GREEN DEALING

The future will be green or not at all. ~ Bob Brown  

Rep. Alexandria Ocasio-Cortez (OAC), Sen. Ed Markley and their fellow Green Dealers may be in their ascendency. Their Feb. 7 introduction of the Green New Deal (GND) certainly got the media’s attention. So much so that it was promptly designated another key litmus test that all Democrats vying for the 2020 presidential nomination must judge. How many Dem candidates are there now? It seems like at least 23; with the list including Pete Buttigieg [mayor of Ft. Wayne, IN] but at this moment it’s merely 13 and sure to rise.

After Medicare for All appeared at the top of candidates’ litmus tests several weeks ago, it’s now just basic blue and the GND now basks as uppermost. These litmus tests are being tossed at candidates as each new “hot topic” newly emerges and the media decides it’s one that candidates must instantaneously adopt or reject. Unfortunately, most candidates readily take the bait before understanding what they’ve signed on to. These repeated tests must make each candidate feel like they’re back in high school. Ah, the good ol’ days.

Green Dealers like OAC seem to believe that shouting from the proverbial tippy-top of endangered redwood trees, combined with a fervent belief that they’re holding a royal flush of solutions, is the best way to change laws. Others, including the many more taciturn Democrats, likely disagree. OAC hopes the GND manifesto will rearrange everyone’s priorities, now. Why; because she has gladly taken the scepter of lead spokesperson for the capital “P” Progressive clan at the capital “C” US Capitol and beyond. She also sees herself as savior of the truly environmentally righteous (or is it leftous) across their much-expanded purview. This expansion comes from the nature of progressivism.

Progressivism is progressive. Over time it seeks ever larger moral advance. If progressives have their way, the list of things considered unequal, unjust and unworthy will broaden, as the scope of the GND’s “environmental” agenda has swelled. This can be a good, but. Here’s a recent example of progressivism’s progressiveness: Additional New York City regulatory guidelines to be released this week will give legal recourse to individuals who have been harassed, punished or fired because of the style of their hair. NYC will henceforth ban discrimination based on an individual’s hair style, which will now be considered racial discrimination.

Because I live way outside the DC beltway, I wasn’t aware of the GND’s initial rounds of formulation, based on gathering opinions of experts and stakeholders. There were some discussions, right? If so, it’s not obvious. Instead, it appears OAC and Markley couldn’t and didn’t say no to any progressive idea that’s somehow connected to an improved “environment” for needful people, especially workers. Beyond decarbonizing the entire US economy in 11 years, the GND’s extra-environmental commandments, er objectives include the government being responsible for:

·        guaranteed jobs, with living, sustainable wages and full benefits for all workers, including folks who have been unable or unwilling to work;

·        affordable, adequate and energy-efficient housing for all;

·        universal, high-quality health care provided by a single-payer;

·        competitive economic markets not clouded by nasty monopolies and oligopolies; and

·        high-quality, free public college tuition for all.

In other words, the GND comes in many varieties of green that will cost lots of green; likely over $40 trillion during the next decade. And these multiple, herculean goals must be accomplished by 2030, only a few proverbial ticks of the governmental clock to entirely revamp the world’s largest economy. Sir Thomas More, the creator of utopian literature 500 years ago, would be impressed with the GND.

Advocates of the GND, being fantasists, are insisting that no trade-offs will be needed nor sacrifices incurred in order to satisfy their manifesto’s objectives. Indeed, AOC has stated, “The question isn’t how will we pay for it, but what is the cost of inaction, and what will we do with our new shared prosperity created by the investments in the Green New Deal.” [Emphasis added.]

She’s not worried about how to pay for these grand objectives perhaps because progressives like her are thoroughly at one with emerging Modern Macroeconomic Theory (MMT). MMT posits that sizeable government deficit spending, which increases the nation’s public debt, isn’t a concern at all. The government can keep printing Benjamins 24/7 as long as inflation doesn’t rise to an unpleasant level.

