Dispatches from a Small Business
Posts tagged ‘prices’
It is amazing the number of goofy ideas folks have generated to try to substitute for prices in matching supply and demand. And none of them ever work. David Zetland has a good example in the world of water, where politicians are willing to jump through just about any hoop to avoid matching water supply and demand via prices.
I am exhausted with folks who have never tried to shop for health care telling me that it can't be done, despite the fact that I do it all the time and achieve substantial savings. This is a meme developped and maintained solely to support government power by declaring that there is a market failure in the pricing mechanics in the health care industry that can only be solved through regulation and price controls. I wrote in response
I agree that the pricing in health care is often arbitrary and capricious. Of course some suppliers are going to try to soak third party payers. But I don't think simply changing the payer (from private to public) or having a government bureaucracy set prices for millions of line items is the solution. My diagnosis is that health care lacks the one thing we have for most every other product or service: shopping.
Now, you try to head off this argument with a few folks who claim shopping is impossible in health care. But that is absurd. There is a large and growing community of us who have real health insurance, rather than pre-paid medical plans, which means we have high deductibles. We pay all of our regular expenses out of pocket, and maintain health insurance for large, unpredictable, potentially bankrupting expenses.
I must admit that shopping for health care seemed odd and a bit intimidating at first, having lived for years in the world of gold-plated, pay-for-everything corporate health care accounts. But it really is not that hard. I have consistently knocked down the cost of everything from x-rays for my kids' fractures to colonoscopies by a half to two-thirds. I am now used to doctors and providers having that second price book under the counter they go to if they know you don't have a third-party payer they can soak. We always research and ask for generics. We think twice before accepting the need for an expensive test, like a MRI, and price shop it if we have to have one. I push back on my dentist who tries to x-ray my teeth every few months. I have many friends that saved a ton of money on oncology treatments by just doing a little shopping.
I am exhausted with academics and writers who have never tried to shop for health care telling me it is impossible. Many of us do it, and there are more and more resources out there for us. Sure, there are certain things I am not going to have the time or ability to price shop -- if I am lying on my back having a heart attack, my wife (hopefully) is not going to check rates at the hospitals. But it is a fraud to extrapolate from this minority of health care situations to all health care expenditures.
The other argument is used is that at the beginning of a health care interaction we may not know exactly what care is needed. So what? The same is true of auto repair, but I don't blithely allow the repairs to proceed at any cost just because I didn't know up front what the diagnosis would be. I get an estimate when each new problem is found, and I have on several occasions interrupted a car repair, told them their price was too high on certain repairs, and went elsewhere for the repair or deferred it entirely.
Let's suppose there is some sort of market failure for 10-20% of health care charges where price shopping is impossible. Then let's discuss government regulatory approaches for those situations. But for the other 80-90%, we should be structuring a health care system where consumers provide the price regulation, as they do in nearly every other industry, by shopping.
As a note, some people are exhausted by the idea of shopping. My first response is, so what? Get over it. We are not going to take over a whole industry just to free you from a bit of hassle. The second response is that research shows that only a small percentage of buyers need to be price shoppers to enforce price discipline. I generally trust that Amazon has low prices and don't always check them, because I know there are much, much more rabid people who do care and do check.
Over time, I have found physicians who are both sympathetic and cooperative with this approach and actively help us minimize the cost of our care. Its just amazing -- somehow we accept this image as a doctor being above all this cost stuff, in fact with considerations of price and cost being corrupting to their mission of keeping us healthy. Imagine a car mechanic that took that attitude -- "I'm the expert here and you will pay whatever it costs to do what I say you need to do." Would you fire the mechanic and find a better and cheaper one, or would you suggest that what we really need is a massive new government bureaucracy to set prices for every imaginable repair a car might need.
Sometimes I suspect much of the support for government health care is from people who see shopping and taking responsibility for their own care as too much of a hassle.
This is terrific, if true. My fear, of course, is they are getting subsidized through a back door somewhere, but if they really think they can make subsidy-free solar work financially, that's awesome:
Two German solar energy developers are planning to build photovoltaic plants in southern Spain that will earn a return without government subsidies.
Wuerth Solar GmbH & Co. intends to build a 287-megawatt plant in the Murcia area for 277 million euros ($363 million), according to the regional authority. Gehrlicher Solar AG said it plans to develop a 250-megawatt solar park in the Extremadura region for about 250 million euros.
The projects, about three times larger than any European solar plant, may be the first that don’t rely on feed-in tariffs and compete with wholesale power prices. All plants in the region so far depend on fixed premium rates for solar power, which can be several times higher than wholesale prices.
Spain suspended the tariffs on Jan. 27 as part of government austerity measures, threatening the survival of the industry. Tariffs for large-scale solar were set at 121 euros per megawatt-hour. Developers now look to build plants without this support, helped by falling equipment prices.
It would be impossible to trace all the ways taxpayer money ends up in the coffers of solar manufacturers like First Solar. Most of First Solar's money has been made selling panels in Germany to solar plants that, by law, can rape electricity customers with prices 10-15x higher than the market price for electricity. First Solar also benefits more directly from direct subsidies, loan guarantees, "retraining" subsidies and even government Ex-Im Bank loans to sell panels to itself. While First Solar vehemently denies it is a subsidy whore, it is telling that when Germany began to cut its solar feed-in tariffs, First Solar's stock price fell from over $300 to around $20. Just watch day to day trading of First Solar stock, it does not move on news about its efficiency or productivity, it moves on rumors of changes in government subsidies.
