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America, The Nanny State

Great post Mr. Quinn!! I really appreciate the statistics packed into your presentation.

I spent Halloween weekend reading the initial sections of the 1990-page "Affordable Health Care for America Act" kindly posted on-line by the House of Representatives - what a frightening experience! This trillion-dollar horror, foisted on us by the liberal wing of the Democrat party, purports to "reform" the delivery of our health care. It certainly does that, in ways that most of us will regret.

The trillion-dollar cost scored by the CBO with its usual static methodology (neglecting changes in behavior due to changes in policy) addresses only the costs incurred by the federal government. It fails to estimate the costs that will be passed on to the public through increased insurance premiums, excise taxes and penalties, and administrative overhead to provide new reports demanded by the proliferating bureaucracy. WellPoint estimates that insurance premiums for its coverage of citizens in my state of Virginia will increase 98% when this "reform" is fully implemented.

Social Security began in 1935, the year I was born, and eligibility for benefits was pegged at age 65 because that was the average life expectancy then. Thanks in part to advances in medical science I'm still around and kicking, and the Census Bureau says I can expect to live another 14 years (to age 88). A child born in the U.S. today has an average life expectancy of 78 years; on the same basis as original Social Security, why isn't this the new age of eligibility for full Social Security and Medicare benefits? This is a simple reform that would instantly resolve the unfunded liabilities that, as you point out, are the real issues that need to be addressed?

The Act appropriates $7 billion to start both insurance co-ops and a government-run insurance program. These provisions are at the level of noise, since the the CBO estimates that the number of takers for the "public option" will be 2% or less of the total insured population - a sop to the business-hating wing of the Democrat party.

The efforts of Congress to "reform" health care are a failure and a fraud worthy of Bernie Madoff. The House bill and its companion in the Senate deserve to be killed, and any of our representatives who support these monstrosities should not receive our votes in the future.

Healthcare Reform vs Innovation and Growth?

I fully agree with the contention that innovation in medicines and medical devices needs to be encouraged, but not with tax breaks or subsidies. The industry's profit motive is sufficient to continue realization of life-extending therapies.

As a productive 74-year-old with six heart artery bypasses, and sustained with moderate-cost drugs to regulate blood pressure, cholesterol, and blood sugar, I consider myself living proof that modern therapies can extend life. So why do we still consider our working capabilities to end at age 65 or 67? Let's recognize that normal life expectancy is now 75, and extend the eligibility for social security and pensions to that age. Retirement at age 65 was written into law in 1935, when that was the normal life expectancy.

The real waste is retirement of government employees after 30 years of service with full pension benefits, often in their mid-fifties. The cost is already bankrupting states like California, and will impact others until politicians have the guts to rethink their promises to provide retirement benefits while people are still in their prime working years.

Constitutional Problems with Healthcare Reform?

The constitution reserves to the states the right to commit their own blunders. Not just Massachusetts, but Tennessee and Maine have had disastrous experience with mandated coverage - costs have far outrun budgets based on consumption estimates. Like cash for clunkers, the public appreciates a freebie when offered and will increase consumption until program funds run out or the costs are passed to the next generation. What's the unfunded liability for Medicare? $50 trillion?

Our medical insurance "crisis" was made by our pols when they passed Medicare and Medicaid without realistic cost estimates. Obamacare will compound the error.

The Truth About Fossil Fuels and Renewable Energy (Part II)

Re: uranium enrichment, I neglected to mention - URENCO (owned by the British and Dutch governments and German utilities) is building a centrifuge enrichment plant in New Mexico, scheduled for initial operation in 2009. To its credit, the DOE turned down the USEC request for a loan guarantee because adequate capacity is planned at the URENCO and GE sites with commercial resources alone. If the GE laser isotope separation process works as planned, it will be less energy intensive and lower cost that the centrifuge process. The DOE Lawrence Livermore Lab, with B&W assistance, tried to develop a pilot laser separation facility in the 1999-2000 period, and abandoned the project as not feasible.

The Truth About Fossil Fuels and Renewable Energy (Part II)

A thoughtful and useful sequel to Part I of your essay, thanks Joe. We agree that federal subsidies and regulation are the main impediments to a rational and economic solution to energy supply.

A few points in support of your thesis and investing ideas:

1. I'm retired from the Babcock & Wilcox Company in Lynchburg, VA. B&W produces the fuel elements and other components for all the Navy's reactors that, as you say, have a fifty-year history of incident-free operation. B&W also designed and built the Three Mile Island reactor, and after that fiasco (due as much to operator error as to faulty design) sold their commercial nuclear business to the French. Areva North America continues to operate in Lynchburg and is a leading contender to build new reactors in the U.S. based on a European design. Areva has entered a joint venture with Northrop Grumman (NOC) to build a plant in Newport News capable of fabricating large reactor vessels (NOC also installs the reactors in the Navy's carriers and some of their submarines). B&W recently proposed and submitted a license application for a 100-MW modular commercial reactor that has features that make much environmental and economic sense. B&W is a subsidiary of McDermott International (MDR), which also has interests in the construction of off-shore drilling platforms and boilers and environmental controls for fossil-powered generation plants.

