Tag: energy

Egypt’s Subsidy Nightmare

If you think that Western welfare states are in a pickle, imagine what they would look like if, instead of transferring money, governments tried to help people by giving all of them free or cheap stuff. One does not need to be an economist to see the inefficiency of in-kind transfers, but many countries use redistribution of stuff – typically in the form of commodity subsidies – as the main tool of redistribution and social assistance.

In Egypt, the government subsidizes the prices of fuels and certain food products at artificially low levels. Obviously, the wealthy – who can afford to consume more of the subsidized commodities – are the largest beneficiaries of the subsidy system. In urban areas of Egypt, for example, the top quintile of the income distribution receives eight times as much in energy subsidies as the bottom quintile.

As I argue in a new Cato Policy Analysis published today, commodity subsidies are behind Egypt’s fiscal meltdown – the country is currently running a deficit of 15 percent of GDP, while being kept afloat only by the inflow of funds from the Gulf countries. To avert a looming fiscal catastrophe, Egyptian policymakers need to act now. The paper, which I also summarize here, provides a list of recommendations about how the reform should be approached:

U.S. Policies Deter Inward and Encourage Outward Business Investment

This morning, Cato published a new study of mine titled, “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.” The thrust of the paper is that, despite still being the world’s premiere destination for foreign direct investment, the U.S. share of the global stock of direct investment fell from 39% in 1999 to 17% today.

This downward trend is attributable to two broad factors. First, developing economies – many of which have achieved greater political stability, sustained economic growth, improved infrastructure and higher-quality worker skill sets – are now viable options for pulling in the kinds of FDI that was once untenable in those locales. Second, a deteriorating business and investment climate in the United States – owing to burgeoning, burdensome, and uncertain regulations; an antiquated, punitive corporate tax system; incoherent immigration, energy, and trade policies; a wayward tort system; cronyism and perceptions thereof; and other perverse incentives and disincentives of policy have pushed investment away.

The first trend should be welcomed and embraced; the second must be reversed. From the study:

Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative. In a global economy, “offshoring” is an inevitable consequence of competition. And policy improvement should be the broad, beneficial result.

The capacity of the United States to continue to be a magnet for both foreign and domestic investment is largely a function of its advantages, many of which are shaped by public policy. Considerations of taxes, regulations, trade openness, access to skilled workers, infrastructure, energy policy, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. It should be of major concern that inward FDI has been erratic and relatively downward trending in recent years, but why that is the case should not be a mystery. U.S. scores on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy suggest that the U.S. business environment is becoming increasingly less hospitable.

Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. Some see the shale gas and oil booms as more than sufficient for overcoming policy shortcomings and attracting the necessary investment. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. They fail to appreciate that increasingly transnational U.S.-based businesses are not obligated to invest, produce, or hire in the United States.

It is the responsibility of policymakers, however, to create an environment that is more attractive to prospective investors. Current laws, regulations, and other conditions affecting the U.S. business environment are conspiring to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States.

A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.

Details, charts, and analysis, and citations are all included here.

The Best Government Action on Climate Change Is No Government Action on Climate Change

Global Science Report is a weekly feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

Many eyes will be on President Obama’s State of the Union address tonight watching to see how he follows his inauguration promise to “respond to the threat of climate change.” Rumors are flying that he will use his executive power to bypass Congress and further EPA efforts to regulate greenhouse gas emissions. But his best response would be to get the federal government out of the energy market and allow it to flourish as it may. The inconvenient truth is that the U.S. influence on global climate is rapidly diminishing as greenhouse gas emissions from the rest of the world rapidly expand. As a consequence, whether or not the United States reduces its emissions at all is immaterial to the path of future climate change and its impacts.

Several reports last week have shown that carbon dioxide emissions from the United States declined in 2012 and now stand at a level on par with what they were back in 1994. U.S. carbon dioxide emissions have dropped about 13 percent from their high in 2007.

All the while, global carbon dioxide emissions have been on the rise—primarily fueled by rapid emissions growth in developing countries, namely China (which is responsible for about two-thirds of the global increase during the past decade).