Let's look at one subsidy. In 2010, the Obama administration gave First Solar a subsidy of $16.3 million, ostensibly to help open a new plant in Ohio. But it is interesting that this private company, which apparently could only raise the $16.3 million it needed by taking it by force from taxpayers, had plenty of money to pay its CEO. In the 13 months leading up to its $16.3 million taken from taxpayers, First Solar paid its new CEO $29.85 million!
Rob Gillette, the ousted CEO of First Solar Inc., earned more than $32 million in compensation from the struggling company for his two years of service, according to a regulatory filing Wednesday.
Gillette came to First Solar from Phoenix-based Honeywell Aerospace in October 2009 and was fired by the Tempe-based solar company's board of directors in October 2011....
Most of his compensation came in the three months of 2009 that he worked, when his total compensation, including salary, bonus, stock and options awards and other perks, reached $16.55 million. In 2010 his total compensation was $13.3 million, and last year he earned $2.46 million, which consisted of $763,000 in base salary and a $1.7 million severance.
Yep, they can't scrape up $16.3 million of their own money for a factory but they can find $30 million to give to an unproven CEO they eventually had to ride out on a rail.
By the way, I don't know Mr. Gillette, but I was once an executive at Honeywell Aerospace for several years. I can tell you that it's a great place to find an executive who is focused on process to manage large complex organizations in a relatively stable business where manufacturing, logistics, and schmoozing large buyers is important. It is a terrible, awful place to seek an executive for a fast growing business that needs to rapidly shift business strategies and where grinding through the process gets the wrong answer 12 months too late.
Another solar company which received $2.1 billion in loan guarantees from the Obama Administration has gone bankrupt. The good news is that it has not spent much of that taxpayer money, and its bankruptcy is probably due more to the bankruptcy of its German parent, which in turn is likely related to the huge cuts Germany has made in its feed-in tariff subsidies.
The big asset possessed by Solar Trust is the Blythe solar project, a planned 1000MW facility that apparently has all of its permitting in place. The Blythe facility was originally going to be a solar-thermal facility, with adjustable mirrors focusing the sun on a central boiler that would in turn power turbines. This plan was scrapped last year in favor of a more traditional PV technology, and I know local company First Solar has been hoping to save itself by getting the panel deal (First Solar also has been hammered by the loss of German subsidies).
If we take the cost of this planned 1000MW facility as the stated $2.8 billion (of which 2.1 billion would be guaranteed by US taxpayers), we see the basic problem with solar. A new 1000MW natural gas powered electric plant costs no more than about $1 billion. It produces electricity 24 hours a day. This solar plant, to be the largest in the world, would produce 1000 MW for only a few hours of the day. That area of desert gets about 7 peak sun hours per day (the best in the country) so that on a 24 hour basis it only produces 292 MW average. This gives it a total capital cost per 1000 MW of $9.6 billion, making it approximately 10 times costlier than the natural gas plant to build. Of course, the solar plant has no fuel costs over time, but solar is never able to close the gap over time, particularly with current very low natural gas prices.
Update: Apparently the $2.8 billion was just for the initial 484 MW so you can double all the solar costs in the analysis above, making the plant about 20x costlier than a natural gas plant.
My Forbes article is up for this week, and discusses 10 reasons why legislation frequently fails. A buffet of Austrian economics, Bastiat, and public choice theory that I wrote for the high school economics class I teach each year.
Here is an example:
3. Overriding Price Signals
The importance of prices is frequently underestimated. Prices are the primary means by which literally billions of people (most of whom will never meet or even know of each others' existence) coordinate their actions, without any top-down planning. With rising oil prices, for example, consumers around the world are telling oil companies: "Go find more!"
For a business person, prices (of raw materials, labor, their products, and competitive products) are his or her primary navigation system, like the compass of an explorer or the GPS of a ship. And just as disaster could well result from corrupting the readings of the explorer's compass while he is trekking across the Amazon, so too economic damage can result from government overriding price signals in the market. Messing with the pricing mechanisms of markets turns the economy into a hall of mirrors that is almost impossible to navigate. For example:
- In the best case, corrupting market prices tends to result in gluts or shortages of individual products. For example, price floors on labor (minimum wages) have created a huge glut of young and unskilled workers unable to find work. On the other side, in the 1970s, caps on oil prices resulted in huge shortages in the US and those famous lines at gas stations. These shortages and gas lines were repeated several times in the 1970's, but never have returned since the price caps were phased out.
- In the worst case, overriding market price mechanisms can create enormous problems for the entire economy. For example, it is quite likely that the artificially low interest rates promoted by the Federal Reserve over the last decade and higher housing prices driven by a myriad of US laws, organizations, and tax subsidies helped to drive the recent housing and financial bubble and subsequent crash. Many will counter that it was the exuberance of private bankers that drove the bubble, but many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered
Last week I was in Albuquerque several hours early for my meeting in Santa Fe. Several years ago I had written about the Railrunner passenger rail line that operates from south of Albuquerque north to Santa Fe. Our Arizona Republic had written a relentlessly positive article about the line, focusing on how much the people who rode on it loved it. Given that the picture they included in the article showed a young woman riding in a nearly empty car, I suspected that while the trains themselves might be nice for riders, the service probably wasn't a very good deal for taxpayers.
