Cap and Trade Would Sink the U.S. Economy 54 comments
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First and foremost, cap and trade is a carbon tax on capital, which really means a tax on economic growth. To get some understanding of the severe ramifications of Obama's proposed carbon tax we need to get a grip of basic capital theory. In everyday parlance capital has several meanings. It can be what an entrepreneur needs to start a business or what a business needs to expand output. It can also be an individual's assets: his house, savings, investments, etc. Using the term capital in this way is perfectly legitimate. However, in economics capital is something else altogether: it is the material means of production. It consists of those tools by which we eventually transform lower-valued resources into those higher-valued products we call consumer goods.
Unfortunately the vast majority economists tend to treat capital as a homogenous lump in which capital goods are perfect substitutes for each other. When challenged on this approach they readily admit that it is pure fiction. On the other hand, (there's that phrase again) they would argue that from a theoretical point of view it ultimately doesn't matter whether capital is treated as homogeneous or heterogeneous. This is a dreadful error that is preventing economists from grasping the enormity of Obama's insane energy policy.
Economic textbooks once contained diagrams illustrating the fact that production took place in stages and that these stages formed a capital structure consisting of heterogeneous producer goods, e.g., lathes, furnaces, trucks, drilling machines, etc. Goods moved down this structure until they reached the consumer. (Please understand that this is a highly simplified explanation). To keep on raising real wages and hence living standards for everyone the structure needs to be continuously extended. (What economists usually call raising the ratio of capital to labour). This is can only be done by using savings to add more and more complex stages to the structure that embody new technologies. It is this process that raises what economists call the value of labour's marginal product and therefore wage rates.
Regardless of what some economists teach, there is absolutely nothing automatic about this process of capital accumulation, which is what it is. No savings means no growth. Negative savings, meaning capital consumption, shortens the structure which in turn lowers real wage rates. In other words, any policy that causes the production structure to abandon the higher stages of production (reduce the capital-labour ration) will savage living standards. And this is exactly what the Waxman-Markey cap and trade policy that Obama loves so much will do to Americans — savage their living standards.
Not only does a production structure narrow as one moves up it but the higher stages become more and more energy and labour intensive per unit of output. A miner, for example, requires more capital to work with than someone who sells shirts. Production workers at the Caterpillar company require more energy and tools than someone making hamburgers.
These stages have a common feature: they are what we call time-consuming projects, unlike a McDonald's outlet they can take years to plan and set up. This makes them particularly sensitive to interest rate movements and energy costs. The higher the rate of interest the less capital intensive the project and therefore the less productive it will be.* This is where Obama's so-called energy policy comes in. It's aim — he freely admits — is to cause electricity prices to "skyrocket". (An interview with the San Francisco Chronicle, January 2008). Whether he realises it or not, this would cause firms in the higher stages to immediately close down or start consuming their capital. Either way, the result would be the same, an eventual fall in living standards.
The reason is straightforward, Obama is championing wind and solar as viable energy alternatives. Complete and utter balderdash. These so-called alternatives are grotesquely inefficient economically. This is because solar energy is not only erratic it is also highly dilute, which in turn creates massive diseconomies of scale that no amount of subsidies can possibly overcome. So even if they were 100 per cent efficient from a technical angle the economic consequences could still not be evaded. In plain English, you cannot get a gallon out of a pint pot.
Now the Heritage Foundation estimates that by 2035 — a mere 26 years from now — Obama's policy will have cut economic output by $9.4 trillion and destroyed 2.5 million net jobs. I have gone over this before. My critics argued that it's not that great a loss because an average growth rate of 3 per cent over 26 years will give the US a GDP of $30 trillion, turning the $9.4 trillion into a loss of less than $400 billion per annum which would be about 1.5 per cent of GDP in 2035. "No big deal". Apart from the fact that there is a huge difference between $30 trillion and $40 trillion this line of thinking is totally wrong. The actual cost would exceed $9.4 trillion by a vast amount.
Most people do not realise that GDP does not measure economic growth. Now it has three basic components: consumption, investment and government spending. Under no circumstances should consumption ever be confused with growth. As for government spending: it would take a statist fanatic to assert that every dollar of government spending expands the capital stock, particularly social spending. This leaves net investment which we define as that which adds to the capital structure. The following chart reveals the average growth rate for GDP during the last century to be about 3.2 per cent. 
