economy

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My Take On Ohio’s Energy Efficiency Fiasco

DUKE001Robert Michaels wrote an interesting post on Mercatus called Ohio’s Energy Efficiency Fiasco. Since I complained about rising electrical rates in 2012 and 2013 I was fascinated that a Northern Virginia college would publish a paper by a professor of economics at California State University about Ohio electrical rates. Talk about strange bedfellows! In 2012 I was ready to complain to state officials about the electric rate increase when I realized that my problems were pretty minor compared to problems faced by several public school districts whose budgets were blown out of the water with the rate increase. Despite all of the fervor I can say that not much has changed. My bill is much higher and Duke is inordinately interested in getting me to buy light bulbs from them. Here is the junk mail I got from Duke last week. So what could have gotten Mr. Michaels and Mercatus all upset?

It seems that Mr. Michaels is concerned about free riders. Here is an example.

Free riders are subsidized by higher bills for other consumers. Despite hopes that the EERS would encourage efficiency innovation that would produce “green jobs,” since the EERS became law there has been very little such innovation. Instead, utilities have relied heavily on lighting-related discounts for compliance. For some utilities in some years these discounts have accounted for more than 80 percent of EERS expenditures.

RateChange1The problem for these utilities is that I still have plenty of CFLs I bought three years ago so I do not need anymore. He also complains about “riders” added to the distribution portion of the electrical bill to satisfy the whims of certain advocacy groups. My latest Duke electric bill shows that the combination of the delivery and generation riders is now 42% of my delivery charge. It really irks me that my electric bill keeps going up despite lower fossil fuel costs and improvements I made in energy efficiency. The problem is with distribution rate increases. Here is a graph of my annual electrical rate increases. It looks like the stupidity has subsided so why is Mercatus still interested?

I think Mercatus is interested in the legislative fight to alter the renewable and energy efficiency mandates in Senate Bill 221 enacted by legislators in 2008. Many states have similar mandates but Ohio seems to be particularly foolish in writing S.B. 221. The supporters of S.B. 221 say these subsidies have created a renewable energy industry and the bill was about creating jobs. State Senator Bill Seitz begs to differ and told members of the Senate Public Utilities Committee, “Simply put, the economic projections upon which (S.B. 221) was based have turned out to be wrong.” I think the quickest way to get up to speed on the economic predictions upon which S.B. 221 was based is to read Jonathan Lesser’s study, Ohio’s Electricity Usage Reduction Mandate: The “Free Lunch” Paid for by Ohio Consumers. In that article Mr. Lesser says that since S.B. 221 mandates reduced electrical usage, it expects that electrical generation rates will go down. The economic logic used to justify S.B. 221 is that since the retail customer is saving money on these presumed generation rate decreases they can easily afford to subsidize renewable energy and energy efficiency projects paid for by the riders included in the distribution rates. The problem is that delivery rate increases far exceeded any savings I got from generation rate decreases. If the only renewable energy job created is to send me junk mail about CFLs, I think we can safely say that it has failed and it is time to work with businesses to change the renewable and energy efficiency mandates. The good people of Ohio can only go so far with bad legislation.

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Can This Health Care Economy Grow 3% In 2015?

This week I was trying to get my head what the weak retails sales report for December and the currency freak-out by Switzerland says about the prospective of 2015 US economic growth. Although everyone seems happy about the US economy and jobs I am getting a little worried. This health care driven economy has very short coat tails when you compare it to the more traditional housing driven economy and there is no better example of this than weak retails sales for December despite lower gasoline prices. Despite good GDP growth, good employment numbers, and positive consumer sentiment, the consumer is not spending on goods. The weak retail sales numbers supports a speculation I made in a previous post that the Affordable Care Act is primarily wealth redistribution and every additional dollar spent in health care is a dollar subtracted from retail sales. 

Then we have the currency freak-out by Switzerland. As the European Union crisis has deepened, demand for the Swiss Franc has risen. As the Quartz article, Absolutely everything you need to understand what happened to the Swiss franc this week, explains:

A strong franc hurts the Swiss because it makes their exports more expensive for foreign buyers, and the country has a giant export sector.

