Tax Hike Will Accelerate Connecticut’s Decline

Prior to 1991, Connecticut did not have an income tax and the state was competitive and very prosperous. Since adopting the tax, however, the state has suffered the slowest job growth of any state. Now the Governor (who hid her plans while campaigning) wants to boost the tax even higher to fund an orgy of new spending. The Wall Street Journal opines on this self-destructive proposal: 

Connecticut Governor M. Jodi Rell wants to thank constituents for electing her with 63% of the vote by socking them with a 10% hike in the personal income tax rate. Fellow Republicans in the state legislature are understandably scratching their heads. But the proposal has no doubt also left many taxpayers wondering why they even bother to pull the lever for Republicans. Ms. Rell dropped this bombshell last week when she presented her biennial budget. In addition to the income tax increase, which would push the top marginal rate to 5.5% from the current 5% over two years, the Governor also proposes increasing cigarette taxes, hiking bus fares and phasing out a $500 property tax credit. Democrats, who control both houses of the legislature, welcome the plan. So does much of the state’s liberal media, who are hailing Ms. Rell as “brave” and “courageous.” But as Susan Kniep of the Federation of Connecticut Taxpayer Organizations put it to the Associated Press, “Gee, why didn’t we kind of hear about this before we went into the polls?” Governor Rell says a tax increase is necessary to fund more education spending. But Connecticut already spends more money per student on public schools than all but three states. According to the latest Census data, which is from the 2004 school year, Connecticut’s per-pupil spending is $10,788, or more than 30% above the national average of $8,287. …Connecticut adopted its income tax in 1991, and it has since ranked last nationally in employment growth while losing tens of thousands of people to other states. Increasing the income tax rate seems an odd way to reverse these trends. “When looking at states that have growing economies and are thriving,” said Republican state senator David Cappiello in an interview, “they’re the states that either have no income tax or are looking to phase down their income tax. Connecticut is moving in the opposite direction.” …By the way, it’s not as if Connecticut taxpayers haven’t been doing their part; the state will end the current fiscal year with a $600 million revenue surplus. The problem is that the politicians want to spend the money faster than it comes in. Governor Rell’s budget would grow government by nearly 13% over two years and bust constitutional spending caps approved by 81% of voters back in 1992. No wonder she kept her plans secret until after the election. 

The Wall Street Journal’s Baby Talk on Energy

Today’s Wall Street Journal features a special insert titled “Energy: The Journal Report” (subscription required) featuring 12 articles on the glories of renewable energy and energy conservation and the case for government subsidy thereof.  Those articles are so bad that it’s hard to know where to start.  Let’s look at the highlights.

Rebecca Smith’s lead story for the insert, “The New Math of Alternative Energy,” sets the tone.  While she’s happy to report the fact that no renewable energy can compete effectively in the market at the moment, she understates the cost differential between renewable and conventional fuels and is happy to parrot the industry’s optimistic forecasts about the future.  From her article, you’d never guess that there was anybody on planet Earth not bullish on 13th century energy technology. 

Ms. Smith, for example, argues that wind energy costs 6-9 cents per kilowatt hour “not counting the subsidies,” which means that they are ”approaching the point where wind power may be able to prosper without subsidies.”  But not even wind energy investors would buy that.  A recent presentation from Ed Feo of Milbank, Tweed, Hadley & McCloy, for instance, noted that two-thirds of the economic value of wind projects comes from federal and state tax benefits.  The U.K. Royal Academy of Engineering likewise recently estimated that even with a $45 per ton carbon tax, wind was substantially more expensive than conventional energy. 

Ms. Smith’s riff on solar energy is similar.  “A new generation of solar plants is on the cusp of being able to produce electricity on an industrial scale at competitive rates” she says.  But even the dubious cost estimates she presents for those facilities reveals that it costs 2-4 times more to generate electricity this way than to do so with coal.  That’s one heck of a “cusp.” 

