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Category — Political capitalism/rent-seeking

William N. Niskanen: Economist, Scholar, and Foe of Political Capitalism

The longtime chairman of the Cato Institute, William N. Niskanen, passed away last week at age 78. We shared the podium a few times on energy issues, and I admired his Enron project at Cato that resulted in two books, Corporate Aftershock: Lessons from the Collapse of Enron and Other Major Corporations (2003) and After Enron: Lessons for Public Policy (2005).

Like virtually everyone else who knew him, I remember Bill as a scholar and gentleman. He had one tone of voice and reliably imparted insightful logic. He was what I like to call a scholar’s scholar, role model for the rest of us.

Career

William Arthur Niskanen Jr. (1933–2011), born in Bend, Oregon, graduated from Harvard University with a degree in economics in 1954. He earned his economics doctorate in 1962 from the University of Chicago.

After teaching at the the University of California at Berkeley, Niskanen Joined Ford Motor Company in 1975. Forced out at Ford (see below), Bill worked as an economist at the Rand Corp., the Department of Defense, and the Office of Management and Budget.

Niskanen then joined Ronald Reagan’s Council of Economic Advisors (1981–85), after which he joined Cato where he served as chairman for 23 years before becoming chairman emeritus in 2008. He was the ‘establishment’ figure that Ed Crane needed badly for Cato to reach the next level, and Ed pulled off the deal to make it happen.

‘Blunt Libertarian Economist’

The New York Times obituary described Niskanen as “a blunt libertarian economist.” But Cato’s Gene Healy, in his tribute Farewell, to the Most Honest Man in Washington, brought attention to the “vastly more interesting and admirable” side of the man. “Bill Niskanen had the kind of character that’s vanishingly rare in Washington DC,” wrote Healy. “He was a man who put principle above partisanship and personal gain.”

Bill Niskanen will be remembered for various things. One was his root insight into how the government really works as versus the romantic view of government.

The bureaucrat, in Niskanen’s words,  “is a ‘chooser’ and a ‘Maximizer’ and … not just a ‘role player’ in some larger social drama.” [Bureaucracy & Representative Government. New York: Aldine Atherton, 1971, p. 5.]

Ford Motor Company: A Great Freedom Moment [Read more →]

November 4, 2011   No Comments

“Rob Bradley at Enron” (for the record)

“Sorry to bother you with this…. Rob is obviously not a fan of renewables or the global warming issue.  Unfortunately, he works for a company that is.”

- “Rob Bradley’s Writings.” Tom White [chairman & CEO of Enron Renewables Energy Corp. ] to Ken Lay [chairman & CEO of Enron Corp.], June 8, 1998.

The Confluence, a blog advertising itself as “Democrats Putting Principle Over Party,” recently criticized a new initiative of the Institute for Energy Research, Stop the Energy Freeze. After reciting some peak-oil arguments against IER’s case for expanding access and production of domestic oil and gas resources for new jobs and greater BTUs, the post Sunday: Spreading the mess to YouTube goes after yours truly.

I also bothered to look up who was behind this Stop the Energy Freeze campaign.  It’s the Institute for Energy Research and it seems to be particularly concerned with oil that is currently off limits in the Gulf of Mexico, for some strange reason.  Maybe that’s because they’re based in Houston?  Or maybe it’s because it’s because it’s been touted by Rush Limbaugh who hasn’t met a resource (natural or human) that he hasn’t considered exploitable?

Ahhh, this little tidbit is interesting.  The co-founder and CEO of The Institute for Energy Research is some dude named Robert L. Bradley.  And HE used to work for Enron and Kenneth Lay.  You know, the Smartest Guys in the Room?  The ones whose traders used to yuck it up about how they were going to f$^& over some Granny in California by manipulating the energy market?  The company that made all of its employees invest in Enron stock in their 401Ks and then locked them out of their accounts when the price plummeted so that they lost EVERYTHING? 