Figure 1. Emissions of carbon dioxide from the U.S., China, and the rest of the world, 1990-2010 (data from U.S. Energy Informat

Since carbon dioxide is well-mixed in the atmosphere, who actually emits it is of little consequence when it comes to its potential to lead to global warming.  This means that the global percentage of a country’s annual carbon dioxide emissions is equivalent to its annual percentage contribution to the increased warming pressure (we use the term “warming pressure” to indicate that things other than the atmospheric concentration of greenhouse gases also act to influence that global average temperature from one year to the next). Since total global carbon dioxide emissions are quickly distancing themselves from U.S. emissions, as time passes, the relative influence of U.S. emissions on the future state of the global climate is rapidly declining.

Enron: Dependent on Government

A new piece at the Library of Economics and Liberty written by Robert J. Bradley is a timely reminder that it’s often government policies that fosters bad corporate behavior—not the “free market” as the left likes to claim.

Bradley, a sixteen year employee of the now defunct Enron Corporation, demonstrates that the company was actually “a political colossus with a unique range of rent-seeking and subsidy-receiving operations.” Manipulating the tax code, pushing for self-serving government regulations, and grabbing taxpayer handouts were all key components of Enron’s energy empire. It’s not a stretch to suggest that in the absence of government, the Enron story never happens.

In my recent Cato paper on corporate welfare in the federal budget, I discuss the government subsidies that Enron received:

Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its projects from the Export-Import Bank, the Overseas Private Investment Corporation, the U.S. Trade and Development Agency, the U.S. Maritime Administration, and other agencies. Enron received about $3.7 billion in financing through federal government agencies.

Business subsidies create damaging economic distortions. All those subsidies to Enron induced the firm to make exceptionally risky foreign investments. And the resulting losses were an important factor in the company’s implosion.

A 2010 Bloomberg investigation, which looked at the Ex-Im Bank, found that companies seeking financing aid from this agency had been paying the travel expenses of government employees on visits to projects under consideration. For instance, Exxon Mobil spent almost $100,000 on Ex-Im Bank employees responsible for helping the agency decide whether it should aid Exxon on a major gas project in Papua New Guinea. Eleven months later, the Ex-Im Bank approved $3 billion in financing for the venture.

Early in the Bush administration, high-level officials went to considerable lengths to help Enron on an investment in India that had gone bad. When the Washington Post reported this in 2002, the administration argued that it was simply trying to guard taxpayer interests in the more than $600 million in federal loans that had been given to Enron by Ex-Im and the Overseas Private Investment Corporation. However, the government should not be putting taxpayer money into such risky private schemes in the first place.

IRS Can’t Manipulate Tax Code to Generate More Revenue for Itself

This blogpost was co-authored by Cato legal associate Matt Gilliam.

An American energy company called PPL bought one of many state-owned British utilities privatized in the 1980s. In 1997, PPL thus became subject to the UK’s new “windfall tax,” which was based in part on “profit-making value”—the utility’s average annual profit multiplied by an imputed price-to-earnings ratio.

Various American energy companies subject to this tax filed claims with the IRS for a “foreign income tax” credit, which the IRS denied in 2007, asserting that the British tax was not a creditable one under the “foreign income tax” provision of the Internal Revenue Code (Section 901). The IRS claimed that the windfall tax did not satisfy the “predominant character” standard (was not predominantly an income tax) because the British statute used the term “profit-making value” instead of “net income” and “gross receipts,” and the tax rate was defined “as a percentage of an imputed value … rather than directly as a percentage of net income.”

After the federal tax court held that PPL was entitled to the foreign tax credit, the U.S. Court of Appeals for the Third Circuit reversed. Explaining that a tax exemption is a privilege extended by legislative grace, the appellate court held the tax not to be creditable because it reached beyond realized profit and did not tax actual gross revenue. In a different case last year, however, the U.S. Court of Appeals for the Fifth Circuit held that the British windfall tax was indeed creditable because (1) it reached realized income and (2) gross revenue was an inherent part of the calculation. The Fifth Circuit explained that the form and label of the foreign tax are not determinative and that the predominant character standard requires the IRS to analyze the history and intent of a tax to assess whether it tries to reach some net gain.

