The Providence Journal just published an op-ed I wrote regarding how long term contracts for clean energy can help reduce costs and risks for electric utility ratepayers.
Category Archives: Economic Policy
Recently, I testified at the Rhode Island Statehouse regarding the impact of the state’s Distributed Generation Contracts law on ratepayers. In preparing the testimony, I realized it is important for legislators to have a tool to estimate those impacts under a variety of scenarios. I decided to create that tool for them, which is attached here:
This isn’t intended to replace a full economic impact study, and actually significantly underestimates the positive benefit of solar for ratepayers. But it gives a general sense that cab hopefully help better inform policy related to renewable energy and utility regulation. Try it out.
With all the noise about federal budgets, sequesters, debt ceilings and taxes, its sometimes hard to figure out what’s real.
So I spent a little time doing some research using government statistics and basic math this evening. The results are shown on the spreadsheet below comparing various economic factors.
In summary, between 1967 and 2011:
Population growth was 159% and inflation was 673%, which combine to create a normalized growth basis of 1,071%.
Gross Domestic Product grew 168% relative to normalized growth.
Average household income increased 119% relative to inflation but only 45% relative to GDP growth.
The official poverty level stayed flat relative to inflation but increased only 38% relative to GDP growth, while the number of people living below the poverty line increased 105% relative to population growth.
Federal spending grew 214% relative to normalized growth and grew 127% relative to GDP growth.
The deficit portion of federal spending has increased 1,411% relative to normalized growth. In dollars it has increased 15,112%.
Our federal debt has increased 4,337%.
So what conclusions can be drawn from those numbers?
1) Government spending has clearly grown far more than the economy, inflation, population or average family incomes.
2) Our economy is growing faster than normalized growth expectations so productivity is improving. That’s good news. Our society has extra resources to solve problems. We shouldn’t have to borrow.
3) The disparity between GDP growth and average household income growth indicates significant wealth is accumulating that is not accruing to the average household, thus wealth disparities are clearly increasing.
4) Growth in average household income has been better than inflation, but the average household income data shown is presumably skewed by the increasing share of income accruing to wealthy households. Average middle class family incomes are likely holding steady or improving a bit, but that data is hard to tease out of the statistics.
5) Poverty is getting worse in America. Significantly increased government spending has not helped at all to alleviate poverty and likely hasn’t done much good for average middle class households either.
6) It appears that there is plenty of room to cut federal spending to be more in line with normalized growth.
7) Growth in federal deficit spending and debt is dangerously unsustainable and needs to be addressed.
The “tax the rich” vs “cut the budget” rhetoric in Washington is not solving the urgent problem we have of getting the deficit and debt under control. We need to do both.
What the statistics don’t show is there are smart ways and stupid ways to implement both spending cuts and tax revenue increases. There are plenty of programs and entire federal departments that can be selectively eliminated because they frankly aren’t doing anyone any good except the government employees who take home paychecks. Raising tax rates is not the answer when the byzantine tax code is riddled with loopholes for the wealthy to exploit. We should be eliminating all tax loopholes, eliminating the corporate tax altogether and then treating capital gains, dividend income, carried interest and all the other specially favored income categories of the wealthy as regular income taxed at regular rates.
Lynne Kiesling recently wrote a great overview of the elegant complexity and beauty of self organizing free markets. Read it here.
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.
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.
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.