Yeah, that Enron.  Bradley was the PR guy.  He’s also an adjunct “scholar” of the Cato Institute.  How charming.  Is that where he learned to deceive unsuspecting youtube viewers?  Is the liberty to make the end really justify the means ensconced in the Constitution somewhere?  Are we free to pull the wool over citizen’s eyes with bullshit?  I guess it’s the responsibility of every rugged individualist to be on his guard.

Well, I founded (not co-founded) IER, and headquarters is in Washington, D.C. (not Houston where I continue to work). And most importantly, I was a quite arguably public-policy whistleblower against “green” energy inside the company. [Read more →]

October 20, 2011   4 Comments

U.S. Chamber of Commerce: Free Market Recommendations for Congress & Obama (oil and gas prominent in potential job bonanza)

Previous posts at MasterResource have been critical of the energy-related positions of the U.S. Chamber of Commerce, such as The U.S. Chamber’s Energy Security Index: Where’s the Definition? by Robert Michaels and Dear U.S. Chamber of Commerce: Why Attempt to Resuscitate a Brain Dead Climate Bill? by yours truly.

The Chamber, in fact, was waxed and waned for and against the free-and-neutral market for virtually its whole existence. Such is life in political capitalism where special government favor is sought and received by business.

John T. Flynn’s 1928 essay, “Business and the Government”   (Harper’s Monthly Magazine), criticized the Chamber motto More Business in Government and Less Government in Business as ”sloganeering.”

Flynn noted that new laws were coming far less from the imaginations of legislators as from “the legislative program committees of trade associations or from the special counsel of trade groups … backed often by resolutions from trade conventions and chambers of commerce.”

The Chamber, complained Flynn, was falsely selling a view of business “as a huge giant, gagged and shackled like a moving-picture galley slave to his oar,” to which Flynn forwarded his own ideal for the Chamber: Less business interference in government and more statesmanship in business. (Quoted in Bradley, Capitalism at Work, chapter 6, pp. 172–74.)

Flynn, early on, captured the essence of free-market capitalism and Principled Entrepreneurship™.

The September 5th Letter

The September 5th letter from the Chamber of Commerce to the U.S. Congress and President Obama, reprinted below, is noteworthy for its free market flavor. With government running on empty, and the public mood against Big Government in most areas, the Chamber has come a long way from its disappointing cap-and-trade position on carbon dioxide (CO2) emissions and its watered down energy White Paper.

The six point jobs plan was singed by Thomas Donohue, president and CEO of the Chamber. [Read more →]

September 8, 2011   5 Comments

The ‘Economic Means’ vs. the ‘Political Means’: Franz Oppenheimer Makes a Key Political-Capitalism Distinction

[Editor Note: With T. Boone Pickens (et al.) trying to get natural gas vehicles off the ground with a $80,000 per vehicle special tax break, it is worth examining the origins of the political means versus the economic means to business (profit/loss) success. All roads lead to Franz Oppenheimer (1864–1943), a German sociologist/political scientist who saw capitalism's business leaders at work.]

“I propose in the following discussion to call one’s own labor, and the equivalent exchange of one’s own labor for the labor of others, the ‘economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means’.”

- Franz Oppenheimer, The State. New York: Free Life Editions, 1908 (1975), pp. 24-25 (full quotation at end of blog).

MasterResource sharply distinguishes between enterprise that is motivated by and dependent upon consumer demand in a free market, and profit-seeking that is abetted by special government favor (SGF). SGF can be a special provision in the tax code, a check from the U.S. Treasury, or a regulation that benefits a company or whole industry at the expense of consumers or taxpayers.

The useful terms economic means and political means were introduced by Franz Oppenheimer in 1908 (see above) and have become part of libertarian political economy as explained at Wikipedia: [Read more →]

June 14, 2011   1 Comment

Wisdom from T. Boone against Rent-Seeking Pickens (remember when you said ….?)

“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”

- Milton Friedman. “Which Way for Capitalism?” Reason, May 1977, p. 21.

Special government favor. A little something for nothing at the other’s expense…. Sure, a particular business or industry can gain in the short run. But when everyone is getting the booty, almost all lose.