In the case of Switzerland, exports account for 72.2% of their GDP. To protect Swiss exports In September 2011, the Swiss National Bank set a limit on the amount of strength it would tolerate. Last week they gave up and let the Swiss Franc float. Swiss exporters and the financial markets were not amused. Even though Switzerland is not part of the European Union they have been drug into the European Union problems and have increased the likelihood of a Swiss recession.

The United States has a strong currency but the US economy is not nearly as dependent on exports as Switzerland or Germany. Unfortunately the effects on export dependent companies in the US is the same as it is in Switzerland. When you combine the export weakness with the expected weakness in the oil sector and auto sales, you have to wonder where the retail sales demand will come from. If European deflation is almost a certainty then can the US be far behind. Switzerland is one of the best managed economies in the world and they gave up the currency fight. When you combine weak retail sales, oil demand, auto sales, and housing demand with deflation worries, it makes me wonder how this health care driven economy can grow 3% in 2015.

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The Link Between The Health Care Economy And Income Inequality

Ever since the latest GDP report said the economy grew at a 5% rate in the latest quarter I have been thinking of the theme song for the Jeffersons, Movin’ On Up. Surely With 5% growth everyone should be feeling a little wealthier like the Jeffersons. Here are some of the lyrics from that song.

Well we’re movin on up,
To the east side.
To a deluxe apartment in the sky.
Movin on up,
To the east side.
We finally got a piece of the pie.

The irony is that despite 5% growth I do not feel wealthier in 2014 and am pretty sure my wealth in 2015 will diminish even more. So I started exploring the GDP contributions and found that most of the gain in Real Personal Consumption Expenditures(PCE) is attributable to health care(23.8%).This is not too surprising since health care has growing faster than every other PCE category since I started working in 1976. As long as our politicians were unwilling to slow down health care cost increases, it was just a matter of time before it would be number one. What was surprising was that the next three largest contributors were Financial services and insurance(16.3%), Recreational goods and vehicles(14.1%), and Motor vehicles and parts(12.8%). Missing in action were those durable and non-durable stalwarts of clothing, furnishings, food, gasoline, and housing. Obviously this health care economy is a much different economy than the Jeffersons were enjoying in the 1970s. The “Jeffersons” in this economy are definitely not moving on up. That is when I started thinking about my number one financial problem for 2015, health insurance.

In a previous post I mentioned that my grandfathered insurance premium for January 2015 will be $479. This is up 18% from my 2014 insurance premium of $407 and up 54% from my 2011 premium of $311. The lowest cost bronze plan in 2015 would cost me $923. As a person whose last insurance claim was made in the 1990s I think the fair market value for my health insurance is probably around $311 and everything charged above that amount is the equivalent to a wealth redistribution tax. From the perspective of my employer I got a raise since they paid more for my services. Unfortunately for me my raise did not buy clothing, furnishings, or bolster my retirement savings. Instead it went to pay other people’s medical expenses and insurance.

Unfortunately for the Affordable Care Act supporters it is an easy argument to show that income inequality increases when the health care economy is based primarily on redistributing wealth between different parts of the middle class. It did not have to be that way. Reforming health care costs was an essential part of health care reform and an integral part in supporting a growing the economy and creating good paying jobs. Instead we see a health care system that is dominating the economy and is literally sucking the growth out of other sectors of the economy. It looks like we are in a race to the bottom. Milton Friedman would probably have this to say.

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.

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Keystone Pipeline Vote Is About Growing The Economy

BarrelOilI am getting increasingly annoyed with the President saying that the Keystone pipeline will allow Canada to send their oil through our land where it will be sold elsewhere. Here is an example from a yahoo news story, Keystone Pipeline vote isn’t about energy.

In a press conference last week in Asia, Obama remarked that the pipeline wouldn’t add anything to the U.S. energy economy and would allow Canada to, “pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else.”

