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Why Obama's massive energy bill will wreck the US economy
Gerard Jackson
My exposé of Obama's energy tax (aka the Waxman-Markey anti-growth bill) triggered an onslaught of criticism from his supporters, several of whom pointed out that based on my own assumptions the "$0.237 trillion per year" figure I used should have been $0.208 trillion making the figure for 2036 approximately $4.9 trillion. In fact the annual average should have been $225 billion ($9 trillion divided by 40 years). Multiplied by 24 this gives us $5.4 trillion for 2034. The confusion was caused entirely by my inexcusable carelessness. (I really should stop scribbling numbers down on different scraps of paper).
However, any error in my figures was, as these critics underlined, a minor point that has no fundamental bearing on my argument. In their opinion my real mistake was in averaging out the cost and treating it as cumulative. According to one critic this means that the "actual cost for 2036 would only be about 1.5 per cent of GDP, a far cry from 20 percent". No it wouldn't. I used the 'average' cost to simply stress the fact that the policy really is cumulative.
As representative John Dingell publically admitted: "Cap and trade is a tax and it's a great big one". And this fact should be our starting point. In my opinion the $9 trillion figure considerably underestimates the true cost of Obama's energy bill, the aim of which is to greatly reduce the amount of energy consumed by massively increasing the cost of producing it. This is why Obama freely acknowledged in an interview that: "Under my plan of a cap and trade system, electricity rates would necessarily skyrocket. (San Francisco Chronicle, 17 January 2008).
Although Obama knows, even if his supporters don't, that his energy proposals will be extremely expensive not even his critics realise just how expensive they really are. The error here is to look at them in purely dollar terms. It's is generally understood that one way of restricting the output of any product is to raise the cost of producing it. This is what cap and trade does. By imposing heavier and heavier taxes on centralised power generation Obama hopes to eventually replace them with so-called 'renewable' alternatives by forcing them out of business.
It ought to be clear that continuing annual increases in an energy tax would in fact be cumulative. Obviously, x dollars in taxes in one year followed by an additional x dollars the following year until year 10 raises the total tax to 10x dollars and not x dollars. If it were otherwise energy prices could not "skyrocket" and Obama's policy of forcing America to substitute renewable energy sources for centralised electricity generation would fail. We should now be able to see why Obama is absolutely correct in saying that energy prices must skyrocket if his policy is to succeed.
Now I thought I had made it clear by paragraph 10 in my article that the figures I started with were purely academic because an annual growth rate of 3 per cent would be impossible under Obama's plan. Even the 1 per cent growth rate I used would be on the generous side. To go even further, if his policy was fully implemented it would put an end to capital accumulation, otherwise known as economic growth.
Time and time again I have stressed that every economy has a production structure consisting of complex stages of production. The longer the structure relative to the labour force the higher will be living standards. (An orthodox economist would simply refer to the ratio of the capital to labour). Shortening the structure therefore lowers living standards. This is precisely what Obama's energy policy would do. The following figure illustrates my point.
Therefore, what Obama's policy amounts to is the wilful destruction of the nation's capital. This would not be the first time that bad economic policies have wreaked havoc on a country's capital structure and hence its standard of living. Nearly 75 years ago Fritz Machlup wrote:
Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin. (Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19).
Obama is basically pushing the same policies with the addition of an insane energy tax — and it is insane because 'renewable' alternatives are grossly and irredeemably inefficient. This is because they suffer from massive diseconomies of scale. The more you try to expand their output the more their average costs of production will rise as more capital, land and labour is expended per unit of output.
The economy would face a double whammy: "skyrocket[ing]" energy prices and greater competition for capital and other factors. The result would be a collapse in productivity and hence real wages along with an increase in unemployment. Fortunately this fact is beginning to dawn on an increasing number of commentators. Terry McCrann of the Sun Herald pointed out with respect to Spain's version of the Obama energy policy that
because the resultant hike in electricity affected costs of production and employment principally in metallurgy, non-metallic mining and food processing, beverage and tobacco industries.... Even with its huge commitment Spain is only getting started down the alternative energy route. As the analysis noted, despite solar power being subsidised at seven times the mean price of the power pool, it was yet to get to 1 per cent of Spain's total electricity production. (Green jobs blown in the wind).
In short, the production structure would contract. Moreover, the Spanish experience (Study of the effects on employment of public aid to renewable energy sources) exposes Waxman's claim — based on a CBO report that eschewed economic analysis — that Obama's policy would only cost households "a postage stamp a day" as utter nonsense. Economic analysis and experience has proven otherwise. In plain English, damage from the energy tax really is cumulative.