Fiscal irony is very much alive and well in Washington. MMT’s semi-magical leftish thinking is completely in line with solidly-right Republican conservatives who happily passed their unfunded 2017 Tax Cuts and Jobs Act that’s raised the US debt to historically high levels. This year’s federal budget deficit will be nearly $1 trillion. The 2017 tax law revealed Repubs to be hyper-hypocritical deficit scolds. They condemn “excessive” government expenditures only when it involves Democratic policy, not their own.  

Let’s look at the GND’s principal environmental objective, rapid decarbonization of our $20.7 trillion economy. I spent the majority of my career working to promote and assess energy efficiency programs and policies. I’m all in with a greener America. The GND’s objective of requiring the entire nation to produce 100% of its energy from renewable sources and produce net zero carbon emissions by 2030 is as astonishing as it is realistically unattainable. The International Panel on Climate Change (IPPC) has previously and ambitiously proposed to cut global emissions just by 40% to 60% by 2030, and hopefully get to net zero by 2050. How does OAC and her Green Dealers propose do to this in 20 less years than the IPPC? They never say; that’s for others to stress about.

For reference, in 2017 (a baker’s dozen years before 2030) just 18% of total US power generation was produced from renewable energy sources, an all-time high. In the nine years between 2008 and 2017 this renewable share of power generation doubled, an impressive accomplishment. The GND’s goal for 100% of US energy use, not just power generation (electric power accounts for about 16% of total energy use), to be produced from renewable sources, would require renewable energy to increase by 550% over the next 13 years. The Green Dealers leave reality by the side of their utopian, all electric-vehicle throughways to the future.

I have no doubts that were only one of the GND’s lofty objectives to be undertaken; it could certainly benefit us all and would create many prosperous winners in that endeavor. But there also would be losers. For example, the vast majority of workers in the coal, oil, gas and petrochemical industries (1.44 million people, over half of which are blue-collar workers) would be out of jobs. Sure, job retraining is clearly called for, but in the undefined interim that can last for a while in job retraining, such workers would be SOL. They are not likely to be happy GND campers, nor would their employers. But no worries; each of them would be offered a government-guaranteed job.

Eliminating the internal combustion engine as the transportation sector’s motive power, another GND goal, would likewise lead to numerous lost high-paying manufacturing jobs and large economic dislocation in the short- to medium-term. Transportation of people and goods accounts for 29% of US total energy use. The auto industry is one of the largest in the US, contributing about 3% to the US GDP. Three percent seems like a small number, but it works out to $620 billion in cumulative yearly economic activity. That’s not a small number to trifle with. In 2018, US electric vehicles (EVs) sales reached an all-time high of 361,300, accounting for 2.1% of total vehicle sales. Getting to 100% EVs in 11 years boggles my mind’s engine.

As always, trade-offs will be present if and when the government begins investing in GND’s vast decarbonization. Any and all trade-offs have been denied by the Green Dealers, together with dismissing the substantial costs of attaining the manifesto’s goals. Such denials weaken OAC’s Green Dealing in the jungles of Congress and make the prospect of political victory much smaller. She might not care.

However, if AOC et al. really do want to create actual legislation based on the GND, then it’s incumbent on them to transparently develop specific plans for how the GND objectives could be met by 2030; how these objectives can overcome inevitable challenges; and what trade-offs, if any, the Green Dealers are willing to make to secure decarbonization within 11 years. That process is unexciting and tedious compared to commandment creation.

Maybe OAC is playing a longer game. Fundamentally, I suspect the Green Dealers don’t view their GND as a basis for actual legislation. In this sense it’s worthwhile remembering that Nancy Pelosi has already agreed to step down as Speaker by 2022. After all, the GND will require unprecedented and very big expansions of federal, state and local government programs, oversight and regulation. This is entirely consistent with the precepts of the few elected democratic socialists, like AOC and Sen. Bernie Sanders. This future is not consistent for the majority of current Congressional Democrats. Speaker Pelosi has given the GND a “seal clap,” hardly unequivocal support. But who knows what the future will bring.

