The economic reports are grim, growth has stalled and the US is again at the edge of recession. The debt deal that wasn’t has proven to be ‘business as usual’ from our elected leaders now more fearful about their own reelection prospects than ours.
IRS data from the annual Statistics of Income tables that were released this week tells us U.S. incomes fell again in 2009, with total income down 15.2% in real terms since 2007. The data showed a drop in the number of taxpayers reporting any earnings from a job — down 4.2 million from 2007. Think about that for a moment, every 33rd household that had work in 2007 had no work in 2009.
Average income fell in 2009 to $54,283, down $3,516, or 6.1% in real terms compared with 2008. Since 2007, average income is down $8,588 or 13.7%. Average income in 2009 fell to 1997 levels when it was $54,265 in 2009 dollars, just $18 less than in 2009.
We know the reality we face.
The US debt has driven us to the brink. The debt levels are made worse by reckless spending and entitlements we can no longer afford. The high unemployment levels mean fewer workers paying taxes, spending and investing. Business is hoarding cash due to the uncertainty about the economy, uncertainty about taxes, uncertainty about regulation and uncertainty about whether making a business bet at home is better or worse than making one abroad. Even a casual look at earnings reports tells us the answer. Much of business earnings growth is coming from overseas markets better positioned today than the US to deal with the current problems, but equally or more exposed to volatility and bad outcomes if the situation in the US gets worse.
Things are likely to get worse before they get better.
Since our fundamental problem is high debt levels we can’t use deficit spending to “stimulate” the economy to create jobs, make investments and restore confidence. Our politicians tried that option in a spending binge that rewarded politically correct causes and did little for the economy. The value of the dollar has fallen significantly thus raising the price of oil and other global commodities and creating an inflationary spike around the world. The tools left for the Federal Reserve are limited. They don’t want to raise interest rates because that would only make matters worse. They could ‘buy back’ US debt but that would be inflationary. They could retire the US Treasury bonds the Fed has purchased but doing so risks pushing the economy into recession by slowing growth.
What are our Options?
- Inflation. Our greatest fear is actually the most likely reality. The Fed has kept interest rates low but they can’t go any lower and the size of our debt means we sooner than later will have to pay higher interest rates to keep the system going until we find a solution. Remember we faced this same situation in the 1970’s when rabid inflation savaged the economy. Interest rates were the tool of choice Fed Chairman Paul Volker used to break the back of inflation and restore balance. But raising rates today will only explode the size of the US debt and could make matters worse. But when politicians are unwilling to act, inflation is the cruelest tax of all. So pay off your credit cards, you are going to need cash to pay for food.
- Freeze Federal Spending! I know this sounds simple and is what each of us has been required to do, but our government seems unable to quit spending, quit adding regulations that drive up our cost or discourage investment and job growth, quit promising new entitlements. The debt deal that wasn’t proves the charade. We need a break because the government is sucking the oxygen out of the economy. The most dramatic break would be a true and genuine freeze in Federal spending to current year actual levels. No more fuzzy math! If such a spending freeze would be enacted it might stimulate confidence. But we’re going to have to hold down REAL spending and then do more by weeding out the ineffective programs in order to redeploy the savings to higher priority programs and services. This is triage! It will be painful but it is essential. One plan discussed would freeze spending at current year levels and then each year cut 1% more until the budget is balanced. It would take 6-8 years but we would be a leaner, smarter, more self sufficient country. A plan like this would do wonders or confidence and quit digging the hole deeper.
- Domestic Energy Production. We spend billions importing oil and other energy products when we have domestic energy resources that our environmental regulations and political correctness prevents us from using. This must stop. Reducing oil imports would help moderate inflation, reduce our balance of payments, increase domestic jobs growth and investment and recycle the money in the US instead of OPEC. If ever there was a time to change this dynamic of foreign dependence it is now. If you think this will not work look at north Dakota and more recently Pennsylvania.
- Corporate Tax Rates, Repatriating Earnings and Capital Gains. The way to coax business into spending its hoard of cash is to make it more profitable to invest money at home in America than to go overseas. Getting to this outcome requires setting aside the class warfare political rhetoric by cutting corporate tax rates not just to competitive global levels but lower than that to suck money back into the country from overseas. The current tax on repatriated earnings should be ended as should capital gains taxes. These actions make it more expensive to hoard cash than to spend it productively especially if the risk of inflation rises.
