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Posts from — August 2012

Crony Capitalism: Principles (Part I)

Editor note: This post will be followed tomorrow by Part II: Crony Capitalism: Practice. On Tuesday, Robert Bradley will post on cronyism in the U.S. energy industry.

To the great economists of free trade and free markets, capitalism meant laissez faire: “Let us compete free of government help or hindrance.” To Adam Smith and David Ricardo, to Ludwig von Mises and Milton Friedman, laissez faire in the phrase “laissez faire capitalism” was redundant.

But today, opponents of capitalism such as leftist MIT Professor Noam Chomsky and sociologist Jane Jacobs believe that “crony capitalism” is the redundant phrase. They believe that capitalism by its nature involves corruption of the political process to favor one enterprise over another.

What about the American public? Earlier this year, a poll by the Rasmussen firm revealed that 39 percent of those responding consider ours to be a system of “crony capitalism.” And they are right. But that does not answer the question: Does it have to be?

Defining “Crony Capitalism”

What is “crony capitalism”? The Wikipedia definition will serve: “an economy in which success in business depends on close relationships between business and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.”

The reign of cronyism throws into relief two radically different breeds of businessman: the one who profits by innovating, producing, cost-cutting, and serving customers—and the one who prospers by means of “pull” in Washington, the state capital, or the town hall.

Crony capitalism has been around for a long time—indeed it plagued the great era of railroad building in nineteenth-century America, when huge subsidies and land grants were given for proposed lines—some never built. But the event that put the term into the active vocabulary of the American public, I believe, was the massive government intervention in private business that followed financial panic of 2008. If, today, almost 40 percent of Americans identify our system as “crony capitalism,” we may hope that they also know—or are open to learning—about the real thing. [Read more →]

August 31, 2012   9 Comments

Environmentalism’s Sword: Protectionism

Josiah Neeley

Economists are famous for disagreeing among themselves. Yet on the subject of free trade, economic opinion speaks almost with one voice. In a recent survey, 87.5 percent of PhD members of the American Economic Association agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

As Paul Krugman (not exactly a proponent of laissez-faire) has stated, “if there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the Principle of Comparative Advantage’ and ‘I advocate Free Trade’.”

Indeed. Since the days of Adam Smith and David Ricardo, economists have been tireless in demonstrating the role free trade plays in promoting prosperity and harmony for all nations.

Yet the economic consensus in favor of free trade has not always been heeded. Still, it has led to a pronounced reduction in tariffs over the last two centuries. Recently, however, there has been a growing trend among environmentalists to use the tools of protectionism as a means of limiting energy production.

If successful, these efforts could not only threaten some of America’s core industries, but also risk sparking retaliation that could unravel much of the progress made on this front in the last several decades.

An Internal Embargo

Consider, for example, the case of natural gas exports. The United States is currently in the midst of an unprecedented oil and gas boom made possible by the innovative use of technologies like horizontal drilling and hydraulic fracturing.

Increased production has led to a sharp fall in American natural gas prices. Given that natural gas prices remain much higher in Europe and Japan, gas companies are eager to increase exports of liquefied natural gas (LNG). Yet as Evan Soltas recently noted, the Department of Energy is using a Bush-era executive order to impose a “de facto moratorium” on LNG export: [Read more →]

August 30, 2012   5 Comments

ANWR: Let’s Go!

“We can’t drill our way out of our energy problem.” This oft-repeated mantra may have superficial appeal. However, on closer examination, it reflects an abysmal grasp of energy and economic facts by special interests that exert far too much influence over U.S. policies.

If only their hot air could be converted into usable energy.

Drilling won’t generate production overnight. But it will ensure steady new supplies a few years hence. Unlike electricity generation from wind and solar, hydrocarbon development is not an intermittent process. It is 24-7 every month, every year.

Simply announcing that America is finally hunting oil again would send a powerful signal to global energy markets. It would also tame speculators, many of whom bet that continued U.S. drilling restrictions will further exacerbate the global demand-supply imbalance and send prices even higher for “futures” (under which a person pays a specific amount today, with the expectation of selling a commodity on a future date at a higher price).

Pro-drilling policies would likely bring lower prices, as did past announcements that Brazil had found new offshore oil fields, that Iraq would sign contracts to increase oil production, and that hydraulic fracturing had unlocked enormous new U.S. supplies of natural gas.

Conversely, news that supplies are tightening – because of sabotage in Nigeria’s delta region, for example, or continued bans on leasing American petroleum – will send prices upward.

Resourceship

We really don’t know how much petroleum we have. When “experts” discuss U.S. oil and gas resources and reserves, they are basing their estimates on outdated seismic, drilling, and other data and technologies. They often cite reserve estimates that were proven wrong years ago, or treat oil reserves as a fixed number, when in reality reserves are constantly changing and usually increase over time. [Read more →]

August 29, 2012   21 Comments

“Not Cheap, Not ‘Green’” at the California Energy Commission

“In my period at Cato (1990–present), “Renewable Energy: Not Cheap, Not ‘Green’,” is probably our most important Policy Analysis in the energy/environment area. Bradley’s thorough review and analysis (60 pages, 325 footnotes) was a real pushback against the viability of ‘green’ energy in theory and practice.”