With all its practical and political challenges I imagine AOC and other acolytes see their GND more as an edict for progressives of every stripe to rally around their maypole, not as a summarized playbook for real legislation.

Any specific legislation that might have a chance of becoming law coming through Speaker Pelosi and other “establishment Democrats” will elicit cries of derision from progressives. Because Democrat decrees that could actually pass the House will be instantly declared limited, insufficient and unworthy by Green Dealers. They have already claimed the very highest green ground, even if it’s realistically and politically impossible. They’ve now planted their flag, the GND, atop an ever-green Mt. Everest, without having to worry about actually climbing it.

It will be a long time before AOC and Green Dealers might gain enough votes in the House to pass her GND. I’m not holding my exhaled CO2-filled breath. Nevertheless, she has three million Twitter followers right now who have rallied behind her and probably the manifesto. To these devotees, the GND and its 6 commandments are gospel for achieving an alleged more perfect and far greener future. Alas, I’m not one of them; I’m too pragmatic.

  

MAINSTREAMING ELECTRIC CARS

Amping along the byways… 

Hark, electric vehicles (EVs) are hopefully travelling towards the broader car-buying public. Under very strong prodding by the California Air Resources Board (CARB) and the Obama administration, 32 different models of EVs are currently being sold in the US, principally in CA. To date, the 6-year old US market for EVs remains a very thin one; optimism about future growth far outweighs actual sales. As of last December, EV sales represent a slender 1.43% sliver of US new car sales, when you count both plug-in hybrid sales together with battery-only vehicles’ sales. If you consider only battery electric vehicle sales, the EV market share shrinks to 0.76% of new car sales. This negligible market share maps the rocky road EVs need to travel towards genuine public interest and acceptability. This road contains both opportunities and potholes that need filling.

The automotive press observantly genuflected last week as Tesla finally displayed a production version of its smaller, more affordable Model 3 EV. Much hope (and hype) accompanies Tesla’s Model 3 that it produces in Freemont, California, because its base price is said to be about $35,000, less than one-half as much as the two other EVs it makes. Last year Tesla raised much-needed cash by requiring Model 3 customers to provide a $1,000 down-payment/deposit for their car. At this point roughly 400,000 customers have provided a deposit. Very impressive. Some of these folks will be waiting for quite a while to get their car; and some of them might not receive the entire currently-available federal tax credit.

Tesla’s chief executive, Elon Musk, said he expects 100 Model 3s will be produced in August and 1,500 or more in September. He also said that he expects the company to be able to produce 20,000 a month starting in December. In the first quarter of 2017, Tesla lost $397 million, 40% more than a year earlier, but its revenue more than doubled, to $2.7 billion.

Flying far under the hood of the Model 3's media coverage is Chevrolet’s comparable Bolt EV, which with little fanfare has already been selling in CA for seven months. The Bolt has captured strong reviews and has an impressive 238 mile battery range. The Bolt’s MSRP is $36,600 before rebates. Sales of the Bolt have inched forward; in June 1,745 were sold, ranked second behind Tesla’s Model S, whose MSRP ranges from $68k to $138k. All EVs sales are measured in proverbial inches. Of the 32 EV models being sold in CA, only 6 had more than 1,000 sales in June. For perspective, the nation’s best-selling car, the Toyota RAV4 SUV, sold 34,120 vehicles in June. The top-selling vehicle in the US remains the Ford F-Series pickups that sold 77,895 trucks in June. The top-selling EV in June, Tesla's Model X (its crossover vehicle), is ranked 151st, with national sales of 1800 vehicles, down 10% from June 2015. The Chevy Volt has 1642 sales, ranked 162nd.   

Effective environmental policy necessitates mainstreaming electric vehicles that will appeal to and convince “regular people” like Jane and Joe Van (who have 2.4 mini-Vans) to buy an EV. The transportation sector now produces the most CO2 emissions of any industry in the US. The sooner they’re convinced, the better for the environment. People like the Vans represent far more typical car purchasers than rich folks who can afford to and choose to buy expensive Model S’s and X’s. 