(Note that the decade 1930-39 shows a rate of 1 per cent. The problem here is that overall this decade was one of capital consumption. In other words, real growth was negative. Aging capital goods is one sign of capital consumption. After all, if there is no net addition to capital then it follows that machinery should be getting older. And this is precisely what we find: the amount of metal working machinery more than 10 years old rose from 48 per cent in 1930 to 70 per cent in 1940, an increase of 45.8 per cent. Obviously the average growth in GDP came from reductions in idle capacity, increased consumption paid out of capital, and government spending.)
It is my contention that if Obama's energy policy is implemented capital accumulation will cease. So-called green investments in the form of wind farms and solar plants are gigantic malinvestments: utterly wasted capital that can never be retrieved. These phony investments will not only divert huge amounts of savings from productive expenditure they will also — as Obama admitted — cause electricity prices to "skyrocket" — sending their operating costs through the roof. Under these circumstances there is no way America could maintain its capital structure let alone expand it. (All of this escaped the attention of the Heritage Foundation because it has no capital theory with which to work with).
But what about green jobs? Because the policy reduces the capital-labour ratio (makes the economy more labour intensive) these so-called green jobs will lower wage rates. This sort of thing can happen a lot fast than one imagines. A recent report by Senator Debbie Stabenow of Michigan and Representative Jay Inslee of Washington, both Democrats, revealed that green jobs pay below the "national average" for those employed in the production of durable goods. Clear evidence that these so-called green investments do not raise the productivity of labour. The classical economists understood that jobs relying directly on consumption or the wasteful use of capital do not raise real wages. This is why John Stuart Mill could write:
I apprehend, that if by demand for labour be meant the demand by which wages are raised... [the] demand for commodities [consumer goods] does not constitute demand for labour. I conceive that a person who buys commodities and consumes them himself, does no good to the labouring classes; and that it is only by what he abstains [saves and invests] from consuming... that he benefits the harbouring classes, or adds anything to the amount of their employment. (John Stuart Mill, Principles of Political Economy, University of Toronto Press, 1965 p. 80)
To further hammer home my point let us take the example of a stationary economy. This is one that is neither expanding nor shrinking and in which the size of the population remains constant. Let us also assume that this community's GDP is $12 trillion. One day its government decides that eventually all of its electricity needs must now be produced by wind power and solar plants. The appalling economic inefficiency of these plants is such that their costs amount to $4 trillion. (I am also assuming a very docile population). Being a stationary state it must now shorten its production structure until the economy comes to rest at an annual GDP of $8 trillion.
Critics will scream that the US economy is not stationary. So what? The principle remains unchanged. The colossal changes Obama and his economic vandals propose will have this effect because there is absolutely no way on this planet that the dreadful economic consequences of running an economy on these so-called alternative energy sources can be averted. (It would be very much like forcing the economy to rely on animal and water power and then claiming that it will have no affect on output). Therefore a so-called green economy can only be achieved through a massive consumption of capital accompanied by a collapse in living standards, a fact that the more intelligent greens fully grasp as revealed by the following statements:
Amory Lovins: "It would be little short of disastrous for us to discover a source of clean, cheap abundant energy".
Paul Ehrlich: "Giving society cheap abundant energy . . . would be the equivalent of giving an idiot a machine gun".
Ernest Callenbach, another green, made it clear in his book Ecotopia that alternative energy sources should be used precisely because they will raise energy prices and thus slash living standards.
However, I don't actually envision a collapse in US living standards because I don't believe Americans would tolerate it. Once they realise what is really afoot there will be a very nasty electoral backlash that could permanently change America's political landscape to the detriment of the Democrats, assuming they survived the political repercussions of their collective stupidity. At the moment it all depends on how many Congressional Democrats are prepared to support Obama's green lunacy
Economic impacts from the promotion of renewable energies: The German experience. This report was produced by the German think tank Rheinisch-Westfälisches Institut für Wirtschaftsforschung. It is devastating. Subsidies were up to 175,000 Euros about US $250,000 per worker! One can only imagine what would have happened to Germany if the economy had been forced to rely entirely on these phony energy sources. Incidentally, this study nails the Australian Centre for Independent Studies' ridiculous assertion that tax cuts can offset the destruction of capital. Senator Debbie Stabenow and Representative Jay Inslee's report does the same thing.
