I have an op-ed online in USA Today today entitled “America should learn from Europe on wind power.” In it, I outline how Europe has begun to come to its senses about the unsustainable cost of wind energy:
However, wind power is expensive, and the growing size of the industry has meant that subsidies – and energy bills – have surged. The German subsidy is paid for by a surcharge on household electricity bills. The growth in wind power meant that in January the surcharge increased to over 5 cents (euro) per kilowatt hour, representing 14% of all electricity bills.
In Germany, Chancellor Angela Merkel, realizing that wind power is economically unsustainable, has proposed capping the subsidy until the end of 2014 and capping further rises to 2.5%, with the probability of further significant reform after the federal elections this year. It’s a similar story in Spain, where subsidies have been cut so much that the chairman of the country´s Association of Renewable-Energy Producers said recently: “Spain’s government is trying to smash the renewable-energy sector through legislative modifications.”
As it happens, President Obama has repeatedly said we should look to Spain and Germany as examples of how to handle renewable power. Indeed, and he should apply this thinking to the loan guarantee application for the Cape Wind project:
The project will cost $2.6 billion, and it has secured funding for $2 billion of that from a Japanese bank. But this is believed to be subject to the project gaining a loan guarantee from the U.S. Department of Energy. And there is every reason to believe that this would be as bad a bet as its loan guarantee to Solyndra.
The contracted cost of the wind farm’s energy will be 23 cents a kilowatt hour (excluding tax credits, which are unlikely to last the length of the project), which is more than 50 percent higher than current average electricity prices in Massachusetts. The Bay State is already the 4th most expensive state for electricity in the nation. Even if the tax credits are preserved, $940 million of the $1.6 billion contract represents costs above projections for the likely market price of conventional power. Moreover, these costs are just the initial costs, and like in Germany, they are scheduled to rise by 3.5 percent annually for 15 years.
In fact, one major Massachusetts employer estimates that each 1 cent increase in the cost of energy per kilowatt hour will cost the company $4 million, creating a major incentive to relocate, costing the state jobs and revenue.
When you consider that the Cape Wind project would also inflict environmental damage to cause Massachusetts residents and businesses to pay more for their energy, the case becomes a “no-brainer.” This is one case where the President could do with being a little more European in his outlook.
“This is the modern world. It’s miraculous, it’s intricate, and it gets better every day so long as people are free to interact with each other. If we can leave the creative energy of humankind uninhibited, there’s no limit to what we can accomplish.”
Today, the Competitive Enterprise Institute launches the first in a series of videos inspired by Leonard Read’s classic work I, Pencil. In it we attempt to illustrate the classical liberal concepts of connectivity and spontaneous order, and how they come about, in the absence of a controlling mastermind, to deliver the wonders of the modern world. We have also released two follow-up videos with academics that explore these concepts further. St Lawrence University professor Steve Horwitz commented, “I do not have words for how beautiful and inspiring and perfect this is.”
As the East Coast cleans up after Sandy, the usual suspects, such as TheNew York Times, now argue a big storm requires big government to clean up. This isn’t true, as I explain over at Forbes.com today. In fact, most of the response to a disaster is private and doesn’t require a mastermind to oversee it. Government can actually get in the way by enforcing rules that slow or prevent the recovery process. The Institute for Humane Studies has compiled a page of videos from its Learn Liberty series that provides a quick introduction to what free market economics says about natural disasters. I highly recommended it.
The new Basel III capital requirement regulations are supposed to strengthen the international financial system, with their avowed effect being to:
improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
improve risk management and governance
strengthen banks’ transparency and disclosures.
In fact, the regulations threaten to wipe out community banks, which were not responsible for any of the problems these regulations seek to address. As Cam Fine of the Independent Community Bankers of America puts it, in stark language:
Unchanged, these Basel III capital rules, together with the extended near-zero interest rate environment and extremely restrictive proposed mortgage and other new credit rules, will significantly impact in many and very negative ways every community bank in this nation. Basel III (together with all the other piling on) will have the aggregate effect of not only significantly damaging Main Street and rural America and millions of credit-seeking consumers and small businesses, but also will likely do what the Civil War, the Great Financial Panic of 1907, the Great Depression and the Great Recession could not do—wipe out the community banking industry by the end of this decade. If the federal banking regulators truly want to reduce this nation’s commercial banking system to a handful of banks, imposing Basel III capital rules on community and midsize banks will do it!