- Regulatory Balancing of Interests. Our regulatory agencies are out of control. None of them have a duty to balance their regulatory policy zeal with their impacts on the economy. This must stop. Congress should pass a mandatory requirement for regulatory balance that says every regulation must be reasonable and equitably balance environmental and other interests against the public interest in economic growth, job creation and global competitiveness. Regulation that cost the public interest more than the benefits—as objectively scored by an independent third party—are not, by definition, reasonable. Congress should be required to vote up or down on every regulation within 90 days of its submittal before it can go into effect or it dies. Business would be able to challenge regulations in court based upon reasonableness just as environmental groups can challenge agencies to act.
- Stabilize Housing. The home mortgage mess was a big part of creating this economic problem and it is still holding us back. Today perhaps 50% of American mortgages are underwater as home prices have fallen. Banks and mortgage lenders including Fannie and Freddie made this mess and are not doing enough fast enough to fix it. Banks have been loath to make mortgage modifications and most of the Federal assistance programs actually required homeowners to go into default in order to get any help. State AGs (all politicians up to their eyeballs in the mess) are suing banks over Mortgage backed securities and loan practices. Everyone is going to take losses in cleaning up his mess. We need a better shared loss or modifications strategy to help clear the market, restore confidence and avoid further unintended consequences as we dig out of the mess:
- Offer fixed rate loan modifications for all adjustable rate notes now. If inflation is coming and adjustable rate notes that were the cause of so many problems rise our housing crisis compounds. Loan to value ratios make refinancing to fixed rates impossible in this market. Economic stability will be seriously undermined by rising inflation in mortgage rates. Offering a fixed rate for adjustable notes would mitigate that risk. If you don’t take the deal, you can take your chances on inflation.
- Facilitate short sales. It takes too long for short sale approval. Set specific rules that banks must follow to enable buyers and sellers to enter into presumptive approve of short sale requests within specific parameters and require banks to approve or reject other short sale requests within days—not months.
- Principal Reduction now for capital gain sharing upon sale. When a home is more than say 25% underwater banks should be required to offer a swap reducing principal now in exchange for a share of capital gains not exceeding 50% when the property is sold or refinanced. To be eligible homeowners must not default or the deal goes away. The goal is to keep homeowners in their homes and keep them paying and get the housing market stabilized.
- Fed Housing Resolution Trust. Why can’t the Fed use some of the assets of Fannie and Freddie or some of the US Treasuries it has been buying to insure this faster transition to a stabilized housing market while writing off some of the debt it has bought or insured anyway in the MBSs to help clear the market.
Actions such as these would help restore confidence, focus our efforts on real solutions to the problems we face in getting back to growth and demonstrate that we are resolved to doing so.
- A Few Things You Need to Know About the U.S. Economy (xkorpion.wordpress.com)
- Don’t Look Now but the National Debt Could be $23 Trillion by 2021 (xkorpion.wordpress.com)
- Making Sense of Mixed Economic Signals: Part 1 (insightadvisor.wordpress.com)
- Obama’s Mouthpiece: No Threat of Double-DipObama’s Former Obama Economic Adviser: Threat of Double Dip Is 1 in 3 (minx.cc)
- Macro Update: U.S. inflation still low? (tradingfloor.com)
- Focus Turns Back to Fed on Economy (nytimes.com)
- The Problem is Too Much Debt – Wall Street Pit (news.google.com)
- The Reserve considered pushing up rates aright (petermartin.com.au)
That was the headline from the cleantech blog I opened May 27, 2011 as I surveyed my email inbox, sipped my first cup of coffee and tried to wake up. There were other stories about the decision by the California Public Utilities Commission to approve a revised rate design for electricity rates, but this ‘Victory for Solar Friendly PG&E Rates’ symbolized this morning the inherent conflicts in utility rate design—it is almost always a zero-sum game.
