If This Is Economic Success...

The refrain heard most often from paleoconservatives with regards to taking serious steps to curb our dependence on fossil fuels and to reduce greenhouse emeissions is, that such measures will "threaten our economic well-being." Even today among so-called liberals the fear of change in carbon-burning behaviors will be blamed for the next economic downturn run rampant among Democrats who are jittery about even their meek efforts thus far.

Congress is debating a carbon cap-and-trade plan. But even as they do, knock-kneed Democrats such as Lieberman and Warner are conspiring to cripple the legislation by offering "emergency offramps to protect the economy if costs for cutting carbon dioxide rise too high."

Any legislation designed to prevent any disruptive effects on existing business practices (by usefully penalizing those slowest to change) can by definition have no serious effect on reducing carbon emissions.

And lets talk about this economy we are taking such great pains to preserve in its current, pristine state. An economy where the middle-class dream is quickly slipping away for the great majority of Americans. As this Chicago Tribune story makes clear, those who have good jobs must keep them at all costs because they are the last ones. Our country, which no longer actually manufactures much of anything is rapidly becoming one of rich and poor with those left in the middle desperately trying to avoid the drop.

As Brad DeLong pointed out in a useful video post a few months ago the gap between the richest and the poorest in this country is now as high as it was in the Gilded Age of the 1890's and of the Roaring Twenties just before the Great Depression.



In the graph below, supplied by DeLong, the triangular and black trend line shows the top 1% income bracket. As usual, click on the image for a larger view.

In the meantime, here in Iowa the largest economic development announcements in the last year are: a Google data center in Council Bluffs (new economy) and a number of wind-power related initiatives.

It is an inexorable law of both nature and of economics that when an economic or environmental niche opens up, there will be a surge of new entrants to exploit it. Only the fecklessness of our leaders -- and the fear their petro-economy contributors inspire in them -- hold us back from an economic renewal based upon the manufacturing and adoption of sustainable technologies in our society.

Automobiles Per Capita Infoporn.

Via the venerable, Policy Pete, comes this interesting graph, courtesy of ExxonMobil: (As always, click on graphic for larger view.)






The OECD, for those not familiar with the myriad international organizations is an organization of economically developed, democratic countries devoted to peace and prosperity. It was orignally set up after WWII. It includes, as one might expect, all the European democracies, Canada and the U.S., as well as Australia, et. al. Full membership list here . OECD membership is often used in geo-economic studies as shorthand for "the First World," or "The Northern Economies." Notably absent are; China, India, South Africa, Indonesia, Brazil, and the rest of South America. In other words, more than two-thirds of the Earth's population.

Back to the graph. Note that both axes are on a log scale and that the top value of the y-axis is 1000 cars per 1000 people. Note also how as the non-OECD countries start to have larger segments of the population achieving reasonable living standards how the value starts to get very close to that 1:1 ratio.

What do you suppose the oil demand curve will start to look like as more and more of the 3-billion plus non-OECD humans start to get into that US$20,000 - 40,000 range? Note the total fleet. It nearly triples from 2000 to 2030.

iPhone: How Big Will It Be?

Shamelessly cross-posted from the work blog.

We don't deal much in Apple products at ENLLC. But we do deal in cell phones. We are a proud, U. S. Cellular dealer. And we are technology watchers and this blog is dedicated to distributing our technology wisdom to our customers and the rest of the world. So...

The introduction of the iPhone has been the most-hyped product introduction since... well since the Mac really. But does it live up to the hype? Early reports say, mostly yes. Does it have some quirks and shortcomings that all first generation products have? Certainly. The non-user replaceable battery is a biggie. But on the whole reviewers seem to agree that it is just as cool and paradigm-changing as the marketing hype makes it look. And quite frankly, if the thing does 80% of what is looks like it will do in the ads, as easily, it will going to do some major paradigm shifting. It is "a breakthrough," in the words of WSJ tech commentator, Walt Mossberg.

The iPhone's true measure will probably be more greatly felt a few years down the road, when the exclusive deal with AT&T expires and when the second (third?) generation iPhone starts to really move into the masses, when and if the iPhone installed base starts to push into say, the tens of millions.

How major an innovation is the iPhone? Well, let's look at a recent New York Magazine profile of Steve Jobs.

With the iPhone, in particular, he is hurling Apple into foreign waters. His motivations for doing so aren’t difficult to discern. Somewhere in the neighborhood of a billion cell phones are sold worldwide every year; in terms of scale, ubiquity, and relevance, it’s the mother of all consumer-electronics markets. The chance to upend this sprawling industry, bend it to his will, is one that Jobs, being Jobs, finds irresistible.

Apple’s competitors, by contrast, find the prospect of the iPhone terrifying. “The entire fucking Western world hopes that it’s a case of imperial overstretch,” says the CEO of one of the planet’s largest communications companies. “But everybody is quietly saying, er, what if people want to buy a $500 phone? What if, er, people have been waiting for a device that does all these things? What if this thing works as advertised? I mean, my God, what then?”

Indeed. What then? What if Apple starts moving iPhones in numbers comparable to the iPod, at 16 million a month.

What then is that the mobile computing industry -- and increasingly, that is what cellphones are morphing into; Apple has merely finished the job that was started by the Blackberry and the Treo -- is going to have to get really serious. Serious about innovation, serious about quality, serious about customer service and serious about interface design and function.

One of my favorite business bloggers, Barry Ritholtz of The Big Picture, posts the big lessons and hard questions that are going to be asked not only of cellphone companies, but of all of us who run businesses in the wake of this.

1. 1. Committees Suck: The old joke is that a Camel is a Horse designed by a committee. As we have seen all too often, what comes out of large corporations are bland-to-ugly items that (while functional and reliable) do not excite consumers.
   
