Tag Archives: economics

Calculating the Value of Solar Energy for Ratepayers

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:

Unger – Value of RI Solar

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.

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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.

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Filed under Civilization, Economic Policy, Fundamental Perspectives, Uncategorized

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.

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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.

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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.

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Filed under Best Stuff, Economic Policy, Environmentalism, Fundamental Perspectives

Flunking Arithmetic

In his address to the Brookings Institute today, President Obama was proud to claim that the American Recovery and Reinvestment Act “Stimulus Bill” has “created or saved” at least 1.6 million jobs.

Do the math: $787,000,000,000 / 1,600,000 jobs “created or saved” = $491,875 per job.

Of course that does not yet include interest on all that borrowed money to pay for those short term temporary jobs that will be payed out over the indefinite future of endlessly increasing federal debt.

I have to wonder how much those jobs actually pay in wages and benefits to the people who “got or kept” them and what else has been “stimulated” in the process.

Even if there are still many more jobs to be “created or saved” before those funds are completely gone, what future revenue stream will support all those people in all those publicly funded jobs? Do folks in government really believe that this is the way the economy works and that massive long term borrowing for poorly conceived short term spending is the way to “stimulate” prosperity?

The president’s speech had all sorts of great rhetoric about the private sector and entrepreneurs. But unfortunately his actions speak much louder than his words.

Today’s news also includes stories regarding AT&T, Caterpillar and John Deere taking massive charges against the cost of complying with the new federal health care legislation. Security and Exchange Commission regulations require publicly traded companies report such write downs the same quarter that changes in tax laws that impact them are enacted. Many more such reports should be coming in the next couple days. While it is obviously very well intentioned from a social perspective,  despite the smoke and mirrors in the official projections, it isn’t difficult to anticipate what kind of federal budget impacts we will see from the health care bill. Unfortunately the legislation doesn’t address the underlying causes of rapidly rising health care costs and doesn’t promise to be economically “stimulating”.

The news today also described new legislative proposals from the White House intended to encourage banks to write down mortgage principles for homeowners underwater on their loans and delay foreclosures. Megan McCardle offers a good overview of the concerns with such legislation. If the legislation ultimately includes sticks along with carrots for incenting lenders to comply, then one really doesn’t have to wonder how it will impact banks perspectives on evaluating risk or their inclination to lend in the future. If it is all carrots, and really just another bailout for banks in disguise, with taxpayers taking on liabilities for bad loans written during the boom years, then it isn’t hard to anticipate how that will impact federal deficits. Again, while clearly well intended from a social perspective, the economics of such policies are hard to reconcile and don’t promise to be “stimulating”.

Is it unrealistic to expect that at least a few of the officials in Washington D.C. might have paid attention during some economics, finance or accounting courses in school or at least during sixth grade arithmetic?

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Debt And Productivity

Interesting Chart from Nathan’s Economic Edge.

[Diminishing+Productivity+of+DEBT+(2).jpg]

Here’s how Nathan explains it:

This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

Frankly, I am not sure what this chart indicates for the future, though I doubt it can be anything good.

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