As a guy who lived in Houston for 18 years the idea that the oil will be sold elsewhere is very unlikely. What is likely is:

  1. Refiners along the Gulf coast will see lower prices for all of their feedstocks. Most of the refiners can handle a variety of feedstocks and will switch to the feedstock that makes them the most money.
  2. Refiners will convert every barrel coming out of the pipeline into high valued products like gasoline, diesel, jet fuel, and the chemicals used to make plastics and fibers. The Gulf coast already has an intricate web of product pipelines for the building blocks of plastics.
  3. The United States oil and chemical industries are very, very good at capturing as much value as possible out each barrel of oil. That is what they have been doing for over 100 years. It is unlikely that Canada will get a better price exporting crude.
  4. Almost all of these high valued products will be consumed within the United States. The State of Texas has this great summary on crude and it echoes what Keystone Pipeline folks say on the Myths & Facts page.
  5. Lower feedstock prices will translate into higher profits and potentially into a combination of higher profits and sales since the Gulf coast will now have a competitive advantage over other countries. It is the ripple effect from lower feedstock prices that may be the most significant contributor to economic growth. If you are the low cost producer then selling value added products overseas becomes feasible again. If we continue to focus on infrastructure policies that improve productivity then we should see the result in real growth in the business sector and eventually in middle class disposable incomes.
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In The New Economy Are Low-paid Jobs An Improvement?

vpplogo_resizeA couple of days ago Marc Andressen said in a Business Insider interview that in the new economy “even low-paid jobs — is an improvement”. Here is the entire quote.

“The old farming jobs were f–king terrible jobs. I mean, farmers wake up at 6 in the morning and work 14-hour days. Industrial jobs — people would get killed in these factories all the time. Coal miners — people are trying to protect coal-mining jobs. They’re terrible, terrible jobs … In developing countries, everybody’s dying to get into modern factory jobs, because the alternative is far worse.”

Back in the 1980s and 1990s I worked at a chemical plant near Houston. During my 15+ years at the plan we had one on the job injury. Our safety record was good enough that we applied and was accepted as an OSHA Star site. I know. I was on the committee. I know the slogans and I really do believe that companies really mean it when they say “we like you just the way you are!” A safe workplace is good for the company’s bottom line and both management and the employees are happy! While I was on the committee I knew the injury statistics for various industries.  In the 1980s chemical workers and coal miners were not on the top ten list. Since it has been a few years since I looked at the numbers, I did a little research to see if anything had changed. Here is the list from a recent Forbes article, America’s 10 Deadliest Jobs.

1. Logging workers
2. Fishers and related fishing workers
3. Aircraft pilot and flight engineers
4. Roofers
5. Structural iron and steel workers
6. Refuse and recyclable material collectors
7. Electrical power-line installers and repairers
8. Drivers/sales workers and truck drivers
9. Farmers, ranchers, and other agricultural managers
10. Construction laborers

Yup, the list is pretty much as I remember. Industrial jobs did not make the list either. Mr. Andressen was 0 for 2 in job safety predictions. Our country learned a lot of bitter lessons improving mine safety since 1900s and the unions and coal companies are proud of their progress. The same can be said for industrial jobs, too.

I am kind of surprised Mr. Andressen did not crank up his favorite browser and check the safety and salary information for coal mining before he spoke.  If he did he would find that the average coal miner salary in 2013 was $82,058 while the average U.S. worker got $49,700. According to the Glassdoor the average hourly wage for a Starbucks Barista is $9.32 per hour or about $18,640 a year if they work full time for 50 weeks. When you look at the safety record and the salary, I think it is pretty obvious why coal miners want to hold on to their jobs. These “new economy” jobs are jobs you take while you are look for a real job.

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If The American Middle Class Is A Myth Then Is The American Dream A Myth, too?

