Busted Big Government

01 Monday Jun 2015

Posted by in National Debt

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accounting or accountability

Alan Greenspan says we are “way underestimating” the U.S. national debt. His statements on this point make a great follow-up to last night’s post on bailouts. Here are a couple of recent Greeenspan quotes from an article by Nicholas Ballasy:

“Largely because we are not including what I would call contingent liabilities, that is the issue of, which is answered by a question: what is the probability that in today’s environment JP Morgan would be allowed to default? The answer is zero or less.”

Now, that means that whole balance sheet is a contingent liability. Now to be sure, while it’s contingent, there’s no interest payments but ultimately that overhangs the structure because we have committed in so many different ways to guarantee this, that and the other thing. It’s not only Fannie and Freddie but it’s a whole series of financial institutions and, regrettably, it is also non-financial institutions.”

The bailout barometer I mentioned last night is an eye-opener, but it reflects a very incomplete view of the contingent liabilities faced by the government. Ballasy discusses some massive unfunded liabilities associated with programs like Social Security, which has a trust fund that Greenspan calls “meaningless”:

“The Social Security and Medicare Trustees 2014 annual report said while legislation is needed to address all of Social Security’s financial imbalances, ‘the need has become most urgent with respect to the program’s disability insurance component. Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016.’”

Lawrence Lindsey, an economic official in the Bush Administration, says the real national debt is closer to 300 percent of GDP when unfunded obligations for Social Security and Medicare are added. The fast-dissipating disability insurance fund was the subject of another post here two days ago. It is a case study in irresponsible governance. Here is Ballasy with another Greenspan quote:

“According to Greenspan, entitlement spending in the U.S. was 4.7 percent of GDP in 1967 compared to more than 14 percent today. ‘Had we kept it at that level, our productivity would be far higher today. The average wage would be very significantly higher, the standard of living would be higher and what we have to do is think about how we are going to shrink that pie back and, to me, that is the single most important problem that confronts this country,’ he said.“

Shrinking the ongoing flow of entitlements is a tall political order. Avoiding the contingencies that would add to existing obligations calls for economic policies that promote stability, rather than boom and bust cycles that follow misguided efforts to stimulate the economy. Still another matter is to deal with the obligations that already exist. Higher taxes, inflation and default do not represent attractive policy options, but our activist government has placed us squarely in that corner.

Bailouts and Destruction: Your Risk, Our Reward

31 Sunday May 2015

Posted by in Big Government, Regulation

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bailout-gravy-train-cartoon

The federal government creates some artificial incentives for financial risk taking. These are mostly guarantees against losses, either explicit or implied by similar, past acts of loss indemnification, i.e, bailouts. Under this regime, successes accrue to private risk takers while failures are borne by taxpayers and others from whom resources are diverted by artificially low user costs. This is a huge source of waste, pure and simple.

The financial crisis that began in 2007 featured bailouts of a variety of privately-owned institutions such as banks and insurers, as well as government-sponsored enterprises (GSEs: Fannie Mae and Freddie Mac). So-called financial reforms enacted in the wake of the crisis, especially those embodied in the Dodd-Frank Act, did nothing to eliminate the expectation that losses, should they occur, would be met by a rescue package.

“This approach to financial regulation, while a natural response to a market failure narrative, only increases the vulnerability of financial system to regulatory failure. Regulatory failure played an important role in the last crisis by concentrating resources in the housing sector, encouraging reliance on credit-rating agencies, and driving financial institutions to concentrate their holdings in mortgage-backed securities. Dodd-Frank gives regulators more authority and broad discretion to shape the financial sector and the firms operating within it.“

The Federal Reserve Bank of Richmond’s so-called “bailout barometer” shows the share of implicit and explicit federal guarantees on a large class of financial liabilities. It reached a total of 60% at the end of 2013. When losses are covered, who cares about risk? Did any of this change, as a lesson learned, after the last financial crisis? No. Instead, we have this:

“The 2010 Dodd-Frank law has certified various large institutions as “systemically important,” as prelude to burying them in costly regulation ostensibly for safety purposes but partly to divert lending to politically favored sectors. This hasn’t helped the economy. It probably hasn’t done much to make the financial system safer.“

