Cato “Neutered” on Electricity Deregulation?

Last week, Peter Van Doren and I had an op-ed in The Wall Street Journal that reflected on the record of electric utility restructuring in light of the recent rate hikes experienced in the “deregulated” states. Libertarian energy consultant Mike Giberson over at The Knowledge Problem, however, was unimpressed.

Giberson offers only two substantive criticisms. First, he takes issue with our claim that the case for vertical integration was scarcely heard during the debate over restructuring:

It isn’t clear from the article where Taylor and Van Doren were during the debates over unbundling, but delving into the voluminous public records of both federal and state regulators of the electric power industry would reveal that vertical integration has been among the matters discussed at length. Earlier in the article they quote MIT economist Paul Joskow, but if they were at all familiar with his work they would not make such “unfortunate” claims.

Vertical integration was in fact a big part of the policy conversation in the state legislatures and regulatory hearing rooms during the course of restructuring. But as Economist Robert Michaels at U. Cal., Fullerton argues, those discussions were superficial, uninformed, and politically charged conversations primarily concerning utility market power and the need to corral it. Paul Joskow’s work on this matter (which we are indeed well acquainted with) along with that of other academics who’ve investigated vertical integration in the electricity sector from an I/O perspective was given little serious attention by policymakers. That was our point.

Second, Giberson seems to take issue with our contention that vertical integration is an efficient means of remedying hold-up problems between generators and power distributors, facilitating efficient investment in transmission, and maintaining system reliability. Giberson finds it “curious that Cato Institute writers are so skeptical about the ability of decentralized arrangements (like prices and contracts) to lead to efficient results.”

Market arrangements indeed have their place, but if they were always preferable to alternative arrangements, then the firm as we know it would not exist – a point well made by Ronald Coase (no enemy of markets he) in his classic essay “The Nature of the Firm” back in 1937. Just because one has great faith in the power of markets does not necessarily mean that one should enter a daily spot market in the search for secretarial help or, alternatively, daily spot markets for electric power. For a longer discussion on why “decentralized arrangements (like prices and contracts)” are problematic in the electricity business, see this Cato study from the aforementioned Robert Michaels.

With the substance now put aside, let’s examine the kicker:

And it dawns on me that through it all, the Cato authors don’t advocate anything at all, not even the “true deregulation” that they describe in the final paragraph. They discuss history, explain some economics, call the loss of vertical integration unfortunate, speculate on preferences for contracts, and suggest that a totally unregulated world might turn out to be like the old regulated world.

We are to some extent guilty as charged. We did indeed spend a lot of our available word count explaining how electricity markets work. But it seemed to us that this was necessary in order to fully explain why the current emphasis on recent price increases in deregulated electricity regimes is misleading. Consumers seem advantaged by regulation during fuel-price upswings and disadvantaged by regulation during fuel-price declines. But over a longer time frame (1990-2006), the average price increases in regulated and deregulated regimes are not statistically different. Thus the differences between the old and new regimes are more apparent than real.

We go on to argue (as we did more robustly in this study published a few years ago) that a totally deregulated world of independent generators, transmitters, and distributors and consumers buying spot would not be efficient or stable because of the hold-up problem. We speculate that the arrangements to which firms and consumers would agree would resemble vertical integration which returns certainty for firms and price limits for consumers. Giberson might not like that argument, but it’s hard to miss.

Often Cato is bold, or insightful, or both, and sometimes it is over-dramatic in asserting the costs of this-or-that government program or the benefits of some tax cut or another, but almost always Cato offers clear advocacy for liberty. Taylor and Van Doren don’t give us that Cato in their rambling Wall Street Journal essay. Instead we get what amounts to an implicit defense of the old status quo.

While we do criticize the regimes produced by “restructuring,” we do not defend the old regime. In fact we do not defend any particular substantive market outcome at all. Instead, we defend an idea – that business owners – not politicians – should decide how market enterprises are organized and operated. If there is a more libertarian argument, then I have not heard it.

Oprah Winfrey, Political Power Broker

Billionaire Oprah Winfrey is making a million-dollar contribution to Barack Obama’s presidential campaign. And despite all the campaign finance restrictions of the past 30 years, it’s perfectly legal. That’s because Oprah is making her contribution in the form of time on her television show, appearances with him on the campaign trail, and other uses of her celebrity. But if a rival media mogul, someone like Sumner Redstone or John Malone, wanted to make a contribution of more than $2,300 to a presidential candidate, that would be illegal. Because, you know, it’s corrupt to make a large contribution. Wouldn’t want the next president to be indebted to a businessman who gave him a $10,000 contribution.

