January 2012

New Credit Card Regulations Wipe Out Cash Back and Rewards Programs, Punish Responsible People

by Hans Bader on August 21, 2009 · 10 comments

in Economy, Legal, Politics as Usual, Regulation, Sanctimony

If your credit is good, or your credit card balance is low, you may soon pay more on every credit card bill. Why? Congress passed a misguided new credit card law, the Credit Card Accountability Responsibility and Disclosure Act of 2009. As a result of it, you may end up paying an annual fee. And you may end up losing your percentage rebates, your cash back, or your rewards program.

The new law arbitrarily limits credit card companies’ ability to increase rates on credit card balances, even when a cardholder’s balance has been rapidly increasing — meaning that a sensible bank might raise the interest rate, because a rising balance drives up the risk that the credit card company won’t get paid what it’s owed. (Increasing numbers of credit cardholders have run up big balances in recent years, then failed to pay them off).

In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers’ percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.

One of my co-workers just emailed me that he has recently been notified that he will be charged an annual fee on what he calls “the best reward card I ever found.” It’s the same card I use for many of my purchases.

The new law is supposed to “protect” cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.

If you make it harder for credit card companies to charge risky people higher rates than responsible people, they’ll increase rates for everyone, or make it harder for people to get credit cards in the first place.

That’s how it used to be, a generation ago, before the Supreme Court ruled in 1978 that states couldn’t restrict the interest rates charged by out-of-state credit card companies (in the Marquette National Bank case). States set strict limits on how much interest credit card companies could charge their citizens — even those who were high-risk borrowers with bad credit. As a result, many people couldn’t even get credit cards, and the vast majority of consumers got charged an annual fee.

That ended after the Supreme Court said states couldn’t regulate credit card companies outside their borders. That killed off most state regulation, since most credit card companies moved to states like South Dakota that didn’t restrict interest rates. As law and economics professor Todd Zywicki notes, consumers benefited enormously from this: “The effect was to unleash an era of extraordinary competition and pro-consumer financial innovation. Marquette spurred competition and innovation, leading to vast improvements in payment card services for consumers along with the elimination of annual fees on cards, lower interest rates, and the beneficial uncoupling of retail and credit transactions, thereby permitting the rise of the Internet and small businesses.”

The new federal law imposes some of the same archaic burdens that existed before 1978, and it will have many of the same bad results.

As economists and banking experts have noted, state credit regulations “often backfire, hurting the very consumers that they are intended to protect by making credit more expensive and less available.” State interest-rate ceilings, for example, “dry up the flow of credit to the low-income and high-risk borrowers” and force some “borrowers to turn to loan sharks and disguised loans.”

In other countries which restrict credit card interest rates more, it’s much harder to get a credit card, annual fees are rampant, and rewards programs basically don’t exist. My wife is from France, where there are stricter limits on the interest banks can charge credit cardholders. As a result, she never could get a credit card in France, even though she always had money in the bank, and never missed a payment on anything. She finally managed to get a debit card, but was charged an annual fee for it.

Only after she came to America, which has less regulation, did she manage to get a credit card. Her credit cards came with rebates and no annual fee. But thanks to the regulations in the new credit card law, she may soon lose her cash back and get charged an annual fee.

Earlier, the government pushed through $250 billion in mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Now, it’s applying the same destructive, redistributionist philosophy to credit cards.

Commercial lawyer John Hinderaker notes, “Congress has just enacted new credit card regulations intended to limit banks’ ability to collect money from distressed or incompetent customers. The New York Times explains the consequences:

‘It will be a different business,’ said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. ‘Those that manage their credit well will in some degree subsidize those that have credit problems.’

“The competent subsidizing the careless . . . Of course, the new rules will cause banks to lose interest in extending credit . . .

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

These are not the only counterproductive lending regulations on the horizon. There are also proposals in Congress to create a new bureaucratic agency to pressure banks to make risky, low-income loans — even though such forced lending contributed to the mortgage meltdown. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”

Friday Fun: Viking Funeral

by Ryan Young on August 21, 2009

in Culture, Odds & Ends

Today’s American Spectator Online contains my take on Brett Favre’s comeback with the Vikings.

I think it’s great for Brett. He loves to play, so he might as well. I am less sanguine about how he’ll affect his new team.