That quote is from Holman Jenkins in “Bank Bashing: the Modern Nero’s Fiddle“. Jenkins accepts “too big to fail” (TBTF) and government guarantees as a reality, blaming the financial crisis on other aspects of government regulatory policy. And there is plenty of evidence that the government contributed in a number of ways, contrary to the usual media narrative. I don’t disagree, but federal guarantees have, and still do, distort risk-reward tradeoffs faced in the financial sector. And the guarantees don’t stop there: federal bailouts of large or politically-connected firms in other industries are now more commonplace and they will continue. Today, the expectation of federal bailouts even extends to other levels of government saddled with insolvent pension funds and other debts that can’t be paid.

Even now, the federal government is creating conditions that may lead to another financial crisis: in addition to the high bailout barometer, bank reserves are plentiful thanks to Federal Reserve policy, and the government seems eager to have those reserves invested in new mortgage lending. Here is John Ligon on this point:

“Two recent examples: Fannie Mae recently started a program guaranteeing loans with as little as 3 percent down payments, and, earlier this year, the Federal Housing Administration reduced by 50 basis points the annual mortgage insurance premiums it charges borrowers. …

A great irony, though, is that these affordable housing initiatives have had the exact opposite of their intended impact: These programs encourage higher levels of debt, increased housing prices (and lower affordability) in many markets, and greater risk within the overall housing finance system.”

There is no doubt that taxpayers will be called upon to cover losses should another financial bubble pop, whether that is in housing or other assets. The one-sided risk this creates represents a transfer of wealth to the financial sector. What’s worse is the contribution of government policy to the sort of economic instability this creates.

Counter-Cyclical Disability Debauchery

29 Friday May 2015

Posted by in Government, Macroeconomics

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Disability

Should economic growth drive changes in the Social Security disability insurance rolls? It appears to have done just that over the past ten years, suggesting that the program embodies a degree of sham. The Political Calculations blog has some fascinating charts and discussion of this phenomenon entitled “The Disability Dumping Ground“. It shows that the number of workers receiving disability benefits rose across many age cohorts, and especially more “mature” cohorts, as the economy entered the Great Recession. Successful claims continued to rise throughout the weak economic recovery, but the increases began to taper as economic activity finally neared and exceeded pre-recession levels. However, the post notes that:

“the vast majority of those who were added to Social Security’s disability rolls during the period from 2008 through 2013 are still on them.“

One must question whether the Obama Administration had a motive to encourage more latitude in the approval of disability claims during this period:

“And because being classified as disabled would remove such individuals from being counted as both unemployed and part of the U.S. civilian labor force, the Obama administration had a strong incentive to get the program’s administrators to look the other way at the disability insurance applications for benefits that were being made as jobless benefits were expiring, as the resulting math would considerably reduce the official unemployment rates reported by the U.S. Bureau of Labor Statistics.“

Of course, an intentional effort to bring more of the long-term unemployed onto the disability rolls might be defended as counter-cyclical fiscal policy and on immediate humanitarian grounds. However, the accelerated depletion of the Disability Insurance Trust Fund implies “that the payments to individuals receiving … benefits will be reduced by nearly one-fifth.” Such cuts would be extremely unjust to those suffering from more legitimate disabilities. In any case, this makes the pretext under which payroll taxes are collected highly suspect.

It would be interesting to know whether changes in the disability rolls or benefit payments bore a correlation to economic growth over a longer history. The social gains from pooling risks at this level are easily frittered by mismanagement and fraudulent activity, faults to which government activity is particularly prone.

Federal Strings and Executive Puppeteers

28 Thursday May 2015

Posted by in Big Government, Federalism, Regulation

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federal bribes

We often think of government bureaucracy as a force of stasis, but it is unlikely to promote stability. At all levels, government administrative organs have a way of growing, absorbing increasing levels of resources and constricting private activity by imposing increasingly complex rules. A large administrative apparatus tends to calcify the economy, undermining growth or even a sustained level of economic activity. The negative consequences of the administrative state were treated twice on this blog last year.