Ms. Smith is likewise high on biomass (burning wood, plants, and municipal garbage for electricity) and geothermal energy, but little context is provided the reader.  For instance, the peer-reviewed literature finds that biomass is probably even more polluting than coal, a fact which will like put a cap on its ability to contribute to electricity supply in the future.  She then cites without any critical analysis a study from MIT finding that geothermal energy could produce 10% of the nation’s electricity by 2050 at prices competitive with fossil fuels.  Yeah, well, anything COULD happen, but what likely WILL?  Breathless predictions about geothermal energy have been with us since time immemorial but have yet to pan out despite numerous studies over the years that sound a lot like MIT’s.  Most analysts agree with Vaclav Smil that ”geothermal will remain a globally marginal, although nationally and regionally import, source of electricity.”  Not that you would know that from Ms. Smith’s article.

Finally, Ms. Smith turns here fractured gaze towards ethanol and, again, she is misled by her sources.  Keith Collins, chief economist at the USDA, is reported as saying that it costs $1.60 to produce a gallon of ethanol.  For a rebuttal, see this study from Mr. Collins’ office in 2005, which reports that the capital costs associated with producing ethanol average about $1.57 a gallon while the operating costs average about 96 cents per gallon.  That equals $2.53 per gallon.  Presumably, Mr. Collins was referring to the operating costs associated with ethanol production, which have gone up since then given the steep rise in corn prices.  But unless someone is handing out free ethanol processing plants, operating costs alone aren’t the full story.

Now, you’d never know from all of this happy talk about renewables that those not connected to the renewables energy industry are somewhat less sanguine about market prospects.  The U.S. Energy Information Administration, for instance, believes that, in 2030:

  • biomass will likely make up 1.7% of the electricity market compared to 0.9% in 2004;
  • wind energy will make up about 1.1% of the market compared to 0.4% in 2004;
  • geothermal will make up 0.9% of the market compared to 0.4% in 2004;
  • grid-connected solar will make up less than 0.1% of the electricity market; and
  • even an optimistic assumption about the growth of ethanol production suggests that it will make up only about 6% of the U.S. transportation fuels market. 

Moving right along, page two features recommended readings from Matthew Simmons, the most prominent proponent of the idea that the world’s oil fields are about to run dry.  This, to put it charitably, is a minority perspective among oil analysts.  That the Journal turns to someone like Simmons - and only Simmons - to lay in print the groundwork for readers interested in knowing more about the oil industry speaks volumes.  Much more intelligent conversations about oil with Daniel Yergin and Robert Mabro are briefly referenced as on-line supplements. 

Anyway, here’s my recommended reading - Michael Lynch’s absolute demolition of Simmons’ popular but dubious book Twilight in the Desert

Next up is Matthew Dalton’s article on page four titled “The Bottom Line,” subtitled, ”Utilities typically have had little incentive to reduce demand for their product.  States are trying to change that.”  Now, think about this for a minute.  What would we make of an argument that went like this - ”Shoe companies have had little incentive to reduce demand for shoes AND THIS MUST CHANGE!”  We’d think the person is crazy, that’s what.  And we’d be right.

The gist of the piece is two-fold.  First, Mr. Dalton reports that there is a move afoot to guarantee electric utility companies a profit no matter what their revenues might be.  If they earn less than the guarantee, the ratepayers write them a check.  If they earn more than the guaranteed level, the utilities write the ratepayers a check.  Everybody wins - or so Mr. Dalton reports.  Of course, if you run this sort of an idea past an economist, he or she would bust a gut laughing.  One could spend hours listing all the bizarre incentives that would follow from such a regime and the inefficiencies that would result.  But since Mr. Dalton never bothered to do so, the reader is unaware of anything besides the neon-lit free lunch sign.

