There have been two recent editorials in the Wall Street Journal regarding the folly of wind power as a major component of US energy policy. A lead staff editorial on 23 December discussed a number of questionable aspects of federal wind power energy policy. The 23 December piece, by Robery Bryce, entitled A Wind Power Boonedoggle, lampooned Boone Pickens' vaunted alternative energy policy, announced 30 months ago, featuring wind power.
I wrote posts here, here and here concerning Pickens' "policy." Now it seems his extensive wind farm investments have fallen afoul of the low price of natural gas.
Bryce wrote in his editorial,
"The Dallas-based entrepreneur, who has relentlessly promoted his "Pickens Plan" since July 4, 2008, announced earlier this month that he's abandoning the wind business to focus on natural gas.
Two years ago, natural gas prices were spiking and Mr. Pickens figured they'd stay high. He placed a $2 billion order for wind turbines with General Electric. Shortly afterward, he began selling the Pickens Plan. The United States, he claimed, is "the Saudi Arabia of wind," and wind energy is an essential part of the cure for the curse of imported oil.
Voters and politicians embraced the folksy billionaire's plan. Last year, Senate Majority Leader Harry Reid said he had joined "the Pickens church," and Al Gore said he wished that more business leaders would emulate Mr. Pickens and be willing to "throw themselves into the fight for the future of our country."
Alas, market forces ruined the Pickens Plan. Mr. Pickens should have shorted wind. Instead, he went long and now he's stuck holding a slew of turbines he can't use because low natural gas prices have made wind energy uneconomic in the U.S., despite federal subsidies that amount to $6.44 for every 1 million British thermal units (BTUs) produced by wind turbines. As the former corporate raider explained a few days ago, growth in the wind energy industry "just isn't gonna happen" if natural gas prices remain depressed."
So much for predicting the rise of one energy source by hoping for scarcity of another. And it's sort of funny, because, separately, Pickens has been stumping for natural gas-powered vehicles. So I guess one windfall threw another of his energy bets for a big loss.
Bryce went on to note how well-subsidized wind power has been,
"Despite wind's lousy economics, the lame duck Congress recently passed a one-year extension of the investment tax credit for renewable energy projects. That might save a few "green" jobs.
But at the same time that Congress was voting to continue the wind subsidies, Texas Comptroller Susan Combs reported that property tax breaks for wind projects in the Lone Star State cost nearly $1.6 million per job. That green job ripoff is happening in Texas, America's biggest natural gas producer.
Today's low natural gas prices are a direct result of the drilling industry's newfound ability to unlock methane from shale beds. These lower prices are great for consumers but terrible for the wind business. Through the first three quarters of 2010, only 1,600 megawatts of new wind capacity were installed in the U.S., a decline of 72% when compared to the same period in 2009, and the smallest number since 2006. Some wind industry analysts are predicting that new wind generation installations will fall again, by as much as 50%, in 2011."
According to Bryce, Pickens is moving his wind turbines to Canada, where mandatory alternative energy legislation requires utilities to buy power he'll generate up there with his new toys.
All of this makes you wonder just how much of Pickens' vaunted plan was a way to drive federal subsidies for his investment strategies, doesn't it?
Meanwhile, in the earlier Journal staff editorial, the writers note how much less efficient wind power is, in terms of megawatts/worker production. It "takes at least 25 times more workers to produce a kilowatt of electricity from wind as from coal."
The cost to taxpayers for each wind-related energy job was estimated at $475K in the editorial. There's no way private industry could accommodate such expensive job-creating investments. Only government, taxpayer-funded subsidies would be so foolishly squandered.
I think the larger story here is that Pickens' wind-based defeat exposes his eagerness to benefit his investors at the explicit expense of taxpayer subsidies, while never effectively responding to charges that his alarm over the US oil import bill is unjustifiable on purely economic bases.
Thursday, December 23, 2010
Wednesday, December 22, 2010
Demographic Stress Tests
For some time now, I've been convinced that US government employee unions and various social wealth transfer schemes, e.g., Social Security, Medicare and Medicaid, will have to accept significant reductions in promised benefits due to unchecked growth in said benefits due to unrealistic contract terms and poorly-designed programs.