Federalism, on the other hand, is usually viewed as a check on federal power relative to state governments. That was the perspective of “Nullifying the Federal Blob” last year on SCC. However, in “The Rise of Executive Federalism“, Michael S. Greve discusses forms of federalism that can serve as adjuncts or even alternatives to the exercise of federal legislative power. First, he discusses “cooperative federalism”, whereby lower levels of government receive federal funds and in turn administer federal programs:

“With very few exceptions…, virtually all federal domestic programs are administered by state and local governments, often under one of over 1,100 federal funding statutes (such as Medicaid or NCLB). Since its inception under the New Deal, this ‘cooperative’ federalism has proven stupendously successful in doing what it was supposed to do: expand government at all levels.“

Greve draws a connection between political and economic developments over recent decades, the coincident decline of cooperative federalism and the rise of a more aggressive “executive federalism”. These developments include constraints on funding at both the federal and state levels, a decline in the willingness of states to cooperate on certain programs, and a divided Congress. No funding, no federal-state cooperation and no federal legislative direction leaves a vacuum to be filled by federal executive initiative:

“Thus, to make federal programs ‘work’ under current conditions, agencies rewrite statutes, issue expansive waivers, and negotiate deals with individual states on a one-off basis. That is how the ACA is being ‘administered.’ That is how Secretary of Health and Human Services Sylvia Burwell is trying to expand Medicaid. That is how No Child Left Behind is run. And that is how Environmental Protection Agency is trying to impose its Clean Power Plan: ‘stakeholder meetings’ and assurances of regulatory forbearance for cooperating states; unveiled threats against holdout states. This brand of federalism knows neither statutory compliance nor even administrative regularity. It is executive federalism.“

It does not bode well that this perverse form of federalism “is robust to partisan politics.” Greve notes that certain aspects of executive federalism were initiated by the Reagan Administration.

Greve’s advice on combating this trend is to make federalism “less cooperative, one program at a time.” While he’s a little short on specifics, he advises that initiatives such as block grants to states are likely to be counterproductive in restoring traditional federalism. One point on which I part company with Greve is his disparaging reference to “state’s rights” as a battle of “yesterday”. I suspect his underlying objection (which I do not share) is drug legalization at the state level, or any other measure that he might find morally objectionable. Otherwise, I have no issue with what I take to be his favored approach, which seems to involve any assault on the exercise of federal administrative power and rule-making, whether that is through the courts or the exercise of nullification by the states. It is promising that so many states are resisting the imposition of additional administrative and funding burdens attendant to expansive federal sweeteners and control.

Heal, You Dogs!

26 Tuesday May 2015

Posted by in Obamacare, Shortage, The Road To Serfdom

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Doctor-shortage

In bondage to the State: The Classical Values blog has this interesting quote from Dr. Rand Paul:

“With regard to the idea of whether or not you have a right to healthcare, you have to realize what that implies….I’m a physician, that means you have a right to come to my house and conscript me, it means you believe in slavery. It means you’re going to enslave not only me, but the janitor at my hospital, the assistants, the nurses…There’s an implied threat of force, do you have a right to beat down my door with the police, escort me away, and force me to take care of you? That’s is ultimately what the right to free healthcare would be.”

It would be “free” only in nominal terms to the patient, and greatly degraded. The gap between the need for health care and the available supply cannot be solved via “conscription” of providers. And caring for the sick is one thing, but granting a “right” to well-care or health maintenance makes the gap much larger. Inadequate compensation to providers is an important subtext here, and it goes to the heart of the conflict. Basic economics tells us that the gap in access will expand if buyers are subsidized and providers are penalized by artificially low prices. The expanded eligibility for Medicaid in many states under Obamacare only exacerbates shortages, as physician reimbursements remain generally low.

Obamacare may have improved access to health care for a small minority of individuals, but only at the expense of penalizing many others, including providers. The program has fallen far short of its goal of covering the uninsured and has failed to “bend the cost curve” (despite false claims to the contrary, which attempt to take credit away from the Great Recession for slowing costs). Obamacare still looks to be unsustainable, as many have predicted. Insurers are now seeking large rate increases in many states, and going forward, they will not have the cushion of government-funded “risk corridors” when premiums fail to cover claims.