CEI Weekly: Remembering Rose Friedman and Robert Novak

by Charles Huang on August 21, 2009

in Culture, Zeitgeist

CEI Weekly is a compilation of articles and blog posts from CEI’s fellows and associates sent out via e-mail every Friday. Also included in the Weekly newsletter is a brief description of CEI’s weekly podcast and a feature on a major CEI breakthrough made during the week. To sign up for CEI Weekly, go to http://cei.org/newsletters.

>CEI Weekly
August 21, 2009

>>CEI Remembers Rose Friedman and Robert Novak
>>Fred Smith and Ryan Young write on the contributions of Rose Friedman to human freedom.
>>Fred Smith, Myron Ebell, and Gary Howard write on the distinguished career of Robert Novak.

>>Shaping the Debate
Ryan Radia’s Op-ed in the Washington Examiner
Greg Conko’s Regulatory comments to the FDA on CEI.org
Fred Smith’s Article in the Concise Encyclopedia of Economics
Michelle Minton’s Letter in OpposingViews.com

>>Best of the Blogs
by Hans Bader
“ObamaCare is all about rationing,” says one of Obama’s own advisers, Martin Feldstein. Feldstein… Civil-libertarian and former ACLU board member Nat Hentoff says that after reading Obama’s health-care plan, he was more scared of the Obama Administration than any other Administration he’s lived under.
by Ivan Osorio
The former director of the Las Vegas chapter of the far-left advocacy group ACORN (Association of Community Organizations for Reform Now) has agreed to testify against the organization, in exchange for a plea to reduced charges.
by John Berlau
After a long and protracted battle between the U.S. and Swiss government, Swiss bank UBS AG agreed to turn over the names of at least 4,450 U.S. holders of accounts in Switzerland… American civil liberties advocates on either side of the political fence should be alarmed by the U.S. government’s sweeping disregard of privacy interests in its original demands to the Swiss government, and should encourage their home country to never treat privacy and another country’s sovereignty so cavalierly again.
by Hans Bader
Obama has nominated David Michaels, an anti-gun activist, to head the federal Occupational Safety and Health Administration (OSHA)… Michaels also has links to wealthy breast implant lawyers, who relied on junk science to drive silicone implants from the market, even though they remained available to consumers in most other Western countries.

>>LibertyWeek podcast
In episode 56, we start with the White House compromising on healthcare, the unintended consequences of the Credit Cardholders Bill of Rights and a Pirate (party) invasion of Britain. We continue with a scandalous blast from the past on the New York City waterfront, an appreciation of the life of Les Paul from Ivan Osorio and some fender-bending Olympic News.

>>Support CEI
Like what you read?
The Competitive Enterprise Institute’s 25-year record of success is made possible by our over 3,000 supporters. Make sure to stop by www.cei.org/support and make a donation to continue your support or become a supporter. Curious about all the possible ways to donate to CEI? Contact Al Canata at acanata@cei.org or 202-331-2280 to find out more.
To sign up for CEI Weekly, go to http://cei.org/newsletters.

Charles Huang
Web and Media Associate
Competitive Enterprise Institute
202-331-1010

Regulation of the Day 37: Lemonade Stands

by Ryan Young on August 21, 2009

in Deregulate to Stimulate, Economy, Nanny State, Regulation, Regulation of the Day

It is illegal for children to sell lemonade in New York City without a permit.

Clementine Lee, 10, was recently fined $50 for selling lemonade in Riverside Park. Fortunately, “A spokesperson for the Parks Department says the agents showed poor judgment and that the ticket will be dismissed.”

This translates roughly to “we were getting too much bad publicity.”

(Hat tip: Reason Daily Brickbats)

The Great Health Care Reform Trilemma

by Alex Harris on August 21, 2009

in Healthcare

I recently posted on facebook about health care reform and trying to “have it all.” I’m no expert, but it seems to me that you can have two of the following three things:

1. Increased benefits

2. Reduced costs

3. More government involvement

The one you don’t pick will have to go way in the opposite direction.

So, if you want to get the government more involved and increase benefits, costs will necessarily skyrocket. Didn’t we learn this with Medicare Part D? Any arguments about providing more entitlements somehow reducing the total amount of entitlements just don’t work. Insurance produces moral hazard. People overconsume goods they get for free on the margin. That’s Econ 101. The Democrats may have realized this and so proposed various cost-cutting measures, like panels to determine who gets care and who doesn’t.