What we are seeing here is yet another example of how regulation misfires. Financial regulation in particular, meant to control the big banks, has in fact dramatically decreased the chance of creative destruction ever occurring again in the banking industry. The raft of regulations passed around the world since the financial crisis began (and in many cases before it) have merely created massive entry barriers to the banking industry, and as such are protecting the big banks from competitive discipline. You may be disgusted by the big banks’ behavior over recent years, but soon you may not have any other option than the big banks if you want banking services. And financial regulation will be to blame.
Those with an interest in conserving our oceans’ fish stocks and those with an interest in promoting private property should both be interested in my latest short study at CEI, “Give a Man a Fish.” Here’s the introduction:
Some policy makers and environmental advocacy groups are beginning to realize that the solution lies not in further government regulation, but in investing fishermen with property rights. However, government bureaucrats are also attempting to utilize this insight to gain even more power over fisheries, threatening to derail the momentum toward a more rational allocation of ocean resources. That would be bad news for both fish populations and the people who depend on them for their livelihood.
The oceans are an important source of food and income for people around the world. In 2007, proteins from fish accounted for 15.7 percent of the total global animal protein supply. In 2008, an estimated 44.9 million people were directly engaged in the fishing industry (both marine capture and aquaculture). However, the world’s fish stocks are not limitless, and are being depleted rapidly.
Two principal factors are at work. First, the billions of dollars in subsidies bestowed on the fishing industry by many governments makes overfishing profitable, even as per capita fishing yields decline. Second, the absence of property rights over fish in most countries means that there is no incentive for any party to husband this resource. In fact, the absence of property rights, combined with subsidies, creates a perverse incentive to deplete this scarce resource.
Attempts to prevent overfishing by promulgating regulations (which are often at odds with subsidies) have proved both ineffective and impossible to enforce. As long as the incentives are skewed by bad government policy, many fishermen will continue to work around regulations or simply neglect to report some of their catches—a practice known as “black” fishing that is all too prevalent. Ending subsidies and extending genuine property rights to fisheries will help solve these problems.
Thanks are due to my co-author, Roger Abbott, who provided much of the initial research effort, and to Michael DeAlessi, who wrote the definitive free market work on privatizing fish stocks, Fishing For Solutions, in 2003.
The Law of the Sea Treaty would drastically undermine American sovereignty, giving massive powers to the U.N. (aka the Dictators’ Club of New York), but the Senate is actually considering passing it — get this — as a tribute to Dick Lugar, whose voters unceremoniously dumped him last week. Seriously, couldn’t they just give him a medal? This is enough to make me think the House of Lords is a good idea.
In any event, Let Freedom Ring has an action site up on this – Let’s Lose LOST.
For further background, here are twostudies from CEI on the subject of LOST that we issued when the George W. Bush administration was thinking about getting it ratified to curry international favor.
The latest edition of my colleague Wayne Crews’s annual snapshot of the regulatory state, “Ten Thousand Commandments,” is out. This year’s lowlights include:
Estimated regulatory costs, while “off budget,” are equivalent to over 48 percent of the level of federal spending itself.
The 2011 Federal Register finished at 81,247 pages, just shy of 2010’s all-time record-high 81,405 pages.
Regulatory compliance costs dwarf corporate-income taxes of $198 billion, and exceed individual income taxes and even pre-tax corporate profits.
Agencies issued 3,807 final rules in 2011, a 6.5 percent increase over 3,573 in 2010.
Of the 4,128 regulations in the works at year-end 2011, 212 were “economically significant,” meaning they generally wield at least $100 million in economic impact.
822 of those 4,128 regulations in the works would affect small businesses.
The total number of economically significant rules finalized in 2011 was 79, down slightly from 2010 but up 92.7 percent over five years, and 108 percent over ten years.
Recent costly federal agency initiatives include the Environmental Protection Agency’s Mercury and Air Toxics Standards Rule and the Department of Transportation’s Fuel Economy Standards.