On the weekend after Thanksgiving, Nicholas Eberstadt of the American Enterprise Institute and Hans Groth, senior director for Healthcare Policy & Market Access for Pfizer Europe, wrote Time for 'Demographic Stress Tests,' an editorial in the Wall Street Journal which describes some of the potential consequences if my expectations are not realized.
The editorial paints a dark picture, beginning,
"Financial crises can erupt suddenly and unexpectedly. Demographic pressures, by contrast, gather slowly and predictably—but over just a generation they can transform the economic and social landscape irreversibly.
Such a transformation is already underway in the developed world. Twenty years from now, Western economies will be characterized by stagnating populations, shrinking work forces, steadily increasing pension-age populations, and ballooning social spending commitments. These demographic changes will mean major increases in public debt burdens and slower economic growth, as savings are diverted from investments and innovation that enhance productivity."
For example, they write,
"The U.S., meanwhile, can expect to see continuing population and manpower growth between now and 2030, thanks to relatively high birth rates and a robust inflow of immigrants (roughly half of them legal). America will remain the most youthful Western society, although its 65-plus population will be about 19% of the total, up from 13% today.
Nevertheless, entitlement liabilities—especially the unfunded liabilities in the health-care system—are on course to skyrocket in the decades ahead. The country's recently enacted health reform will make the burden heavier.
At present, the ratio of gross U.S. public debt to GDP is nearing 100%, and the country is running annual deficits of around 10% of GDP. The Congressional Budget Office projects gross public debt to be 200% of GDP by 2020, and the BIS sees it hitting 300% of GDP by 2030. By the BIS estimates, restoring the U.S. public debt burden to 2007 levels would require budget surpluses of 2.4% of GDP for the next 20 years.
Maintaining economic growth in the face of these demographic trends will require rethinking current approaches to work and retirement, pension and health-care policies, and government budget discipline."
Music to my ears, most assuredly. I've become certain that, for the US to avoid fiscal calamity on a society-wide scale, the 1930s- and 1960s-era social safety net programs, all sharing design flaws, must soon be seen as a temporary taking leave of economic senses by a country careening between deep despair and post-war elation. They will have to be halted, dismantled, or severely capped, to be replaced by more restrained, individually-based, defined-contribution, rather than defined-benefit approaches.
Eberstadt and Groth provide similar statistics for other countries, including Germany and Japan, which, together with the US, the authors note comprise "half of the West's output and nearly 30% of the world's GDP."
All three are projected to experience public debt/GDP ratios of over 200% in just twenty years. Japan's would hit 600%. These are stunning numbers, when you are used to the US running no more than about 50% on this ratio in past decades.
The authors suggest, in conclusion,
"Thanks to the recent financial crisis, we're now familiar with the concept of the "financial stress test" used to evaluate the soundness of banks and allied institutions. A "demographic stress test" for Western economies is now in order, so that voters and their elected representatives can cope with aging populations and declining work forces.
Such an exercise would assess how manpower availability, labor force participation rates, aging and budgetary commitments would, over the next 30 years, affect key measures of national economic well-being like growth and productivity, fiscal balances, and government debt. It would also indicate the extent to which adverse "baseline" costs and consequences could be mitigated or offset by changes in lifestyle, personal behavior and public policy. These could include, for example, later retirement thanks to healthy aging, increased attention to preventive health care, enhanced personal savings, and adjustments to health and pension schemes.
Every Western country will have to determine how to pursue a future that is grayer but healthier and more affluent. The sooner we pay serious attention to the demographic challenge, the likelier we will be to meet it successfully."
Even these pundits avoid what ought to be obvious to objective observers of these predictions. Most large Western country pension, social safety net and health care schemes will have to be radically redesigned and reduced in scope and cost. There's just no way, after several decades and generations in which expectations have been so heavily affected by citizens' knowledge of social benefits replacing their own savings, that younger, working citizens can or will sustain these obligations.
Who in their right mind expects people to work from 21-70, then live for another 15-20 years at similar standards without having saved substantial amounts of their prime years' compensation? Especially when you add in the demographics of shrinking young Western populations- except for the US- which make the burdens so much more heavy?
