off the coming onslaught to make it worse.

With that kind of “realistic adult attitude” dominating the political debate in support of policies moving in exactly the wrong direction and doomed to inevitable wasteful failure on major issues like health care and energy,  I am reminded of the “realistic adults” in the Kremlin debating Soviet five year plans in 1988.

It would actually be far more responsible for American citizens to get realistic about the complete failure of our congressional “leaders” from both parties. Its well past time to start throwing them all out if these are the best kinds of solutions that they are able to come up with.

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Cleaning Up Carbon Cap & Trade Fraud – Good Luck With That

In “Brussels targets carbon trading fraud ahead of Copenhagen Summit”, the Guardian reports on attempts to clean up fraud in the European Carbon Cap & Trade Market.

Good luck to them with that.

As I summarized in “The Problems With Cap and Trade”, the fundamental challenge they face is described very well by William Buiter –  the whole system is designed to engender fraud and corruption on behalf of the politically connected. Buiter is a professor of European Political Economy at the London School of Economics and Political Science and former chief economist of the European Bank for Reconstruction and Development.

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Unintended Consequnces – Everybody Did It

Johan Norberg is in an interesting overview of the “Origins of the Financial Crisis” at Reason.TV. Bottom line – everyone is guilty. This mess was caused by the combined idealistic zeal of both the political right and the left encouraging home ownership combined with increasing micromanagement of economic policy by both parties.

Perhaps of most interest is Norberg’s claim that while under Clinton financial regulations decreased, government control and regulation of the financial sector increased dramatically under the Bush administration.  He claims the country was encumbered with 210 pages of new regulations per day under the Bush administration, the fastest pace of regulatory growth in history.

Most refreshing was his non-partisan take on the whole mess – both major parties are equally responsible with their ideological intrusions in the market.

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Smarter Than Everyone Else

David Brooks column “Benthan vs Hume” is an excellent exploration of those who believe the role of the government is to have really smart experts micromanage every aspect of our society vs those who believe the role of the government is to outline broad social goals, implement broad incentives around those goals and trust that good solutions will arise from the creativity and innovation engendered by a free society and a free economy.

This is the fundamental debate now playing out regarding the role of government in our society. I explored it here earlier in “Free Markets vs Intervention” and “Favoring Corporate Interests or Free Markets?”.

The debate really reflects a question of respect of the governed by those who seem to actually believe that they and their few elite friends are so much smarter than everyone else that they need to micromanage a nanny state to take care of the rest of us and keep us under control.

Brooks points out the ultimate reason that the “Bethams” that favor elitism will continue to win in Congress. Lobbyists and those they represent depend on government dictates and  hand outs which assure predetermined success and reward those who lobby rather than innovate. And congress depends on the lobbyist’s campaign contributions and other favors. It’s a perfectly symbiotic relationship that feeds the huge egos of those arrogant enough to believe that they actually are smarter than the collected inspiration of the free economy which has created the phenomenal wealth and innovation we all enjoy as a society.

In his response to Brooks editorial, “The Doers vs The Thinkers”, David  Harsanyi clarifies the difference in world view between the brilliant policy wonks (Mr Hoover) with their academic pedigrees and those with the actual experience of starting businesses, taking risks, making investments, and creating jobs and real value for the world (Jim) – those who control the economy vs those who actually create the economy. Unfortunately he comes to the same conclusion as Brooks – the “Bethans” or “Thinkers” of the world will always continue to win until the entire system collapses from the cumulative weight of their unfounded and counterproductive egotistical ideas. As Harsanyi summarizes before confirming Brooks summary regarding the role of lobbyists:

Yes, this debate pits the theoreticians against the doers, but it is largely a fight between the state and the individual.

So let’s have the debate. But before we do, let’s understand that Mr. Hoover is going to win. Mr. Hoover always wins. He takes no real risk. If he can’t convince us, he has the power to bribe, print money, “compel” citizens, bully and monopolize the process. It’s no more complicated than that.

While Brooks suggests it may be otherwise, it really is a question of crony corporate socialism vs free enterprise.  In the end, if we want an innovative society and opportunity for everyone, it doesn’t matter how smart the folks are managing what Brink Lindsey described as the dead hand of government. Until we get the power of arrogant egos and the lobbyists who support them under control, our freedom will continue to erode and our economy will  continue to decline.

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