   When a company decides to break the committee mindset and give a great designer the reins, you get terrific products that sell well. The Chrysler 300 does not looks like it was designed by a corporate committee. Think of Chris Bangle's vision for BMW -- and its huge sales spike -- and you can see what the upside is in having a visionary in charge of design.


Better pick a damned good one, though . . .


2. 2. Present Interfaces Stink: How bad is the present Human Interface of most consumer items? Leaving the improving, but still too hard to use Windows aside for a moment, let's consider the mobile phone market: It was so kludgy and ugly that the entire 100 million unit, multi-billion dollar industry now finds itself at risk of being completely bypassed, all because some geek from California wanted a cooler and easier to use phone.


What other industries may be at risk?


3. 3. Industrial Design Matters: We have entered a period where industrial design is a significant element in consumer items. From the VW Bug to the iPod, good design can take a ho-hum ordinary product and turn it into a sales winner.



4. 4. R&D is Paramount: While most of corporate America is slashing R&D budgets (and buying back stock), the handful of companies who have plowed cash back into R&D are the clear market leaders this cycle: Think Apple, Google (Maps, Search), Toyota (Hybrid), Nintendo (Wii). A well designed, innovative product can create -- or upend -- an entire market. Even Microsoft did it with the X-box;


What other companies have the ability to disrupt an entire market?


5. 5. Disdain for the Consumer can be Fatal: As we have seen with Dell, Home Depot, The Gap, Sears, etc., the consumer experience is more important than most corporate management seem to realize. Ignore the public at your peril.

Obama Health Care Plan

Sen. Barack Obama spelled out his plan to provide all Americans with health insurance at the U of I Hospitals and Clinics (the largest teaching hospital in the Western Hemiphere! -- John Deeth)this week. Plan is here:

http://www.barackobama.com/pdf/HealthPlanOverview.pdf
http://www.barackobama.com/pdf/HealthPlanFull.pdf

I've got and looked at John Edwards' DVD. (What, you didn't get one? You're the only Iowan who didn't.) It's okay. In a perfect world where scrapping the current private system and starting from scratch would be politically possible short of bloody revolution, I'd be all for it.

The thing that strikes me about Obama's plan is that it seems doable, politically and economically. A reform here, a new program there and pretty soon you are looking at universal coverage. And that has to be the first goal of health care reform, to get everyone insurance. That one step will reduce everyone's costs substantially (even those who remain in private plans) because it will take billions of dollars of costs in uncompensated care for the uninsured off the backs of everyone else.

Once we get that stabilized a bit, then we can tackle the really thorny issues of allocation of resources, who gets what level of care, and how soon, etc. But Job One has to be getting everyone covered in a meaningful way.

Monday Post-And-Run: LA Times Carbon Tax Editorial

Yesterday's Los Angeles Times has a long, cogent editorial in favor of serious carbon taxes. Make no mistake, after health care policy, this is the number one issue that will affect the American economy, and global economic and environmental health.

Time to Tax Carbon:

IF YOU HAVE KIDS, take them to the beach. They should enjoy it while it lasts, because there's a chance that within their lifetimes California's beaches will vanish under the waves.

Global warming will redraw the maps of the world. The U.N.'s Intergovernmental Panel on Climate Change predicts that sea levels will rise 7 to 23 inches by the end of the century; as the water gets higher, the sandy beaches that make California a tourist magnet will be washed away. Beachfront real estate will end up underwater, cliffs will erode faster, sea walls will buckle and inlets will become bays. The water supply will be threatened as mountain snowfall turns to rain and the Sacramento-San Joaquin Delta faces contamination with saltwater. Droughts will likely become more common, as will the wildfires they breed.

Californians are serious about this because they know that without their glorious beaches (and beach culture), a hotter, drier California is nothing but 34 million people living in the desert. Bummer, man.

And yet for all its benefits, cap-and-trade still isn't the most effective or efficient approach. That distinction goes to Method No. 3: a carbon tax. While cap-and-trade creates opportunities for cheating, leads to unpredictable fluctuations in energy prices and does nothing to offset high power costs for consumers, carbon taxes can be structured to sidestep all those problems while providing a more reliable market incentive to produce clean-energy technology.

Californians are also a bit edgy regarding fluctuating energy prices. All those Google servers don't run on positive vibrations.

Carbon taxes avoid all that. A carbon tax simply imposes a tax for polluting based on the amount emitted, thus encouraging polluters to clean up and entrepreneurs to come up with alternatives. The tax is constant and predictable. It doesn't require the creation of a new energy trading market, and it can be collected by existing state and federal agencies. It's straightforward and much harder to manipulate by special interests than the politicized process of allocating carbon credits.

Make the invisible visible. Finally put a (state-imposed, yes) cost on those negative externalities and let the market decide. No new trading scheme to be gamed, no regulatory authority to look over their shoulders. Just annual inspections and a bill.

End of the Music Business As We Know It, Part XVI

One of the themes of this blog is how technology is changing our society. Unbeknownst to most people, a life-and-death struggle for the future of an industry is occurring in the area of the audio-visual arts businesses. The ability to digitize their products changed forever the face of the huge book, music, television and movie industries. The conglomerates who largely run those industries are having some very difficult times coming to grips with the changed realities of their circumstances.

Last week came two new benchmarks in their changing worlds. One, Country Star and former American Idol winner, Carrie Underwood, became the first artist to debut a song in the Top 10 of the Billboard Hot 100 with no physical CD sales. Her cover of the Pretenders' "I'll Stand By You," is an Apple iTunes exclusive download and hit the chart at number 6 last week.

Secondly, Warner Music, one of the "Big Four" studios, announced losses of $27M last quarter. The company announced a restructuring plan that includes the layoffs of over 400 employees, mostly in the... music sales and distribution area.