This Saturday, “Winfrey will host her first-ever presidential fundraising affair on the grounds of the Promised Land, her 42-acre ocean- and mountain-view estate in Montecito, Calif. – an event that is expected to raise more than $3 million for Obama’s campaign.”

Matthew Mosk of the Washington Post outlines some of the other ways Winfrey might help her preferred candidate.

Among the weapons in Winfrey’s arsenal: the television program that reaches 8.4 million viewers each weekday afternoon, according to the most recent Nielsen numbers. Her Web site reaches 2.3 unique viewers each month, “O, the Oprah Magazine,” has a circulation of 2 million, she circulates a weekly newsletter to 420,000 fans and 360,000 people have subscribed to her Web site for daily “Oprah Alerts” by e-mail.

More than that, though, the Nielsen tracking data show that her most loyal viewers are women between 25 and 55 – a group that also votes in large numbers in Democratic primaries.

Oprah’s well aware of her power:

The fundraiser may be only the start. The Winfrey and Obama machines have maintained silence on the exact nature of their talks over what her role will be, but the idea of her appearing in television ads and other appeals is very much in play. She offered during a recent interview with CNN’s Larry King: “My money isn’t going to make any difference. My value to him – my support of him – is probably worth more than any other check that I could write.”…

Winfrey said in an audio Web chat last week that, this year, the Obamas will be her only political guests.

Campaign finance reform was promised as a way to make everyone equal in the political process, to squeeze out the power of big money. But one of its effects is to make some rich people more equal than others. If Oprah–or Rupert Murdoch, or Donald Graham–decides to use his or her resources to help a particular candidate, that’s legal and very powerful. But the rich man who runs a software company is forbidden to use any significant part of his financial resources to help a candidate.

All power to journalists and celebrities in the reformed political process.

The Republicans’ Post-Election Personal Pork Party

At The Hill, I have an article about a little-known dip into the pork barrel: big bonuses for congressional staff if there’s money left over at the end of the year, especially if the money will fall into the hands of the other party at the end of the year.

How can there be money left over when the government is running multi-hundred-billion dollar deficits? Well, you might ask. But each department has its own appropriation, and those accounts often have “money left in the budget” as the end of the year approaches, necessitating the famous end-of-the-year spending spree.

In the congressional case, I found examples like this on committee staff budgets:

The House Energy and Commerce Committee showed similar patterns. In 2005, when the Republican leadership was spending its “own money” on year-end bonuses, several staffers received less than 10 percent of their annual salaries, while a few lucky staffers received extra payments of as much as 17 percent.

But when GOP Energy and Commerce bosses faced losing their chairmanship after the 2006 election, they decided to leave no dollar behind for the Democrats. Lucky staffers then got windfalls of 31 percent on a $35,000 salary, 30 percent on a $50,000 salary, 18 percent on a $100,000 salary, and so on. At least 15 committee staffers got bonuses of between $11,000 and $17,600.

And I concluded, cheekily:

Members of Congress are free to pay their staffers whatever they choose, up to an annual ceiling, so there’s nothing illegal about year-end bonuses, even year-end, post-election, before-the-other-party-gets-in bonuses.

But this pattern illustrates a big difference between the private and public sectors. In the private sector, if your customers become dissatisfied with your product, you tend to make less money. In the public sector, you get a couple of months to double-dip before you lose control of the money. For participating in a Congress that voters booted out of office, these bonuses are a handsome parting gift.

A big tip of the hat to Cato interns Schuyler Daum and Jonathan Slemrod for poring over payroll records, and to LegiStorm for making such information about Congress public and accessible.

A Second Industrial Revolution?