A bunch of nutters on the right got all up in arms about the panels. Why? Because they would reduce benefits. Of course if you want government-run health care, you’ll have to ration. But, my god, isn’t this better than government-run health care that doesn’t ration? Government entitlement programs have unfunded liabilities of $107 trillion, an order of manitude above what we weakly label the “national debt” and above GDP. Most of that is from Medicare. When we added another government health program, prescription drug coverage for Medicare, this figure rose by $16 trillion, greater than both debt and GDP. And you want to add on more government health care without any rationing to control cost? Seriously?

So, the “death panel” mongerers want #1 at any cost, though it sounds like some may (slightly) prefer #1 and #2. And the Dems want #3 at any cost, though it sounds like some may (slightly) prefer #3 and #2. So, what will we get? #1 and #3. Again. Which means costs will skyrocket. Again.

Of course, it would be best if we just got #1 and #2, by getting the goverment out of health care. But that’s not going to happen. Instead, we basically face the choice between government-run health care that rations and government-run health care that doesn’t and so utterly destroys the nation’s economy. Which would we rather have? This is the choice that’s lost in the “death panels” rhetoric. Nat Hentoff apparently would rather have no rationing and exploding costs. Marty Feldstein doesn’t face this question squarely, instead hoping for #1 and #2. Which should libertarians prefer: a limited new government package that provides minimal care (e.g. with high deductibles) or a big luxury package that provides everything? I would think we should prefer the minimal package (so long, of course, as private health care isn’t outlawed and so people can still get additional care elsewhere).

So, yes, let’s keep pointing out the trilemma. But, if our only options are government-run health care with “death panels” and without them, I’ll take the one with the death panels.

Yes, ObamaCare Will Likely Cover Illegal Immigrants

by Hans Bader on August 20, 2009 · 3 comments

in Healthcare, Legal, Politics as Usual, Sanctimony

Media fact-checkers have caught Obama telling several falsehoods about his health-care proposals. But they have let him get away with other false claims, such as his claim that ObamaCare would not cover illegal immigrants. As John Rosenberg, an expert on discrimination law, explains, the health-care legislation backed by Obama would indeed likely cover illegal immigrants.

While a House health-care bill backed by Obama purports to exclude exclude illegal immigrants from receiving certain taxpayer-funded subsidies, it effectively includes them, since it blocks any way of determining whether or not recipients of government health insurance are in the country legally. This is because leftist lawmakers deliberately blocked Republican attempts to require verification that recipients of federally-subsidized health insurance are citizens or in the country legally.

One of the “Blue Dog” Democrats who voted for the bill in committee now admits that it does cover illegal immigrants.

As columnist Jay Ambrose notes, “Democrats want to make it impossible to find out if an applicant for benefits is here illegally or not, despite specific wording in bills saying they don’t qualify. Republicans have tried on a number of occasions to include amendments requiring more than what Democrats want — just writing down a Social Security number that will never be checked — and the answer is, oh my, this is an invasion of privacy, or that mistakes could result. It’s an invasion of privacy to find out whether someone is or is not a citizen and therefore eligible for something taxpayers are providing? What blather. All of us have to produce IDs of one kind or another on a host of different occasions, from driver’s licenses, to passports, to birth certificates. As for mistakes, tell me one single interaction between the government and citizens in which mistakes are not possible. I am waiting. I am still waiting. ‘Saying that illegal immigrants cannot benefit while at the same time blocking verification is akin to passing a law that sets the legal drinking age at 21 years and then preventing bars from checking a patron’s identification,’ writes Rep. Steve King, R-Iowa, in an op-ed piece in The Washington Times, and it seems to me that about says it.”

Covering illegal aliens is problematic because they lack the same responsibilities as citizens. Illegal immigrants are exempt from the taxes and penalties contained in ObamaCare, even though they are effectively able to access its benefits due to the lack of eligibility verification safeguards. Illegal immigrants should not receive preference.

Yet the Congressional Hispanic Caucus pushed to have illegal immigrants benefit from ObamaCare.

The illegal-alien issue is certainly not the biggest health care issue. But it does shed light on the media’s willingness to gullibly accept many of Obama’s claims at face value. Some media fact-checkers have claimed that ObamaCare won’t cover illegal immigrants simply because Obama says so.