All of this comes as retail brick-and-mortar CD sales are down up to 25% in the industry, (Source: Sound Opinions) but while single-song music sales overall (that includes retail downloads, such as iTunes) are UP. But, there is no way the single-song 99¢ sale price of "I'll Stand By You," can ever make up for potential loss of the the $17.00 or more for a physical copy of Underwood's CD, "Before He Cheats."

None of this is going to bottom out for the music industry until they learn that they are no longer in the business of:

1. Physically making things that are cheap to manufacture but which produce large margins at retail, e.g. compact disk recordings.


2. Controlling the agenda with regards to being able to definitvely pick hits (through control and manipulation of Radio-the traditional music taste-making medium) and thus justify their multi-million dollar investments in such artists as Ms. Underwood and her recordings.

They need to come to grips with the fact that they are in the business of distributing bits (not atoms) with (fortunately) very low production costs and (unfortunately) very low margins -- which can be readily copied by people who don't want to actually pay for their product.

Sadly, this leaves very little room for middlemen in the music business, which is being taken back over by... musicians.

Last summer's End of the Music Business As We Know It benchmarks were the debut of the Gnarls Barkley song, "Crazy" as the number one song on the U.K. Charts without a CD released and (now) star Lilly Allen's songs charting without a recording contract.

What this means is that for the first time in a long time, music fans and consumers are making markets in music based on perceived merit as opposed to the dictates of studio execs. Exciting times for music lovers and music makers. Exciting times too for music executives, but only in the Chinese sense.

CBC: Demand for plant-based ethanol driving food prices up.

A quick link-and-run. Saw this Canadian Broadcasting Corp. article today. Rising corn prices hit grocery shoppers' pocketbooks:

The rising demand for corn as a source of ethanol-blended fuel is largely to blame for increasing food costs around the world, and Canada is not immune, say industry experts.

Food prices rose 10 per cent in 2006, "driven mainly by surging prices of corn, wheat and soybean oil in the second part of the year," the International Monetary Fund said in a report.
...
A study released in May from Iowa State University shows increased prices for ethanol have already led to bigger grocery bills for the average American — an increase of $47 US compared to July 2006.

In the United States, as elsewhere, ethanol is made from corn. But corn is also used to feed chickens, hogs and cattle, which means a rise in prices for meat, eggs and dairy.

In Mexico last year, corn tortillas, a crucial source of calories for 50 million poor people, doubled in price. The increase forced the government to introduce price controls.

NYT Gas Price Inforporn

Last week I was looking for a way to get inflation adjusted current gas price data. The NYT gives me what I need. Click image for link to NYT graphic.

Gas Price Watch

A healthy discussion on gas and energy going on over on the Clinton Herald board. This graph is the price of regular gas formulations from August 1990 to last week.



The raw data in Excel format is available here at the Department of Energy. If anyone can tell me how do do inflation, adjusted numbers, that would be great. All the inflation-adjusted graphs I can find date from early to mid last year. Such as the one below which I used in an April, '06 post in which I wrongly predicted that the Long Emergency Begins Now.

Gas Pump Prices: Spring 2007 Edition

Yesterday, I was in Cedar Rapids running errands for Mom. I did some shopping at the HyVee on N. Edgewood and then thought to make good on the 3¢/gal. discount at the HyVee gas station. I didn't even look at the pump price before plugging in the nozzle and starting to fill with the 87 octane low-grade gas. Price at the pump: $3.39.9! The manager happened to be on duty so I asked him what was up? Was HyVee gouging to make up the discount? No, he said. His usual terminal in Iowa City was out of gas, so was the terminal in Dubuque and Davenport. He had to take delivery from W. Des Moines. Longer distance, higher price.

Which brings me to the following via The Oil Drum. In senate testimony last week, Paul Sankey of Deutchbank (PDF) said the following:

Anybody who blames record high US gasoline prices on "gouging" at the pump simply reveals their total ignorance of global oil supply and demand fundamentals. The real reason for high pump prices is the lack of global gasoline supply relative to demand. Just in the US, overall US refining capacity, at 17 million barrels per day (mb/d), is far below demand at 22 mb/d. In turn, pump prices are effectively set by import prices. With strong demand outside the US on the back of global economic growth and a weak dollar, the era of abundant US oil supply augmented by willing international sellers is dead.

Read that again. US daily gasoline demand is 22 mb/d. US production capacity is 17mb/d. That's a 5 mb/d shortfall that has to be made up by importing finished gasoline products or out of stockpiles. As the stockpiles get drawn down, spot shortages are going to occur. Spot shortages means, sometimes there will be no gas to be had from the distributors. That will drive prices at the pump wild.

The only way this situation gets fixed is a) to build new refining capacity -- there has not been a new refinery built in the continental US in nearly two decades, or b) lower demand.

How do I handle this in my personal life? We do almost all our shopping for the week in one "mega-shop," usually on Sundays. Trips for incidentals during the week are done during the evening commute home or by bike to the Jewel just five blocks away.

I'm in a line of work where I have to drive quite a bit. Although we use remote access to PC's and servers as much as possible, there are lots of times where face-time with the client is a business imperative or physical interaction with hardware is technically required.

I drive a car that is pretty near the top of the fuel-efficiency stats for piston-engined vehicles, an '05 Toyota Matrix. Lastly, we pass on to the customer full mileage costs for all trips over 5 miles. That doesn't do anything on the demand side, but at least we recover our costs and the transportation costs are not "hidden." Having the cost of energy out in the open is an important first step to dealing with the demand issue.

Technology Transfer of Clean Technology

The NYT today has an article on the UN's Clean Development Mechanism, part of the Kyoto Protocol that helps developed countries offset their carbon emissions by paying for non-polluting projects in developing countries. Clean Power That Reaps a Whirlwind.