Reading a non-partisan, cold-eyed piece like Eberstadt's and Groth's really opens your eyes to the magnitude, across most of the West, of the size of the shortfall and drag on economic activity that old, ill-conceived social spending obligations for pensions and health care will have in a comparatively short time.
More than in past years, we are now, for many countries, on the cusp of moving irrevocably into financially dangerous territory if we continue to allow badly-designed, unsustainable social programs to remain in place.
On the weekend after Thanksgiving, Nicholas Eberstadt of the American Enterprise Institute and Hans Groth, senior director for Healthcare Policy & Market Access for Pfizer Europe, wrote Time for 'Demographic Stress Tests,' an editorial in the Wall Street Journal which describes some of the potential consequences if my expectations are not realized.
The editorial paints a dark picture, beginning,
"Financial crises can erupt suddenly and unexpectedly. Demographic pressures, by contrast, gather slowly and predictably—but over just a generation they can transform the economic and social landscape irreversibly.
Such a transformation is already underway in the developed world. Twenty years from now, Western economies will be characterized by stagnating populations, shrinking work forces, steadily increasing pension-age populations, and ballooning social spending commitments. These demographic changes will mean major increases in public debt burdens and slower economic growth, as savings are diverted from investments and innovation that enhance productivity."
For example, they write,
"The U.S., meanwhile, can expect to see continuing population and manpower growth between now and 2030, thanks to relatively high birth rates and a robust inflow of immigrants (roughly half of them legal). America will remain the most youthful Western society, although its 65-plus population will be about 19% of the total, up from 13% today.
Nevertheless, entitlement liabilities—especially the unfunded liabilities in the health-care system—are on course to skyrocket in the decades ahead. The country's recently enacted health reform will make the burden heavier.
At present, the ratio of gross U.S. public debt to GDP is nearing 100%, and the country is running annual deficits of around 10% of GDP. The Congressional Budget Office projects gross public debt to be 200% of GDP by 2020, and the BIS sees it hitting 300% of GDP by 2030. By the BIS estimates, restoring the U.S. public debt burden to 2007 levels would require budget surpluses of 2.4% of GDP for the next 20 years.
Maintaining economic growth in the face of these demographic trends will require rethinking current approaches to work and retirement, pension and health-care policies, and government budget discipline."
Music to my ears, most assuredly. I've become certain that, for the US to avoid fiscal calamity on a society-wide scale, the 1930s- and 1960s-era social safety net programs, all sharing design flaws, must soon be seen as a temporary taking leave of economic senses by a country careening between deep despair and post-war elation. They will have to be halted, dismantled, or severely capped, to be replaced by more restrained, individually-based, defined-contribution, rather than defined-benefit approaches.
Eberstadt and Groth provide similar statistics for other countries, including Germany and Japan, which, together with the US, the authors note comprise "half of the West's output and nearly 30% of the world's GDP."
All three are projected to experience public debt/GDP ratios of over 200% in just twenty years. Japan's would hit 600%. These are stunning numbers, when you are used to the US running no more than about 50% on this ratio in past decades.
The authors suggest, in conclusion,
"Thanks to the recent financial crisis, we're now familiar with the concept of the "financial stress test" used to evaluate the soundness of banks and allied institutions. A "demographic stress test" for Western economies is now in order, so that voters and their elected representatives can cope with aging populations and declining work forces.
Such an exercise would assess how manpower availability, labor force participation rates, aging and budgetary commitments would, over the next 30 years, affect key measures of national economic well-being like growth and productivity, fiscal balances, and government debt. It would also indicate the extent to which adverse "baseline" costs and consequences could be mitigated or offset by changes in lifestyle, personal behavior and public policy. These could include, for example, later retirement thanks to healthy aging, increased attention to preventive health care, enhanced personal savings, and adjustments to health and pension schemes.
Every Western country will have to determine how to pursue a future that is grayer but healthier and more affluent. The sooner we pay serious attention to the demographic challenge, the likelier we will be to meet it successfully."
Even these pundits avoid what ought to be obvious to objective observers of these predictions. Most large Western country pension, social safety net and health care schemes will have to be radically redesigned and reduced in scope and cost. There's just no way, after several decades and generations in which expectations have been so heavily affected by citizens' knowledge of social benefits replacing their own savings, that younger, working citizens can or will sustain these obligations.