Of course, as is typical, the Republic article had absolutely no information on costs or revenues, as for some reason the media has adopted an attitude that such things don't matter for rail projects -- all that matters is finding a few people to interview who "like it." So I attempted to run some numbers based on some guesses from other similar rail lines, and made an educated guess that it had revenues of about $1.8 million and operating costs of at least $20 million, excluding capital charges. I got a lot of grief for making up numbers -- surely it could not be that bad. Hang on for a few paragraphs, because we are going to see that its actually worse.
Anyway, I was in Albuquerque and thought I would ride the train to Santa Fe. I had meetings at some government offices there, and it turns out that the government officials who spent the state's money on this project were careful to make sure the train stopped outside of their own workplaces. I posited in my original article that every rider's trip was about 90% subsidized by New Mexico taxpayers, so I might as well get my subsidy.
Well, it turned out I missed my chance. Apparently, trains do not run during much of the day, and all I saw between 9:30AM and 4:00 PM was trains just parked on the tracks. I thought maybe it was a holiday thing because it was President's Day but their web site said it was a regular schedule. I caught the shot below of one of the trains sitting at the Santa Fe station.
Anyway, I got interested in checking back on the line to see how it was doing. I actually respected them somewhat for not running mid-day trains that would lose money, but my guess is that only running a few trains a day made the initial capital costs of the line unsustainable. After all, high fixed cost projects like rail require that one run the hell out of them to cover the original capital costs.
As it turns out, I no longer have to guess at revenues and expenses, they now seem to have crept into the public domain. Here is a recent article from the Albuquerque Journal. Initially, my eye was attracted to an excerpt that said the line was $4 million in the black. Wow! Let's read more
New Mexico Rail Runner Express officials said Wednesday the railroad will receive an additional $4.8 million in federal funding this year that puts the operating budget more than $4 million in the black.
The injection of new money boosts Rail Runner’s revenues this year to $28 million, well in excess of expected operating costs of $23.6 million, said Terry Doyle, transportation director of the Mid Region Council of Governments, which oversees Rail Runner.
OK, I am not sure why the Feds are putting up money to cover the operating costs of local rail lines in New Mexico, but still, this seems encouraging. This implies that even without the Fed money, the line was withing $800,000 of breaking even, which would make it impressive indeed among passenger rail lines. But wait, I read further down:
The announcement comes as state lawmakers debate a measure that would require counties with access to the Belen-to-Santa Fe passenger railroad to pay for any deficit in Rail Runner’s operations with local taxes. Currently, almost half its revenues, $13 million, comes from local sales taxes.
Oops, looking worse. Now it looks like taxes are covering over half the rail's costs. But this implies that perhaps $10 million might be coming from users, right? Nope, keep reading all the way down to paragraph 11
The Rail Runner collects about $3.2 million a year in fares and has an annual operating budget of about $23.6 million. That does not include about $41.7 million a year in debt service on the bonds — a figure that include eventual balloon payments.
So it turns out that I was actually pretty close, particularly since my guess was four years ago and they have had some ridership increases and fare increases since.
At the end of the day, riders are paying $3.2 million of the total $65.3 million annual cost. Again, I repeat my reaction from four years ago to hearing that riders really loved the train. Of course they do -- taxpayers (read: non-riders) are subsidizing 95.1% of the service they get. I wonder if they paid the full cost of the train ride -- ie if their ticket prices were increased 20x -- how they would feel about the service?
Of course, the Railrunner folks are right on the case. They have just raised prices, which "could" generate $600,000 in extra revenue, assuming there is no loss in ridership from the fare increases (meaning assuming the laws of supply and demand do no operate correctly). If this fare increase is as successful as planned, they will have boldly reduced the public subsidy to just 94.2% of the cost of each trip.
By the way, it is interesting to note in this Wikipedia article (Wikipedia articles on government rail projects generally read like press releases) that ridership on this line dropped by over half when the service went from free to paid (ie when the government subsidy dropped from 100% to 95%). The line carries around 2000 round-trip passengers (ie number of boarding divided by two) a day. It is simply incredible that a state can directly lavish $60 million a year in taxpayer money on just 2000 mostly middle class citizens. That equates to a subsidy of $30,000 per rider per year, enough to buy every daily round trip rider a new Prius and the gas to run it every single year.
Postscript: This person seems to get it. One thing I had not realized, the trip from Albuquerque to Santa Fe that I did in my rental car in 60 minutes takes 90 minutes by "high-speed rail".
Yesterday, Congress agreed to extend the payroll tax reductions for another period of time. I have been thinking about this for a while, and I am slowly coming to the conclusion these taxes should be raised. I am still thinking this through so I welcome feedback.
I don't think I have to convince regular readers of this site that I am against government-run and mandated-for-all retirement funds (income via Social Security, medical via Medicare). But if we are going to have such programs, and maintain the pretense that they are insurance programs and not welfare/transfer programs, then the "premiums" we are forced to pay should reflect true costs.
I don't think Medicare premiums are covering anywhere near the actuarial-expected costs of one's future medical care. And while Social Security rates may be set correctly if trust funds were truly held securely, the fact of the matter is that past Social Security premiums that were paid to support future benefits have all been spent by a corrupt Congress. Rates are going to have to be raised to replace this theft.
