Monday, September 20, 2010
NBER Agrees With Me - June 2009 Trough
Middle age sucks.
Joking aside, the significance of this determination by NBER is that they do not believe that we are currently undergoing a second contraction. Neither do I, but I find it quite reassuring that they have made this statement.
I have been following the latest Chinese/Japanese kerfuffle with some attention. So far it does not see too serious, but that may not hold.
But back to the US economy:
In general, I try to track real incomes and necessary changes in expenditures that will affect real incomes. In doing so, I concentrate on edge populations, both geographically and by demographic/income slices. In other words, if I take the middle quarter of income recipients, I try to concentrate on the bottom fifteen percent of that slice. Doing so makes my analysis more sensitive. I track flexibility on expenses and incomes (can they shift and adapt?), rate of change, and five-year shifts.
This is becoming almost impossible because of the uncertainty in tax policy. Congress appears frozen, so I am guessing we will not find out until January or February what level of taxes most people will be paying next year.
This raises some extremely interesting problems in forecasting. Pretty much anything could happen, because the underlying structure is still very price-sensitive, and producers of all mass-market goods don't have much in the way of pricing power. That means that businesses are also extraordinarily sensitive to taxation changes. Every dollar of additional tax is one more dollar reduction of real income, so it is hard to improve the economy by raising taxes.
One of the oddest things about our current political-economic cycle is that the political discussion seems almost at right angles to the underlying structures of the problem. This does not encourage one to expect a solution.
Also, some of the laws currently on the books or currently not in much contention may be economic suicide pacts. It's difficult to explain this. Banking is currently a good example, but quite abstruse. Perhaps a more understandable example would be our energy policies.
The best quick way to get an understanding of how huge an impact energy regulations will have is to spend a few days reading through the EIA's energy outlook page. In particular, see the no sunset and extended policy cases. We are spending a tremendous amount of money on policy, and in some cases the funding is at cross-purposes. I quote:
Tax credits paid to consumers in the buildings sector in the Extended Policies case average $10.5 billion more per year than in the Reference case, reaching a cumulative total of $300 billion in revenue reductions to the Government over the period from 2010 to 2035. In comparison, cumulative revenue reductions as a result of tax credits in the buildings sector total $27 billion over the same period in the Reference case. The largest response to Federal PTC incentives for new central-station renewable generation is seen in the No Sunset case, with extension of the PTC resulting in cumulative reductions in Government tax revenues that total approximately $45 billion from 2010 to 2035, as compared with $24 billion in the Reference case. Additional reductions in Government tax revenue in the No Sunset case result from extension of the blenders tax credit, the biodiesel blenders tax credit, and the cellulosic biofuels PTC, with cumulative total tax revenue reductions from 2010 to 2035 of $156 billion, $32 billion, and $168 billion (all in 2008 dollars), respectively, compared to the Reference case.I'm not sure if it is clear that these are cumulative. Extension of current laws assumed in this case results in net federal costs of:
- 300 billion (paid to consumers)
- 45 billion (paid to power producers)
- 156 billion (ethanol)
- 32 billion (biodiesel)
- 168 billion (cellulosic biofuels)
There are tremendous additional costs involved in other energy regulation. To get an idea about these costs, I recommend reading through EEI testimonies and filings to the regulatory bodies involved. EEI is basically a utility companies association. Even if you won't do that, read at least this one comment about the proposed regs for industrial boilers. The approach the EPA is using is insane. It's as if they had gone through every type of motor vehicle available, and used the best "parts" of each, with the end result that no actual vehicle could meet the final standard.
No one understands the total impact, but such regulatory abuses are a very significant reason that investment in the US is limited, and jobs are continually exported. Until we reach the end of this secular trend, it is very hard to make projections about US economic potential.
To place these numbers in some perspective, we are justifiably worried about funding Social Security. But if we were to cancel our current energy subsidies for most of these "alternative" sources, we would more than recover the projected Social Security deficit for the period through 2025. See page 51 in the Trustees report (ignore interest income and look at taxes (contributions plus tax on benefits) in comparison to total cost.
This does not even address the state-level costs of energy innnovation, which are quite significant. At one point CA's ten year plan was slated to cost about 100 billion over the ten years. Because we are in a very tight spot over the next ten years, raising income taxes will tend to cut GDP, which will cut income taxes. But cutting some of our government transfer programs will directly reduce incomes which will also reduce GDP. Some attention to efficiency here is warranted.
The other reason why we should pay attention to energy costs and plans is that we appear to be backing into greatly extending the planned life of a lot of nuclear plants. I am not sure this is wise. The longer we extend their planned lives, the more potential risk we run. Hydropower projects will probably pay and produce very reliable power, but no big new hydropower plants can be built in the states because all are considered too environmentally disruptive. Solar power can be somewhat more reliable than wind, but it is extremely expensive in most areas. Trying to go renewable in large percentages of solar is therefore unbelievably expensive. Wind is netting out so far to be more expensive than thought, but the big problem there is integration into the power grid. The more wind you try to integrate the more backup and less net replacement of non-renewable you get. In the end, it may prove more expensive than solar power in many areas.
Efficiency/conservation measures generally provide the best long-term return. However there is an upfront cost (and still we need to replace aging power plants), and since conservation directly reduces current and near-term costs quite dramatically, the end result is that you have to increase subsidies for alternatives, which is a somewhat paradoxical result.
Any time you interfere with markets you run these risks! Interfering with energy markets (other than to stabilize them) is about the most economically risky thing you can do, because energy costs are inextricably linked to real living costs, which tend to affect real incomes for about 70% of the population very dramatically. Thus, large energy cost shifts move economies from cycles of contraction to expansion and back again through adjustment to incomes (both business and personal):
Ain't it the truth. I keep saying that our way of life floats on a sea of reasonably priced, abundant energy. When it is scarce it becomes dear and affects us all like a row of falling dominoes.
If this administration did nothing more than encourage the streamlining of the nuclear power plant permitting process, opened up all the closed oil drilling sites, and quit worrying about AGW; the economy would begin to recover in a big way.
I don't pay much attention to CNBC. (Too many "tips.") But here's an interview with Bernie Schwartz, one of the founders of Home Depot, that defines in no uncertain terms why we are mired in stag-deflation.
It's well worth the 16 minutes.
That gave me a serious chuckle!! A real out loud laugh that lasted not less than 2 seconds. :)
Congrats by the way.
I didn't realize that alternative energy subsidies were that big, percentage-wise. I believe it, though. I'm seeing enormous distortions in the market for R&D engineers in the power area. Everybody is working on a DoE contract or for a business segment whose business plan depends on subsidies.
Every time I ask around what my colleagues are up to, I get a terrible top-of-the-roller-coaster feeling in my stomach....
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