But Obama’s credibility is undermined by his long line of broken promises, such as his pledge to enact a “net spending cut,” which he broke in a big way with proposed budgets that will explode the national debt through $9.3 trillion in massively increased deficit spending.

Obama’s own advisors have called into question his claims about how ObamaCare will supposedly let you keep your health coverage while cutting costs.

“ObamaCare is all about rationing,” says one of Obama’s own advisers, Martin Feldstein. Feldstein earlier noted that Obama’s health-care plan would harm people with insurance, and massively raise taxes.

ObamaCare is penny-wise and pound-foolish, cutting reimbursement for crucial things like anesthesia to ridiculously low levels (and thus aggravating a shortage of anesthesiologists and doctors), even while increasing spending on wasteful frills.

Legal experts and the U.S. Commission on Civil Rights have questioned the constitutionality of major provisions of ObamaCare.

Fact-checkers say Obama is lying about health-care.

Feldstein, a Harvard professor, warns that “For the 85 percent of Americans who already have health insurance, the Obama health plan is bad news. It means higher taxes, less health care and no protection if they lose their current insurance because of unemployment or early retirement.” Obama’s plan would “cost more than $1 trillion,” and raise the top federal “income-tax rate from 35 percent today to more than 45 percent,” he notes.

As CNN earlier noted, Obama’s plan would take away “5 freedoms,” including the freedom to choose your doctors, the freedom to choose what’s in your plan, the freedom to keep your existing plan, the freedom to be rewarded for healthy living, and the freedom to choose high-deductible coverage.

Earlier, we described how Obama’s health-care plan would destroy many affordable health-care plans, raise taxes on the middle class, and break Obama’s campaign promises, as well as his recent pledge that “if you like your health care plan, you can keep it.”

Most other countries do not provide national health insurance for illegal immigrants.

New Schumpeter Book

by Ryan Young on August 20, 2009 · 1 comment

in Bailout Watch, Culture, Economy, Stimulus to Nowhere

In the tradition of the Reader’s Digest condensation of F.A. Hayek’s The Road to Serfdom, Joseph Schumpeter’s Can Capitalism Survive? Creative Destruction and the Future of the Global Economy is coming out on September 1.

Can Capitalism Survive? is a condensation of Schumpeter’s 431-page masterwork of 1942, Capitalism, Socialism, and Democracy. The timing couldn’t be better. With economic crisis and recession dominating the news, people are as interested in the topic as ever. The trouble is, they don’t understand it very well. This book should help.

In this age of bailouts and cash-for-clunkers, Schumpeter’s theory of creative destruction is crucial for understanding why some policies will work and others will fail.

Putting Schumpeter’s ideas in a more accessible format does not dilute them, as some ivory tower types will no doubt allege. It increases their impact. Economic literacy is a good thing. The economic way of thinking badly needs to be popularized. May many more distillations of major economic works follow this one.

Cash for Clunkers Sputters to an End

by Ivan Osorio on August 20, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Features, Mobility, Zeitgeist

The Transportation Department announced today that it will wind down the Cash for Clunkers program, which the Obama administration promoted as a way to both help the economy and clean up the environment, by Monday. It was supposed to spur car sales while replacing older cars with more fuel-efficient models.

As I noted here in an earlier post, “The car buying site Edmunds.com compared car sales under Cash for Clunkers with typical car sales over a similar period as that of the program’s existence, and found a net increase of only 50,000 cars — at a cost of $20,000 each.”

For more on Cash for Clunkers, see here.

Policy Peril Segment 9: Big Business

by Marlo Lewis on August 20, 2009

in Global Warming

Today’s excerpt from CEI’s film, Policy Peril: Why Global Warming Policies Are More Dangerous Than Global Warming Itself, rebuts the argument that regulatory climate policies can’t be bad for the economy because so many big businesses support them.

This is an odd argument coming from people who are usually suspicious of big business, or even hostile to corporations. When did they decide that corporate support is some kind of good-housekeeping seal of approval?

To watch today’s film excerpt, click here. To watch the entire movie, click here. The text of today’s film clip follows.

Narrator: Some big corporations call for caps on CO2 emissions. Supposedly, this proves such policies won’t harm the economy. In fact, all it proves is that special interests can make windfall profits from energy rationing schemes.

Remember that $5 trillion loss the Lieberman-Warner bill would inflict on the economy? Well, that’s only half the story.