Peter Goodman has a fine article in Monday’s Washington Post about the resilience and tenacity of the manufacturing sector in the United States – even in the storied ghost towns that dot the once-bustling textile regions of North Carolina.  Like my recent paper on the topic, Goodman points out that U.S. manufacturing is thriving:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation – three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

And he reinforces a key point of my paper that has yet to penetrate the pessimistic political discourse:

With less than 5 percent of the world’s population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

The major difference between my paper and Goodman’s story is that the former takes a birds-eye view of the manufacturing sector, presenting an impersonal, data-driven assessment of the state of U.S. manufacturing.  Goodman’s story focuses on a particular biotechnology company that occupies a former textile mill, producing a drug for liver ailments from a local pond weed.  The story is emblematic of the metamorphosis throughout the North Carolina and U.S. manufacturing sectors:

North Carolina encapsulates the forces remaking American manufacturing. Between 2002 and 2005, the state lost 72,000 manufacturing jobs, about three-fourths in textiles, furniture-making and electronics, according to the North Carolina Commission on Workforce Development. At the same time, the state has become a rising powerhouse in lucrative new manufacturing sectors such as biotechnology, pharmaceuticals and sophisticated textiles.

During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum.  Opportunities abound for workers with skills or the willingness and wherewithal to acquire them.  In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.”  It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.

National Health Care and the Nanny State

As if John Edwards proposal for mandatory preventive care wasn’t proof enough that national health care means less freedom, the Tories have now proposed that the UK’s National Health Service monitor Britons to ensure they are living “healthy lifestyles.” Those who don’t measure up could be denied treatment under the NHS (which could be a blessing in disguise). Those who lose weight, give up smoking, and make other healthy changes can have the government pay for their gym memberships and even buy them fresh fruit and vegetables.

Sometimes politics is beyond parody.

And We Thought Mitt’s Mandate Was Bad…

Democratic presidential candidate John Edwards has announced that preventive care and regular check ups would be mandatory under his new health care plan. Every American would be required to get an annual physical and tests, such as mammograms and colonoscopies as frequently as the government deemed prudent. Although he didn’t spell out the penalties, we can look forward to Americans being hauled into court for failing to provide proof of a blood test.

The Nanny State marches on.

The Left Is Half Right on NCLB

Over at the popular leftish blog Crooks and Liars, Bluegal laments the No Child Left Behind Act, which is up for reauthorization this month. The nearly 100 comments on her post overwhelmingly echo her negative views. Nevertheless, it seems that she, her commenters, and the vast majority of Democrats in Congress want the law reauthorized. Why?

The reason for this apparent contradiction is that NCLB is only the latest incarnation of the Elementary and Secondary Education Act (ESEA), which has been directing federal tax dollars to public schools since 1965. Leftish critics of No Child want to dilute or repeal most of the testing requirements introduced to the law in 2002, while increasing its funding. They believe that the testing provisions of NCLB are ineffective and likely harmful, but that federal spending is good for American education so long as it is not narrowly channeled into high-stakes testing. They’re half right.

As Neal McCluskey and I demonstrate in our new NCLB study (which we’ll be releasing on the Hill tomorrow), the evidence shows that the law’s testing and teacher qualification regimes have failed to improve achievement or narrow the gaps between groups. So the left’s skepticism on this point is justified. But the left-liberal goal of securing higher federal spending without bureaucratic “accountability” is both unattainable and undesirable.

A perennial blind spot of both major political parties is that they love to seize new powers and revenue streams while they’re in office, failing to realize that those same powers and dollars will inevitably fall into the hands of their ideological opponents. The Democrats gave us ESEA, and the Republicans eventually turned it into NCLB. As long as Republicans are elected they will try to hold schools bureaucratically “accountable” for the federal funding they receive – particularly given that real federal per pupil education spending has risen by a factor of 18 or so since the ESEA was passed in 1965. So even if the left manages to enact a “hands off but wallet open” version of NCLB this fall, it will live a short policy life, succumbing again to federal testing/performance mandates the next time Republicans control Congress.

For the sake of argument, though, would it do any good if it were a realistic long-term goal? Since it took Republicans a long time to get around to imposing the testing standards of NCLB, we actually have nearly four decades of experience with the ESEA with which to answer that question. Did higher spending translate into higher achievement? No. Federal spending went from about $50 per student in 1965 to nearly $900 per student in 2003-04. Total per pupil spending doubled to more than $11,000 over the same period. But at the end of their public schooling careers, students perform no better in reading and math today than they did nearly four decades ago. They’ve actually gotten worse in science (data from the Long Term Trends studies of the National Assessment of Educational Progress, for 17 year-olds).

If liberals want to stop Washington from meddling in the classroom, as most claim, there is only one way to go about it: stop collecting and spending federal tax dollars on it. So long as American schools are beholden to the federal purse, they will be puppets on the end of federal purse strings – strings held, on a recurring basis, by Republicans.