2. Expansion of nuclear power requires facilities to enrich natural uranium with the fissionable isotope U235. The leading source of enriched uranium in the U.S, is USEC (USU), which operates a Cold War-era gaseous diffusion plant in Ohio. USEC has invested $1.5 billion in development of a centrifuge enrichment plant, but was recently denied federal loan guarantees for funding completion of the plant, putting the project and the future of USEC in doubt. Meanwhile, GE has formed a joint venture with Hitachi and Cameco (CCJ) to build an enrichment plant in North Carolina using a laser isotope separation process that has not been demonstrated at commercial scale. These issues must be resolved before expansion of nuclear generation is realistic, and I'm hopeful that they can be resolved without government subsidy.

3. I've had holdings in Chesapeake (CHK) and Penn-Virginia (PVR) for some time, and have ridden the shares down and now up in recovery. PVR has the advantage of diversification between coal properties and a natural gas mid-stream business. PVR and Martin Midstream (MMLP) both throw off nice income streams.

4. Some of your commenters, particularly jerrydd, do not seem to understand the difference between energy and power (the rate at which energy is generated or used). As you point out in your post, wind and solar (and ocean waves) are intermittent sources of both power and energy. A wind farm or solar array can generate multi-MW of power when the wind blows and the sun shines, and can offset some of the energy generated from fossil or nuclear generators, but (apart from massive energy storage facilities) cannot be relied upon to supply power or energy when it's needed. Since wind and solar cannot replace fossil or nuclear plants, their economics are highly dubious.

The Truth About Fossil Fuels and Renewable Energy

Thanks Joe for a well-reasoned and non-ideological post. I look forward to Part II.

Several comments endorse a "comprehensive energy policy". I take the heretical position that, given the tragic history of past efforts to craft a useful policy, the best outcome would be NO energy policy. Our politicians and the technologists who populate the energy bureaucracies have proven that they are not competent to create a beneficial policy. Let the markets work!

This week the President let fly $2 billion in new subsidies for advanced battery production. Members of my family in recent weeks have benefited from $9000 in subsidies to trade clunkers for new cars that they would have bought anyway. I will benefit from a $1500 tax credit to replace a HVAC system this spring that had to be replaced anyway. I traded in a hybrid Ford Escape this year, purchased three years ago with a $2000 tax credit, because for our transportation requirements it didn't really offer a significant benefit in mileage compared to the 4-cylinder Escape we received in trade (with a $50 per month reduction in amortization cost). Before I retired, I worked on a project to build an enormous superconducting magnet for energy storage, funded with a $25 million grant from DOE, that was delivered to a scrap yard in Florida.

You get the point: subsidies granted by our politicians have been an unmitigated waste. Any policy that attempts to drive the market in a direction that is not economically justified will fail, and if an approach has economic justification, it doesn't need a policy push.

Small Business Lending: Why the Programs Need to Change

I volunteer with our local chapter of SCORE, a private foundation and "resource partner" of the SBA. We see budding entrepreneurs each week looking for startup capital and advice on how to develop business plans and organize new operations. We have access to the SBA web site, publications, and financial resources, but over the past years I have yet to see any of these "services" be useful to a new - or existing - business.

There are other federal and state agencies with paid employees offering services similar to those we offer as volunteers - except that our staff of eight volunteers has more than 200 years of collective business experience, whereas few of the government employees we see have ever held responsible positions outside of government. One recent client with a highly credible business plan was denied an opportunity to even meet with a bureaucrat responsible for disbursing state Small Business Financing Authority funds because she was "extremely busy preparing for an upcoming Board meeting".

I doubt that the SBA or corresponding (and duplicative) state agencies can be reformed to be more responsive or useful. Better to save the taxpayers the expense of maintaining these costly and useless agencies, and let small businesses make their case to the wide variety of established private funding sources. And support community-based volunteer advisors like SCORE to help guide new businesspeople through the hoops.

Investing in the Smart Grid

"Smart Grid" is mostly Washington hype. Some aspects of "smart grid" have been around for years: I built a house in Maine in 1986 that used off-peak power to store heat in a large, well-insulated water heater, and to heat silica bricks in space heaters. Central Maine Power installed two meters, one for daytime load and one for off-peak, and charged half the rate for off-peak. The system worked like a champ and paid back quickly when compared to a conventional hot water or forced hot air heating system.