Who in their right mind expects people to work from 21-70, then live for another 15-20 years at similar standards without having saved substantial amounts of their prime years' compensation? Especially when you add in the demographics of shrinking young Western populations- except for the US- which make the burdens so much more heavy?
Reading a non-partisan, cold-eyed piece like Eberstadt's and Groth's really opens your eyes to the magnitude, across most of the West, of the size of the shortfall and drag on economic activity that old, ill-conceived social spending obligations for pensions and health care will have in a comparatively short time.
More than in past years, we are now, for many countries, on the cusp of moving irrevocably into financially dangerous territory if we continue to allow badly-designed, unsustainable social programs to remain in place.
Tuesday, December 21, 2010
The Euro-Based Changes In The EU
This past weekend's Wall Street Journal featured a half-page editorial by Brian Carney & Anne Jolis entitled Toward a United States of Europe. It's amazing to me how relatively little attention this major change is receiving in US business and other mainstream media.
Most of us Americans don't really understand the specific limits of the original Treaty of Lisbon which gave birth to the European Union. Among them was, with the birth of the Euro and the European Central Bank, to quote the Journal article,
"each member state would be responsible for looking after its own budgetary and borrowing needs. Going forward, the euro zone's members will stand as guarantors of each others' national debts."
Thus, the title of the editorial, because there is joint responsibility among the EU members for all sovereign liabilities. Very much the same effect as Alexander Hamilton's original plan for the United States government's assumption of all debts of the thirteen member states.
Rather troubling, however, for the Euro and the EU, is the fact that the politicians aren't giving this massive change its due, ramming it through as a "limited treaty change."
On the contrary, France's Finance Minister, Christine Lagarde, said,
"It's a major adjustment. We violated all the rules because we wanted to close ranks and really rescue the euro zone."
Further, Lagarde said that the original Treaty "was very straightforward. No bailing out."
I recalled, with interest, early on in the Euro's existence, that France and Germany were two of the first members to violate the currency union's economic guidelines regarding budget deficits and/or deficits. The rules were, as Lagarde admits, flouted from the very start.
Carney and Jolis cite Germany's one-time Bundebank head, the venerable Hans Tietmeyer, writing,
"that monetary union required 'the degree of solidarity characteristic of a nation.' "
That's a big jump for the EU member states. Unlike US states, most of which have some sort of balanced-budget requirement, however loosely-enforced or defined, formerly sovereign states in the EU were, only decades ago, issuing their own currencies, and running budget deficits even now.
The editorial's authors make the insightful point,
"Economic competition is to be replaced by consultation and cooperation. Whether that is an improvement is doubtful, but it is also, in a sense, beside the point. Europe has chosen its path. The common currency will stand or fall based on the ability of the EU to impose ever-more intrusive spending and taxation oversight on the euro zone's members. Does Europe have the necessary solidarity for that to succeed where less coercive measures have failed in the past?"
The transition from common currency to facilitate individual competitive advantages among the EU members, to its use to enforce top-down budgetary and taxation policies, is a sea-change. Even the US does not have this wrinkle in its Constitution.
The EU's members are much more ethnically distinct, and more recently, than are US states. I've always thought that this reality would prohibit a truly-shared fiscal and monetary union in the EU.
Now I guess we'll see whether I, and so many other observers, are correct. The effects of Euro failure aren't clear, but one has to suspect, if the establishment of the Euro brought so many benefits, its disappearance would reverse those, and bring new costs for the member states and businesses operating therein.
Most of us Americans don't really understand the specific limits of the original Treaty of Lisbon which gave birth to the European Union. Among them was, with the birth of the Euro and the European Central Bank, to quote the Journal article,
"each member state would be responsible for looking after its own budgetary and borrowing needs. Going forward, the euro zone's members will stand as guarantors of each others' national debts."
Thus, the title of the editorial, because there is joint responsibility among the EU members for all sovereign liabilities. Very much the same effect as Alexander Hamilton's original plan for the United States government's assumption of all debts of the thirteen member states.
Rather troubling, however, for the Euro and the EU, is the fact that the politicians aren't giving this massive change its due, ramming it through as a "limited treaty change."