A Supreme Court ruling in the King v. Burwell case is due next month. The case has been discussed on this blog twice this spring. The plaintiffs have challenged federal subsidies in states relying on federal insurance exchanges in direct contradiction to the “plain language of the law”. The subsidies were intended to be an inducement to states to set up their own exchanges, but a number of states chose not to do so. A ruling for the plaintiffs would severely damage the Obamacare program, since the subsidies are key to making the relatively extravagant mandated coverage affordable to low-income individuals. However, Joel Zinberg insists that ending federal subsidies will not cause a death spiral.

Still, such a ruling would seem to give Congress and the Republicans an opportunity to craft legislation to replace Obamacare with a more viable program. Republicans seem have been unable to craft a strategy for dealing with this contingency, but their best strategy might be to wait, pass an extension of subsidies until 2017, and dare Obama not to sign it into law.

The Stench of Green Desperation

23 Saturday May 2015

Posted by in Global Warming

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jimmy_and _barack

“Devastating release of carbon emissions has ancient Syrian city of Palmyra now under ISIS control“.

Tongue in cheek, of course, from Twitchy. But maybe not so much: in his commencement address to graduates of the Coast Guard Academy this week, President Obama took the laughable positions that global warming was a) contributing to unrest in the middle east; and b) is an immediate threat to U.S. national security. He bases this immediacy on climate models that have been not just wrong, but extremely wrong, as well as a series of related distortions. These are rebutted one-by-one in “Does the ‘leader’ of the free world really know so little about climate?” by Christopher Monckton.

Global warming activists are so fond of their scare stories that they just can’t stop, despite a long track record of predictive lousiness. But their sins extend beyond bad predictions to bad data itself. One scare story has the world’s sea-ice extent shrinking drastically, especially in the Arctic. Now, NASA has come clean on this point: updated data from the agency shows that sea ice has not contracted over the past 35 years, it has actually increased somewhat. The data is charted here. From the Forbes link:

“Updated data from NASA satellite instruments reveal the Earth’s polar ice caps have not receded at all since the satellite instruments began measuring the ice caps in 1979. Since the end of 2012, moreover, total polar ice extent has largely remained above the post-1979 average.“

To this day I see posts suggesting that the polar ice caps in a fast melt and that polar bears are increasingly endangered. Both assertions are simply not true. The global polar bear population has recovered from the lows of 50 years ago and is stable. Most regional populations are stable, some are in decline, and some are growing.

Another claim is that that Antarctic ice is melting. In fact, the ice extent around Antarctica is at record levels. There is massive volcanic activity under an area in western Antarctica, where some ice loss has been recorded. That is hardly proof of a man-made carbon-induced effect. Along with the fictitious ice melt, alarming predictions of increased sea levels are often heard. But sea level increases in the past 100 years are minuscule relative to more distant historical episodes.

President Obama is casting about for a legacy other than failure. His signature health care plan is in jeopardy on several fronts, his foreign policy is bumbling (even to a non-interventionist), his economic legacy is weak at best, his legacy of cronyism is legend, and his legacy of debt is gargantuan. As to Obama’s record on the environment, he just might be a slave to defunct climate researchers.

Lucky Barack: Let Me “Invest” Your Winnings

22 Friday May 2015

Posted by in Big Government, Taxes, Welfare State

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lucky obama

Ask a group of teenagers how to get rich and a significant share will say to win the lottery. The truth is that NOT buying lottery tickets and instead saving the ticket money is a far better approach. That, and hard work, are much more likely to get you there. Of course, that’s how many of the rich got that way, but President Obama now refers to them as “society’s lottery winners”. No doubt this description serves his redistributionist policy agenda by appealing to the ignorance of his base. I am tempted to say that his use of the phrase is a testament to his own ignorance, as his only real experience is in the political realm, as opposed to the world of actual production and wealth creation.