I don't like raising taxes. I wish these two programs would go away or else be restructured drastically. If they exist, though, there is nothing more dangerous than an incorrect price. Prices help consumers make price-value tradeoffs -- the Keanu Reeves lifetime DVD collection may be a deal at $6.99 but not at $99.99. So charging the wrong prices for these programs not only royally screws up the government's finances, but it also misleads Americans about the value of these programs in comparison to what they pay for them.
I have said for quite a while that despite all the hand-waving about efficiency and electronic records and other BS (efficiency from owner of the Post Office?) the only two cost reduction tools that state-run health care have are 1) Price Controls and 2) Rationing. This has become clear yet again in California. Allocation of scarce resource by bureaucratic fiat has NEVER worked, not only leading to mis-allocations but generally reducing the size of the pie to be allocated in the process. The only solution is returning health care to a world (that most every other product and service is in) where consumers have the incentive to shop and make price-value tradeoffs for themselves using prices set by the free operations of supply and demand.
This could have also been labelled as from the files of "anti-trust is not about consumers." Apparently, a mapmaker in France has successfully sued and won damages from Google for unfair competition, ie from providing Google Maps for free.
Just as in the Microsoft anti-trust case and just about every anti-trust case in history, companies who brought the suit are really trying to stop an up-start competitor from trashing their business model, but they have to couch this true concern in mumbled words about the consumer. Specifically, they raise that ever-popular boogeyman of jacking up prices once the monopoly is secured. The next time this happens, of course, will be the first time. Its a myth. For example, in Google's case, left unsaid is how they would jack up their prices when at least two other companies (Bing, Mapquest) also provide mapping services online for free.
Food activists on the Left often point to the use of High Fructose Corn Syrup (HFCS) as one of those failures of capitalism, where rapacious capitalists make money serving an inferior product. But HFCS resulted from a scramble by food and beverage companies to find some reasonable alternative to sugar as the government has driven up sugar prices through a crazy tariff system that benefits just a tiny handful of Americans, and costs everyone else money
For the last 10 years or so, HFCS-42 has actually traded at a price higher than the world market price for sugur, but lower than the US price for sugar. There is a lot complexity to prices, but this seems to imply that HFCS would not be nearly as attractive a substitute for sugar if US sugar tariffs did not exist (not to mention subsidies of corn which support HFCS). This can also be seen in the fact that HFCS has not been used nearly so often as a sugar substitute in markets outside of the US, even by the same manufacturers (like Coke) that pioneered its use in the US.
President Obama used a lot of his state of the union address again teeing up what sounded to me like a new round of protectionism. Protectionism is the worst form of crony capitalism, generally benefiting a handful of producers and their employee to the detriment of 300 million US consumers and any number of companies that use the protected product as an input.
My column for this week is up at Forbes, and inevitably, deals with the State of the Union address last night.
But the portion that really floored me was Obama’s taking credit for the increase in US oil and gas production over the last several years. It is certainly true that, against all predictions of peak oil, new technologies have helped drive a surge in US hydrocarbon production. Combined with a recession-driven drop in demand, America’s oil imports as a percentage of its total use has dropped to 45.6%, the lowest level in over 15 years.
This surge in energy production is a fabulous reminder of how markets work. For years I have written that the peak oil folks were missing something fundamental by performing an overly static analysis. They looked at current “proven” reserves of oil and gas and projected forward how many years it would take for these to run out. But oil and gas reserve numbers only make sense in the context of a particular set of technologies and pricing levels. As hydrocarbons run short, rising prices tend to spur both innovation and new, more expensive exploration activity. Oil and gas companies are once again proving Julian Simon’s addage that the only true scarcity is human brain power, and they should be given a lot of credit for the recent production boom.
The one person who deserves no credit for this boom is Barack Obama....
The 5-year old transcripts of Federal Reserve Board meetings make for interesting reading. Bernanke & Geithner basically yawn at concerns raised about housing prices and mortgages.
Let's be clear. Unlike most of those who are likely commenting on this, I do NOT blame these folks for being wrong about the direction of the incredibly complex economy, and how one or two factors might influence the whole. My sense has always been that it is impossible to be consistently right.
What I do criticize is the hubris of making major top-down Federal policy decisions that require that these folks be consistently right. It's simply madness, and I am exhausted with the continuing reaction of both the media and most politicians that if we only had the right folks making these decisions, all would be well. The reality is that these decisions are impossible to make, and will virtually always lead to gross mis-allocations of capital and resources in the economy that lead to recessions.
Update: Here is one example
JUNE 28-29: In summarizing Fed officials’ views, Bernanke notes how it’s getting more and more difficult to make forecasts, describing the economic situation as “exceptionally complicated.” Since housing is particularly hard to project, Bernanke calls it “an important risk and one that should lead us to be cautious in our policy decisions.”
So, this seems like an admirable statement of humility. Given these remarks, the group did nothing, right? Of course not ... they raised interest rates a quarter of a point.
Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital. In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts. MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.
Certainly it strikes most folks as unethical to lose the assets in your customers' brokerage accounts making bets for the house. But it turns out, it may have been entirely legal. This article is quite good, and helps explain what was going on, what this "hypothecation" thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.
In short, the article discusses two regulatory changes that seemed to be important. The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers' collateral in their trading accounts. The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.