- Jerry Taylor, Senior Fellow and Director, Natural Resource Studies, Cato Institute.

On the fifteenth anniversary of “Renewable Energy: Not Cheap, Not ‘Green’” (yesterday), I recall, with no little pride, a lot of hard work that went into supplying the author with information about California’s wind and solar experience.

At the time I was working in the belly of the beast, the California Energy Commission (CEC) in Sacramento. The Commission was a major proponent of all things renewable, almost to the point of fanaticism. Well, actually far beyond that point (and that persists to this day), and therein lies a story about how I met a particular Texan and became the silent author of a major public policy study that still reads well today.

Three Amigos

Back in the 1980s and 1990s, I was fortunate to work alongside Richard Bilas, Vice Chair of the Commission, who was our ‘F. A. Hayek’ (think 1944 and Road to Serfdom). Dick Bilas was schooled in Austrian School and Public Choice economics and a real rarity–a free-market California energy regulator (and not wannabe energy planner).

And the third person in our group was Manual Alvarez, principal advisor to Commissioner Bilas, who actually cared about energy consumers. The three of us were rather wide-eyed at what can only be described as postmodern energy policy, a sort of ‘anything goes and is good if you really want it.’ [Read more →]

August 28, 2012   4 Comments

“Renewable Energy: Not Cheap, Not ‘Green’” Turns 15

[Ed. note: On August 27, 1997, the Cato Institute published Policy Analysis #280, which criticized the government push to subsidize politically correct renewable energy, particularly solar and windpower. Today and tomorrow, different authors revisit what was the free-market-movement's first full-scale rebuttal, on economic and environmental grounds, to so-called "green" energy policy .]

“The policy implication of [a thorough examination of renewable technologies] is, stop throwing good money after bad. All renewable energy subsidies from all levels of government should cease.”

Such is the conclusion voiced today by a rising chorus of energy experts, economists, even politicians, after many years of failed renewables projects and more expensive utility bills in the growing shadow of a $16 trillion national debt ($140,000 per taxpayer). But, remarkably, fifteen years have passed since Rob Bradley crafted this statement for the Cato Institute as the bottom line of his comprehensive six-part policy alarum, Renewable Energy: Not Cheap, Not ‘Green’

An Opening Shot

Few knew about or shared Bradley’s concerns at the time. Even more remarkably, his analysis was at odds with the policy direction of his employer, Enron, as Ken Lay’s political capitalism began promoting renewable investment as sustainable tax shelters.

By taking his concerns public, even as a scholar, Bradley risked much as Enron’s director of public policy analysis. Sparks flew as executives within Enron Wind Corporation digested Bradley’s external work (see these internal memos).

Bradley’s one-person stand also challenged the (Enron-directed) energy policies of Texas governor George W. Bush (and what would be the policies of his successor, Rick Perry). For Bradley, there was indeed a problem in Houston…. [Read more →]

August 27, 2012   6 Comments

How the Federal Reserve Affects the Gold-Oil Relationship

After oil and gasoline prices continued their relentless march up earlier this year, it was nice to have some relief at the pump in May and June. However, since the end of June, prices of WTI crude oil is up over 15%, Brent crude oil is up about 25%, and retail gasoline is up over 7%. Oil and gasoline prices reached three-month highs last week and the Energy Information Administration (EIA) increased their 2012 forecasts of these prices.

There is no doubt that these higher prices will grab the attention of news outlets, policy makers, and the public. With this increased attention, political rhetoric regarding fantasies of governmental regulations and market manipulations will likely reemerge as catalysts to lower these prices.

The less likely scenario is increased awareness on the impacts that central banks, particularly the Federal Reserve, have on these petroleum prices by changes in the money supply. Over the period of this substantial rise in petroleum prices, central banks around the world have taken action from the dismal economic outlook in many global regions.

The U.S. GDP growth rate of only 1.5% in the 2nd quarter of 2012 and unemployment rate of 8.3% in July concern the Fed about economic stability, and several Fed governors recently called for additional quantitative easing measures—purchase of long-term bonds by printing more money. Although the Dallas Federal Reserve Bank President Richard Fisher opposes these additional measures (there are few marginal benefits versus costs), I examine the costs of monetary easing policy based on the relationship between gold and oil prices.

[Read more →]

August 24, 2012   3 Comments

Hansen’s Temperature Analysis: Today’s Normal is Yesterday’s Extreme–and Nobody Cares

Yesteryear’s climate extremes are today’s climate normals. Yet we are largely oblivious and better off. A hundred years from now the same will be true. Ho hum….

But not everyone thinks this way. Take NASA’s James Hansen for example.

Hansen has recently published a prominent paper (in the Proceedings of the National Academy of Sciences, PNAS) and placed a prominent op-ed (in the Washington Post) that are aimed at raising the public’s awareness of the impacts of climate change, both now and in the future. In a rather candid admission for a scientific paper (and one which in most cases would have resulted in an immediate rejection), Hansen (and co-authors) proclaim that “…we were motivated in this research by an objective to expose effects of human-made global warming as soon as possible…” To drive the point home further, Hansen’s op-ed was headlined “Climate change is here — and worse than we thought.”