Just look where government is today. The chronic, gargantuan federal budget deficit is testament to the Enrons then, GEs now  receiving government subsidies from either the U.S. Treasury or the tax code. The rest of us pay (or will pay) what the rent-seekers are getting and not paying for (outside of their lobbying costs).

Business has been a force for regulation. In the twentieth century, the energy industry was behind the large majority of major government intervention with oil, natural gas, and coal. As I concluded in Oil, Gas, and Government: The U.S. Experience:

As a rule, the free market was the “default” situation into which government intervention was introduced to achieve business objectives. In the great majority of cases, identifiable industry coalitions led the way. The history of regulation of the oil and gas industry is the story of how compromise and pragmatism, in the absence of principle, created interventionist pressure at every turn. When it was costless, the industry proclaimed its support for the free market in principle. But this philosophical leaning meant little when more was at stake. (1)

The same is true with electricity, a story that my forthcoming book, Edison to Enron: Energy Markets and Political Strategies, will detail through the rise and fall of the father of the modern power industry, Samuel Insull.

And so it is with 21th-century energy interventionism. Whether Enron saving the domestic wind industry or Pickens trying to politically wedge natural gas in the transportation market by T. Boone Pickens, political capitalists are expanding the government side of the mixed economy.

T. Boone Pickens circa 1987, 2000

Guess what? The pre-Pickens Plan T. Boone gave ample warning against the very behavior that characterizes him today.

If I were a congressman questioning Pickens under oath, I would read him the following quotations and ask him for comment–and then get to the sour economics of whatever he is pushing for the government to push on consumers.

Four quotations (with references) follow: [Read more →]

May 27, 2011   6 Comments

German Wind Capacity Revisited: High Cost versus Least Cost

My post last week evaluated the claim that wind generation can save money for power pool customers.  It was found that the supposed savings could be realized only if the elephant in the room – the above-market feed-in tariff – was ignored.  In other words, consumer payments for electricity from a power pool was half of the story; the real price had to include the consumer-qua-taxpayer funding of the feed-in-tariff (FIT).

And with this two-part scheme, games are played. Wind generators can bid a low price into the pool only to receive a higher FIT, which gives them an incentive to underbid. This might reduce the pool price but not overall cost to Germans for electricity.

Investing in New Generation: What Makes Sense?

If a generation resource is a good investment for its developers then it must return a profit to them.  In a normal electricity market this profit comes from supplying a segment of the demand (peak, intermediate/cycling, baseload) from a plant that is efficient technically and financially.

For existing plants and determinations of electricity costs in the here and now we can figure out the average cost of supplying electricity by calculating the weighted average cost of supply for each time period in the market every day.  If the addition of one generation source raises this weighted average without improving service quality or reliability, then it is not economical and would generally not be chosen in a well-functioning market.

But what about the future?  Electricity suppliers must invest large sums in new generation plants with the expectation that these plants will meet demand at the least cost.  This cannot be known with certainty, and mistakes are made all the time, especially when government policy and rent-seeking drive investment choices.

Transmission network operators – those in charge of the “natural monopoly” part of the power business – try to reduce the risk attendant to future supply by figuring out the least costly way to supply power and energy to their customers in the future, including the wires to transmit the electricity.  They have to take account of a long list of considerations: investment cost, fuel supply, emissions and licensing regulation, proximity to existing load centers and transmission nodes, transmission congestion – you get the idea.

The transmission system operator also has to pay attention to public policy – renewable energy mandates (“portfolio standards”), federal tax incentives (producer tax credits for wind and solar), feed-in tariffs, powerful politicians who do not want their vistas impaired – in a host of ways that directly impact their views of an optimal future generating system.

What Does the Wise Transmission Operator Do?

A wise investor in generation will first figure out what is economic to build? what are the physical constraints on the system? and finally, what limitations will public policy put on otherwise least cost generation choices?

A Case Study of “Germania”[i]

Let us imagine that we have a rather large and wealthy country to play with, one that currently has about 129 GW of installed generation capacity.  Further, we can imagine that this wealthy country, responding to its powerful environmental movement, has decided to

(i) phase out nuclear power;

(ii) limit future coal power-plant operations;

(iii) build a lot (a lot!) of wind generation plants; and

(iv) bring in most of its gas supply from Russia at prices linked directly to refined oil products and crude (i.e., high and volatile). [Read more →]

September 7, 2010   4 Comments

Blowout Prevention Act–or Oil-Production Prevention Act?