The increase in leverage was staggering. Already, cash in most commodities trading accounts is leveraged - customers might have only 30% of the value of their trading positions as collateral on their margin account. Then the brokerage houses took this collateral and used it as collateral on new loans. Those receiving the collateral on the other end often did the same.
MF Global would be bad if it were fraud. But it is even worse if MF Global is doing legally what every other brokerage house is still doing.
Here is the minimum one should do: Diversify brokerage accounts. We diversify between bonds and stocks and other investments, but many people have everything in one account with one company. I am not sure anyone can be trusted any more. My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.
I accidentally watched a few minutes of a morning show today, something I try really hard to avoid. Matt whats-his-name was interviewing Richard Branson, and they were talking about the importance of corporations "doing good". Once startups get going, Branson said, they need to start doing good for people, meaning I guess that they buy carbon offsets or something.
Guess what? If my startup is succesful, I am already doing good. I can't make a dime unless I create value for people net of what they pay me. Every customer walks away from our interaction better off, or they would not have voluntarily elected to trade with me (and if they are not better off, I will never see them again and I will find lots of nasty stuff chasing future customers away on the Internet.) I am tired of this notion that a succesful business person's value can only be judged by what he or she does with their money and time outside of business. I understand the frustration with a few Wall Street and GE-type executives who are living like fat ticks on their connections with government, but most of us only are succesful if we do something useful.
This, from Carpe Diem, is along the same lines. He looks at an editorial from the DC paper about the entry of Walmart, which says among other things
Despite the peacocking by Gray and others after the agreement was signed, the District is receiving mostly crumbs. Walmart has committed to providing $21 million in charitable donations over the next seven years, an average of $3 million a year. That's a pittance."
Walmart does not have to do squat for the community beyond its core business, because selling a broad range of goods conviniently and at really low prices is enough. Or if it is not enough, they will not make money. The promise of $21 million to some boondoggle controlled by a few politician's friends is just a distraction, I wish they had not done it, but I understand that this is essentially a bribe to the officials of the DC banana republic to let them do business.
Postscript: I have no problem with doing charitable work outside of work. Both my company and I do, by choice, though unlike Richard Branson I don't need to have a crew of paid PR agents making sure everyone knows it.
Holly Fretwell of PERC discusses the huge leap in agricultural yields since WWII
Not only does this mean that we have have billions of people on Earth and not starve, but it also has freed up labor for more productive and value-enhancing activities.
As an aside, remember this chart when global warming alarmists argue the the warming trend of the last 50 years is reducing crop yields. (If the linked article seems simply bizarre given the chart above, realize the NYT is saying that crop yields are down from what they might have been. This is the same kind of faulty logic that was used by Obama to credit his stimulus with job gains when in fact the economy was losing jobs. They posit some unproveable hypothetical, and then say reality diverged from that hypothetical because of whatever factor they are trying to push, whether it be CO2 or stimulus).
The problem with food prices is not production, its the fact that we take such a huge percentage of our food grains and, by government dictat, convert them to automotive fuel.
This is really sad to see in what is supposed to be a liberal democracy:
Now that the carbon tax has passed through [Australian] federal parliament, the government’s clean-up brigade is getting into the swing by trying to erase any dissent against the jobs-destroying legislation.
On cue comes the Australian Competition and Consumer Commission, which this week issued warnings to businesses that they will face whopping fines of up to $1.1m if they blame the carbon tax for price rises.
It says it has been “directed by the Australian government to undertake a compliance and enforcement role in relation to claims made about the impact of a carbon price.”
...
There will be 23 carbon cops roaming the streets doing snap audits of businesses that “choose to link your price increases to a carbon price”.
Instead, the ACCC suggests you tell customers you’ve raised prices because “the overall cost of running (your) business has increased”.
Update: Obama loves the Aussie carbon tax
Addressing the press in Australia, where legislators passed a carbon tax earlier this month, Obama praised Prime Minister Julia Gillard for pursuing “a bold strategy” to trim industrial emissions that most scientists say are contributing to global warming.
I hinted at it in my last post, but have addressed it in more depth in my column this week at Forbes. A brief excerpt:
The theme from all these failures is distorted signals and corrupted communication. People, no matter how savvy, cannot possibly research every nook and cranny of the economy before making an investment. They make decisions, therefore, based on signals – prices, interest rates, perceived risks, and the profit history of other similar investments. If these signals are artificially altered or corrupted, bad decisions that destroy wealth and growth will result.
Which brings me back to education. I will tell you something almost every business owner knows: We business owners may whine from time to time that banks won’t lend us money, but what really is in short support are great people. Nothing has more long-term impact on an economy than amount and types of skills that are sought by future workers. That is why everyone accepts as a truism that education is critical to economic health.
Unfortunately, there is good evidence that our education policies have already done long-term harm. The signals we send to kids making their higher education plans have disconnected them from reality in a number of fundamental ways, causing them to make bad decisions for themselves and the broader economy.
Examples follow. Read it all.
Paul Krugman had this sideswipe comment the other day:
This isn't the only case where news organizations consistently report as truth something that didn't happen, while failing to report what did. Another one that comes to mind is the California electricity crisis of 2001-2002. As some readers may recall, that crisis was caused by market manipulation -- and that's not a hypothesis, Enron traders were caught on tape telling plants to shut down to create artificial shortages. Yet "news analyses" published after the whole thing was revealed would often tell readers that excessive environmental regulation and Nimbyism caused the crisis, with nary a mention of the deliberate creation of shortages.