Study of the effects on employment of public aid to renewable energy sources was study directed by Dr Gabriel Calzada Álvarez at the Universidad Rey Juan Carlos in Spain. It's results mirrored the German report.
Unfortunately Australia also has its share of stupid politicians: The government's green Renewable Energy Target legislation is economic lunacy
*This doesn't mean that every time-consuming process is more productive than shorter processes, only that those genuinely more productive would be adopted.
Gerard Jackson is Brookesnews' economics editor
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Besides, there's plenty of opportunities left in energy *efficiency*. Does your household lose capital when you switch from incandescent light bulbs to compact fluorescents?
The other side of the coin: taking no action will accelerate climate disruptions, which is *really* bad for business.
I will give you this: cap-and-trade is an inefficient way to regulate. A straight-out tax would be better. Don't like taxes? Move your business to some place that doesn't have them. You may be disappointed in the business opportunities in Antarctica or Somalia, though.
mr. young mentions acid rain. have you been to the adirondacks or vermont or new hampshire recently? the forests and the wildlfe are still dying because the old 1950 vintage polluters in ohio-indiana- illinois-kentucky etc. were never required to add controls under the 1969 legislation. congress just assumed that since they are 29-year property under the internal revenue code these plants would just all disappear in 1998 or earlier. didn't happen - if you have a site with a permit to operate you just add new parts as needed & keep it running. a no-brainer - except to the congress.
> jack
I also agree with this from the article:
"However, I don't actually envision a collapse in US living standards because I don't believe Americans would tolerate it. Once they realise what is really afoot there will be a very nasty electoral backlash that could permanently change America's political landscape..."
I don't think Americans are a docile group.
On the other hand, the citizens of Michigan and particularly the (dwindling) citizens of Detroit, never seemed to get the message.
On Oct 29 09:28 AM Alan Young wrote:
> Utter hogwash. This is exactly the argument made against capping
> sulfur dioxide emissions in the 1970's. It didn't kill the economy
> then; on the contrary, it made growth more attractive by reducing
> pollution (look up "acid rain" if you want to know the price of NOT
> regulating pollution). The "sink the economy" argument was wrong
> then, and it's wrong now. Reducing CO2 emissions will support the
> economy by stimulating alternative energy growth and making us less
> dependent on imported oil.
>
> Besides, there's plenty of opportunities left in energy *efficiency*.
> Does your household lose capital when you switch from incandescent
> light bulbs to compact fluorescents?
>
> The other side of the coin: taking no action will accelerate climate
> disruptions, which is *really* bad for business.
>
> I will give you this: cap-and-trade is an inefficient way to regulate.
> A straight-out tax would be better. Don't like taxes? Move your business
> to some place that doesn't have them. You may be disappointed in
> the business opportunities in Antarctica or Somalia, though.
Who benefits from global warming in the media?
- Media, NBC
- GE, trying to sell the (cure)
- Politicians pandering to their eco voters
- Goldman Sachs traders that want to trade permits
Who suffers
- Energy consumers ( all of us)
- American business
- American workers
Americans want to support local shops and businesses in their towns and communities... until they see Wal-Mart has lower prices. I mean, they want to support their neighbors but only if it means they don't have to pay "extra".
Americans want to support the environment... up until the point their monthly heating bill goes through the roof. They want to be kind to mother earth, but pay an extra 80 bucks a month? Can't my neighbor or some big business pay for my share?
Only the die hard greens want to pay more for energy. In their view mankind is infesting the planet. Their problem isn't with how we live our lives, their problems is that we are alive in the first place. Consuming.
"In other words, any policy that causes the production structure to abandon the higher stages of production (reduce the capital-labour ration) will savage living standards."
When Mr Jackson was young and we were dominated by smokestack industries, this might have made some sense. Now it doesn't. Perhaps Mr Gates and Mr Ellison for example, would have been richer if they had done something more capital and energy intensive, but they will probably accept their savagely reduced living standards.
We need to increase energy efficiency and develop energy technology. We can't rely on a strong dollar to give us carbon intensive lifestyles for ever. Get used to it.
Great article except it's completely wrong!!
A better question would be what will happen if we don't put the full cost of oil, coal in them?
Or what will happen to our economy if we stay on fossil fuels?