Those who argue that energy taxes result in more efficiency and will therefore pay for themselves know neither economics nor economic history. Economic efficiency is achieved when we get the minimum ratio of the value of inputs to a given output. In other words, when the cost of producing a given product is reduced to the lowest possible amount. But with massive diseconomies of scale the ratio of the value of inputs to output would continue to rise for renewable energy even if 100 per cent technical efficiency was achieved. The reason is that solar and wind are extremely dilute sources of energy, meaning that they need huge collection areas. (Solar Power Realities). This is a scientific fact that no amount of wishful thinking or misrepresentations by Obama's disciples can change. (Obama's wheelbarrow economics)
A couple of critics argued that in California some firms did very well and created jobs by expanding into alternative energy. So what? These investments are what the Austrians call malinvestments in that they can only be supported by subsidies. (The exception would be residential solar panels and heaters the complete costs of which were met directly by the consumer). Any loss of intensive industries due to an increase in these malinvestments and the imposition of punitive regulations and government charges would work to reduce the state's capital-labour ratio and therefore the intensity of the demand for labour. This would eventually bring about a downward pressure on wages accompanied by rising unemployment.
Since Assembly Bill 32 — another energy policy — came into effect in January 2007 California's unemployment began to accelerate. It is now about 11.5 per cent. It was reported that this bill forced the city of Truckee to abandon long-term power contract with a Utah company which resulted in city's electricity costs being doubled. (And some people still think this kind of nonsense cannot cost jobs and lower living standards).
Obama asserts that California is a successful example of the ideologically-driven energy policy he is promoting. Perhaps he doesn't know — along with his disciples — that California uses more electricity than it generates to the extent that about 20 per cent of demand is met by states that did not cripple themselves with unnecessary regulations, the same regulations that force Californians to pay an average of 14.42 cents a kilowatt-hour of electricity. As proof that Democrats are possessed of a negative learning curve Antonio Villaraigosa, aka the village idiot, just declared: "Los Angeles will eliminate the use of electricity made from coal by 2020, replacing it with power from cleaner renewable energy sources"*. This is sheer lunacy.
To argue that energy costs have nothing to do with the loss of jobs and industry because the real problem is the fiscal irresponsibility of the Democrats is to assert that a continuing rise in energy prices has no effect on industry, output and jobs. This is patently absurd. The odd thing is that the person who emailed me this admitted to being an Obama supporter. That Obama's tax, regulatory and fiscal policies are the most reckless in US history and would do to the country what was done to California completely eluded him.
The costs of Obama's scheme are massive and cumulative. Nevertheless, the dollar figures I gave in my last article are really hypothetical in the sense that they could never come to pass. Once Americans realise that Obama's energy policy will savage their living standards that will be the end of it. Of course, that still leaves his ideologically motivated spending and borrowing mania.
Let us never forget that it was Obama who said he would cause electricity prices to "skyrocket".
*In 1991 LUZ, a solar-electricity generating company, went into bankruptcy. LUZ is interesting because it had been asserted by zealous supporters of alternative energy (especially in the media) that the company's technology had finally made solar power a genuine economic alternative to nuclear power. Even Fortune magazine waded in with support. LUZ built its plant in the New Mexico desert to take advantage of the highly favourable conditions. But even there they could not make their 354 MW operation pay its way.
Note: Readers express considerable frustration in not being able to get through to Obama supporters. I tell them not to bother because they are dealing with cultists and like all cultists they live in a state of permanent denial. To get a decent grip on the problem I suggest that readers get hold of When Prophecy Fails by L. Festenger, H. W. Riecken & S. Schachter (Harper Torchbooks, 1966). Unfortunately it is a very dry read as well as being out of print. However, you should be able to get George Orwell's Decline of the English Murder. The section called Notes on Nationalism contain penetrating insights into the nature of unchallengeable party loyalty, the sort of thing you run up against when dealing with hardcore Democrats.
These cultists' mindset was also admirably described by Robert Conquest in his book The Great Terror: A Reassessment, (Oxford University Press, 1990, pp. 110-138). Also see his Reflections on a Ravaged Century (W. W. Norton & Company, 2000, p. 94) and We and They (Maurice Temple Smith Ltd, 1980, chapter 7).
In my last article I asked the rhetorical question that if deregulation caused America's financial crisis how does one account for the European crisis. Some fanatic responded with: "globalisation!" This is what passes for intelligent comment among Obama groupies. Australia also as an open economy and yet it was not swept by a financial crisis. In fact, her monetary policy is very tight. The crisis was created by central banks running recklessly loose monetary policies. Full stop. (Recession is already here — and has been for months).
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 6 July 2009
The triangle ABC represents the production structure (also called the capital structure) before Obama's energy taxes are implemented. AB'C' is what the structure likes after it has started to shorten while the grey area represents the loss of capital and. The grey area is wider at the top than the bottom because this is where energy intensive industries will be concentrated. (It's somewhat more involved than this). What we are left with is a much smaller structure with far fewer stages of production. No matter how "flexible capital and labour" are allowed to remain the result will still be the same.