And as you'll notice, in both cases the imaginary history just happened to be one more comfortable to status quo interests.
I find it hilarious that Krugman is talking about imaginary history, since he plays the same game so often. In fact, the disconnect between many of Krugman's current political writings and his historical economic work are often jaw-dropping. Even the differences in Krugman's opinion on the same topic when a Republican vs. a Democrat is in the White House can be amazing.
But I wanted to address the California utility issue. Certainly Krugman is right, as far as he goes, in that Enron made a lot of money in the California electricity crisis creating some short-term artificial shortages. But what he leaves out of his brief comment were the structural rules the government had put in place that made Enron's actions possible. Enron's profits in the California electricity crisis could never have been made in a free market.
I am not an expert on the whole regulatory environment in which these events occurred, but there were three key regulatory facts that need to be understood:
1. California, due to the NIMBY and environmental concerns Krugman mentions in passing, want lots of electricity but do not want the electricity production near them. So they have exported the production to other states, and, more importantly, California utilities did not control the production of the electricity they needed. Thus a lot of California power, and all of its marginal demand, is satisfied by local utilities buying out of state power. As we will see next, Krugman is really putting up a straw man here, as this is simply background, the least important of the three government factors that drove the problem.
2. California deregulated wholesale utility prices, but not retail prices. The point of price deregulation is that suppliers and consumers can make better decisions because the information they get via prices is not distorted by government mandates. But price deregulation only makes sense if the ultimate consumers have prices that float with the market. But California consumers still had fixed prices. There were no changes to pricing signals to consumers that might cause them to conserve more when electricity was particularly short.
So, only wholesale customers saw their prices paid increase when electricity supplies ran short. This mainly applied to large California utilities that bought power they needed from out of state. Theoretically, when prices spiked, they could cut back their demand. This is more awkward for them than consumers, but could be done either with pre-determined shut down priorities or rolling brown-outs. At some point, one would assume the cost of power would be higher than the cost of service disruptions, but...
3. California utilities were effectively required by regulation to try to serve all demand. Right or wrong, they felt they were in a position that if power were available, they had to buy it no matter what the cost.
So step in Enron. Seeing this mess, they found they could corner the market at a few peak demand times and sell Calfornia power for a gazillion dollars a Kw. I would not personally have been proud to make money that way, but Enron jumped right in.
I have no problem giving Enron grief for the way they make money, but one has to ask themselves, why the hell were California utilities buying power no matter what the price, and why was it that when electricity was so dear, it was illegal to communicate this to end users via prices (as we do with any other product or commodity). The story here is a lot more complicated than Enron.
Update: Finem Respice took a more sophisticated look at this same issue a while back in a broader post about trying to close an open system.
On the retail side, just as California was patting itself on the back for "deregulating" in 1996 (via a bill that Pete Wilson created with complexities and exceptions for e.g., San Diego that make the special interest game in Washington look tame by comparison), it froze, just after reducing, retail electricity rates for five years. Add to this the fact that California had long depended on supplies from, e.g., the Northwest, which, for years, enjoyed a hydroelectric power generation surplus. As the surplus vanished with droughts and increased demand in the Pacific Northwest, so did the supply buffer California was so used to, and that it leaned on most heavily over the years to avoid building new generating capacity (new capacity being the bane of the progressively green environmental utopian-paradise that was (is) California energy politics). All this conspired to spike rates. Who is surprised?
It is somewhat unfortunate that Enron's shrewd manipulation of California's badly flawed and outright schizophrenic market scheme was so flagrant, and that unrelated accounting scandals at the company permitted the story to become one of deregulation evils and free market greed rather than the core issue: the political spinelessness exhibited by California officials and their ongoing attempt to insulate voters from anything resembling market prices for electricity
From the Hill, the ghost of Hawley-Smoot returns
The Senate voted Monday to advance legislation pressuring the Chinese government to stop undervaluing its currency, a practice most economists agree is giving the country an unfair trade advantage and is costing the U.S. jobs.
The Senate voted 79-19 to end debate on a motion to proceed to the bill, the Currency Exchange Rate Oversight Reform Act of 2011. While the vote does not mean the bill has passed, the strong show of support suggests it could well be approved in the upper chamber by the week’s end. Passage through the House is less clear, however, and GOP leaders have given no indication they will move forward with it.
Senate Democratic leadership, responsible for bringing the legislation to the Senate floor, heralded it as a way to create jobs and right a long-standing trade imbalance with China.
“China is by far the biggest exploiter of predatory currency practices,” Sen. Charles Schumer (D-N.Y.) said Monday. “[T]hese currency policies artificially raise the price of U.S. exports and suppress the price of imports into the United States, undermining the economic health of American manufacturers and their ability to compete at home and around the globe.”
This is a great example of how a group, in this case the Democratic Party, can say they are against corporate welfare, but in fact be 100% behind it simply by changing the terms used.
Look at the sentence in bold. Another way to write this would be "we want a law to help a few visible and influential manufacturers who most compete with China, but hurts consumers (ie every single American) and every business that uses imported raw materials.