Second, Mr. Dalton reports that many people want utilities to be rewarded for expenditures on energy conservation made on behalf of their rate payers, which he reports is something of a novel idea.  Nonsense - utilities have been handsomely paid to do just that for two decades now, and state programs to underwrite those utility investments in energy conservation go by the name of “demand-side management” and “integrated resource planning.”  In fact, RAND economists David Lougrhan and Jonathan Kulick report that U.S. electric utilities spent $14.7 billion on energy conservation for their ratepayers between 1989-1999 but found that sales declined by only between 0.3-0.4%.  The cost of saving electricity in this manner?  14-22 cents per kilowatt hour - a lot more than it would have cost those companies to generate power.

Mr. Dalton makes a big point of the fact that utilities support these sorts of reforms.  Well, gee, what company wouldn’t happily accept a state guarantee of robust earnings regardless of performance?  Once again, there’s no hint anywhere in Mr. Dalton’s piece that anyone of consequence fails to share his giddy anticipation for this brave new world to come.      

Reporter John Biers mails in a vacuous piece titled “Texas’ New Tea” about how Houston is poised to become the center of the renewable energy biz, transforming the former oil town into the international headquarters of Big Green, Inc..  While his article might as well have been written by the city’s Chamber of Commerce, it would be nice to provide some perspective.  For example, how much capital is flowing in to Houston to underwrite renewable energy investments versus how much capital is glowing in to Houston to underwrite fossil energy investments?  I can guarantee you that the dollars associated with the latter are light years beyond those associated with the former and that rising oil prices are doing far more for the city’s economic health than anything else.  He might have also asked how much of that venture capital is being driven by government regulation and subsidies.  The answer would be “all of it” - which speaks volumes about how precarious those investments might be. 

Page 12 gives us a fawning portrait of Hal Harvey, director of the environmental program at the William and Flora Hewlett Foundation.  Reporter Jeffrey Ball writes a story that isn’t far from what we might see in People magazine.  We get some policy discussion, but it’s little more than froth - nothing serious.  I guess some editor decided that it was important to offset Erica Herrero-Martinez’s equally empty piece a couple of pages earlier on ex-Greenpeacer Patrick Moore, who now likes nuclear power.  More trees die for no good cause.

Reporter Matt Chambers strikes out big-time with his article “A New Playing Field,” on page 12, subtitled “As oil-futures trading moves out of the pits, the impact may be felt far from the exchange floor.”  There is a really big story to be written about how the huge flood of dollars flowing in to the futures market is driving spot prices and how poorly those investments have performed of late.  But Mr. Chambers is too busy to notice, wrapped up as he is in the impact that new electronic trading regime is having on the floor at the NYMEX.  In short, he misses the forest for the trees.

Reporter Christine Burma gives us on page 13 the now standard “How to Cut Energy Costs” article that one has probably read a hundred times in Parade or in similar newspaper inserts or lightweight magazines.  Thank God the Journal is here to give us another.  

Finally, reporter Leila Abboud brings us back to a major topic of Rebecca Smith’s piece.  To wit, how can government’s make renewable energy more attractive to investors?  Yet again, superficiality rules the day.  Some countries, she tells us, have adopted policies requiring companies to purchase renewable energy at government-established prices.  This, she says, invariably pushes the costs on to consumers.  “In contrast,” she notes, other countries have adopted ”renewable energy portfolio standards,” which require companies to purchase a set amount of renewable energy for their customer base. 

“In contrast”?  They are two policies of the same genre, and both policies will impose costs on consumers.  Only the form is different.

Ms. Abboud then goes on at length about what she calls “The Danish Success” in promoting wind energy.  Believe it or not, government can in fact construct Potemkin Village industries if the production subsidies and consumption mandates are aggressive enough.  Heavy-handed government can succeed in Denmark just as easily as it can succeed in the old Soviet Union if your definition of success is meeting the planners’ dictates.  But such policies only “succeed” in an economic sense if they produce competitive industries that don’t need further subsidy.  And in Denmark, they have not.

