For a little while there, ethanol was being pushed as the replacement fuel of the future. The corn lobby was the biggest advocate, but other environmental-seeming groups jumped in. The future of the automobile seemed bright, and even though corn was quickly recognized as not optimal, switchgrass and other approaches seemed popular for a while. It looks like the hype has now died off, which is a good thing. Much of the support was coming not from people concerned with improving the environment, but from front groups sponsored by fossil fuel companies.
Professor Patzek puts the energy inputs to produce corn ethanol at about 7 times the energy produced. Today, nearly all of this is from fossil fuels, mostly petroleum and natural gas. These include agricultural inputs--fertilizer and pesticides, (which are substantially petroleum products) fuel to operate machinery, harvesting, processing (distillation being the big one), and transport costs. Ethanol is too volatile to be shipped in pipes--it has to be shipped in tanks, on trucks or trains. This is also why gasoline with some ethanol in it--typically E10--goes bad after a few months. All of these inputs are ignored and ethanol is treated as a zero emissions biofuel, for computing subsidies and tax breaks, over and above the crop subsidies for growing corn. This clearly not true, and is bad policy, at many levels. The process could be improved: no-till agriculture eliminates most fertilizer and pesticides and some of the other fuel consumption. Agricultural waste could be burned to power some of the distillation process (for corn, there's not enough of it to do it all). Converting to switchgrass would improve much of this. But even making the most optimistic assumptions, the energy required to produce ethanol is about four times the energy produced.
The bottom line is that ethanol, especially corn ethanol, is a boon to the fossil fuel and corn companies. The subsidies have distorted the market, and the corn and fossil companies have put up a big environmental-appearing front to try to improve their own profits. But it's a fraud.
20 December 2012
11 December 2012
The Failure of Banking
In the past few decades, banks and similar institutions have been allowed to consolidate, to get involved in businesses that had previously been out of bounds for them, to engage in a wide variety of scams, cons and ponzi schemes, all with impunity. Anyone familiar with the work of the Pecora Commission, John Maynard Keynes, and a host of others, could have predicted the consequences, and many did, from Byron Dorgan to Paul Krugman, to Brooksley Born, to Noriel Roubini. But they proved Cassandras. Five years after the bubble collapsed, the big banks are even bigger, yet instead of providing better services at lower cost, they're engaging in an ever growing list of petty scams--instead of offering interest and free checking, banks are charging for everything. A series of probably criminal and certainly incompetent screwups at Chase, Citi, HSBC and others indicate that this is not a successful business model. This is a race to the bottom. An astonishing series of unchallenging interviews by supposedly real reporters reveals that the men in charge do not understand, and do not care how the economy works, and do nor care what the consequences of their behavior is to 99.999% of the population. They're only interested in feathering their own beds.
The right thing at this point would be to do what Simon Johnson recommended 4 years ago and nationalize the banks. It might not be necessary to take them all, but certainly anybody with more than a handful of branches....assets over around $500M or so. The local banks and credit unions are often doing reasonably good service but are being swept up by the downdraft of the giants. All senior management of the giants should be banned for life from any business related to banking. I'm thinking burning at the stake would be about right, but sadly, the constitution bans that. The "national" bank would renegotiate mortgages and other loans and begin lending at traditional market rates. Like banking, it could be a profitable business, but as a government bank, it would be forbidden from making a profit, which eliminate most of the scams that the big banks now employ. As the economy improves, it could begin spinning off more and more small banks, which engage strictly in commercial banking and have rules analogous to the FDIC rules about capitalization, leverage and types of investment. But whenever one of them exceeds the size threshold, back into the national bank they go. If the banks are smart, they'll split themselves up before this happens.
It's probably not necessary to put such an onerous size limit on investment banks. They deal with larger amounts of money--frequently a single investment is larger than the cap on bank size would be. They're also not as subject to capitalization requirements. But they should still be small enough that if they fail, they fail, period, and the government can never feel tempted to step in. I think this puts an absolute limit of about $50B on them--about 1/3% of GDP.
In 1911, Standard Oil, which until then had about 70% of the US petroleum market, was split into 33 smaller companies. Within 5 years, 9 of them were larger than Standard had ever been. Petroleum was at the time a growing business, while banks are necessarily a finite share of the economy, but this is suggestive of what could happen if we broke up the banks. Imagine banks gaining customers because they're providing better service! I remember that happening in the 1970s and even into the 1980s a little. I know it could happen again. It doesn't need to be a race to the bottom, and we must not allow it to happen again.
Unfortunately, we probably missed our moment--the year or so after the Sept 2008 collapse. During the '30s, President Hoover and his allies did almost exactly the wrong thing, so Roosevelt had a mandate to really fix the problem. Bush, Paulson, Bernanke and Obama didn't actually compound the problem the way Hoover had, and although they didn't actually fix it, the TARP, the ARRA, Quantitative Easing and the symbolic but feckless "stress tests" put enough of a band-aid over it to start a slow recovery. We may need another bank-driven recession to give us the political will. The consequences of this will be terrible, but it may make us stronger in the end.