“The California Public Utilities Commission voted down proposals by PG&E that would have been a big step backward for solar customers. The two major victories were 1) the CPUC opted to maintain its 4 tier rate structure, wherein high usage customers are given a strong price signal to conserve electricity or invest in solar to offset the cost of high usage, and 2) PG&E will not be allowed to implement a fixed customer charge,” the blog story from Vote Solar read.
On the warm side of the hills where a growing share of PG&E’s customers live and try to make a living sufficient to feed their family and afford their rising utility bill, the reaction was very different.
The CPUC action in this rate design case split the differences between the parties. It did allow PG&E to reduce the rate tiers but did not permit the increase in the customer service charge. This PG&E rate re-design proposal came about because of outrage in Bakersfield over high utility bills as PG&E was installing smart meters. This outrage has come to be known as the Bakersfield Effect because it brought customers out into the street ‘totally ticked off’ blaming their smart meter for the high bill caused by the socially engineered rate design.
PG&E’s spokesman Tom Bottorff said after the CPUC decision that PG&E customers who use large amounts of electricity will pay 17.6 percent less than they do now under the new rate design approved but will still pay nearly three times as much as the Tier 1 customers.
For years Tier 1 rates have been called “lifeline rates” designed to provide low cost rates to the first block of energy use to benefit poor, seniors and others in need. But apartment dwellers in San Francisco and homes in the foggy Bay Area use less electricity and thus benefits from the tiered rate structure because they don’t use their air conditioners in summer. On the warm side of the hills or in the central valley portion of PG&E’s service territory it is a different story. There the steeply progressive nature of PG&E’s residential rate structure hits hard whether you are low income or not. PG&E had proposed to reduce the tiers even more than the CPUC approved and more evenly distribute the cost of service by moving a portion of the revenue requirement to a larger customer service charge paid by all residential customers—about $3.00 per month which would have affected the folks in the fog.
The next paragraph in the Vote Solar cleantech blog post revealed the truth about the rate design contest that the CPUC had just resolved:
“Why does this matter? Because rate design, or the process of setting electricity prices, is one of the most important factors in the financial decision for energy customers to go solar. Since much of a solar energy system’s value comes from the utility payments it is offsetting, electricity rates have a significant impact on a solar customer’s return on investment.”
“In the PG&E rate case, the utility had proposed eliminating its 4th residential tier – effectively moving its highest consumption customers into a lower tier and raising rates for others. This closely follows PG&E’s decision to eliminate Tier 5, which recently penalized existing PV owners and makes the changing price dynamics for solar even more extreme – not helpful when you’re trying to encourage investments with long-term payoffs. We modeled the impact of these proposals across a variety of consumption levels, PV system sizes and geographic locations under the two rate scenarios. The modeling showed that most PV customers would lose bill savings in a big way under PG&E’s proposed changes. The graph below illustrates the impact to a typical Tier 4 customer:
Furthermore, PG&E proposed a fixed $3.00 charge in lieu of its existing minimum charge. On policy grounds, Vote Solar opposes flat charges like these because they represent a lost opportunity to incentivize energy conservation and customer investment in PV; in other words, no amount of customer activity would be able to reduce that charge. And the net effect of the proposal would be to drive up rates for low usage customers and reduce rates for high usage customers.”
There you have it!
The reason the solar lobby in California vigorously opposed PG&E’s rate design proposal had nothing to do with the public concern about rising utility bills and EVERYTHING to do with keeping rates as high as possible on the warm side of the hills to improve the competitive position of solar energy companies.
You see solar still costs more even though its costs have been dropping—than other power generation supply options. But PG&E and other investor owned utilities in California are required to procure 33% of the electricity consumed from renewable sources even if they cost more. That is one factor driving up utility rates. So the best hope of solar companies to make a profit and be sustainable is to keep the 33% RPS pressure on utilities to buy the output of their projects and keep the rates high to make solar look more cost effective.
It’s enough to make you green—-with envy. You can be sure this Vote Solar bragging is not taking place in Bakersfield or elsewhere in the Central Valley—but safely in the fog of their 300 Brannon Street, San Francisco office.
- Consumers Win Partial Victory Over PG&E Rate Proposal (yubanet.com)
- DRA Declares Proposed Residential Customer Charges on Electric Bills Are Illegal (yubanet.com)
- PG&E rates to drop for heaviest utility users (sfgate.com)
Fracking Safety Review Panel named even as new unconventional production records are set.