Thomas Sowell offers remarks on Obama’s smug characterization of the wealthy, highlighting the President’s disingenuous assertion that redistributionists merely “‘ask from society’s lottery winners’ that they make a ‘modest investment’ in government programs to help the poor.” Sowell notes that “asking” is not what the U.S. government will do:

“Despite pious rhetoric on the left about ‘asking’ the more fortunate for more money, the government does not ‘ask’ anything. It seizes what it wants by force. If you don’t pay up, it can take not only your paycheck, it can seize your bank account, put a lien on your home and/or put you in federal prison.“

Sowell also decries Obama’s continued abuse of the term “investment”. Everything is now an “investment”, whether it pays for consumption or new physical capital. You can feel Sowell’s frustration:

“... please don’t call the government’s pouring trillions of tax dollars down a bottomless pit ‘investment.’ Remember the soaring words from Barack Obama, in his early days in the White House, about “investing in the industries of the future”? After Solyndra and other companies in which he ‘invested’ the taxpayers’ money went bankrupt, we haven’t heard those soaring words so much.“

In The World According to Barack, wealth is created by luck, the government merely requests the cooperation of those paying the vast bulk of federal taxes, and redistribution itself and the consumption it pays for is “investment”.

Conscious Design, the Collective Mind and Social Decline

20 Wednesday May 2015

Posted by in Big Government, Human Welfare, Spontaneous Order

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All those in favor

The great gains in human welfare over the past few hundred years are not the result of some conscious design by a central authority. They are due instead to the emergence of conditions under which a “spontaneous social order” could bear fruit. Yet most people toil under the illusion that the progress of humanity and civilization are impossible without the imposition of some conscious design and intervention by human planners. In “The Counter-Revolution of Science“, F.A. Hayek noted that conscious direction was unnecessary to the development of such fundamental institutions as language, markets, money, the legal system and morals:

“We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we were doing.“

A liberal, spontaneous social order arose against a backdrop of secure rights that encouraged voluntary exchange. Individuals, free to act on their preferences, capabilities and personal resources forged their own trade relationships and contractual arrangements. In this sort of environment, the prices established by free exchange not only direct goods and resources in the present, but also direct their availability over time by balancing the time preferences of savers and investors. Again, it was this set of unplanned but voluntary private arrangements that brought such dramatic material progress to humanity. The chief contributions of central authority were the provision of a reasonably stable legal environment and, ironically, the constitutional framework in the U.S. that imposed limits on government power.

On the other hand, there is a long history of attempts to impose “conscious” designs by edict. They have met with consistent failure, and for good reason: human authorities cannot possess the dispersed knowledge needed to balance the diverse needs and preferences of millions of economic agents with the abilities of others to produce and provide for those demands. Nor would human authorities have the correct incentives to properly direct resources to their most valued uses, even if they possessed the requisite knowledge. In fact, the imposition of a “collective” plan implies a degree of coercion. The plan, no matter how well meaning, will necessarily conflict with the objectives of some individuals. Efforts to work around the plan will lead to additional coercive steps to bring all parties into compliance.

Still, there seems to be a deeply ingrained belief that advances can only be a product of conscious design and central direction. The idea dovetails with the tendency to view policies and objectives as things that must be achieved by “society” as a collective. But the details of deliberate social policies must be promulgated by relatively few policymakers and then executed by technocrats, even if the policies themselves are the product of representative democracy.

The elites who administer central plans must rely on aggregate measures of economic activity and broad categories or class groupings, which grossly over-simplify and misrepresent the complexities of human activity. This aggregation problem afflicts a wide variety of measurements and attempts to analyze behavior. Gary Galles discusses various aggregation problems in “How Economic Aggregation Hides The Problems of Interventionism“.

By analyzing things at aggregate levels, we may deceive ourselves by thinking that the aggregates can represent meaningful outcomes, or even worse, policy levers. The aggregates become constructs to which theories of “behavior” are applied, often rationalized by so-called “micro-foundations” of “representative agent behavior”. This effectively elides the fundamental reasons for engaging in voluntary market exchanges in the first place: differences in preferences, abilities, knowledge, and endowments of resources create opportunities for gain through trade. David Kreps is quoted at a link above on a prominent example of this phenomenon, the weak foundations of “aggregate demand”:

“… total demand will shift about as a function of how individual incomes are distributed even holding total (societal) income fixed. So it makes no sense to speak of aggregate demand as a function of price and societal income ….“

In short, the theoretical relationships between aggregates do not describe real economic behavior. Hayek noted that relying on aggregates fosters the all-too common but mistaken view among policymakers, pundits and the public that the economy can be shaped and managed much as an engineer designs a machine, or as a manager runs his factory. That is an incorrect but insidious viewpoint. Hayek explains that engineers or factory managers are able to perform their functions with relative precision because they are able to take so much for granted: prices or the availability of certain materials and resource flows, and reliable, technical relationships between inputs and outputs. Again, the economy and society encompass too many complex relationships and details that are unknowable to any central authority to manage effectively from the top down.