But even if we accept Ms. Abboud’s curious definition of “success,” its not obvious that it holds any relevance to the United States.  Denmark is slightly smaller than the combined area of Vermont and New Hampshire and has a population about equal to that of Cook County, Illinois.  Supplying a tiny population over a small amount of land with 25% of its electricity from wind is one thing - doing so over the entire expanse of the United States is quite another.

Ms. Abboud then goes on at some length about how America does less than Japan to subsidize renewables.  Well, yes.  And that’s all to the good.  Yet Ms. Abboud writes that “As governments continue to experiment with policy alternatives, the key is that whatever policies they employ must be predictable and reliable.”  Of course, predictability is all to the good.  But more important is that the policies produce net gains to the economy, which means enhancing overall efficiency.  That’s the supposed “end” of government intervention in markets.  The intervention is the “means” and not, pace Ms. Abboud, an end unto itself.

One could spend a lifetime slamming dross in the news pages of the Wall Street Journal - particularly when it comes to energy.  Only the driving need to be more productive with my time keeps me from doing so on a daily basis.  But when something as bad as this insert comes along, something must be said. 

Property Rights Promote Conservation

My daily visit to Marginal Revolution continues to pay dividends. Alex Tabarrok comments on a New York Times story that explains how giving people private ownership of trees has improved conservation and led to millions of additional trees: 

Recent studies of vegetation patterns, based on detailed satellite images and on-the-ground inventories of trees, have found that Niger, a place of persistent hunger and deprivation, has recently added millions of new trees and is now far greener than it was 30 years ago. These gains, moreover, have come at a time when the population of Niger has exploded, confounding the conventional wisdom that population growth leads to the loss of trees and accelerates land degradation, scientists studying Niger say. …Another change was the way trees were regarded by law. From colonial times, all trees in Niger had been regarded as the property of the state, which gave farmers little incentive to protect them. Trees were chopped for firewood or construction without regard to the environmental costs. Government foresters were supposed to make sure the trees were properly managed, but there were not enough of them to police a country nearly twice the size of Texas. But over time, farmers began to regard the trees in their fields as their property, and in recent years the government has recognized the benefits of that outlook by allowing individuals to own trees. Farmers make money from the trees by selling branches, pods, fruit and bark. Because those sales are more lucrative over time than simply chopping down the tree for firewood, the farmers preserve them.

NYC Parents Need Actual Power

Probably only because it involved “privatizing” education, on Saturday the New York Times ran an editorial criticizing the Bloomberg administration, and new deputy schools chancellor Chris Cerf, because Cerf failed to quickly and fully disclose that until very recently he held stock in for-profit Edison Schools. Lamented the Times:

Mr. Cerf should have provided this relevant public information. It may seem like a small matter, but it adds to the perception of many parents that they are not being taken seriously, despite the creation of parent groups in every school.

“Perception”!? It’s a cold, hard fact that parents aren’t being taken seriously, and that’s because they have no serious power. Until they can take their children – and the money attached to them – out of the public school system, no public school or bureaucrat has any reason to take them seriously. Unfortunately, the Times seems to think that the solution to the problem is just for education officials to spruce the “we care what parents think” window dressing up a bit, not empower parents to leave a system that all too often holds them in contempt.

Federal Bureaucrats: Same Old Story

The Washington Post reports on a new survey of 221,400 federal workers and their pay and performance.

Among the survey findings are that only 22 percent of federal workers agreed with the statement “pay raises depend on how well employees perform their jobs.”