North Dakota is doing its part by setting another record production month in March with reports that it pumped 359, 589 barrels of oil per day in March according to the North Dakota Department of Mineral Resources.
But no good deed goes unpunished as the old saying goes so back in Washington DC:
- On April 16, 2011 House Democrats Henry A. Waxman, Edward J. Markey and Dina DeGette released a report they said was “the first comprehensive national inventory of chemicals used by hydraulic fracturing companies during the drilling process.” used by the 14 leading oil and gas service companies in the U.S. They want the industry to disclose all the chemicals used in fracking and want EPA to regulate their use in hydraulic fracturing to prevent groundwater contamination.
- On May 9, 2011 U.S. Department of Energy Secretary Steven Chu formed a subcommittee of his Energy Advisory Board of industry, environmental and state regulatory experts to make recommendations to improve the safety and environmental performance of hydraulic fracturing from shale formations in response to fears that use of fracking chemicals can cause groundwater contamination.
- Frankly, the oil and gas industry has not helped allay concerns about groundwater contamination by its reluctance or refusal to release the ingredients used in fracking fluids. This has fed fears that the chemicals are dangerous and given opponents of horizontal drilling using hydraulic fracturing more ammunition for their NIMBY cause.
The steady increase in domestic oil and natural gas production from unconventional sources is a genuine American energy success story. US DOE’s Energy information Administration says recoverable unconventional natural gas deposits may represent more than 100 years of average domestic supply and oil recovery from unconventional sources is offsetting the foot dragging on drilling in the Gulf and deep water along the coasts needed to replace rapidly depleting conventional vertical drilling resources.
So let’s get on with this health and safety review and set some best practices to assure that hydraulic fracturing is the safe, reliable, effective E&P strategy we think it is for putting America back into the energy production big leagues.
- U.S. Investigates Safety of Natural Gas “Fracking” (scientificamerican.com)
- Shale gas and ‘fracking’: disaster deferred? (safetymanagement.wordpress.com)
- Russian Gas -vs-Unconventional Gas: Which will the EU Choose? (insightadvisor.wordpress.com)
- France To Ban Fracking (businessinsider.com)
- Inhofe says fracking doesn’t cause contamination, day after contamination (americablog.com)
In 2010 193 businesses pulled up stakes or materially reduced their business investment in California to build facilities out of state or out of the country. This compares to 51 companies leaving in 2009 according to Joseph Vranich who bills himself as a business relocation coach. In a series of posts on his business relocation blog he documents the companies departing and where they said they were going.
These business losses are driven by deliberate business decisions to relocate outside of California followed by decisions to redirect capital investment that more likely than not would have been directed to California but now will not. California is losing its attractiveness to business while other states with better business conditions are working hard to suction up the doubters.
The biggest losers among California Counties are Orange County (40) Santa Clara (36), the heart of Silicon Valley, Los Angeles County (34) and Alameda County (14) together making up 64% of the business losses.
The series of blog posts Joe Vranich has produced is eye opening reading for those who want California to return to growth and succeed, but it is going to take a change in attitude to match changes in policies for that to happen.
“Green jobs are key to our future, right now, China is taking every possible step – many of them illegal under international trade laws – to ensure that it will control that sector. America can’t afford to cede more of its manufacturing base to China.” — Leo W. Gerard, International President of the United Steel Workers
That was the press message from the United Steel Workers as they asked the US Government to file an unfair trade complaint against China at the World Trade Organization (WTO) as permitted by Section 301 of the treaty. The focus of the union complaint is China’s push into the clean and renewable energy sector of wind turbines and solar panels. The union says China is taking clean American manufacturing jobs by heavily subsidizing the production of cheaper wind and solar equipment and exporting it to the US at prices that make American made alternatives uncompetitive.
In fairness, this is not a new position for the USW or other unions. They have alleged that world trading regimes have caused the decline of America’s manufacturing base. European unions and manufacturers have made similar arguments. This same argument over solar panel prices hit the fan in Spain and then Germany where their own feed-in-tariffs (paying above market prices for solar and wind energy to attract producers) backfired because they attracted Chinese producers who offered lower prices for their equipment than Spanish or German firms and thus slurped up the lion’s share of the feed-in-tariff subsidy money and sent it back to China.