Protectionism like this is corporate welfare for a few large manufacturers. I find it amazing the reporter can say that "most economists agree" an undervalued Chinese currency is costing us jobs. My sense is that most economists don't agree with this statement. All this law will do is unilaterally increase consumer prices and raw material costs, and I know few economists who think this is stimulative.
A cheap yuan is a direct subsidy of American consumers by the Chinese, and I am not sure why we shouldn't let it continue as long as they are dumb enough to keep doing it.
Kevin Drum makes a pleas for liberals to, in effect, rally around Solyndra and be proud of the investment. I am sure Republicans would give the same advice to liberals. I want to look at a few of his arguments.
First, for libertarians like myself, the argument that Republicans did it too, or the Republicans started it, are a non-starter. In particular, I actually thought the Obama Administration's attempt to blame Bush for Solyndra was an Onion article, since its almost a caricature of this administrations refusal to take responsibility for anything. Unlike Republicans, I don't see this so much as an Obama failure as a government failure, and I don't really care if it is of the red or blue flavor.
Second, the fact that private investors put their own money into it is irrelevant. Private investors poured money into Pets.com too. Obama was pouring my money into Solyndra, and yes the fact that it is my money makes a difference.
Further, private investors put their money into Solyndra years before the taxpayer did. It may well have been that they had a reasonable expectation at that time of investment returns. That is their problem. Our problem is that by the time Obama put our money into the company, it was pretty clear to everyone in the industry that Solyndra was going nowhere.
Drum and his source, Dave Roberts, attempt to argue that the drop in silicon prices and addition of low-cost solar capacity in China didn't occur until months after Obama's decision to fund Solyndra. But that is a tortured argument. In point of fact, everyone in the industry saw this coming - after all, the capacity Roberts describes as coming online in June was under construction months and years before that, and was known to be coming by everyone in the industry. When I was in a global manufacturing business, we kept up with everyone's plans for capacity additions -- I can't even imagine waking up one day and saying, "huh, a bunch of capacity just opened in China." (by the way, it is pretty typical of liberals to see prices as a given, rather than as a part of a feedback system where high prices lead to actions that might well lower prices over time).
This timeline is therefore pretty disingenuous
March 2009: The same credit committee approves the strengthened loan application. The deal passes on to DOE’s credit review board. Career staff (not political appointees) within the DOE issue a conditional commitment setting out terms for a guarantee.
June 2009: As more silicon production facilities come online while demand for PV wavers due to the economic slowdown, silicon prices start to drop. Meanwhile, the Chinese begin rapidly scaling domestic manufacturing and set a path toward dramatic, unforeseen cost reductions in PV. Between June of 2009 and August of 2011, PV prices drop more than 50%.
I am sure that this is wildly logical to a journalism major, but someone in business would laugh off the implication that what happened in June was wholly unforeseeable in March. Want more proof? The loan guarantee itself is proof. Years earlier, the company attracted a billion dollars of private capital. Now it takes a government guarantee to get capital? And you think nothing had changed with the insider's perception of the opportunity?
A good analogy might be if I invested in Greek bonds today. And then in 3 months the Greek government defaults and I lose all my money. I suppose I could craft a timeline that said the default did not happen until months after my investment, but could anyone living right now say that I really had no reason on September 16, 2011 to expect a Greek default?
The real howler in the article is this one:
There was no scandal in the loan process, and there's nothing unusual about having a certain fraction of speculative programs like this fail. It's all part of the way the free market works.
First, I agree there is no scandal here if one defines scandal as something out of the norm. Republicans want to count political coup on Democrats so they want to say this is fraudulent. But fraudulent implies that we could find honorable technocrats who could have avoided this problem. We can't. This kind of failure is fundamental and inseparable from the act of government trying to pick winners, and would exist no matter what people were in place.
Second, calling this "the way free markets work" is obscene. Free markets don't use force on investors to make them put money into certain investments.
But more importantly, government loan guarantees go only to those companies who the free market has chosen NOT to fund. If the free market was willing to toss another half billion into Solyndra, its owners would not have been burning a path back and forth to Washington. So by definition, every single government loan guarantee in this program is to a company or a technology that the free market, knowledgeable investors, and industry insiders have rejected as a bad investment. For the program to work, one has to believe that Obama, Chu, and some career energy department bureaucrats have a better understanding of commercializing technologies than do private investors (who are investing with their own money) and industry experts.
Postscript: I have to also comment on this from the timeline:
February 2011: Due to a liquidity crisis, investors provide $75 million to help restructure the loan guarantee. The DOE rightly assumed it was better to give Solyndra a fighting chance rather than liquidate the company – which was a going concern – for market value, which would have guaranteed significant losses.
The author glosses over it, but this is the $75 million I discussed the other day that dropped the US out of the senior position and guaranteed that the taxpayer would lose everything rather than only a portion of the investment
The notion of giving it more time was absurd. Even closed with everyone laid off the company is burning a million a week in cash. How much was it burning when open? And if it was totally clear at this point that the market had fundamentally shifted and the company could not compete, what the hell was the time going to help? Maybe they were hoping to win the Publishers Clearing House Sweepstakes? I suppose it could have been to give them time to try to sell the company, but there is no evidence any such discussions were taking place.
In fact, it is pretty clear that the US Government got played with that $75 million investment. Any private lender who had allowed someone else to grab the senior position for a trivial investment in a company on the express train to chapter 7 would be fired immediately.