Although the article focuses largely on the dispute about the funding priorities of the project. More than two-thirds of the CDM projects go to China -- which will this year or next surpass the US as the world's leading carbon emitter -- with most of the rest going to Mexico, Argentina, Brazil, even South Korea. Less than $150m out of the $4.8b transferred in 2002 went to Africa.

I think that many of the deciding factors of not investing in Africa are valid -- higher capital risk, poor infrastructure and capital management systems that can actually DO anything with the money. That said, Africa must receive development aid and the UN should focus on those pockets where the necessary conditions do exist, Southern Africa, Mali, etc.

Complaints that sophisticated Chinese are probably gaming the system are also probably valid. But when you are the world's biggest coal user, you deserve the extra attention.

In the main, this program has to be considered a big step in the right direction. Technology transfer and direct subsidy of leapfrog technologies by the industrial north are going to be crucial to helping the developing world avoid the pitfalls and dead-ends that we have gone through. It will also prevent global carbon emissions from climbing even as the North decreases its own carbon footprint.

Renewable is Not a Synonym for Sustainable

Keep reciting it to yourself... Renewable is not a synonym for sustainable

One of my dad's maxims was "never buy or sell hay." Buying hay might bring in the seeds of weeds we had spent years trying to control; selling hay removed tons of nutrients without replacing it with commensurate manure.Thousands of years of unharvested prairie had built the rich silt loam. The first 75 years of diversified, value-added farming saw mainly livestock and livestock products leave a nearly-level farm, using no commercial fertilizer, yet with ever-increasing yields.

We began raising soybeans during World War II, rotating and covering about one-fifth of the acreage each year. By 1954, soil tests showed a need for phosphate fertilizer. (The southwest Iowa soils were high in potassium and we inoculated the beans for nitrogen fixation.)

A farmer may be able to sell some switchgrass grown from the nutrients in the soil, but over time will have to replace a lot of nitrogen, phosphorus and potassium and eventually some micro-nutrients.

Maintenance rates would cost around $30, at 2007 prices, per ton of dried switchgrass sold. For biofuels to be sustainable, fertilizer sources would have to be limitless and economical.

Some in the biofuels industry say farmers will need a $50-per-ton subsidy to make switchgrass work for them.

Letter to the Editor of the Des Moines Register from Dale Shires of Iowa City.

The Ethanol Bubble -- prices to $4.50 per bushel in February, I think we can begin to call it a Bubble -- is on the rise. Even at the $3.70 or so price of last week, farmers willl sorely tempted to plant every last acre in corn. Never mind the fences or the marginal land, or the "green strips" or the CRP fields.

America and America's farmers seem perfectly willing to sacrifice the last few inches of world-class topsoil in order to extend the Age of Easy Motoring just a couple more years.

Also, check out The Exchange, (MP3 file) from Iowa Public Radio last week as Dennis Keeney, Senior Fellow at Institute for Agriculture and Trade Policy, cautions against irrational exuberance in renewables.

We need a sustainable, future-proof energy policy. Renewables and ethanol (from whatever source) are just a small part of the eventual solution.

How's that $3.00 a gallon gas treating you?

Drive less.

Biodiesel Economics and Clinton Plant

This week the City of Camanche and Clinton County met with officials from Hawkeye Bio Energy to consider a tax increment financing plan to assist in the building of a soybean biodiesel plant. The Hawkeye Bio Diesel plant has been in the works for more than two years now and construction is underway on the plant business and administrative offices on the plant site. Estimated cost of construction is $90m. According the an article in the Clinton Herald,, Hawkeye Bio Energy is requesting $5m in TIF financing for the project.

I have written extensively on this blog about the macroeconomics of ethanol production. But we have paid little attention to soy (and vegetable oil-based)
diesel. A September, 2006 article by the Minneapolis Federal Reserve Bank outlines some of the economic factors. One of the most attractive things about biodiesel is that it can be made from post-consumer waste. A major input in smaller biodiesel plants is recycled grease and frying oil.

Most important for producers of biodiesel, the 2005 Energy Act provides a $1.00 per gallon subsidy for biodiesel produced from virgin oilseed. The Act only provides a 50-cent subsidy for diesel made from recycled product, an effective $ .50 subsidy for oilseed farmers. Although the tax-credit portion for seed producers is scheduled to sunset in 2008 there will certainly be efforts to extend it by farm state members of Congress. In addition to the direct subsidies to biodiesel producers and indirect subsidies to seed stock farmers, one needs to also factor in the additional multimillion dollar annual direct federal subsidies to soy and canola farmers.

Biodiesel or blended diesel (regular petroleum diesel with biodiesel added) is technically and chemically an attractive substitute for petroleum-based diesel. One factor is because of recent regulations that require diesel fuel to include substantially less sulfur, a major ingredient in smog and acid rain. Sulfur is however a key ingredient in diesel fuel that allows it to lubricate engines. So reducing the sulfur content in petroleum-based fuel requires additives. However, adding just 1 or 2 percent biodiesel will restore the lubricity of the fuel.

According to the Minneapolis Fed, biodiesel from seed stock will remain price competitive (with or without the Energy Act subsidies) as long as crude oil prices remain in the $50/barrel range. Regardless of subsidies however, the Fed goes on to state:

The National Biodiesel Board estimates that if all the current and proposed projects in the country get built, they would be capable of producing 1 billion gallons of the fuel a year. A federal biodiesel mandate (some members of Congress have proposed requiring U.S. vehicles to burn 2 billion gallons annually by 2015) would certainly stimulate demand for that much biodiesel.