Changing people’s automobile purchase habits so they actually consider buying an EV requires numerous changes and is a marathon rather than a sprint. To date federal and state EV oriented policies are sadly unidimensional, offering financial incentives. What’s needed? First, attractive, capable EVs must be available in the marketplace; and second, these vehicles must be comparable with non-EV vehicles, especially regarding cost, range performance and supporting infrastructure. Only a select few EVs are now available for mainstreamers like the Vans.

Electric vehicles have been available since the beginnings of automobiles. Gustave Trouvé, a French electrical engineer, invented perhaps the first EV in 1881. But they have never succeeded against internal-combustion engine technology. Al Jardine, who is a musician and co-founded the Beach Boys as the band's rhythm guitarist, has mentioned that his grandfather worked with Thomas Edison on the electric car and he sold electric cars at the 1900 World's Fair in Paris. Those were the days.

When I was growing up in Philadelphia during the 1950s, I remember being impressed by the big, lumbering trucks of the Saturday Evening Post Co. on downtown streets filled with giant, heavy rolls of paper used to publish the magazine. These trucks were all electrically powered by lead-acid batteries. The magazine was published weekly from 1897 to 1963. Its heavy-duty electric trucks disappeared some time before its fall from weekly readers’ grace.

As mentioned before, the federal government and the State of California have actively promoted electric vehicles with several mechanisms. The Obama administration boldly increased the required corporate average fuel economy (CAFE) standards. In 2011, President Obama announced an agreement with 13 large automakers to increase CAFE to 54.5 miles per gallon (mpg) by model year 2025. The administration was able to secure agreement with the manufacturers in no small part because of its increased leverage. The federal government had bailed out both General Motors and Chrysler, two of the three largest US automakers, from bankruptcy in 2009. This big increase the CAFE standard has provided strong incentive for auto makers to improve their cars’ fuel efficiency and to introduce more hybrids and EVs towards that end.

Adding to the EV charge, Volvo Cars (owned by the Chinese firm Geely Holding Group) announced will stop investing in internal combustion technologies for its cars starting in 2020 and will focus exclusively on plug-in hybrid and all-electric vehicles. In addition, France declared last week it would end sales of internal-combustion engine vehicles by 2040.

However, when gasoline prices started tumbling five years ago, the sales growth of hybrid and EV cars unsurprisingly plummeted. In January, sales of two different, popular Prius models fell over 30% on average from a year earlier. With gas prices down, consumers have bought more low-mpg SUVs and pickups rather than cars, which have made achieving the 54.5 mpg goal increasingly unrealistic. In fact, the major car producers have begun laying off workers in their car factories due to lower sales. Recently, car manufacturers have complained to the Trump administration that the 2025 CAFE standard needs to be relaxed, given the purchasing behavior of consumers. Who knows if they can gain the president’s ear let alone his brain?  

The California Air Resources Board (CARB), the state’s environmental agency, has formally adopted the 2025 CAFE standard for vehicles sold in the state and upped their mandate for zero-emission vehicles (ZEVs): battery, fuel-cell and hydrogen powered vehicles. California has optimistically estimated its regulations would result in ZEVs making up about 15% of all California auto sales by 2025, but the current share has been stuck in first gear, around 3% since 2014 with regulations in force. [EVs actually don’t have first gears, they use gearless, continuously variable transmissions, but you get the idea.]

The CARB’s ZEV mandate is a complex set of regulations that prioritizes the offering of ZEVs via a California cap-and-trade mechanism using the issuance of ZEV credits when a manufacturer sells a ZEV. This ZEV credit system has greatly benefited Tesla in particular, as well as other ZEV manufacturers like Nissan and Toyota. Because it’s a low-volume manufacturer that sells only EVs, Tesla has built up an impressive surplus of credits and has gladly sold them to other manufacturers who don’t sell enough ZEVs in California. These credit sales have significantly helped Tesla’s cash-flow challenges as it rapidly expands.