On the contrary, France's Finance Minister, Christine Lagarde, said,
"It's a major adjustment. We violated all the rules because we wanted to close ranks and really rescue the euro zone."
Further, Lagarde said that the original Treaty "was very straightforward. No bailing out."
I recalled, with interest, early on in the Euro's existence, that France and Germany were two of the first members to violate the currency union's economic guidelines regarding budget deficits and/or deficits. The rules were, as Lagarde admits, flouted from the very start.
Carney and Jolis cite Germany's one-time Bundebank head, the venerable Hans Tietmeyer, writing,
"that monetary union required 'the degree of solidarity characteristic of a nation.' "
That's a big jump for the EU member states. Unlike US states, most of which have some sort of balanced-budget requirement, however loosely-enforced or defined, formerly sovereign states in the EU were, only decades ago, issuing their own currencies, and running budget deficits even now.
The editorial's authors make the insightful point,
"Economic competition is to be replaced by consultation and cooperation. Whether that is an improvement is doubtful, but it is also, in a sense, beside the point. Europe has chosen its path. The common currency will stand or fall based on the ability of the EU to impose ever-more intrusive spending and taxation oversight on the euro zone's members. Does Europe have the necessary solidarity for that to succeed where less coercive measures have failed in the past?"
The transition from common currency to facilitate individual competitive advantages among the EU members, to its use to enforce top-down budgetary and taxation policies, is a sea-change. Even the US does not have this wrinkle in its Constitution.
The EU's members are much more ethnically distinct, and more recently, than are US states. I've always thought that this reality would prohibit a truly-shared fiscal and monetary union in the EU.
Now I guess we'll see whether I, and so many other observers, are correct. The effects of Euro failure aren't clear, but one has to suspect, if the establishment of the Euro brought so many benefits, its disappearance would reverse those, and bring new costs for the member states and businesses operating therein.
Monday, December 20, 2010
The Sudden Emergence of Contentions of 'the End of Savings Glut'
I have read two separate articles in the past week concerning a contended coming 'end of savings glut.' One piece, by David Wessel, appeared in the Wall Street Journal, while the other was in a recent edition of The Economist. Both cite McKinsey & Co.'s McKinsey Global Institute as the source of their articles.
Seeing McKinsey's institute cited twice in a week on the same topic makes me suspicious that the consulting giant is once again gearing up its media machinery to stoke demand for projects based on yet another shocking 'finding' from its 'institute.'
I recall when McKinsey created its institute many years ago. At the time, I was with Andersen Consulting, now Accenture, which, belatedly, I believe, created their own allegedly-separate research arm, as well. Back then, it was relatively easy to identify McKinsey's 'institute' concept as simply a way to refashion certain publicly-releasable elements of their confidential client work, the better to get free media attention and put forth an image of doing independent research. I said as much to senior executives at Andersen at the time, but it took quite a few years for them to come around to the McKinsey concept.
Whether this latest shocker from the consulting firm is the result of its deliberate consideration of the question, or simply an agglomeration of various client work elements, is not clear. Or even if it's mostly some deductions made from combing through available OECD information. Reading the two derivative articles suggests it could easily be the latter.
Rereading those pieces, I find myself rather unsurprised by McKinsey's alleged 'findings.' It doesn't take a genius to see that wealthier developing nation consumers will both attract more investment to build infrastructure to serve their evolving needs, as well as provide some savings from their accelerating incomes.
Are the estimates of global investment, savings, and growth from McKinsey accurate? I don't know. Why should they be any more accurate than those of other pundits, researchers and observers?
Here's a sample of Wessel's interpretation of the McKinsey report,
"The global savings glut could easily become global savings dearth. And that would mean substantially higher interest rates.
If long-term rates, adjusted for inflation, returned to the 40-year average, McKinsey estimates, they would be 1.5 percentage points higher, a big jump from the current 3% or so yield on 10-year Treasurys. And rates could go up more if emerging markets try to step up infrastructure and other investments faster than U.S. and other rich countries increase their overall saving, which could be an unwelcome brake on global growth."
Funny, I thought the US is dissaving to the tune of a trillion dollars of federal deficits per year, plus various municipal pension funding gaps in the tens of billions.