While some people talk about Republican tentacles, this report clearly shows how vast the Leviathan of the federal government has grown, with its massive tentacles extending into every business — and every pocket — in the nation.
With the prospects for a Greek pro-austerity coalition fading rapidly, here is a round-up of the most useful stories on the Greek tragedy:
The BBC’s business editor, Robert Peston, asks if the Euro could survive a Greek exit. His comments on German reactions are key.
A group of economists and financiers comment on what a Greek exit would mean. The consensus: economic disaster for Greece, but only a couple note that the Greek position right now isn’t exactly bread and roses.
A useful note from JP Morgan that suggests that immediate losses from a Greek Euro exit could be around $400 billion.
The suggestion that Greece could run out of money as early as tomorrow.
Trading desks in London have started adding a shadow Drachma to their computer systems (and lots more in that excellent rolling blog from The Guardian).
Drafts from Berlin suggest that Germany wants a Europe-wide bailout fund to stabilize the European economy after a Greek exit (now being elided to “Grexit” in City of London shorthand). This would mean non-Eurozone members helping pay for the costs of the Euro.
The election results in Europe, we are told, are a vote against the austerity of “savage” spending cuts. Veronique de Rugy, in National Review Online, contested this claim, backing up her words with data. The Economist‘s Ryan Avent found her claims outrageous and presented data of his own to show that austerity was sooo there. Veronique has responded with more detail. Her case is essentially that in most countries, “austerity” has been implemented more in terms of tax rises than in spending cuts. The fact that the UK and France, both of which supposedly voted against austerity last week, have not actually implemented spending cuts, is best illustrated by this alarming chart.
It is important here to note that spending cuts are, in this debate, regularly portrayed as being harmful to GDP growth, as if shaving government expenditure results inexorably in a reduction in GDP. That is clearly not the case. The respected British economist Andrew Lilico, for instance, regularly points out that spending cuts in the Uk should lead to growth:
The key ways the government could raise the sustainable growth rate are as follows:
Cut government spending relative to GDP. The government is already committed to cutting spending below 40% of GDP. If it succeeds, that could add 0.5% to annual GDP growth.
Raise the efficiency of government spending. If public sector productivity grew as fast as private sector productivity, that could add 0.5% to annual GDP growth. Matching private sector productivity growth should be a modest target, since there is considerable scope for catch-up, with public sector productivity growth having dropped one third behind over the decade to 2007. To achieve private sector levels of productivity growth, use private sector methods – surplus/profit motives; competition; private sector management methods and cultures, etc.. These things will be desperately unpopular, politically. But they won’t be as unpopular as having the banks go bust again and the economy collapsing into another massive recession.
In a column for the FT today, Wolfgang Munchau lays out what may be the only plausible solution to the Eurozone crisis – for governments like Greece to “default into” the European Stability Mechanism. The ESM could then issue bonds, thereby mutualizing the bad debt of the defaulting governments. The Euro survives, the PIIGS (Portugal, Italy, Ireland, Greece, Spain) get their debt off their books and can rebuild without having to do distasteful things like reform their labor markets, and the Euro project continues with its new Banking Union.
Except…
The great unasked and unanswered question with all of these schemes is: where is the money coming from? That’s not the same as the question who will buy this debt. Banks will, of course, if they have a clear idea of where the repayment and yield will come from. If it looks like the debt might not get repaid, they will require too high a yield, and the problem starts again. So who is the ultimate guarantor of this scheme? Together, the PIIGS supposedly contribute 37 percent of the ESM’s cash-flow, but that’s now, before the defaults which will require a much bigger capacity than the ESM’s current E500 billion capacity. France, which contributes 20 percent, is likely going to face similar problems given its likely electoral direction this year (Socialist President elected yesterday, socialist-communist-fascist dominated Parliament likely later in the year). So the answer will be, once again, the German taxpayer.
So the ESM banking union option once again collapses into the basic question — will the German taxpayer stand paying not just for the debts but the ongoing fiscal health of the profligate PIIGS nations? All indications seem to be no. So, despite being a seemingly plausible solution, the ESM banking union solution is probably doomed to failure too.
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