But Tiffany, at the University of Minnesota, believes that a lower production ceiling is more realistic. “If we just had a low-blend strategy for the whole country, maybe we could use about 500 million gallons of biodiesel [annually],” he said. Pushing production beyond that level risks driving up prices for soy and canola, thereby raising production costs and making biodiesel derived from fresh oil less competitive, even if the federal tax credit is renewed two years from now.

It is worth noting here that the increased demand for corn for ethanol production is the driving factor behind the recent run up in corn prices and also in farm land.

If demand for biodiesel takes off, producers are likely to turn to yellow grease [post-consumer and industrial waste] as their preferred feedstock. Most recycled grease goes unused, and prices are lower and more stable. So grease renderers, not farmers, are in a better position to capitalize on any long-term growth in biodiesel usage.

The same economic constraints will likely prevent biodiesel from weaning the country of its dependence on imported oil. Even if nationwide biodiesel production rises to 1 billion gallons annually, that represents only 2 percent of diesel consumption in 2005.

Biodiesel's limited horizons raise the question of whether the fuel is worth subsidizing. Compared with other energy and agricultural subsidies, the cost of the federal biodiesel tax credit is a drop in the bucket, but because it's indexed to consumption, the subsidy will grow with biodiesel output.

All of this is not to say that biodiesel doesn't have a bright future in the district. Fundamentally, biodiesel is an effective, environmentally beneficial motor fuel that many consumers want to use. It provides farmers buffeted by low commodity prices with an additional market for their crops. Equally important, it gives those with an entrepreneurial bent the opportunity to add value to their produce, as in the case of the Minnesota Soybean Processors cooperative in Brewster.

Even if biodiesel won't eventually provide a market for all the soy and canola farmers can grow, or displace regular diesel from the nation's gas tanks, it's likely to continue to grow, with or without subsidies.

Bottom line here is that biodiesel, like ethanol, is no panacea to petroleum dependency. It's role should be understood, like ethanol's, to be a regional one and also one of many alternative fuels that will in combination help lower but not eliminate dependence on petroleum. Only drastically reduced demand for petroleum fuel can truly help accomplish that.

Biodiesel shows a slightly more sustainable market case than ethanol with or without subisied It is attractive for the following reasons; it can be made from post-consumer waste, diesel fuel can give a mileage/performance ratio that is better than gasoline powered vehicles making it attractive as an auto fuel substitute.

Being a bit lower-risk than an ethanol plant the Hawkeye Bio Diesel facility should be in a better position to raise the capital for construction. This then begs the question of whether TIF financing to the tune of 18% of construction costs, in order to produce 50 jobs is a good deal for the taxpayers of the City of Camanche and Clinton County. This in light of the already overextended TIF financing in this region that I have documented here. I’ll take that up in a subsequent post.

DeLong on Income Inequality

Brad DeLong graphs out the share of the nation's wealth in the hands of the top 1% income bracket. Short version, we are now at the same level as we were in the Gilded Age just prior to the Great Depression. Is this a good trend for an egalitarian, republican society? I think not.



The original is blurry too. Must be Brad's video codec.

Green Business 101

Very busy this week, with a couple of 12 hour days thrown in. Did discover a neat Special Business Section in the NYT though.

The Business of Green.

TIF-ed Off?

In a once-in-a-millenium alignment of the stars, I find myself in agreement with my bête noir on the Clinton Herald bulletin board in the overuse of TIF districts in Iowa in general but in Clinton in particular.

TIF stands for tax increment financing. TIF is a tool created by the state for local governments. When a public improvement, either a road, school or private development project is carried out it (generally) raises the value of the land. The difference in the taxable value of the land before the development and for a certain period after the development, is the "increment." In a TIF district, all the taxable value of the increment for a certain period of time, usually 10, 15 or 20 years, is diverted from general revenues and used to finance all or part of the project. This can be either to actually build a city-financed project such as roads or schools. Or, it can be a pure tax set aside or rebate to a developer to use such a piece of land, such as has been done in Clinton for large employers with new projects.

In general, TIF's can be good things. They can allow certain projects that could not be financed out of general funds or out of bond issues to come to fruition. They can be a useful incentive to lure that special employer to your town.

But all things should be used in moderation and like any tool its overuse can transform it into a crutch without which the entity cannot perform the original duties. That I fear is what is happening with TIF financing in Clinton, and throughout the state.

Dave put me onto a report from the ISU Economics department, Swenson, Dave, et. al. Tax Increment Financing Growth in Iowa. It contains a lot of useful statistics heretofore not gathered on TIF use in the State. The authors state in their introduction,

During the 2003 Iowa General Assembly, legislators held several meetings on the
topic of economic development tools, and specifically addressed questions of TIF
use and potential abuse. Revealed during these proceedings was a dearth of
information about much of TIF use in Iowa, in particular, the amount of debt
associated with TIF districts in the state, the kind of debt, the duration of the
debt, and overall, the kinds of projects that benefited from this authority. State
secondary data compilations do not allow for an inquiry into the kinds of firms
that benefit from TIF authority – those assessments must be done at the local
government level and involve research of both city and county government
finances.

Apologies for the odd line breaks. Cutting and pasting from Adobe PDF requires an middle step that it is too late for me to bother with.

Swenson, et. al. do not come to any conclusions as to whether TIFs are successfull, good or bad. In fact the authors state in their conclusion that the data is all over the place,

It is very hard to demonstrate that TIF usage has, on the whole, benefited the
state of Iowa in any uniform manner. Our data show that three-quarters of all of
the valuation gains in TIF districts in Iowa are concentrated in just 31 cities (and
half of the growth in a mere 11 cities). Among those top 31 cities, some are
enjoying booming job and population growth, but some are not. Some of are
expanding their total tax bases, and some of them are contracting despite their
aggressive use of TIFs. For some it is enhancing fortunes, and in others it is not
reversing long and pervasive patterns of business and population decline. None
of our data can sort out what growth would have occurred in growing areas
regardless of the use of TIF incentives, nor can it tell us what growth would have
left had TIF resources not been utilized.