Cato now joins Southeastern Legal Foundation and Goldwater Institute on an amicus brief in urging the Supreme Court to take PPL’s case because it implicates fundamental issues of property rights, free markets, and the arbitrary exercise of government power—and the circuit split creates uncertainty for American businesses overseas. We argue that taxpayers have the right to be free from double taxation and that here the IRS and Third Circuit improperly disregarded the substance of the windfall tax and applied an overly rigid construction of its terms.

Ultimately, a foreign tax’s form or label cannot mask its substantive character and intent for legal purposes. American businesses operating overseas should be able to rely on a stable, substantive application of U.S. tax law instead of arbitrary interpretations and constructions manipulated to generate payments to the IRS.

The Supreme Court will decide this fall whether to hear PPL Corp. v. Commissioner of Internal Revenue.

Pielke’s Problem

I generally admire the work of Roger Pielke Jr., a political scientist in the University of Colorado-Boulder’s Center for Science and Technology Policy Research. His new book on climate change is refreshingly honest and non-ideological, if a bit overly technophilic. His broader work offers the important insight that science alone cannot direct public policy, but rather it can only lay out possible results of different policy choices.

Given the quality of his work, I was disappointed by Pielke’s op-ed in today’s NYT defending Congress’s legislated obsolescence of the incandescent light bulb. He argues that government standard-setting is an important contribution to human welfare, and the light bulb standard is just part of that standard-setting (though he does suggest some minor policy tweaks to allow limited future availability of incandescents). 

To justify his argument, Pielke points out the great benefit of government-established standard measures, as well as quality standards:

Indeed, [in the United States of the late 19th century] the lack of standards for everything from weights and measures to electricity — even the gallon, for example, had eight definitions — threatened to overwhelm industry and consumers with a confusing array of incompatible choices.

This wasn’t the case everywhere. Germany’s standards agency, established in 1887, was busy setting rules for everything from the content of dyes to the process for making porcelain; other European countries soon followed suit. Higher-quality products, in turn, helped the growth in Germany’s trade exceed that of the United States in the 1890s.

America finally got its act together in 1894, when Congress standardized the meaning of what are today common scientific measures, including the ohm, the volt, the watt and the henry, in line with international metrics. And, in 1901, the United States became the last major economic power to establish an agency to set technological standards.

 Alas, this argument doesn’t support Pielke’s light bulb standard.

The weights-and-measures and product standards that he cites are examples of government response to market failures—instances where private action is unable to reach efficient results. Concerning weights and measures, a type of market failure known as the collective action problem can make it difficult to establish standard measures privately. Getting everyone to agree can be like herding cats, and there is ample incentive to secretly defect from that standard — e.g., a gas station would love to sell you a 120-ounce “gallon” that you assume is a standard 128 ounces. (OTOH, there are plenty of examples of private action overcoming this problem, such as the standardization of railroad track gauges in the late 19th century.) Likewise, quality standards can be understood as a response to a kind of market failure known as the information asymmetry problem— e.g., a producer of low-quality goods may knowingly try to pass them off as high-quality goods. (Again, there are plenty of examples of private action overcoming this problem.)

As libertarians, we recognize that there are market failures, and that government can sometimes mitigate them. (That’s why we’re not anarchists.) Also as libertarians, we recognize that government intervention can result in outcomes even less efficient than the original market failure. (That’s why we’re not run-of-the-mill Democrats or Republicans.)

But where is the market failure with incandescent bulbs? After nearly 125 years of use, people know the drawbacks and advantages of incandescents—that they use more electricity than other types of bulbs and have a shorter lifespan, but they cost very little and work much better in certain applications—from dimmer switches to Easy-Bake Ovens—than other bulbs. Besides, CFL bulbs were widely available before Congress’s 2007 legislation, and LED lights were already in the R&D pipeline.