Today, the House Energy and Commerce Subcommittee on Energy and Environment will hold a hearing on the Blowout Prevention Act of 2010. A draft of the legislation and other pertinent documents are available on the Subcommittee’s Web site.

Although the draft legislation and hearing documents address serious problems brought to light by the Committee’s ongoing investigations, the Blowout Prevention Act would throw the baby out with the bath water.

To restate the obvious, although oil spills are bad, oil is good. Without oil, there would be no modern commerce and no mechanized agriculture. Life for most people would be “nasty, brutish, and short,” and many of us would not even be alive. Another obvious point — British Petroleum (BP) is to blame for the worst environmental disaster in U.S. history, not the oil industry as a collective entity.

Yet the draft legislation that Chairmen Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) will promote at today’s hearing could shut down all offshore drilling in the United States.

The draft text says the federal government “shall not issue a permit to drill for a high-risk well unless the applicant for such permit demonstrates . . . and the appropriate federal official determines that . . . the applicant has an oil spill response plan that ensures that the applicant has the capacity to promptly stop a blowout in the event the blowout preventer and other well control measures fail.”

Sounds innocent enough. However, the bill defines as “high-risk” any “offshore oil or gas exploration or production well,” not just ultra-deepwater rigs. In addition, at both the June 17 Oversight and Investigations Subcommittee hearing and the June 15 Energy and Environment Subcommittee hearing, Chairmen Waxman, Markey, and Bart Stupak (D-Mich.) emphasized that none of  the major oil companies, individually or in combination, could have stopped the spill after the blowout preventer failed:

  • “BP failed miserably when confronted with a real leak, and ExxonMobil and the other companies would do no better.” — Chairman Waxman, June 15
  • “It could be said that BP is the one bad apple in the bunch. But unfortunately, they appear to have plenty of company. Exxon and the other oil companies are just as unprepared to respond to a major oil spill in the Gulf as BP.” – Chairman Stupak, June 15
  • “Yet when you’re asked can you stop the massive quantities of oil that are now ruining the beaches and marshland, killing the wildlife, and devasting the economy, you [BP, ExxonMobil, Chevron, Shell, ConocoPhillips] say no. You say you’re not well equipped to deal with it, and these catastrophic impacts are simply unavoidable.” — Chairman Markey (hearing transcript, pp. 220-221), June 15

The implication is obvious: The federal government ”shall not” issue any more permits for offshore drilling, because nobody knows how to “promptly stop a blowout in the event that the blowout preventer and other well control measures fail.” Rep. G.K. Butterfield (D-N.C.) put it this way: “BP ignored a very simple rule. If you can’t plug the hole, don’t drill the well.” But, as the BP disaster shows, some holes cannot be plugged, at least not in time to prevent gigantic spills. Logically, the bill implies that no permits to drill should be granted and that existing permits should be revoked.

How might Chairmen Waxman, Markey, and Stupak reply to this criticism? [Read more →]

June 30, 2010   6 Comments

Green Jobs: The Last Redoubt (invoking military images of us-versus-them)

Over the past few weeks, with more dents accumulating in the armor of warmism, a new battle line is taking shape: ” The U.S. economy is ill, energy is important, green jobs will save us, promote green jobs, give us your money.”  Or something like that.

In fact, the shock troops of the green job army are now promoting the phrase “global weirding” to replacing global warming.  There is also terminological retreat on the green jobs side. You see green tech is not actually going to do much positive for the economy, you should think of it rather as a form of “insurance,” against global weirding, I suppose.

As we limp into our second year of crony capitalism under Barack Obama, with small businesses loath to risk their funds in what is increasingly a rigged crapshoot, and the importance of having friends in Washington all the more vital, government-backed green jobs appear to many as the only way out.