The right thing at this point would be to do what Simon Johnson recommended 4 years ago and nationalize the banks. It might not be necessary to take them all, but certainly anybody with more than a handful of branches....assets over around $500M or so. The local banks and credit unions are often doing reasonably good service but are being swept up by the downdraft of the giants. All senior management of the giants should be banned for life from any business related to banking. I'm thinking burning at the stake would be about right, but sadly, the constitution bans that. The "national" bank would renegotiate mortgages and other loans and begin lending at traditional market rates. Like banking, it could be a profitable business, but as a government bank, it would be forbidden from making a profit, which eliminate most of the scams that the big banks now employ. As the economy improves, it could begin spinning off more and more small banks, which engage strictly in commercial banking and have rules analogous to the FDIC rules about capitalization, leverage and types of investment. But whenever one of them exceeds the size threshold, back into the national bank they go. If the banks are smart, they'll split themselves up before this happens.
It's probably not necessary to put such an onerous size limit on investment banks. They deal with larger amounts of money--frequently a single investment is larger than the cap on bank size would be. They're also not as subject to capitalization requirements. But they should still be small enough that if they fail, they fail, period, and the government can never feel tempted to step in. I think this puts an absolute limit of about $50B on them--about 1/3% of GDP.
In 1911, Standard Oil, which until then had about 70% of the US petroleum market, was split into 33 smaller companies. Within 5 years, 9 of them were larger than Standard had ever been. Petroleum was at the time a growing business, while banks are necessarily a finite share of the economy, but this is suggestive of what could happen if we broke up the banks. Imagine banks gaining customers because they're providing better service! I remember that happening in the 1970s and even into the 1980s a little. I know it could happen again. It doesn't need to be a race to the bottom, and we must not allow it to happen again.
Unfortunately, we probably missed our moment--the year or so after the Sept 2008 collapse. During the '30s, President Hoover and his allies did almost exactly the wrong thing, so Roosevelt had a mandate to really fix the problem. Bush, Paulson, Bernanke and Obama didn't actually compound the problem the way Hoover had, and although they didn't actually fix it, the TARP, the ARRA, Quantitative Easing and the symbolic but feckless "stress tests" put enough of a band-aid over it to start a slow recovery. We may need another bank-driven recession to give us the political will. The consequences of this will be terrible, but it may make us stronger in the end.
06 December 2012
Bus Fares and Extrinsic Costs
In a busy society there are a lot of things which have extrinsic benefits and costs. The most popular example is pollution: in a laissez-faire world, a company can dump whatever it wants into the environment. If the company were living in a closed environment (think of a space station), it would have to deal with this pollution itself, but for centuries, they were allowed to pollute the (seemingly infinite) atmosphere, wetlands and waterways. During the 1970s it started to become clear that these were far from infinite and governments instituted various measures to force the companies to clean up. The companies resisted, of course. Now that it's becoming clear that CO2 is such a problem with particularly dire consequences, the polluters are resisting again.
Not all extrinsic effects are negative. Public transit is a benefit to everybody, but especially to the companies and their employees whose riders use it to commute to and from work. Many communities installed transit in the late 19th and early 20th centuries, generally subsidized by real estate developers. For a few decades, the fares collected from riders were sufficient to pay for operating costs, but as demands for expansion and maintenance grew, these became insufficient. Generally, city fathers have been farsighted enough to subsidize them from the broader tax base, but in the cases where they have cut back, the loudest complaints have been from corporate executives: employees can't get to work! They're getting the benefit, but not paying for it--very much like what was happening with their ability to pollute. Ultimately, society has to be taxed.
As a society, we need to face these extrinsic costs and benefits and be willing to pay to make them work as well as practical. There are lots of them--road construction and maintenance, public safety such as police and fire, building inspection, bank regulation, the postal service, lots more. These things are necessary. They don't always have to be government run: for example, most road construction and maintenance is done under government contract by private businesses, although a lot of emergency services--snowplows, sanding, pothole repair--are government workers. When it's practical, we can charge user fees to put as much of the costs as we can onto the people using the facility the most. Gas taxes and bus fares are good examples of this.
But we must not let the fact that some of the costs can be paid this way confuse us into thinking that these are like private businesses. They are not; they are public utilities. These fees should be the highest they can be without discouraging use, but no higher. Bus fares for poor people getting to work should not eat significantly into their take-home pay. To the contrary, we want to encourage people to use it, by making it cheap and desirable.
Not all extrinsic effects are negative. Public transit is a benefit to everybody, but especially to the companies and their employees whose riders use it to commute to and from work. Many communities installed transit in the late 19th and early 20th centuries, generally subsidized by real estate developers. For a few decades, the fares collected from riders were sufficient to pay for operating costs, but as demands for expansion and maintenance grew, these became insufficient. Generally, city fathers have been farsighted enough to subsidize them from the broader tax base, but in the cases where they have cut back, the loudest complaints have been from corporate executives: employees can't get to work! They're getting the benefit, but not paying for it--very much like what was happening with their ability to pollute. Ultimately, society has to be taxed.
As a society, we need to face these extrinsic costs and benefits and be willing to pay to make them work as well as practical. There are lots of them--road construction and maintenance, public safety such as police and fire, building inspection, bank regulation, the postal service, lots more. These things are necessary. They don't always have to be government run: for example, most road construction and maintenance is done under government contract by private businesses, although a lot of emergency services--snowplows, sanding, pothole repair--are government workers. When it's practical, we can charge user fees to put as much of the costs as we can onto the people using the facility the most. Gas taxes and bus fares are good examples of this.
But we must not let the fact that some of the costs can be paid this way confuse us into thinking that these are like private businesses. They are not; they are public utilities. These fees should be the highest they can be without discouraging use, but no higher. Bus fares for poor people getting to work should not eat significantly into their take-home pay. To the contrary, we want to encourage people to use it, by making it cheap and desirable.
Subscribe to:
Posts (Atom)