I suspect that when Marc Andressen said the American middle class is a myth in a Business Insider interview he was unaware that he was summarily dismissing the American Dream, too. It is practically impossible to separate the idea of American middle class from the aspirations of the American Dream. If we look at history we can see that the bourgeoisie of the Industrial Revolution were instrumental in transforming a large group of subsistence farmers into what we call the middle class. The bourgeoisie in Europe and the United States were the innovators who were disrupting the farming and manufacturing markets. It is hard to imagine an industrial revolution without improved farming efficiencies. If we go back even farther in history we can argue that  this bourgeoisie class was probably responsible for most of the innovation in the Europe for the last 1000 years and a pretty good reason why Islam is not the state religion of Europe. Europe’s advancements in ocean going ships did more to halt the spread of Islam than anything else. The idea that this innovative class would not exist in America is preposterous! The American middle class is the modern version of Europe’s bourgeoisie with a few American twists. As a country of immigrants America’s bourgeoisie was especially well suited to embrace the risk of Schumpeter’s creative destruction. On multiple occasions America embraced disruptive technologies that destroyed whole industries only to replace them with more efficient ones. By the end of World War I the willingness of the United States to successfully embrace new industries and subsequently dominate them, allowed the United States to surpass Great Britain as the preeminent world economic power. It was this combination of smart risk taking with the productivity gains that explains most of the wealth of the middle class and the growth of a consumer driven economy. Now the middle class could afford homes, cars, health care, and leisure activities. For over a hundred years this success is was what made America and the American Dream great. Industry giants such as John D. Rockefeller started from modest backgrounds and created great businesses. His story gets repeated over and over again but in America it gets repeated with people with different ethnic backgrounds, religious backgrounds, and color of skin. America made it work and it is impossible to separate the American middle class from the American Dream and America’s success.

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Does Socialism Work? A Classroom Experiment

Here is a old joke Dan Mitchell posted in 2011. I thought it was worth keeping and repeating.

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.
It could not be any simpler than that.

There are five morals to this story:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

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The Latest GDPNow Forecast For Second Quarter Growth is 2.7%

I have a certain fascination with forecasts so on August 1st we shall see if the GDPNow method is better than the professional forecasters. Here is what the Atlanta Federal Reserve site said in the last report.

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2014 was 2.7 percent on July 25, unchanged from its July 17 reading. The first GDPNow model forecast for GDP growth in the third quarter will be released August 1.

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Different Answers For Hourly Wages vs. CPI-Food vs. CPI-All

I was looking at a debate between Mr. Davis and Mr. Perry over inflation. Mr. Davis started out the debate with this provocative article, American Families Are Right To Be Worried About Inflation, and Mr. Perry responded with his own chart showing that average hourly earnings grew faster than inflation. Since I do the grocery shopping for our family my gut feeling says we are experiencing mild inflation in excess of wage growth. So who is right? In almost all cases like this I go over to FRED and chart some data.

My first reaction to the debate was Mr. Perry’s selection of average wage earnings. The logical choice would have been real disposable income since it removes personal current taxes and inflation and is readily available at FRED. For the average person the only wage growth that matters is what they have after taxes.

If we look at a Fred graph of real disposable personal income versus the two CPI measurements, we can see that the graph confirms Mr. Davis’s statements who claims that “food inflation blows away wage growth” and “food prices have soared since 2009”. If we adjust the real disposable personal income for population growth, the difference is even more dramatic. So what is the best way to measure wage growth, average wage earnings or real disposable personal income per capita? They tell different stories.

The graph is shown below. Here is a link to the FRED graph, http://research.stlouisfed.org/fred2/graph/?g=Gix.

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GDPNow Forecast

I continue to be fascinated with forecasting that errs in only one direction. A couple of days ago I made fun of GDP forecasting in the post, Who Is The Better Forecaster, The Economist Or The Climate Scientist? The good news is that these “scientists” are not building stuff that could hurt us like cars or airplanes. For the last couple of years the initial GDP estimates are consistently too optimistic and the chart below continues that trend. Today I found out that the Atlanta Federal Reserve’s GDPNow forecast is expecting 2.6% GDP growth for the second quarter of 2014. It should not be a surprise to anyone that this estimate is at the bottom of the range for GDP forecasts and will leave us at a negative growth rate for the first six months of the year. For those of you who like to look at the details the Atlanta Federal Reserve has graciously provided the spreadsheet they use to make the GDPNow forecast. Here is the latest forecast from their site.

Latest forecast
The GDPNow model forecast for real GDP growth (SAAR) in 2014: Q2 was 2.6 percent on July 10, unchanged from its July 3 value. This morning’s wholesale trade release from the U.S. Census Bureau had no effect on the GDP nowcast after rounding.

Evolution of Atlanta Fed GDPNow Real GDP Forecast