A Fortune article states that Tesla has received a total of $600 million from sales of these credits over time. Due to its surplus, Tesla has had no trouble meeting the CARB's ZEV mandate — because it can satisfy those obligations with state-awarded ZEV credits instead of actually producing zero-emission vehicles. Tesla has thus significantly benefited from some automakers' decisions to buy more credits instead of building more cars. Critics of the ZEV cap-and-trade program understandably argue that the CARB has issued far more credits than needed. Manufacturers have decried the ZEV credit program, saying the mandate covers only the supply-side production of such vehicles; there’s no mandate for (so far reluctant) customers to buy them. They have a point, but. With a substantial stretch, mandating customer purchases of ZEVs might work in China, given its new-found interest in the environment, but not California or the rest of the US where it’s a first-order political non-starter. That only works for health care insurance, another subsidy-loaded, heavily regulated industry. And that mandate won’t be around for much longer if the Republicans ever get their act together; perish the thought.

Nevertheless, the federal government and individual states like California have provided fiscal incentives-subsidies to customers for EV purchases. Rebates and tax credits are offered directly to buyers, to entice consumers – the demand-side of the vehicle market – like the Vans to purchase ZEVs and counter “the forces of carbonization,” as Governor Jerry Brown just categorized climate-change deniers.

The federal EV purchase subsidy is an income tax credit of up to $7,500. This credit has been in effect since 2010 and will begin to phase out once a manufacturer has reached 200,000 EVs sold. Given Tesla’s sales success, its customers may not enjoy the full federal credit within the next year or so. The California ZEV subsidy offers up to an additional $2,500 for the purchase or lease of battery EVs. In addition, several of the state’s electric utilities provide residential EV owners a lower off-peak hours’ rate when they can charge their vehicle.

These consumer subsidies seem to be effectively promoting EV sales to an extent. When the State of Georgia and Hong Kong eliminated their EV subsidies, sales crashed. After 2015 when the Georgia state legislature removed the state’s EV credit, the sales of the Nissan Leaf dropped from 15 times the national average to a small fraction of what they were. In Hong Kong, Tesla sales dropped to zero in April from nearly 3,000 the month before when the province’s EV tax break was eliminated. Thus a big question is raised about future EV sales as the president’s 6-shooter Dept. of Energy Secretary Rick Perry considers eliminating the federal EV tax credit. If all federal EV incentives and involvement are removed, Navigant, a consulting firm, expects overall demand for plug-in hybrids and EVs could be reduced as much as 20% by 2025. When it comes to energy, whatever the form, nary a BTU is produced, sold or used without some sort of subsidy.

Aside from public policy, what other potholes are in the EVs’ road to mainstreaming? There are three. First, is EV batteries. Producing lithium-ion EV battery packs that are cost-effective and enduring has been an ongoing challenge. Costs are coming down and battery efficiencies are incrementally increasing, but when compared to tried-and-true internal-combustion engines battery drive-trains are more expensive.

Experts believe if the price for one kilowatt-hour’s (kWh) worth of lithium-ion battery capacity can be reduced to $150, electric vehicles can become cost competitive with internal-combustion vehicles, without subsidies. Knowledgeable specialists guestimate that the Chevrolet Bolt’s 60-kWh pack costs about $215 per kWh. Tesla’s head of investor relations claims the Model S battery packs cost $190 per kWh, although that figure might be derived with Tesla (nontraditional) math—accounting that often ignores R&D and capital investment costs.

The final $50 or so per kWh are likely to be the most difficult to attain. No one now predicts significant leaps for today’s lithium-ion battery technology. Instead, cost reductions are more likely to be found over the near-term from economies of scale and manufacturing improvements. Tesla’s Gigafactory is a $5 billion battery-making building in Nevada may pare up to 30% of a pack’s cost, if it comes together as planned by 2020. Here’s hoping.