Dr. David Kreutzer (Heritage Foundation): The Lieberman-Warner bill also enacts a huge transfer from the consumers of energy to groups that are picked out–special interest groups–that Congress would designate. So after America has lost $5 trillion in income, there will be another $5 trillion taken and transferred from energy consumers.

Commentary

A corporation may lobby for cap-and-trade for various bottom-line reasons unrelated to environmental concern:

  • In a carbon-constrained world, a company like GE, which makes nuclear reactors and wind turbines, can expect to sell more of its products.  
  • Utilities like PG&E that generate most of their electricity from hydro-electric dams, natural gas, or nuclear power can make a killing in the carbon market if the emission allowances are allocated for free based on a firm’s historic electricity output rather than historic emissions.
  • Conversely, utilities like Duke Energy that generate most of their electricity from coal can make a killing if the emission allowances are allocated for free based on a firm’s historic emissions.
  • Wall Street firms like Goldman Sachs salivate at the prospect of a new, multi-trillion-dollar market in carbon permits, futures, and derivatives. They can make big bucks as brokers and carbon portfolio managers.

The last bullet merits additional comment, because if there ever was a policy issue that pits Wall Street against Main Street, cap-and-trade is it. The Breakthrough Institute summarizes the key finding of a non-public Goldman Sachs report titled “Carbonomics: Measuring impact of US carbon regulation on select industries”:

In a section titled “Carbon exchanges — build it, and they will (must) come to trade,” it estimates the bill [Waxman-Markey] would grow the global carbon market to become one of the biggest in the world, with trading volume of 175 to 263 million contracts per year – larger than the oil and gas markets combined and approximately the third-largest commodity market in the world after U.S. interest rates and stock indexes. The analysts estimate the profit margin for financial firms resulting from the new carbon market could reach $2 billion annually.

 Baptists and Bootleggers

Corporate support for cap-and-trade should really come as no surprise, because nearly all “public-interest” regulation depends on marriages of convenience between the high-minded (or lofty-talking) and the narrowly interested–between those who seek regulation based on some moral, religious, or ideological concern and those who seek regulation to rig the market in their favor.

Economist Bruce Yandle of Clemson University was among the first to develop the theory of the Baptist-Bootlegger coalition as an explanation of public policy change. 

“The theory,” says Yandle, “draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral grounds. Bootleggers tolerated the actions gleefully because it limited their competition.” 

Baptists provided the moral justification–the public-interest rationale–for restricting the sale of alcoholic beverages. Bootleggers provided the filthy lucre–the campaign contributions to politicians supporting the restrictions (known as ”blue laws“). 

Nothing better illustrates the “bootlegger” role of big business in advancing the climate policy agenda than Enron’s lobbying and PR campaign for the Kyoto Protocol.

Enron, that poster child of corporate fraudulance, was a leading advocate of cap-and-trade in the climate treaty negotiations culminating in the Kyoto Protocol. Enron was a natural gas distributor, and Kyoto would suppress (or kill) electricity production from coal, boosting demand for Enron’s core business. Carbon controls would also pump up the market for Enron’s wind turbines and energy management services. In addition, Enron’s energy traders  expected to make juicy commissions on the purchase and sale of emission allowances.

On December 12, 1997, the day after the Kyoto conference, Enron environmental affairs director John Palmisano, in a memorandum to colleagues, enthused:

If implemented, this agreement [the Kyoto Protocol] will do more to promote Enron’s business than almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed.

For both its high-profile and behind-the-scenes lobbying for Kyoto, Enron became the darling of green groups (a fact many prefer to forget). Palmisano elaborated:

Through our involvement with the climate change initiative, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF [World Wildlife Fund], NRDC [Natural Resources Defense Council], German Watch, the U.S. Climate Action Network, the European Climate Action Network, Ozone Action, WRI [World Resources Institute], and Worldwatch. Such praise went like this: “Other companies should be like Enron, seeking out 21st century business opportunities” or “Progressive companies like Enron are…” or “Proof of the viability of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 [sulfur dioxide] trading.” 

At the end of his memo, Palmisano exulted: ”I predict business opportunities within three years. . . This agreement will be good for Enron stock!!”

Many rent-seeking companies follow the trail that Enron blazed. For example, big-business lobbyists had a strong hand in crafting the Waxman-Markey cap-and-trade bill, the American Clean Energy and Security Act (ACES, H.R. 2454).