But they do say this about the small small and medium-sized communities:

Here is a common scenario about TIF usage in Iowa’s smaller cities: Usually, TIF
authority is applied to areas of communities that are near the edge of town or
aligned with other growth areas of the community, say along a major state
highway – their economic development zones or districts. Frequently, much if
not all of the incremental growth in these communities is a relocation of growth
from deteriorating main-street areas out to the benefited zones. As a
consequence, the TIF district gains, the general tax base shrinks, and the relocating
firm gets a tax break. The cities claim they retained the businesses and
count this as an economic development success, but city, school, and county
general fund tax rates go up to cover costs no longer borne by the re-located firm.
Regionally there has been no job or income growth as a result.

From conversations with county auditors and others privy to city and county
government activities regarding TIF usage, there are also increasing reports that
TIF revenues in Iowa are a lucrative revenue stream for cities that they are loathe
to cede back to other local governments. There are also reports that TIF
revenues, according to the Iowa Code, supposed to be collected and used
specifically for economic development or urban renewal debt payments and
infrastructure enhancements are being used to pay for fire stations, libraries,
parks and recreation facilities, general road repair and maintenance, and hosts of
other general or traditional government uses.

As for Clinton itself, the study had the following data about Clinton County's use of TIF financing. The per capita TIF valuation in Clinton County in 1997: $527. 2006: $1497. That is an increase of 284% in nine years. This strikes me as um, shall we call it irrational exuberance?

I have three children ages 5,7 and 9. Most of the new projects in Clinton: Ashford, ADM's expansion, the new riverboat development at Hwy 30 and Mill Creek Parkway are 15 year TIF's. Not one of my children will be the beneficiary of a single dollar of the increased property taxes generated by those projects during their school years.

I think the onus should be very squarely on the shoulders of City and County officials to make a very careful, coherent and concrete justification for any further use of TIF's in Clinton County for the near future. It seems to me that too many business plans now incorporate TIF as part of the profitability calculation. Without it the business plan is no good. But our economic development planners want so much for new development and business that any plan, even if it is fundamentally weak, is looked upon as a gift. That's not right. The burden of proof should on the project owner to show a concrete payoff to the City or County in excess of the avoided or invested incremental taxes independent of his business plan.

I urge everyone in Clinton that the next time a major civic improvement that is proposed to be financed with TIF dollars that some hard questions be asked and that the elected officials know that, finally we are keeping score.

China Markets and Economics Linkfest.

An interesting week in the financial markets. It appears we have avoided a major meltdown, although some historical analysis does suggest that major corrections often take the form of a large down day(s), followed by modest recovery or range trading and then further down.

Some notes on the China effect. Barry Rithohltz notes that the "blame China" crowd is ignoring one thing, the comparatively tiny size of China's equity markets:

Consider this factoid: The combined value of China's Shanghai and Shenzhen stock markets -- the total market capitalization -- was $400 billion at the end of 2005; Over the next 18 months, it nearly tripled, with especially strong gains over the last six months. After this week's 8.8% plunge, it is a mere $1.4 trillion dollars.

To put that into some context, the New York Stock Exchange (NYSE) has a global capitalization of ~$22 trillion. The Nasdaq is worth another $2 trillion dollars.

Bottom line? By my back of the envelope calculations, our correction of 3.5% wiped out an estimated trillion dollars in combined NYSE/Nasdaq 100 value -- two thirds of the entire capitalization of both of China's exchanged combined.

Brad Delong on Brad Sester on China's trading economy and us domestic policy:

Both the US and Europe... have done their part to support China’s development over the past few years. US imports from China have increased from $100 b in 2001 to $280b in 2006.... Eurozone imports from China have gone from 62b euros in 2002 to something like 130b euros, maybe a bit more, in 2006.... Both the US and Europe have supplied a lot of demand for Chinese goods over the past few years. The risk of a protectionist backlash is no doubt rising. But so far, the US hasn’t taken any policy actions that have really crimped the expansion of China’s exports – which is what I think worries DeLong.

Nor for that matter has the US government done much – if anything -- to help in the US whose living standards have been adversely affected by China’s export success. DeLong and Jeff Faux would both agree that tax cuts for the have-mores whose assets are worth even-more thanks to large financial inflows from China doesn’t count...

But China’s policy of buying dollars (and to a smaller degree euros) also means that China is sinking a growing share of its national wealth into a set of assets that are almost certain to depreciate over time.... The sums involved are not trivial. China is now running a current account surplus of around 10% of its GDP. That implies that about 20% of China’s annual savings... is being invested in assets that are likely to depreciate.... China’s government effectively now has a policy of both holding China’s current living standards down and sinking a fairly large share of China’s savings into assets that are sure to lose value.... The capital losses could destroy the PBoC’s formal capital: borrowing in RMB, even at an artificially low rate, to buy depreciating dollars isn’t a winning financial strategy....

I suspect China’s leaders will be somewhat less magnanimous. They will argue that the losses... [stem] from the failure of the US to adopt the policies needed to maintain the value of Chinese investment in the US....

I worry that at some point, China will conclude that investing so much of its savings in the non-tradable part of the US economy isn’t the best way of building Chinese wealth, and the flow of funds will stop. If that process is gradual, it will be for the best--but it if it is sudden, well ... a lot of US workers now employed in the non-tradables sector will need to shift into tradables production, pronto.

The tough issues of globalization, equity for those affected by same, tariff control need to be addressed. Sadly, the U.S. government is busy shouldering the White Man's Burden to the exclusion of all else that matters. Our standing in the international arena is approaching zero.