The second pothole is charging infrastructure (aka, EV “fuel” stations). Electric vehicle charging stations are necessary for anyone who owns an EV, especially those whose range is diminutive. Here's a nice visualization showing more than two dozen EVs' and plug-in hybrids' charging range along with their base prices. With several 200+ mile electric vehicles now available (the Chevy Bolt and Tesla Models S, X and 3) and longer-range EVs hopefully arriving in the next several years, today’s parallel to a pre-Interstate America is the utter lack of a consistent, standardized fast-charging infrastructure for EVs. If EVs are to replace gasoline-fueled vehicles, a national, automaker-independent network of direct-current fast charging stations will be required, that can restore up to 100 miles of range in just 30 minutes.

Unfortunately, standardized charging isn’t yet on the EV horizon. EV drivers from every automaker face a very different experience than gas-fueled vehicles. Electric charging is usually a-frustrating amalgam of chargers run by separate charging networks, using varied hardware. There’s little consistency among interfaces, with some of the chargers only accepting membership cards and fobs for proprietary networks. Is this any way to build popular demand for your EV product? No. But that’s what EV owners now confront and will be for the foreseeable future unless someone (say the IEEE, the Society of Automotive Engineers or much less likely given the present administration’s carbonization focus, the federal government) sets a uniform, national standard for “fueling” EVs.  

Third, the environmental benefits of switching from gasoline to electricity as the source of vehicle power are augmented only if electric utilities generate their power from low-carbon sources. Nationally, electric utilities now use fossil-fuels for 65.1% of electricity generation (including 30.4% from coal), according to the DOE/EIA. That’s not low-carbon.

I know, I know, we humans (especially we Americans) have to change the way we behave and live if we’re going to avoid more bad things from happening to our environment. And while I question the validity of really long-term environmental systems models’ predictions 50 or 100 years out, we still need to do something significant today. Forget the future, post-Industrial Revolution data to date show we’ve already caused key, detrimental changes in the world’s weather and environment.

But really, having the CARB exercise supernumerary control over what technologies California motor vehicles can use is concerning for me, an admitted car guy since I could barely walk. My concern centers on the CARB because it seems to not care one milliliter about what the price of gasoline is or at all about how customers actually make vehicle choice decisions. The CARB mandate only focuses on vehicle supply, not demand. No wonder their mandate keeps slipping.

But why should the CARB change; its goal is environmental greenness, not customer satisfaction. The ZEV mandate which specifies the number of vehicles that must be sold has been revised several times due to unexpected market conditions (e.g., the changing market price of gasoline that influences consumer vehicle-purchasing habits). The CARB first set its mandate for low-emission vehicles 27 years ago, when the nominal price of a gallon of gas was $1.12 ($2.03 in real terms).

 With all the challenges that remain, I don’t yet want to buy an EV by trading in my sports car. Do you? There is, however, the plug-in hybrid Porsche 918 Spyder. I’m not the only person who remains reluctant to hop on the EV bandwagon. I hope the potholes get fixed speedily. More than 98% of car buyers haven’t bought an EV. A smoother byway will help greatly. But hop on it we should; the sooner the better if we and the Vans are to go amping along the byways under bluer skies. 

IT MAY BE THE ECONOMY (stupid), BUT IT'S NOT ECONOMICS

If I am a legend, then why am I so lonely? ~ Judy Garland

It's not hard to understand why economists may now be among the loneliest professionals. All too often, we suggest that a beneficial, economically-appropriate solution for some public problem (e.g., environmental degradation, decaying infrastructure, budget deficit) is to increase the price of some good, or to remove nasty subsidies or tax credits that the government provides some industry or consumer group (that when purged would have the same effect – increasing goods or services prices). Like virtually all economies, the US government has long provided a multitude of direct and indirect subsidies to a broad array of producers and consumers. Economists, imbued with theory that places a premium on attaining economic efficiency[1] and societal welfare maximization, argue that such subsidies and too-low prices are inapt because society's economic optimum won't be achieved. Economists of varying political persuasions have offered such policy prescriptions for decades.