Facts are many RE costs are now or soon will be lower than fossil fuels. If their full cost were in fossil fuels from pollution, health care costs, deaths both pollution and military, oil wars, Persian Gulf military, air, water, land destruction/clean up RE is far cheaper now.
A carbon cap and tax of Obama's plan, not the cap and trade congressional plan is far better because the revenue can go equally to a tax cut, help switching to more eff, RE and balancing the budget plus the stable energy prices of RE will be far better for our economy.
Fossil fuels are going up whether we tax them or not. The only difference is who gets the money, Iran, Russia, oil dictators, coal, oil companies or the gov for the above purposes? The beauty of the carbon tax is the above pay most of it from lower oil, coal prices.
To me subsidizing these enemies of our country is traitorous and taxing to pay the direct, indirect subsidies patriotic. Basic econo 101.
So which are you? I see which one the author is, another greedy person willing to sell our country down the road for a few $ now.
Cap and trade is crazy, but unfortunately that is only the beginning of the story. Cap and trade is crazy, and the forthcoming Copenhagen meeting is going to be exactly what the Kyoto meeting was: A FARCE! But crazy and farcial or not, people - the voters - want something done about this climate business, and their wishes should be respected.
The point is that respecting their wishes does not mean providing the absurd amounts of wind and solar that various know-nothings in the environmental establishments are trying to introduce. But at the same time it needs to be accepted that there is a place in the scheme of things for a certain amount of these items. At a conference in Italy last week Robert Ayres noted that the problem is going to be financing renewables, but it might be possible to handle some of that with a modest increase in nuclear (capacity and energy).
And finally, exactly what does this author mean by 'Obama's energy policy'. How things are going to turn out in the long run for our president is difficult to say, but one thing is certain: he knows as well as I know that a total reliance on wind and solar could ruin the Democratic party for decades to come, and so you and the Heritage Institute don't have to worry about that. On the contrary. By the time he and Hilary have finished their song and dance, they might have cured some of the ills introduced by George W. and Hilary's significant other.
So you are going to charge companies for pollution, they are going to raise prices, then the government is going to take it's cut of the revenue, and you think they are going to lower your taxes because of this new revenue stream? LMAO.
Please tell me you are joking. That's just plain silly talk.
The greens that are pushing for solar and wind power now, are the same people that were killing clean nuclear power in the 70's. But remember, Global Cooling was all over TIME back then. They were talking of plans to heat the earth back then... If the Greens didn't kill nuke power in this country back then, we'd have less carbon in the air now and France wouldn't be leading the world in Nuclear power.
Who would benefit here? It would create the next bubble so Wall-Street and Goldman are rubbing their hands waiting to start trading and pouring money into this bubble machine. The government would be standing with their hands out collecting the taxes that will be placed on all petroleum products.
Anyone doubt Obama wants to give taxing authority to a foreign power need to look no further than one of the few bills he actually proposed in the Senate called the "Global Poverty Act" a feel good sounding bill until you look at the details:
aim.org/aim-column.../
We now have Obama and Harold Koh who seem to think that the Constitution can be subservient to a foreign Treaty:
"Koh is encumbered by a long paper trail that proves he is eager to use foreign and international law to interpret American law. He calls himself a transnationalist, which means wanting U.S. courts to "domesticate" foreign and international law -- i.e., integrate it into U.S. domestic law binding on U.S. citizens.
Koh wants to put the United States under a global legal system that would diminish our "distinctive rights culture," such as our broad speech and religion rights, due process and trial by jury. Koh complains that our First Amendment gives "protections for speech and religion ... far greater emphasis and judicial protection in America than in Europe or Asia." "
humanevents.com/ar...
Mr. Jackson is spot on. Crap on trade would kill the existing industry and drive the price of electricity, and more importantly the price of gas to unprecedented highs. Likely only a coincidence that would force people to buy the electric cars government motors is trying to push through the pipeline.
The amount of stimulus money being pumped into the green initiative and the massive publicity blitz by the Truth Commission papers to try and drum up support for this tripe is astounding. An entire industry of fuzzy headed environmentalists, greenies and liberals are all slavering trying to push an agenda with taxpayer money that will turn brown and excrete methane once the taxpayer funds are cut-off.