Bush isn't just planning on handing the unfinished business of Iraq off to his successors. Hes planning on handing everything off as unfinished busienss. He is a lame duck in every sense of the word.

I'm A Member of the Pigovian Club.

Huh? The Pigovian Club is a group of economists who advocate Pigovian Taxes.

What's a Pigovian Tax? A Pigovian tax is "a tax levied to correct the negative externalities of a market activity. For instance, a Pigovian tax may be levied on producers who pollute the environment to encourage them to reduce pollution, and to provide revenue which may be used to counteract the negative effects of the pollution. Certain types of Pigovian taxes are sometimes referred to as sin taxes, for example taxes on alcohol and cigarettes."

Harvard Economist and former member of the Bush Administration's Countil of Economic Advisors, Greg Mankiw has started the Pigou Club. In October he published the club manifesto in the Wall Street Journal.

With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it.

Why raise the gas tax? Environmental benefits, road congestion relief, relief from other government regulations aimed at reducing consumption, and lastly, more revenue for the budget.

With this nasty cold I am not able to be in Des Moines right this minute presenting to our legislators my own Pigovian tax proposal to raise the state tax on regular gasoline to 50-cents per gallon within four years. Typical tax and spend Democrat you might say. Wrong, I say. You can download the undelivered draft of my position paper here, small PDF.

But this is the plan in a nutshell: The key concept here is what is called tax shifting. Instead of taxing people on how hard they work, we will shift the tax burden to tax how much they consume or waste. Those who consume or waste less, pay less. Thus...

1. Raise the tax on regular gas by increments from 21¢/gal. to 50¢/gal. in 2011.


2. Give each Iowan an income tax refund equal to the mean per captia gas usage of the state times the current gas tax. For example, if in 2011 the mean per capita gas usage is 813 gallons of gas, multiply by 50¢, equals a $406.50 income tax refund


3. Keep the fuel taxes on E85, ethanol blended gas, and biodiesel about half the tax on standard gas

That's it. Most of the legislators I have discussed this with agree that it is a very interesting and quite probably workable idea. What they can't do is bring themselves to vote for any kind of tax increase on gas. I think this is just a failure of imagination and courage. The tax waste, not work meme is tailor made for conservatives of either party to use to convince the people of the state that this sort of tax strategy is in their interests.

Are For-Profit Universities Economically Sustainable?

The following article appeared in last Sunday's New York Times, and encapsulates many of the concerns I and I think others have had about Ashford University. Troubles Grow for a University Built on Profits:

PHOENIX — The University of Phoenix became the nation’s largest private university by delivering high profits to investors and a solid, albeit low-overhead, education to midcareer workers seeking college degrees.

But its reputation is fraying as prominent educators, students and some of its own former administrators say the relentless pressure for higher profits, at a university that gets more federal student financial aid than any other, has eroded academic quality.

According to federal statistics and government audits, the university relies more on part-time instructors than all but a few other postsecondary institutions, and its accelerated academic schedule races students through course work in about half the time of traditional universities. The university says that its graduation rate, using the federal standard, is 16 percent, which is among the nation’s lowest, according to Department of Education data. But the university has dozens of campuses, and at many, the rate is even lower.

...

Many students accuse recruiters of misleading them, and the university’s legal troubles trace back to similar accusations of recruitment abuses. In 2003, two enrollment counselors in California filed a whistle-blower lawsuit in federal court accusing the university of paying them based on how many students they enrolled, a violation of a federal rule.

After the lawsuit was filed, the Department of Education sent inspectors to California and Arizona campuses. The department’s report, which became public in 2004, concluded that the university had provided incentives to recruit unqualified students and “systematically operates in a duplicitous manner.”

The university paid $9.8 million to settle the matter, while admitting no wrongdoing. But the department’s searing portrait of academic abuse aroused skepticism among many educators.

Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to “potentially bankrupting liability.”

It is the function of a corporation to enhance shareholder value. Period. Delivering a good or service are merely the modus for generating the profits that feed the shareholders. A corporation that is well run may well have internalized the importance of delivering a high-quality product or service to achieve those profits. But shareholders may not always be satisfied with the level of growth in profits that diligent attention to quality may imply. This raises a larger question in economics and investing: it is appropriate to have near permanent expectations of growth for most or even many firms?

Let's examine the model of the for-profit education institution. It is probably true that during such a company's early, start-up days growth in revenues and profits may be rather spectacular as the company grows to a given size. At some point management may feel an optimal size has been reached. Such an optimal size is a fuzzy benchmark but surely includes such criteria as an ability to effectively hire and manage faculty and maintain a certain educational standard and graduation rate. It must be able to do this in order to ensure a product of reasonable quality such that customers will continue to patronize the establishment.

At that time, what the company really gets into is what is (one hopes) a long period of very slow or stable growth that produces regular, predicable profits. Nothing spectacular, just good old-fashioned blue chip margins. There are a large number of investors for whom high growth (and coincidentally, higher risk) investments are not appropriate; who put more value on an good, old-fashioned annuity investment. Such companies should be more attractive than they are.

But investors collectively have shunned such blue chip companies in recent years. Such a company will be punished by the Wall Street collective which is dominated by institutional investors and mutual funds who value growth stocks most highly. Furthermore, the business plan of the managers and venture capitalists may call for a medium term profit trajectory that rules out such staid business models.

Thus the drive for continuing growth in company size and profits will eventually see an educational institution grow to the point where the size dictates that quality will be reduced. This in turn leads to increased customer dissatisfaction -- higher drop-out and lower graduation rates, increased difficulty in achieving or maintaining accreditation -- which will put pressure on recruiters to continue to feed the maw of the massive education machine, a la the lawsuit now facing the University of Phoenix.