Unsurprisingly, few consumers are willing to consider paying higher prices a preferred outcome for themselves. After all, who among us personally wants to have our gasoline, food or electricity cost more, or our mortgage or health-care payments rise? The status quo of continued subsidized, low prices rules. In other words, culture trumps economics.

In this regard, a principal difference between economists on the left and right is which prices need to be raised. For example, neocon economists seem far less troubled by government-subsidized fossil energy prices; liberal economists often can rationalize subsidized food stamp programs and Pell grants.

For a long time consumers and producers have been coddled into thinking that not only prices for "necessities" (an ever-expanding term of reference) should remain low, but that they're entitled to them staying low, come hell or high deficits. In a sense, this is the flip side of the Far Right's obsession (one of many) with lowering or eliminating taxes. Logic and economics really don't enter into the argument, only judgment that taxes are bad since they fund government programs that don't work or, worse, are "collectivist" (to use Paul Ryan's description of Social Security). More specifically, conservatives object to such government programs because they don't really help me. This attitude is particularly frustrating when we hear statements from Tea Partiers and their ilk that they would be better off if only the government would get out of Medicare and Social Security – or other government benefit/subsidy programs they participate in.

Mitten's purloined remarks given at a fundraiser stating that 47% of citizens don't pay taxes and are freeloaders receiving government largesse prompted a wave of critical discussion and response. The New York Times posted a blog asking readers to identify which of 21 listed Federal government support programs (e.g., Head Start, unemployment insurance, Pell grants, Medicare, veterans' benefits, employer-subsidized health insurance) they have benefited from. The blog states that 96% of Americans have taken part in and benefited from such programs at one time or another, including folks like Mittens' and Ryan's family members.

No matter who wins the presidential election next week, our economy is likely to continue slowly gaining strength over the coming year. Our GDP growth – measured last week at 2% for the 3^rd quarter of 2012 – is still not high enough to quickly reduce our stubbornly-high unemployment, but it's higher than before.

What's less certain is what Democrats and Republicans will do about the "fiscal cliff" that overhangs the government in December. I am quite certain their economic advisors will ultimately feel fairly lonely and ignored.

Suggestions from economists to public decision-makers to increase tax revenues and/or reduce subsidy and entitlement expenditures will once again fall on politicians' deaf ears. Well-founded economic suggestions that include increasing tax revenues, decreasing tax expenditures, making Medicare, Medicaid and Social Security benefits means-based (the higher one's income or wealth, the lower your benefits) and increasing the qualifying age  for receiving benefits (make it higher than 65) – changes that other nations with structural deficits have already done – will fall to the storms of protest by well-financed interest groups. The so-called "grand compromise" to resolve our unsustainable structural deficit will be thrown in a ditch far from the path of economic progress for all citizens in favor of some partial political "solution" that once again temporizes with a kick of the can down the road.

Perhaps we economists are always to be relegated to the lonely crowd. So it goes…

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[1] Economic efficiency describes a market or economy that is producing what people want at least possible cost – or in plainer English, performing a task (like providing some good) right. By contrast, effectiveness is doing the right thing.

GREENER STOCKHOLDERS?

I try to buy stock in businesses that are so wonderful that an idiot can run them.

Because sooner or later, one will. ~ Warren Buffett

A recent New York Times article by Tyler Cowen suggests an alternative to breaking up the "too big to fail" banks; namely, increase the fiscal liability for major financial institutions through their shareholders. Prof. Cowen suggests for every dollar a bank shareholder invests, he/she becomes liable for at least $1.50 worth of losses as insolvency approaches or occurs. He proposes by making shareholders directly liable for the costs that bank failures impose on society, banks could become more adept (and motivated) at sorting out the risks associated with their activities and tactics without having to increase regulatory overview or split up behemoth banks. His idea apparently is gaining some support, although the article does not state how this fundamental change in shareholder responsibility could be enacted.