All the distinguishing features of the Waxman-Markey cap-and-trade provisions were spelled out months in advance of the bill’s introduction by the United States Climate Action Partnership (US-CAP), in a January 2009 report called A Blueprint for Legislative Action. Core US-CAP proposals incorporated into Waxman-Markey include:

  1. Year 2020 emission reduction targets significantly less stringent  than those called for by the European Union (17% below 2005 levels instead of 20%-30% below 1990 levels).
  2. Generous provision of free emission allowances (energy-ration coupons) rather than 100% auctioning as called for by President Obama (the Heritage Foundation’s August 6, 2009  analysis, p. 4, estimates that 85% to 101% [!] of the coupons will be given away in the early years of the program).
  3. Generous ”carbon offset” provisions authorizing regulated U.S. firms to pay non-regulated entities to reduce, avoid, or sequester emissions in lieu of reducing emissions themselves (the Breakthrough Institute estimates that the Waxman-Markey offsets will allow U.S. emissions to increase through 2030).

A Carbon Cartel

In February 2007 testimony before the Senate Environment and Public Works Committee, CEI President Fred Smith noted that cap-and-trade “is an ugly combination of two of the greatest ills to affect the market economy over the past two hundred years–cartelization and central planning.” The emissions cap, which determines how much CO2-emitting energy society may use, is set by the government–that’s the central planning element. The provision of emission allowances under the cap effectively creates a cartel.

The emissions allowances (energy-ration coupons) function just like the production quota allocated among members of OPEC (Organization of Petroleum Exporting Companies), the only difference being that the ration coupons can be bought and sold. The economic effect, though, of both oil production quota and emission allowances is the same: restrict energy supply, raise energy prices, and create monopoly profits for a favored few.  Fred commented:

As a result of this cartelization, energy costs rise, real wages fall, and output and employment fall. We know these are the effects of cartels, which is why we used to put the people who set up cartels in jail. Yet the Climate Action Partnership wants legal blessing for this new cartel. Any legislation enacting cap-and-trade would actually ennoble a new generation of robber barons and provide legal protection for their profiteering activities.

A key point to bear in mind is that the amount of wealth transferred from consumers to cartel members can greatly exceed the overall loss to the economy. See the diagram below.

wealth-transfer-under-cap-and-trade

Figure description: 1.5 gigatons of carbon (GtC) is the hypothetical amount of CO2 emissions society produces in the absence of a cap. When there is no cap, the right to emit CO2 costs zero dollars per ton of carbon. The hypothetical cap requires a 20% reduction in emissions from 1.5GtC to 1.2 GtC. The right to emit CO2 now costs $50/tC. That increases the cost of energy, which then reduces economic output (the dark shaded triangle). However, the amount taken and transferred from energy consumers–the additional dollars they must spend for home heating oil, natural gas, electricity, and gasoline (the lightly shaded square)–can be much larger.

Think again of OPEC. As long as oil prices don’t get so high that they depress the global economy, the wealth transferred from consumers to OPEC members will exceed the overall reduction in global GDP.

In the European Emissions Trading System (ETS), utilities made out like bandits during the first two years of the program. Governments gave the utilities more free ration coupons than they needed. The utilities then passed their imaginary costs onto their customers by raising rates. Then they sold the surplus coupons they didn’t need to manufacturers whose electric rates they had raised. Thanks to the ETS, the utilities achieved a two-fold (albeit short-lived) windfall profit. Open Europe, the British free-market think tank, provides the gory details in this hard-hitting report.

In the run-up to Waxman-Markey, cap-and-trade proponents repeatedly said that they had learned from Europe’s mistakes, and here in the USA all emission allowances would be auctioned in competitive bids. Yes, your electric rates would “necessarily skyrocket,” Barack Obama said, when campaigning for the White House. But, he assured us, the revenues would be returned somehow to taxpayers. Cap-and-trade would become cap-and-dividend.

That, however, was unacceptable to US-CAP, and in the sausage factory known as the legislative process, they carried the day. The Heritage Foundation’s August 6, 2009  report describes what happened:

In order to get the Waxman-Markey cap-and-trade bill through the House Energy and Commerce Committee . . . Members of Congress promised generous handouts for various industries and special interests. In the near-term, the legislation promises to distribute 85-101% of the allowances to various interest groups at no cost . . . The biggest winners are the electric utilities, receiving 43.75% of the emission allowances in 2012 and 2013.