Despite eight years of Al Gore’s “reinventing government” and six years of similar efforts under President Bush, the federal bureaucracy is still a very ill-functioning “bureaucracy.” Indeed, that will always be the case. Here are some reasons why:

  • Poorly performing federal agencies do not go bankrupt, and thus there is no built-in mechanism to eliminate failures;
  • Government managers face no profit incentive, giving them little reason to proactively reduce costs. Indeed, without profits to worry about, managers favor budget and staffing increases to boost their power and prestige;
  • Without the profit motive, there is little incentive for government workers to innovate and produce better services;
  • The output of much government work is hard to measure, making it difficult to set performance goals for managers and workers;
  • Even if performance could be measured, federal pay is generally tied to longevity, not performance;
  • Disciplining federal workers is difficult, and they are virtually never fired, resulting in agencies carrying heavy loads of poor performers;
  • To prevent corruption, governments need complex and costly regulations and paperwork to carry out routine functions such as procurement;
  • Because of the frequent turnover of political appointees, many agencies experience continual changes in their missions;
  • Congress imposes extra costs on agencies in carrying out their duties, such as resisting closure of unneeded offices in the districts of important members;
  • Agencies get influenced or “captured” by special interest groups that steer policies toward satisfying narrow goals, rather than broad public interest goals;
  • The large size and overlapping activities of federal agencies makes coordination of related functions very difficult. Sadly, we saw the results of this problem with the failures of U.S. intelligence agencies to effectively communicate with each other prior to 9/11.

For these reasons, and many more, the federal government ought to radically downsized with as many functions as possible left to the private sector. See http://www.downsizinggovernment.com/

Great Moments in Government

While making my daily visit to Marginal Revolution, I saw this gem about the Census Bureau’s celebration of Return-Shopping-Carts-to-the-Supermarket month. After 20-plus years observing money get wasted by Washington, I thought I had reached the point where nothing would surprise me. But this caused even my jaw to drop. It’s bad enough that some politician or bureaucrat concocted the goofy idea. It adds injury to insult when they then squander tax dollars to promote it:

We’ve all seen them and wondered how they got there — a supermarket shopping cart, sitting forlornly along a residential street, far from the nearest grocery store. Was it a prank, or someone who walked to the store and bought more than they could carry? Either way, this is Return Shopping Carts to the Supermarket Month — including milk crates and bread trays.

European Commission Poised to Officially Attack Switzerland for the “Crime” of Low Tax Levels

In a move that is both remarkable and disturbing, the European Commission plans to file a complaint - and threaten protectionist trade barriers - because attractive Swiss tax policies are supposedly a violation of a free-trade accord. The bureaucrats in Brussels are not arguing that Switzerland is imposing barriers against EU products. Instead, the Commission actually is taking the position that low taxes are attracting businesses that might otherwise operate in high-tax nations. The implications of this radical assertion are breathtaking. It certainly is true that a nation with more laissez-faire policy will attract economic activity from neighbors with more burdensome levels of government. But if this migration of jobs and investment is a “distortion” or trade, then the only “solution” is complete and total harmonization of all taxes (and regulations, spending, etc). If the Euro-crats succeed with this argument at the European level, it will be just a matter of time before similar cases are filed at the World Trade Organization. Look at this story from the Neue Zuricher Zeitung, but insert “U.S.” for Switzerland and you may get a glimpse of the future:

The European Commission is expected next week to make an official complaint about the practice of Swiss cantonal tax authorities giving corporate tax breaks. But the reproach is considered dubious because the Commission cannot really prove there has been any infringement of free trade. Brussels and Bern have been at loggerheads for more than a year over low corporate taxes some of the cantons use to attract new companies, including firms from European Union countries. The Swiss government has made it clear in recent months that a low tax regime is not in breach of a 1972 free trade agreement. …There may be objections from some EU Commission members but a condemnation of non:EU member Switzerland is practically certain. …The draft claims that these tax practices distort trade between Switzerland and the EU, and therefore contravene the bilateral free trade agreement. …It is also claimed that there does not have to be cast:iron proof of trade distortion. According to article 23 of the free trade accord, it is enough if a privilege “threatens to distort” trade.v…the EU specifically mentions “protective measures” in the draft complaint. The indirect threat is aimed at making Switzerland negotiate over cantonal tax practices.