I left the house in Maine to work for the Babcock and Wilcox Co. (subsid of McDermott Intl.) in Virrginia, developing a Superconducting Magnet Energy Storage (SMES) system before retiring in 2000. Our SMES (funded by DoE to the tune of $25 million) was much bigger than the flywheel energy stores made by the likes of Beacon (BCON) designed to replace a battery UPS - it could store 100 MJ and discharge at 100 MW. The objective was to stabilize a transmission grid's voltage and frequency in the event of a malfunction like a sagging line shorting into a tree (happens all the time). We tried hard to find a utility customer willing to install and operate a free SMES, to no avail. The bones of the magnet were eventually delivered to the National High Magnetic Field Lab in Tallahassee, FL, where they still sit.

A "smart grid" will do nothing to reduce our dependence on foreign oil; next to zero oil is burned to generate power, >80% is used for transportation and there is no viable alternative to that use yet. The main purpose of a "smart grid" is to maintain grid voltage and frequency stability, which will be increasingly important as the load shifts between intermittent generation (wind and solar) and base generation (coal, gas, or nuclear). In fact without sophisticated instrumentation and control, intermittent generation will be next to useless in a high-power grid. Massive (>100 MW) "power flow controllers" have been built by the former Westinghouse Transmission and Distribution Group, now owned by Siemens. The biggies in this field will continue to be ABB, GE, and Siemens, supplied with high-power components by outfits like Infineon, ST Micro, and Cree.

How to Invest in the Coming Demographic Shift

"Around the world, and especially here in the U.S., people are experiencing pandemic bouts of fiscal reality." -- people, but not politicians (one wonders if they're people).

I was born in the same year as Social Security - 1935 - when median life expectancy was 65 years. SS and I are almost 74, and at least I am still healthy and looking forward to more good years of productive work. Can't say the same for SS.

It's unconscionable to me that government employees and union members "retire" after 25 - 30 years of "work" and expect pensions (many not fully funded but dependent on current taxes or corporate income) to support them - in some cases - lavishly. Thus the "gold plated" pensions that have contributed to the bankruptcy of GM and Chrysler (and bailouts by the taxpayers); and the pensions of up to $500,000 per year paid to some "retired" civil servants in California.

I had dinner last week with a management-level California civil servant, just retired, who neglected to train her replacement so is hired back as a consultant to carry on her work and begin to train a successor. Some would call this "double dipping".

I have no problem with us old folks continuing to work after age 65, and this can take some of the burden off pension liabilities, if handled to prevent double dipping. In my case, I pay the "self employment" tax that effectively offsets a major part of what I receive from Social Security. If that's fair for me, why should another pensioner be allowed to multiply their pension payments by working past retirement age?

There's a good case to be made for pension reform - increasing SS retirement age to at least life expectancy, and reining back double dipping - if our politicians had the courage to take it on.

California's Default Is Certain

What an idiotic post! Read the real reasons for California's problems here (seekingalpha.com/artic...?) in another SA post today.

GM's Pending Bankruptcy: How Buying a Car Is Going to Change

When will Ford make its case that continuing government assistance to two of its competitors is not only unconstitutional, but a violation of anti-trust laws? Ford bit the bullet to hock its facilities to gain working capital, and is stuck with the cost of paying down this debt. GM and Chrysler not only shed $billions in debt, but have oodles of low-cost capital courtesy of us taxpayers.

I relish the court case Ford could bring! For once, some lawyers may earn their keep.

U.S. Manufacturing: More Output with Fewer Workers

Mark - Good post! Why should the decline in manufacturing population be different from the history of farm population? In 1850, 64% of the US population worked on the farm; in 1900 it was 38%; in 1950 12%, and now about 2% - and farm production far exceeds what we need to feed the rest of the US population. Automation and process innovation (more than outsourcing) will continue to reduce the population working in mills and factories, both here and overseas, while sustaining production of the material goods we consume.

Are the engineers and programmers who develop new products and processes working in manufacturing or the service industry? Sure there will be dislocations of unskilled labor as increased productivity demands higher skill levels. This should be an incentive for all to obtain their highest attainable level of education, or to accept the menial tasks that will remain as society advances.

A Natural Gas Centric Strategic Long-Term Comprehensive Energy Policy

Good, factual post! We certainly need to wean the U.S. away from imported petroleum quickly, and with minimum expense. CNG may be the way, if not bio-fuels and EVs. Probably a mix of each of these as well as petroleum-based fuels during a transition period.

One flaw in the CNG argument is the 4:1 lower energy density of CNG vs. gasoline. Thus for equal range and energy efficiency, a car powered by CNG would require 4x the tank volume of a gasoline-powered car. I don't know how the Honda GX packages its tank into its body, but I suspect it simply has reduced range and/or trunk space compared to a gasoline-powered version.