To read previous posts in this series, click on the links below.

  • Policy Peril: Looking for antidote to An Inconvenient Truth? Your search is over.
  • Policy Peril Segment 1: Heat Waves
  • Policy Peril Segment 2: Air Pollution
  • Policy Peril Segment 3: Hurricanes
  • Policy Peril Segment 4: Sea-Level Rise
  • Policy Peril Segment 5: Is the Science Debate Over?
  • Policy Peril Segment 6: Cap and Trade
  • Policy Peril Segment 7: Fuel Economy Standards 
  • Policy Peril Segment 8: Coal

    • Land Grabbers Attack Free Speech

    by Marc Scribner on August 20, 2009

    in Legal, Personal Liberty, Politics as Usual, Zeitgeist

    In this morning’s Washington Post, columnist George Will brings to light a particularly egregious example of politically-connected developers abusing the legal system to silence their land-grab critics:

    When Kelo was decided, H. Walker Royall, a Dallas developer, already had designs on some property that for more than a decade has belonged to the Gore family shrimping business in coastal Freeport. In 2003, Royall signed an agreement with that city’s government to build a yacht marina, hotel and condominiums using property the city would seize by eminent domain.

    The day after the Supreme Court made its Kelo mistake, Freeport intensified its pressure against the Gores, whose stout resistance caught the gimlet eye of Carla Main. An experienced journalist (former associate editor of the National Law Journal, she has written for the Wall Street Journal, National Review and numerous other publications), Main has recounted the case in her book “Bulldozed: ‘Kelo,’ Eminent Domain and the American Lust for Land.” Her thesis is that many “takings” of property for economic development are taking a terrible toll on the rights of everyday Americans.

    In October 2008, Royall sued Main and her publisher (Encounter Books), seeking monetary damages and a ban on further production and distribution of the book. He also sued the Galveston newspaper that reviewed the book and the reviewer. A judge dismissed, on jurisdictional grounds, Royall’s suit against Richard Epstein, professor of law at the University of Chicago and New York University, whose offense was a dust-jacket endorsement of the book as a report on an “unholy alliance” between government and a private interest.

    Royall’s defamation suit against Main appears ridiculous on its face, and his support for redevelopment takings is countered by a growing body of research. Moreover, Royall’s development plan was finalized before the state had even acquired the affected property, which is generally a good indication that the “economic redevelopment” in question is really just a transfer of wealth from legitimate property owners to the politically-connected developer. As I have noted in the past, these pretextual takings are recipes for economic and fiscal disaster–benefiting a few government officials and rent-seeking developers, but harming taxpayers, entrepreneurs, and homeowners.

    Unfortunately, the silence-through-litigation strategy being employed by Royall has become increasingly common in the years following Kelo. The Institute for Justice, in its backgrounder on Royall v. Main, mentions the following cases:

    In Clarksville, Tenn., when the city council considered a redevelopment plan that allowed the use of eminent domain for private development, a group of home and business owners formed the Clarksville Property Rights Coalition (CPRC).  Because the group dared to speak out against the project in an advertisement in a local newspaper, a member of the Clarksville city council and a member of the city’s Downtown District Partnership filed a frivolous libel lawsuit against the CPRC and demanded the group pay them $500,000. The Institute for Justice is defending the CPRC in this suit.

    In Renton, Wash., eminent domain activist Inez Peterson led a successful fight against a blight designation—which would have enabled the use of eminent domain—that the city sought to place on the Renton Highlands neighborhood.  Prominent Renton developers Denny and Bernadene Dochnahl sued Peterson for various statements she made about them, such as when Peterson in an email called Ms. Dochnahl “a haughty and proud Pharisee.”

    In St. Louis, the city government itself is trying to shut down a protest of its abuse of eminent domain.  Jim Roos owns well-maintained property that, as a public service, houses the urban poor.  The government has slated the property to be taken by eminent domain because of its location in a redevelopment area.  Roos decided to fight back with free speech.  On the side of one of his buildings, he placed a five-story-high mural that called for the city to “End Eminent Domain Abuse.”  Employing the city’s restrictive sign code, St. Louis is now trying to force Jim to remove the mural. The Institute for Justice is fighting to save the mural in litigation in federal court.

    (Photo by Asa Gauen for IJ)

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