Some kinds of differences between individuals are recognized by planners and collectivists. Policies divide the population into groups subject to disparate treatments in an effort to meet social goals deemed worthwhile by the collective conscience. As my friend John Crawford said in a recent email: “… to have public policy the individual must be subjugated to the group simply for ease of understanding.” These disparate treatments imply that:

“… the simple act of generating public policy requires racism, ageism, sexism, classism, whatever-ism. Some ‘-ism’ must be conceived of simply so individuals can be grouped into bins, measured so a public policy action can be justified.“

These sorts of policies do not encourage a productive society. Instead, they promote political competition rather than economic competition, division rather than unity, and rent seeking and cronyism instead of productive effort, saving and economic growth. Norman Barry discusses the negative consequences of this shift in orientation in his essay “The Tradition of Spontaneous Order“:

“Hayek is no doubt correct in identifying the main disruptive threat to the preservation of a spontaneous order as the inevitable formation, under present democratic rules, of coalitions of interests which divert the stream of income in a catallaxy to politically-favored groups—to the ultimate harm of all.“

High-Speed Third Rail For Taxpayers

15 Friday May 2015

Posted by in Big Government, infrastructure, Taxes

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bullet train

Public boondoggles come in many forms, including sports stadiums and entertainment venues, convention centers, local trolly lines, light rail, superhighways, “gold-plated” public offices, and even subsidies for politically-favored (as opposed to market-favored) industries. Anything involving “infrastructure” has an almost perverse  political appeal. The many varieties of boondoggles have much in common from a public finance perspective: ultimately, they are almost always funded by taxpayers; when they confer benefits to private parties (and they usually do), they are underpriced to those users. Taxpayers are often lucky if these projects cover their operating costs, let alone capital costs, via direct revenue generation. Taxpayers are usually on the hook for the bonds. Pure public benefits might offer some justication for this burden, but those cited by project proponents are often unconvincing on that basis. Let’s face it: projects are seldom evaluated against something approximating the true opportunity costs faced by the public or taxpayers.

A prominent example of such a project that seems to capture the political imagination is high-speed rail (HSR). My friend John Crawford emailed the following link: “Doing the math on California’s bullet train fares“. John provided this summary:

“Not surprisingly, today’s fare estimate has risen 72% over the estimate that was cited during planning. That’s telling but probably not surprising to anyone, even those that tried to change opinions by citing the $50 fare. What I think is most interesting follows.

CA-HSR price of 86 is about 20c/mile. Comparable prices are 22c for a Chinese train that everybody agrees to be subsidized, 54c for a French train that is profitable and 50c for the Amtrak corridor on the East coast, which is probably profitable; 46c in Germany. Somehow, they think they can do what nobody else in the world can do…profit at 20c/mile.“

The California authority is either spectacularly arrogant or stupid. Probably the former, because they are doing what self-interested bureaucrats and politicians always do. They want the project to get done, thus creating an empire, kicking a can-full of fare increases and taxpayer liabilities down the road, beyond the time when anyone will hold them accountable for the malinvestment. But the true extent of the malinvestment will never be obvious, because the counter-factual will remain in the unseen world of lost opportunity.

Something I find exasperating about articles like this are references to “profitability”, as in “… state officials say the system will quickly become profitable“, when the meaning is not actual profitability. My friend John did it too, but I forgive him because he knew the score, and because he’ll forgive me for being a pedant (I hope). But this is important! What the California officials mean by “profitability” (and it is a misuse of the term) is fare revenue in excess of operating costs. The latter do not include initial capital costs, so these officials are not making claims about actual profitability. Profitability means that revenue exceeds ALL costs, including capital costs. Many observers consider the California authority’s estimates of operating costs to be suspect, so it’s not even clear that revenue will cover the future costs of capital replacement, let alone the initial installation costs. Construction and planning costs are expected to be $68 billion for Phase 1 only, and you can safely bet on significant additional overruns by the projected completion of Phase 1 in 2029.