I think Prof. Cowen's clever idea should be expanded way beyond the finance sector. It should be applied as one solution to the classic problem of how to deal with negative environmental externalities.

But first, some background. Until recently, and in tandem with other market-oriented policies generally favored by Republican policy-makers, the regulatory machinery of government has increasingly focused on using “market” mechanisms to resolve environmental issues like air and water pollution. Public deregulation of the airlines and to a lesser extent of the electric utilities was an early example of such regulatory policy shifts away from traditional, centralized “command and control” mechanisms. In the environmental policy arena the emergence of so-called market-based (M-B) mechanisms for incenting companies to reduce production of environmental effluents, such as greenhouse gases (GHG), gained some prominence.

Two principal M-B mechanisms have been considered, Cap-and-Trade (C&T) and a Carbon Tax (CT), where carbon-based materials (e.g., fossil fuels) are taxed according to their carbon (CO2-producing) content. Cap-and-trade became a favored market-based environmental mechanism for public policy. There are several examples: The Regional Greenhouse Gas Initiative (RGGI), involving states from Maryland to Maine (with Pennsylvania and Canadian provincial governments as “observers”), is a C&T scheme initiated by New York in 2003 to reduce CO2 emissions. The European Union’s Emission Trading scheme, started in Jan 2005, involves each of its 25 nation states, is currently the world’s largest M-B emissions trading market. In Feb 2007, California governor Arnold Schwarzenegger, along with other western governors, created The Western Climate Initiative (WCI) that originally committed California, Arizona, New Mexico, Oregon and Washington to create a C&T-based regional system by Aug 2008 to reduce GHG emissions. As of Jan 2012, the WCI parties include California and four Canadian provinces, British Columbia, Manitoba, Ontario, and Quebec. Every other US state has now dropped out of the WCI.

In various ways these two mechanisms add to the market price of these goods, so that price better reflects environmental impacts. Although it merits no substantive discussion, there is a third policy alternative: to do nothing. This is what the Bush administration followed by myopically and unsustainably assuming it could continue to live in that great Egyptian river, denial. Although during its halcyon, early days the Obama administration stated its interest in following a much more active plan for environmental mitigation. To date nothing significant has come of this to the consternation of many. President Obama cannot be accused of swimming in denial, but has displayed apparent ambivalence (at best) about enacting new M-B environmental mechanisms to counter growing environmental hazards.

As mentioned above, with the notable exception of electricity markets, efforts in the US to make a good's price better reflect the actual environmental costs associated with its production and distribution have failed, in part because of fairness issues. Even advocates of C&T and/or a carbon tax have to conjure up complex means for distributing tax or permit revenues to lower-income folks in order for the M-B mechanisms to not end up having distinctly regressive effects.

Instead of new federal M-B action to relieve continuing environmental degradation, perhaps it's time to engage the Republicans' much-loved equity markets to directly remediate environmental impacts. This could be done by adapting Prof. Cowen's idea of increased shareholder liability to reflect the cost of environmental clean-up.

There would be at least two (2) advantages to significantly broadening firms' stockholder responsibilities to include the social costs (and benefits) of environmental performance. (1) It would elevate the market value of firms that perform better than others – or who take advantage of this new basis of stock value by supplying technology/equipment that contributes to the firm becoming "greener." (2) By its very nature, it would internalize the costs of remaining a polluter and the benefits of becoming greener through the price of firms' equity, rather than other M-T based schemes that would almost exclusively affect the price of the firms' final products. Equity-holders, not just product purchasers, would have a direct stake in a firm's improving environmental performance. Stock prices of "dirty" firms (eg, coal producers) would fall (unless they quickly figured out how to become significantly greener), and that of "clean" companies (eg, renewable energy producers) would rise. Incentives to make our environment healthier would be closely aligned with stock prices, not merely EPA regulations.

All this without direct government regulation of the environment. What could be more beneficial for cleaning up our environment than making stockholders environmentally (not just fiscally) greener?