The cost of conversion from gasoline to CNG runs $5000 to $7000 per vehicle, and it's hard to believe that this will be economic until the price of gasoline returns to well over $4 per gallon. I drive a Ford Escape hybrid, and I figured I'd break even on the $3000 cost premium after tax credit with gasoline over $2.75 a gallon; made money last summer, not this year. The cost to convert the entire U.S. light vehicle fleet of 240 million vehicles (R.L. Polk) to CNG would be an astronomical $1.5 trillion (doesn't sound so bad in comparison with the projected federal deficit).

Safety is also a concern: a house I used to live in blew up a few years ago because a technician made a wrong connection to a high pressure gas line. Two houses were destroyed here in central Virginia last year when an interstate gas line blew up. The thought of householders plugging their cars into gas lines for overnight refills scares me. But then gasoline is explosive, too, it's just not under pressure. CNG refueling at service stations with trained operators and reliable devices sounds better to me; that's how I get the propane bottle for our grill refilled.

For these reasons, the Pickens Plan dropped the idea of using CNG for light vehicles last year, and is now concentrated on adoption of CNG for heavy trucks. This is supported by the fact that major CNG lines tend to parallel the major interstate truck routes. I have every respect for Boone Pickens and his investment in the cause; he has the good sense to realize the limitations of CNG as a vehicle fuel in the near term.

You suggest a number of policy steps that should be taken, and I can agree with some, particularly slapping an import tax on petroleum. I do not believe that there is an effective government solution to the problem, however; far better to let the market sort out the best among alternative fuels for our future transportation needs.

$200 Oil Is Coming While We Waste a Perfectly Good Crisis (Part 3)

Mr. Quinn - Having read the 2005 Hirsch report some time ago, I am convinced that your conclusions are correct - that petroleum production has (or will soon) peak, and with a recovering economy demand will outstrip supply, so we will return to the condition of 2007-08 with runaway oil prices at the margin.

That said, I don't see a government policy solution to the problem - to the contrary, present policies will make the problem far worse. The Hirsch report points out that 80% of our petroleum consumption is for transportation, with the remaining 20% going to winter heating, chemicals, road surfacing, etc. Very little petroleum is used for electricity generation, so "alternative energy" like windmills and solar cells are irrelevant to oil consumption. Perhaps we could bring back coal-burning locomotives, but there is no practical substitute for petroleum as fuel for our cars and planes. Even the Pickens Plan has fallen off compressed natural gas as a light vehicle fuel, since its energy density is only one fourth that of gasoline (i.e. we'd need 4x the tank volume for equal range with a CNG-powered car vs. gasoline).

Against this background, we have a new administration that has quickly denied access to new domestic petroleum sources, including oil shale and offshore, while promising $billions in subsidies to alternatives that have no bearing on transportation applications. As Hirsch pointed out, the lead time to develop new fuels and their distribution networks is measured in decades. Likewise the time required to replace the domestic fleet of 240 million vehicles (source: R.L. Polk) with more fuel-efficient models will be decades.

Our present crowd of politicians will respond to the environmentalists, industrial unions, and farmers first, so in the near term we'll see increased taxes on fuels, over-priced small cars that won't sell, and boondoggles like ethanol that consume more energy than they produce.

As usual, John Lounsbury makes a cogent comment: "You have written about the energy problem before and you should keep making the case for action." The solution lies in a time well beyond the term of our present politicos, and we need to keep them from interfering with and delaying the market response that will eventually provide the solution.

The Fate of General Motors' Rick Wagoner

No one here has mentioned the comparison of GM and Chrysler to FORD! Maybe Ford will have its comeuppance yet, but so far it has managed to avoid the financial meltdown and beggary of its U.S. competitors.

I don't find much to admire in the Great O's approach to governing, but his Auto Task Force came through this morning with an admirable analysis and rejection of the "restructuring" plans submitted by GM and Chrysler. They called spades spades, set firm timelines for corrective action, and offered constructive responses to the political issues of destitute Michigan communities and credibility of warranties. Kudos to the Task Force!

Let's not forget either that GM and its competitors turned out cars for years that its customers wanted to buy. Even Toyota, Nissan, and Honda introduced big SUVs - just before the oil prices of last summer caused the market to change its perception of what cars should be. The industry won't be transformed by any technological breakthroughs - just good design to provide the roomy vehicles that the U.S. market wants with incremental improvements in mileage at affordable cost.

It's well known what technical changes will make vehicles more efficient: lighter-weight materials (more composites), hybrid drives, and turbo chargers. (Forget about an all-electric car - this is a silly stunt for GM and companies like Tesla.) All of these changes come at a cost, and it will be interesting to see who can engineer them into affordable and attractive vehicles to come. But be patient - the lead times for these changes will still be five years or more.