Indeed, as the skirmish lines have formed up the green jobs proponents have tried to imbue the subject with the same kind of political insulation that AGW theory previously enjoyed.  Criticizing money spent on green jobs is tantamount to rooting for America to fail.  Don’t believe me, here’s Tom Friedman of the New York Times, chief cheerleader for government-backed (coerced?) green technology promotion quoting Joe Romm approvingly: “China is going to eat our lunch and take our jobs on clean energy — an industry that we largely invented — and they are going to do it with a managed economy we don’t have and don’t want,” And then there’s Tom Friedman’s approach to international economic competition: “Mr. Wen, I just have one thing to say to you: We are going all in on clean tech. I’m going home and I’m going to get through the U.S. Senate a cap-and-trade bill, a carbon price, a carbon tax, whatever it is that will trigger massive scale investment in clean tech in America. And please take this message back to China: We will bury you. We are going to bury you in clean tech.”

This will be the first trade war in history over insurance. [Read more →]

February 19, 2010   6 Comments

Dear U.S. Chamber of Commerce: Why Attempt to Resuscitate a Brain Dead Climate Bill?

“Politically oriented capitalism, whatever particular form it takes, involves the granting by the state of privileged opportunities for profit. Such openings are available only to those with connections or to those who can pay for influence.” 

-          Scott, James. Comparative Political Corruption. Englewood Cliffs, NJ: Prentice-Hall, 1972, p. 52.

Joe Romm at Climate Progress (Center for American Progress) is holding out hope against hope that a climate bill–just about any climate bill–will be passable in 2010. He regurgitates a Boston Globe piece under the headline, Graham, Kerry, Lieberman meet with Rahm Emanuel — and then Chamber of Commerce, whose VP of Gov’t Affairs said, “generally we were in synch”!

This brings up the question: why is the Chamber of Commerce negotiating with the enemies of true (consumer-driven) economic recovery?

This incident reminded me of a section from my book Capitalism at Work (chapter 6, pp. 172–74) that deals with the Chamber of Commerce in a historical sense. (There is a Ken Lay surprise–read on.)

A collection of speeches given in 1966/67 by the president of the U.S. Chamber of Commerce was published by McGraw-Hill as The Business of Business: Private Enterprise and Public Affairs. M. A. “Mike” Wright, chairman of Humble Oil & Refining Company (now ExxonMobil), urged his fellow executives to be more proactive in public and government affairs to improve the business environment and better society. “Virtually every business decision today is affected by public laws, regulations, and policies,” he stated, yet industry leaders were often “indifferent” or “negative” rather than “creative” and “positive” toward lawmaking. [Read more →]

January 26, 2010   5 Comments

"[Nuclear] Fortunes in Cap-and-Trade" (Part III of “Political Capitalism: Understanding the Beast that Broke the Cage”)

This post by Richard Schlesinger of EnergyBizInsider is reproduced with permission. The problem of rent-seeking by corporations (political capitalism) has been explored previously at MasterResource.

Although the electric industry has endorsed the concept of cap-and-trade as the least onerous approach to carbon regulation, at least one major company endorses it with unalloyed enthusiasm. Exelon not only supports the idea, it stated in a second-quarter conference call to analysts, which it posted to its Web site, that it expects to see a “$1.1 billion and growing annual upside to Exelon revenues from implementation of Waxman-Markey.” Is that number real or simply wishful thinking? Does Exelon know something that’s escaped the rest of us?

Actually, if one makes a couple of assumptions, the potential earnings boost is very real. Here’s how it works. Exelon’s 17 nuclear plants, the largest nuclear fleet in the country, generated just over a record 132 million megawatts-hours of power in 2007. That’s fact. Assumption number one: The Senate follows the House and passes an unchanged version of the Waxman-Markey bill.

At the start of the program, about 85 percent of the permits would be given away. Over time, the percentage of free permits would decline. About 15 percent of the permits would be auctioned off to begin with, and that percentage would increase over time. What concerns us is the value of these permits, because that value translates into increased costs for generation. Which brings us to assumption number two: The EPA estimates that during the early years of the program, a permit to emit one ton of CO2 would cost approximately $15. [Read more →]

January 9, 2010   2 Comments