While there is no doubt we could do more to improve our environment, I for one would much prefer to spend my taxes on cleaning up the Puget Sound, Chesapeake Bay, the Great Lakes, provide incentives for industry to install scrubbers on smoke stacks; basically spend the money in our Country where it will not only stimulate the economy but clean-up our environment. Or, we can send TRILLIONS of our tax dollars overseas to Third World Country warlords to squander.
Several days ago I attended a presentation with government officials all from the Greenie movement. They said that people can use the "free money" (insert taxpayer funds) available now, or eventually the government is just going to force people to comply. An example is a proposal to have a required energy inspection when you sell your home and it will be given a score. Getting past the fact this is just another fee that will need to be paid to the inspector and the government, what purpose for this other than the next shoe to drop and require owners to take funds out of the sale price to bring the home up to a certain energy standard. Ignore the fact that this would be a government taking and violate the Constitution, but who pays attention to the Constitution anymore?
Where in the stimulus bill is there any money for nuclear power development? Where is there money to develop the technology to extract the shale oil in Wyoming and Montana that has reserves estimated to be able to meet out energy needs for the next 250 years?
msnbc.msn.com/id/2.../
Instead, let's immediately destroy our existing industry that is based on fossil fuels over this stupidity, rather than transitioning in a staged and calculated fashion that makes economic sense. Just like health care let's rush it through and damn the consequences because it just has to be good for us. Except for the profits the greenies will make as long as the government tit is feeding it, cap and trade will drive the economy further in the toilet. But that appears where this administration thinks it should be.
Why rush it through????
It's the same reason why the President is more focused on Universal Health Care and Cap and Trade over Jobs the the Economy ( by far the #1 issue to voters).
Right now Democrats control the entire government and much of the media. They have the votes and there is little Republicans can do to stop them. Universal health care is the holy grail for them and they are trying to force the expensive plan down our throats now when they have the votes...
You'd think during a recession/depression that they might actually do what's right for people, instead of pushing for political gain, but these are self serving politicians here.
Americans giving up sovereign power to a collection of foreign powers (basically a step towards a one world government) is a very scary thing, and reason enough to grab pitch forks and torches.
" We need to drain the swamp."
So let's take a poll, would you prefer to possibly lower the carbon content in the air or eat? Vote below.
On top of the cost increase in production there will be a corresponding increase in the cost to get the produce to market.
Better start working on those Victory Gardens folks.
Should we bother to curb man-made climate change, or should we not? What price will we pay if we do nothing?
There is compelling evidence that atmospheric carbon dioxide (CO2) is increasing as a result of human activity; and that CO2 pollution is damaging the world’s climate at an alarming pace.
Real experience shows that “big box” retailers pose a greater threat to small businesses -- and health care expenses burden American families more than any environmental protections in effect today.
We have much data to contradict economic arguments against cap-and-trade programs. For example, the EPA’s Acid Rain Cap and Trade Program, has yielded benefits that exceed its costs. Wouldn't a similar program for CO2 deliver similar returns? Why not?
Furthermore, there is more at stake here than US policy. CO2 emissions are growing faster elsewhere than in the US – contributing plenty to the global impact. How can we persuade China and other developing economies to reduce their emissions if we won't ante up and take the lead?
Beneficiaries of the status quo will reject any change proposed for the greater good. Then they try to frighten ordinary people into opposing what is in their own best interest.
The price of inaction will be devastating. Better solutions have yet to come forth. Critics should offer something constructive; instead of idle ridicule of those who try their best to bring positive change. What would cap-and-trade opponents offer as an alternative to deal with carbon pollution?
On Oct 29 11:49 AM ProLogic wrote:
.
> What would cap-and-trade opponents offer as an alternative to deal
> with carbon pollution?
At 400 ppm it's disasterous, at 200 ppm, we can't grow enough food for the people already here, and at 0 (bet there are some "caring folks" who think this would be a goal) all life ends.
On Oct 29 11:49 AM ProLogic wrote:
> with carbon pollution?
But what will we do with all of that nuclear waste for the long run? This radioactive material takes thousands of years to decay, and the decay product remains highly toxic forever.
As long as we're going back to 1979, maybe we should take Carter's advice about getting off of our reliance on fossil fuels from the Middle East.
We could also leave those solar collectors where he installed them on the White House.
Had we done that, where would we be today?