What Hansen wants us to know, is that as temperatures increase, temperatures at the high end of the scale that were once statistically very rare (i.e., extreme) will become considerably less rare.

I agree completely.

However, Hansen is of the opinion that once this knowledge becomes widely known and associated with human greenhouse gas emissions (one of the many ways that human activity can alter the climate), that the majority of people will hasten to support actions (legislative, regulative) aimed at curtailing such emissions.

I completely disagree. [Read more →]

August 23, 2012   20 Comments

Electricity Policy Prime Time: Part II–Analytical, Process & Supply Issues

In an earlier post, I asked readers to consider four thought experiments regarding the reprioritization of our public-policy work on energy. Here is my response to your much-appreciated comments and a proposed path forward.

Thought Experiment 1. Let’s demote oil and climate change to secondary status as analytical issues.

To my surprise, no one seemed to disagree with my proposal. Yet popular media coverage of these issues is probably 90+%.

Thought Experiment 2. Let’s elevate the dialogue about fundamental electric industry reform to primary status.

Again to my surprise, no one seemed to disagree with my proposal, which leads me to wonder why this issue does not get the attention it deserves. My best guess is you cannot boil the solution down to a three word sound bite (Drill Baby Drill! or Climate’s Always Changing!). Maybe it will take a major catastrophe to get our attention à la India.

I make many analogies to other major, successful industry restructurings from statist to market models: airlines, railroads, natural gas, telecommunications, and trucking. I don’t remember that they were either reduced to a three-word slogan or needed a catastrophe to get D.C. moving.

Why is electricity different? Is it possible that we free market fetishists have not put forth a coherent model?

Thought Experiment 3. Let’s debate what is wrong with current electric industry policy.

This will be the subject of this post, more later.

Thought Experiment 4. Let’s identify the set of policies needed to permit the electric industry to enter the 21st Century.

This will be the subject of future posts after we have carefully defined the problem. [Read more →]

August 22, 2012   8 Comments

CONSOLIDATED UTILITIES COMPANY ANNUAL REPORT (Management’s Letter to Stockholders)

Dear Fellow Shareholders:

By now you have heard news reports of Consolidated Utilities (ConU)’s $1 billion cost overrun on the construction of our nuclear plant. However, that’s just part of the good news we have to report. If all goes according to plan, we will be able to overrun another $1 billion before the project is complete. You are, of course, aware this extra $2 billion in our capital base will mean higher earnings for decades to come with increased dividends for us all. We are, indeed, a green company.

This achievement brings with it challenges that your management team is well equipped to handle. While these cost overruns and associated incremental profitability is our fiduciary duty in our world of public-utility regulation, they come with increased public criticism, large expenditure of political capital, and problems for our regulatory allies.

Defending Ratebase Inflation

Your management has responded to the public relations-public sector issue proactively as you have come to expect. We are building on our strengths and experience with these specific measures:

· We have set up a full-time damage control “war room” to take the place of our weekly meetings on stifling critics and manipulating the press.

· We have expanded the scope of services from our outside PR firm. They have been tasked to collect excuses used by other utilities in the past. These excuses will be duly polished and passed to our state regulators where they can be used to provide them with cover.

· Our law firm’s energy practice group now has experienced criminal defense attorneys as part of their team. We are ready for the lawsuits that are sure to come.

· We are continuing our practice of ruining the lives of whistle-blowers and making lucrative arrangements for those who help cover-up our mistakes, falsehoods and corruption. [Read more →]

August 21, 2012   3 Comments

Positive News from AWEA: “Layoffs mount in U.S. wind power manufacturing plants this week”

Unfortunately the [wind] industry has begun letting workers go up and down our American manufacturing supply chain…. Congress must [extend subsidies] now to give wind energy a stable business environment… to … save 37,000 American jobs by the first quarter of next year.”

    - Denise Bode (AWEA), Press Release, August 9, 2012

“He who lives by a legalized sword, will perish by a legalized sword.”

    - Ayn Rand, “The Moratorium on Brains II,” Ayn Rand Letter, 1971

The wind industry is imploding, and the American Wind Energy Association (AWEA) is providing the details. Suffice it to say that there will be no Jay Leno at the next AWEA confab.

With accumulating layoffs, extending the Production Tax Credit (PTC) is increasingly becoming too late. AWEA has been warming about 10,000 job losses by September 1, and now the number is 37,000 in the next seven or so months.

Wind companies are wising up to the fact that consumers don’t like their product. And who wants to bet their future on politicians with federal deficit reduction being the elephant in the room? If AWEA is to be believed, there will not be much of an industry to save in a matter of months.

Here are the latest layoff announcements, according to AWEA:

  • In Tulsa, Okla., DMI Industries announced 167 workers will be unemployed by November;
  • In West Fargo, N.D., DMI Industries said 216 jobs stand at risk; [Read more →]

August 20, 2012   7 Comments