The EU was outraged that the Chinese would intrude in their efforts to subsidize their own manufacturers and undercut the locals to win the bidding on solar projects and wind turbines. Remember this happened just as Greece was melting down and thus was used, in part, as an excuse to reduce or eliminate the unsustainable feed-in-tariff subsidies blaming the Chinese.
Capitol Hill Meets Main Street
Here in the US the story is similar. The renewable portfolio standards adopted by the states and the pressure from Washington to do more to reduce emissions and grow market share for renewable energy has utilities scrambling to procure energy to meet those goals. Many utilities are near achieving those existing RPS targets so pressure is building to raise the RPS goals much as California is trying to do with its 33% target.
Meanwhile, the Bakersfield Effect of angry ratepayers waving their utility bills and demanding answers from regulators and politicians about why these policies are driving their rates through the roof. California even has Proposition 23 on the November 2010 ballot to suspend its AB32 Global Warming Solutions Act implementation until unemployment falls below 5.5% for four consecutive quarters. Bills to enshrine the 33% RPS goal into California law failed to pass this legislative session just ended. So 20% is the legally mandated goal and pushing beyond it is much tougher.
Utilities are under a regulatory obligation to add renewable energy to their power supply portfolio to meet these RPS goals but also satisfy a prudency test of ‘least cost, best fit’ standard of procurement care. Tough to do when the costs are going up. So along comes China with a growing manufacturing base for wind turbines and solar panels to compete against GE and other manufacturers who have sought to dominate the markets in renewable energy just as they did for gas-fired combustion turbine power plants.
Main Street Loves Low Prices
The Chinese offer low prices, almost always lower prices than American or European manufacturers and begin winning more of the deals. The Chinese also are investing in building American market share by buying the energy management and services firms needed to install and maintain all this equipment further irritating local vendors.
Are the Chinese subsidizing this manufacturing of wind and solar panels—absolutely.
The EU and US virtually demanded it remember in the aftermath of the Kyoto Protocol and the build up to Copenhagen by accusing China and other developing countries of failing to do enough to control greenhouse gas emissions. China responded that it was poor and just building its economy and could not slow its economic growth to clean up its environment UNLESS the US and EU were willing to pay it to do so faster by imposing restrictions on our greenhouse gas emissions while letting China off the hook.
This was the essence of the Kyoto Protocol and you know how well that worked. COP15 failed utterly because the world has wised up to the inconvenient truth about the game being played by the developing world to use the treaties and the political correctness of global climate change to enact the mother of all income redistribution regimes. But I digress. . .
The USW object to growing Chinese market share in the US for clean energy business seeing that as a threat to the growth of manufacturing here. The problem with that argument is that battle is already lost. China is driving down the cost of solar panels and wind turbines to grid parity prices and that is a wonderful thing. It means that soon utilities will be able to install this clean energy equipment without the necessity of subsidies from our own government.
The union believes in the promise of millions of clean energy jobs resulting from this shift to a clean energy policy subsidized into the mainstream by the Federal Government and ordered by the states in their RPS targets. These jobs are neither real nor promising. Roofing companies across America are adding solar panels to their inventory and using their existing work forces to install them in order to stay in business during the recession. American manufacturers like Dow are working overtime to design and build new roofing shingle systems with embedded thin film solar technologies to reduce the installation cost and thus compete head to head with older PV panel installation by offering a better product.
The trade complaint may be useful politics but it is wasted time and bad economics. Regaining America’s competitive advantage does indeed involve rebuilding our manufacturing prowess in strategic areas important to the nation. The unions can play a vital role in making that happen and in so doing probably win new members. But the prescription is not tariffs and trade restrictions it is reforming the tax structures, overhead and other costs which chip away at America’s ability to compete by building the newest technologies the world needs while commoditizing the old.
The real fight with China worth having is over access to Chinese markets on level playing field terms so that American manufacturers of new technologies can enter those markets and compete just as the Chinese do in American markets. The measure of that level playing field is a better balance of payments relationship that enables both sides to win through fair trade.