Fares calibrated to cover operating costs are not defensible in terms of long-run marginal cost pricing. While an incremental rider does not cause the capital cost of the system to increase in the short run, incremental riders absolutely do have an impact on long-run capital costs. In any case, there are many incremental riders at start-up. The long run is now. Yet, like many public projects, the burden of uncovered costs is justified in terms of other benefits of a supposedly public nature. Here is a vague description of such benefits from the CA HSR Authority:

“California high-speed rail will connect the mega-regions of the state, contribute to economic development and a cleaner environment, create jobs and preserve agricultural and protected lands.“

Let’s take these one at a time:

  • connecting “mega-regions”, if that is a real benefit of HSR relative to alternative modes of transportation, will largely accrue to riders, not the general public.
  • Economic development benefits are possible along the route or near stations, but that is hardly a pure public benefit, and it is likely to come at the expense of development elsewhere.
  • The trains will be powered, at least in part, by energy from fossil fuels. If HSR produces less carbon than equivalent airplanes, autos and other alternatives, that might represent a pure public benefit (according to the carbonphobic), but this is a costly way to achieve a minor reduction in carbon emissions. It is of value only to the extent that HSR brings real substitution away from other, higher carbon modes.
  • Construction jobs are part of the cost of the project, but this is a common ploy and very handy way to sell the project. Gains for the workers are certainly not a pure public benefit. To paraphrase Bastiat, calling construction jobs from malinvested capital a “public benefit” is like calling a broken window beneficial because it provides work for the glazier.
  • As for preserving agricultural and public lands, I do not believe that HSR will make much of a dent in future, land-gobbling highway construction (and if it did, it would offset those vaunted HSR job gains).

The public should always view large public projects like HSR with skepticism and insist that private benefits should be paid privately. There are always alternative uses of taxpayer funds, including the possibility that taxpayers should keep them. Too many public projects become funding disasters. In many cases, private parties would not be willing to buy the facilities for more than 10 cents on the dollar.of original cost.  Without access to tax revenue, only a low purchase price would allow them to operate at a profit.

At the national level, this week’s tragic Amtrak crash near Philadelphia was the context for misguided calls to provide additional funding to the rail service. Sean Davis in The Federalist has a more logical proposal, even if it is a bit radical: not only should Amtrak be privatized, its assets should be given away! And how could anyone reach such a conclusion?

“Amtrak lost nearly $1.3 billion in 2013. Since its creation, Amtrak has racked up over $31 billion in accumulated losses. And every penny of those losses has been covered by federal taxpayers.

… Hand over the entire enterprise to whichever rail company wants it. ‘But that’s crazy!’ you might say. ‘Giving it away for free makes no cents [sic]!’

Well, neither does keeping it on the taxpayers’ books. The status quo costs taxpayers at least a billion dollars each year.“

Davis makes a fair point, though a give-away might attract multiple takers. Ultimately, bidding just might be necessary! Or, perhaps it would be necessary to PAY a private rail operator to take Amtrak off the federal government’s hands. A fairly high payment would still be worthwhile to taxpayers.

Randall O’Toole provides this excellent discussion of privatizing transit in a video  of approximately 17 minutes. He discusses trends in ridership, the inefficiencies inherent in public transportation systems, and compares various market structures and types of private transportation systems, including private intercity buses (Megabus). He also addresses concerns that private transportation systems will not meet the needs of the poor by proposing the substitution of “transit stamps” for the huge subsidies currently paid into transportation bureaucracies.

Subsidized Waste: The Renewable Irony

12 Tuesday May 2015

Posted by in Renewable Energy

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wind damage

The new Tesla “Powerwall” home battery is probably most noteworthy for the breathless hype it has generated. The $3,500 cost for the 10 kWh version is not cheap, and the installed price is probably closer to $7,000. The battery has a limited number of charge cycles, though Tesla has not fully disclosed all of the specifications. People of considerable expertise in this area (not me!) do not believe that Tesla’s new battery is the least bit innovative as an energy storage technology. See this post by Lobos Motl, or this one by Christopher Helman. This is not to say that Tesla has not made contributions to battery technology, only that this variation is not new, except for the marketing.