Most of the executives of Bridgepoint Education, Inc, the parent of Ashford University, come to their company by way of the University of Phoenix. In my dealings with some of those officials I am convinced that most of them are aware of the flaws of the University of Phoenix and started Bridgepoint to deliver a better quality education product.

A lot of Clinton's future is pledged to Bridgepoint's ability to deliver a quality education product over a long period of time. I think many of the readers will have their own anecdotes with regard to how well Ashford is doing in avoiding the pitfalls of University of Phoenix -- not just at the business model level -- but also in the areas of faculty, class, and workplace quality.

I think that the management of Bridgepoint will serve themselves, their employees, their customers, and (I hope not lastly as far as they are concerned) the City of Clinton by concentrating on a business model that embraces a high-quality, slow growth, long-term moderate profitability approach. The traditional VP trajectory; spectacular growth, IPO, additional growth to the breaking point will inevitably lead to a poor result for the whichever stockholders end up holding the bag (certainly not the management) and most importantly as far as I'm concerned for the City of Clinton.

Opening Moves Of Carbon Trading Gambit In Congress?

A couple of things have crept up in the last few days that make me think that a serious play for some form of carbon credit and/or trading scheme will come up in this Congress. First, the inside baseball bench moves from My DD's, Nancy Scola:

Pelosi's push this week to create a new Select Committee on Energy Independence and Global Warming was a fascinating peek into the inner-workings of the House and the relationships between the Speaker, Democratic leadership, and the rest of her caucus. Yep, the new panel lacks legislative jurisdiction, but is a platform for raising the profile of climate change. As to be expected, John Dingell -- chairman of the committee that loses ground in this new move and the representative from suburban Detroit -- found this whole reorganization business just simply unnecessary.

Motivating Pelosi? The knowledge that Dingell isn't too keen on the idea that there is a scientific consensus on global warming; the Speaker seems to really want movement on climate change this Congress, and this move puts pressure all around to squeeze something out of the House in the near future.

But oh, there's so much more in this mix! For example: Dingell's chief of staff was a lobbyist and strategist at DaimlerChrysler as late as November. Dingell's wife is the executive director of government relations at GM. Dingell favored Hoyer over Pelosi in the Whip's race in 2001. Pelosi backed Dingell's primary challenger Lynne Rivers in 2002. One House chairman, Henry Waxman is of the opinion that "existing committees can deal effectively with global warming," but worth keeping in mind is that Waxman is next in line for the chair of the Energy and Commerce Committee should the 81 year-old Dingell ever vacate the House.

Just in terms of structure, it's hard not to see this as an end run by Pelosi around the House's committee system and its chairmen. There just doesn't seem to be a whole lot of precedent for what she's done. (Of course, one might argue that there's not a whole lot of precedent for global warming.) The last "non-permanent select committee" was created by Republican leadership to blunt criticism after Hurricane Katrina. The one before that, Homeland Security, was created in the wake of September 11 and soon evolved into full standing committee. This new panel isn't as obviously event-driven and isn't yet designated permanent. Is the idea for it to be short-lived and for climate change and energy independence to revert back to Energy and Commerce when, say, Waxman pries the gavel out of Dingell's hands?

So, that's the House, where Pelosi seems to be laying the groundwork for a committee to talk serious shop about climate change. Over on the Senate, the EIA has just posted a response to a request (largish PDF document) by Sens. Bingaman, Landrieu, Murkowski, Specter, Salazar, and Lugar - a bipartisan lot you'll note -- for comment on draft legislation for a carbon trading regime. In the document, complete with the senators' request and draft legislation.

The draft legislation itself is pretty forward-thinking (at least compared to efforts to-date):

The program would establish annual emissions caps based on targeted reductions in greenhouse gas intensity, defined as emissions per dollar of Gross Domestic Product (GDP). The targeted reduction in GHG intensity would be 2.6 percent annually between 2012 and 2021, then increase to 3.0 percent per year beginning in 2022. To limit its potential cost, the program includes a “safety-valve” provision that allows regulated entities to pay a pre-established emissions fee in lieu of submitting an allowance. The safety-valve price is initially set at $7 (in nominal dollars) per metric ton of carbon dioxide equivalent (MMTCO2e) in 2012 and increases each year by 5 percent over the projected rate of inflation, as measured by the projected increase in the implicit GDP price deflator. In 2004 dollars, the safety valve rises from $5.89 in 2012 to $14.18 in 2030.

The proposal calls for initially allocating 90 percent of the allowances for free to various affected groups, but the proportion of allowances to be auctioned grows from 10 percent in 2012 to 38 percent in 2030. The revenue from the auctions and any safety-valve payments are accumulated into a “Climate Change Trust Fund,” capped at $50 billion, to provide incentives and pay for research, development, and deployment of technologies to reduce greenhouse gas emissions. The U.S. Treasury would retain any revenue collected in excess of the $50-billion limit.

Predictably, the EIA takes a dim view of the proposal. In essence they say that it would shave output in the early part of the program as industries pick the low-hanging fruit from a greenhouse gas (GHG) amelioration standpoint. But says the EUA, after that as gains get harder to come by, they would just pay more into the "saftey-valve" account and pollute away. However, the EIA predictions for future prices don't seem to take into account the increased expenses from either building non-GHG production, or paying the production penalty that the producers will incur and inevitably pass on to consumers.

All of EIA's prognostication abilities must be taken with a large grain of salt, considering for example their inability to predict (see: Natural Gas & Diminished Expectations) US gas production and imports over the last six years, or their utter failure to come to grips with North Sea peak oil.

Not saying that anything that reaches the floor will even remotely resemble the draft. But this at least shows that there are people on both sides of the aisle who are starting to think and -- more to the point -- plan seriously about making intelligent policy with regards to petroleum scarcity and global warming.