And if you want fraud, you might look at Solyndra's summer asset sales. All the company's assets of any liquidity and value were sold over the summer to Argonaut, who also happens to be the owner of the majority state AND the company who invested $75 million in return for the senior position. Depending on the sale price for this self-dealing, one could argue that the time the $75 million bought was merely the time needed to loot the company of any valuable assets before it went bankrupt.
Postscript #2: I have written before about how much expertise about business tends to be claimed by liberal journalists and places like Think Progress. I had a funny thought trying to imagine the Think Progress business school and what it would teach. Might be a parody I need to write sometime.
"Today, about 40 percent of all U.S. corn -- that's 15 percent of global corn production or 5 percent of all global grain -- is diverted into the corn ethanol scam in order to produce the energy equivalent of about 0.6 percent of global oil needs.Corn prices, now close to $7 per bushel, have more than doubled over the past two years (see chart above). And recent harsh weather, including floods in the Midwest and drought in the South, will likely mean a subpar U.S. corn harvest. That, in turn, will mean yet higher prices for corn, which will translate into higher prices for meat, milk, eggs, cheese and other commodities.
When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries. They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them. But then I see this chart at Kevin Drum's site
Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes? Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry? In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry. So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.
In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments. Typically, politicians of both parties have advocated for the current rules to encourage investment. Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas. I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow. I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions. But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.
This is really weak. Not to mention flawed. Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made. LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling). Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.
By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.
For a while, I have criticized the practice both in climate and economics of using computer models to increase our apparent certainty about natural phenomenon. We take shaky assumptions and guesstimates of certain constants and natural variables and plug them into computer models that produce projections with triple-decimal precision. We then treat the output with a reverence that does not match the quality of the inputs.
I have had trouble explaining this sort of knowledge laundering and finding precisely the right words to explain it. But this week I have been presented with an excellent example from climate science, courtesy of Roger Pielke, Sr. This is an excerpt from a recent study trying to figure out if a high climate sensitivity to CO2 can be reconciled with the lack of ocean warming over the last 10 years (bold added).
“Observations of the sea water temperature show that the upper ocean has not warmed since 2003. This is remarkable as it is expected the ocean would store that the lion’s share of the extra heat retained by the Earth due to the increased concentrations of greenhouse gases. The observation that the upper 700 meter of the world ocean have not warmed for the last eight years gives rise to two fundamental questions:
- What is the probability that the upper ocean does not warm for eight years as greenhouse gas concentrations continue to rise?
- As the heat has not been not stored in the upper ocean over the last eight years, where did it go instead?
These question cannot be answered using observations alone, as the available time series are too short and the data not accurate enough. We therefore used climate model output generated in the ESSENCE project, a collaboration of KNMI and Utrecht University that generated 17 simulations of the climate with the ECHAM5/MPI-OM model to sample the natural variability of the climate system. When compared to the available observations, the model describes the ocean temperature rise and variability well.”
Pielke goes on to deconstruct the study, but just compare the two bolded statements. First, that there is not sufficiently extensive and accurate observational data to test a hypothesis. BUT, then we will create a model, and this model is validated against this same observational data. Then the model is used to draw all kinds of conclusions about the problem being studied.
This is the clearest, simplest example of certainty laundering I have ever seen. If there is not sufficient data to draw conclusions about how a system operates, then how can there be enough data to validate a computer model which, in code, just embodies a series of hypotheses about how a system operates?
A model is no different than a hypothesis embodied in code. If I have a hypothesis that the average width of neckties in this year's Armani collection drives stock market prices, creating a computer program that predicts stock market prices falling as ties get thinner does nothing to increase my certainty of this hypothesis (though it may be enough to get me media attention). The model is merely a software implementation of my original hypothesis. In fact, the model likely has to embody even more unproven assumptions than my hypothesis, because in addition to assuming a causal relationship, it also has to be programmed with specific values for this correlation.
This is not just a climate problem. The White House studies on the effects of the stimulus were absolutely identical. They had a hypothesis that government deficit spending would increase total economic activity. After they spent the money, how did they claim success? Did they measure changes to economic activity through observational data? No, they had a model that was programmed with the hypothesis that government spending increased job creation, ran the model, and pulled a number out that said, surprise, the stimulus created millions of jobs (despite falling employment). And the press reported it like it was a real number.
Private actors are often accused of collusion to restrain trade and decrease competition, and certainly there are a number of examples of this in history. However, all such private arrangements are usually doomed, in part because the incentive for certain parties to cheat are high in such arrangements. And the parties to such agreements have no control over new or outside competitors entering the fray.
The only stable restraints of trade and competition are therefore enforced by the government, who can use police and prisons to enforce such rules. That is why successful businesses who are tired of fighting off upstart competitors run to the government for help.
But the government does not like competition with its own services (e.g. Federal bans on intracity mail delivery competition). Here is a good example:
"Drivers attending the Indiana State Fair or a major sporting event downtown may sometimes opt to grab a parking spot in someone's yard rather than pay higher prices in a parking lot, but some city officials think people who provide parking spots should get a permit first. City leaders are proposing that residents pay a $75 fee (per event) if they want to turn their yards into parking lots."
Does anyone think there is a burning safety issue here? The goal is to kill competition with publicly operated parking garages. My guess is that someone figured out the average revenue of a private home offering front lawn parking, added $5, and made that the registration fee.