How can it pay for itself? The promise is not so much for back-up power during outages. Instead, it is an arbitrage play allowing consumers to store power during off-peak hours and avoid usage during peak-price hours. But the application (and hope) that has excited the media and well-meaning greens is efficient storage of power generated by intermittent, renewable sources. Tesla’s marketing effort certainly fostered such hopes; those with home solar panels may have Tesla sugar plums dancing in their heads.

Advocates of renewable energy can rightly claim that the costs of energy storage (and some forms of renewable power generation) have been declining. But there is still a mismatch between expectations and reality: the Tesla battery is not new technology, and it is not really cheap in terms cost per unit of energy stored and later delivered. The economic viability of intermittent sources of power obviously depends on the combined cost of storage, transmission and the power generated by a renewable source relative to other fuels, including the initial capital outlays. This is reviewed at the Energy Matters blog in “The High Cost of Renewables“, which is largely based on this paper from The Brookings Institution by Charles Frank.

It’s relevant to compare renewables such as wind and solar to nuclear energy and natural gas as replacements for “base-load” coal plants. Nuclear and gas power are often touted as viable, reduced or no-carbon solutions to providing for the energy needs. Two issues make renewables more costly than nuclear and gas in terms of installed cost per kilowatt, despite the huge up-front installation costs of nuclear. The first is the intermittency of wind and solar power generation. According to Frank’s calculations at the link above, this factor alone causes solar to be nearly four times as costly as nuclear energy, and wind to be more than 25% more costly. The second issue is that wind and solar installations have short useful lives relative to nuclear. This adds to the wind and solar cost disadvantages, but the practice of dividing costs by the number of years of useful life probably distorts the comparisons. The shorter-lived installations can be expected to involve lower costs at replacement, which should be averaged into a comparison with a longer-lived asset. Still, there is no question that renewables are more costly than gas and nuclear power.

Critics took Frank to task over certain assumptions following the publication of his paper. He offered rebuttals here, here and here in which he revised his calculations in ways that tested his critics’ assertions. Frank’s conclusions are the same:

“Taking all changes into account, my main conclusions are strengthened. Wind continues to rank number four and, by a large margin, solar number five. Gas combined cycle continues to rank number one by a large margin, although nuclear drops from two to three [behind hydroelectric power].”

This article in The Economist also emphasizes the problem of intermittency:

“… countries which have a lot of renewable generation must still pay to maintain traditional kinds of power stations ready to fire up when demand peaks. And energy from these stations also becomes more expensive because they may not run at full-blast.“

“Firing-up” a power station repeatedly consumes fuel at a greater than proportionate rate. If fossil fuels are involved, this process eats into the presumed benefits of using renewables. Of course, there are other factors that make large-scale renewable energy  “farming” undesirable, such as massive land requirements and danger to birds and even marine life. Here is another piece offering a reality check on the true costs of wind power.

Certain forms of renewable energy and energy storage technologies will continue to advance and their costs will decline over time. However, solar and wind power are currently more costly than other alternatives. The benefits of these technologies to society are highly speculative, since models of carbon-forced climate change do a poor job of explaining the actual climate. In any case, climate change, should it occur, is not unambiguously costly. In the absence of more convincing evidence, the costs of renewable energy supplies should be fully internalized by rational actors (who may have personal preferences for renewables) in private, arms-length transactions. Unfortunately, to date, the growth in the share of renewable energy production in most countries has been abetted by government subsidies, so even the aforementioned private actors are collecting rents at the expense of the rest of society. The extra costs imposed on society represent a waste of resources.

In the absence of compelling evidence of pure public benefits, new technologies should be subject to true market tests, not forced upon the public by mandates or encouraged via artificial self-interest created by subsidies. In “Green Energy Policy: ‘Nothing That Works’“, Viv Forbes discusses the real goals of the extreme green lobby, quoting several environmental radicals. Here is the “money” quote:

“… Amory Lovins of the Rocky Mountains Institute, said: ‘It would be little short of disastrous for us to discover a source of clean, cheap, abundant energy, because of what we might do with it.’“

There are a few countries that have attempted to adopt aggressive policies of renewable energy mandates. Here is a discussion of the German “Green Energy Debacle”. Australia has had its share of problems as well. And here is a warning about the implications of green policy and the imposition of “energy poverty on poor countries“.