Perhaps Pielke would argue that there is a market failure with incandescents: the negative externality of air pollution, including greenhouse gas emissions. But incandescent lighting is only one of many, many electricity-using devices, and electricity generation is just one of many, many sources of air pollution. So why the focus on just this one externality source instead of advocating a policy that broadly addresses emissions? And why devote his op-ed to discussing technology standards, and make no mention of air pollution?

Gingrich & Woolsey on Energy

The other day, The Wall Street Journal provided a public service by lambasting Newt Gingrich for his absurd speech to the ethanol lobby in Des Moines last month (money line:  ”Obviously big urban newspapers want to kill it because it’s working, and you wonder, ‘What are their values?’”).  Today, Gingrich and fellow ethanol-maven James Woolsey struck back in those very same pages.  In doing so, Gingrich provided yet more evidence that he’s intellectually unfit for office.

“It is in this country’s long-term best interest,” he said, ”to stop the flow of $1 billion a day overseas.”  Really?  So money sent overseas is gone forever.  News to me.  The only thing you can buy with dollars earned from oil sales to the U.S. is to buy things denominated in dollars or to exchange them so that someone else can.  And we sell a lot of stuff to foreigners that are denominated in dollars (treasury bills for one) and that money comes right back to the good old U.S. of A.

But put that aside.  If Gingrich really believes this, then why not just ban all imports all together?  Is that what the GOP is about these days - rank gooberism on trade?

And one other thing; the U.S. does not spend $1 billion a day on foreign oil.  It spends about half that; $530 million a day (in 2009 anyway).

“[I] co-produced a movie with my wife, Callista, ‘We Have the Power,’ that argued for an ‘all of the above’ energy strategy which would maximize all forms of domestic energy production.”  Apparently, being a pol means that one doesn’t have to pick and choose between investments a, b, or c.  We’ll just mandate everyone invest in everything that can attract a lobbyist. 
When you hear this stuff about an ”all of the above” energy strategy, what you’re hearing is a complaint that the Democrats aren’t subsidizing enough of the energy industry.  They are too tight-fisted with the public purse.  They are not ambitious enough in their planning.  And while Republicans bang the table for more, more, and more handouts to private corporations, liberals like Amory Lovins (prominent left-of-center energy guru) and Carl Pope (former head of the Sierra Club) call for zeroing out everyone’s subsidies and leaving the energy market the heck alone (at least when it comes to this matter).  It’s a mad, mad world.
 
“Nevertheless,” says Gingrich, ”the Journal attempts to equate my career-long commitment to increased American energy production with the anti-energy agenda of President Obama. This is a laughable charge, especially considering I have been one of the most vocal opponents of the president’s energy policies since he took office.”  Perhaps, but on this matter, Gingrich is attacking the administration from the Left.  
 
Even more amusing was James Woolsey’s lecture to the editorial board over what it means to be a conservative.   “We could not help wondering,” he asked along with his co-author, Gal Luft, ”why the Journal, despite its commitment to free enterprise, chose to attack Newt Gingrich for his call to open vehicles to fuel competition, which would cost auto makers under $100 per new car.”  Well Jim, a commitment to free enterprise is a commitment to allow enterprises to be free to produce whatever they want.  Of course, if Woolsey had read Gingrich’s speech to the ethanol lobby, he would not need to wonder - it’s about their sick, twisted values.
 
Nonetheless, Woolsey claims that such a mandate ”is perfectly in line with conservative economic principles.”  That may be true given what conservatives believe about economics.  But it’s not consistent with a principled support for a free market.
 
Finally, “Challenging Mr. Gingrich’s conservative bona fides based on his support for breaking oil’s virtual monopoly over transportation fuel is not only myopic but also the best gift the Journal can give OPEC.”  But … oil dominates the transportation market because it is a heck of a lot cheaper than any other fuel.  If it weren’t so much cheaper than ethanol, then we would have no need for such massive subsidies for the same.  The same goes for electric cars.  If and when that changes, oil’s “monopoly” will crumble.  Until then, taking oil out of transportation markets simply takes cheap fuel out of transportation markets.  It would be fun to watch a Gingrich/Woolsey ticket run on that.

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