The fuzzy forecasts for various constructs- savings, investment, economic growth- combined with whether various rates rise, or fall, makes the whole notion of declaring a savings shortages a joke.
I'm not saying their won't be an 'end of savings glut,' nor that their won't be a rise in rates. But so much depends upon the movement of many inter-related factors that it's really just impossible to know, isn't it?
But, then, that's probably McKinsey's objective. To create some newly-imagined risks of uncertainty, the better, well, to go hire those supposedly-smart folks who wrote that study. Just in case there's new uncertainty.
This is classic consultant marketing. I can well-imagine the hours of conference-room sessions at McKinsey dreaming this one up. Corral a bunch of publicly-available statistics, use a lot of beach-time among under-employed junior staffers, and demonstrate the possibility of some shocking headline. Doesn't really matter what the headline is, so long as it's a shocking departure to something current. Change is news, change brings risk, and perceived new risk just might bring in some new assignments to assess various companies' risks to these new, possibly-changing facets of the global economy.
And McKinsey is doubtless counting on getting their share, or more, of those assignments. Regardless of whether there is going to be a dearth, or glut, of global savings on the horizon.
Seeing McKinsey's institute cited twice in a week on the same topic makes me suspicious that the consulting giant is once again gearing up its media machinery to stoke demand for projects based on yet another shocking 'finding' from its 'institute.'
I recall when McKinsey created its institute many years ago. At the time, I was with Andersen Consulting, now Accenture, which, belatedly, I believe, created their own allegedly-separate research arm, as well. Back then, it was relatively easy to identify McKinsey's 'institute' concept as simply a way to refashion certain publicly-releasable elements of their confidential client work, the better to get free media attention and put forth an image of doing independent research. I said as much to senior executives at Andersen at the time, but it took quite a few years for them to come around to the McKinsey concept.
Whether this latest shocker from the consulting firm is the result of its deliberate consideration of the question, or simply an agglomeration of various client work elements, is not clear. Or even if it's mostly some deductions made from combing through available OECD information. Reading the two derivative articles suggests it could easily be the latter.
Rereading those pieces, I find myself rather unsurprised by McKinsey's alleged 'findings.' It doesn't take a genius to see that wealthier developing nation consumers will both attract more investment to build infrastructure to serve their evolving needs, as well as provide some savings from their accelerating incomes.
Are the estimates of global investment, savings, and growth from McKinsey accurate? I don't know. Why should they be any more accurate than those of other pundits, researchers and observers?
Here's a sample of Wessel's interpretation of the McKinsey report,
"The global savings glut could easily become global savings dearth. And that would mean substantially higher interest rates.
If long-term rates, adjusted for inflation, returned to the 40-year average, McKinsey estimates, they would be 1.5 percentage points higher, a big jump from the current 3% or so yield on 10-year Treasurys. And rates could go up more if emerging markets try to step up infrastructure and other investments faster than U.S. and other rich countries increase their overall saving, which could be an unwelcome brake on global growth."
Funny, I thought the US is dissaving to the tune of a trillion dollars of federal deficits per year, plus various municipal pension funding gaps in the tens of billions.
The fuzzy forecasts for various constructs- savings, investment, economic growth- combined with whether various rates rise, or fall, makes the whole notion of declaring a savings shortages a joke.
I'm not saying their won't be an 'end of savings glut,' nor that their won't be a rise in rates. But so much depends upon the movement of many inter-related factors that it's really just impossible to know, isn't it?
But, then, that's probably McKinsey's objective. To create some newly-imagined risks of uncertainty, the better, well, to go hire those supposedly-smart folks who wrote that study. Just in case there's new uncertainty.
This is classic consultant marketing. I can well-imagine the hours of conference-room sessions at McKinsey dreaming this one up. Corral a bunch of publicly-available statistics, use a lot of beach-time among under-employed junior staffers, and demonstrate the possibility of some shocking headline. Doesn't really matter what the headline is, so long as it's a shocking departure to something current. Change is news, change brings risk, and perceived new risk just might bring in some new assignments to assess various companies' risks to these new, possibly-changing facets of the global economy.
And McKinsey is doubtless counting on getting their share, or more, of those assignments. Regardless of whether there is going to be a dearth, or glut, of global savings on the horizon.
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