Why they call it Green Energy: The Summers/Klain/Browner Memo

by on September 28, 2011 at 7:35 am in Current Affairs, Economics, Political Science | Permalink

The LA Times reports that Larry Summers and Timothy Geithner “raised warning flags” about the loan guarantee program for renewables long before the Solyndra bankruptcy. The article doesn’t have a lot of new information (the key players are clearly protecting themselves) but it does link to a fascinating briefing memo written for the President in October of 2010 by Summers, Ron Klain (then chief of staff to the Vice President), and energy advisor Carol Browner.

The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and  “non-incremental investment,” the funding of projects which would occur even without the loan guarantee.

The memo then illustrates with one such program, the Shepherds Flat Loan guarantee. Here is the relevant portion of the memo:

The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.

The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.

Double dipping: The total government subsidies are about $1.2 billion.

Subsidy Type

Approximate
Amount
(millions)

Federal 1603 grant (equal to 30% investment tax credit)

$500

State tax credits

$18

Accelerated depreciation on Federal and State taxes

$200

Value of loan guarantee

$300

Premium paid for power from state renewable electricity standard

$220

Total

$1,238

 

Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).

Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.

Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).

In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy.

In short, the Shepherds Flat project was corporate welfare masquerading under an environmental rainbow.

So are you surprised to learn that shortly after the memo was written the Shepherd Flats loan guarantee of $1.3 billion was approved? Of course not; no doubt you also saw that the memo authors were careful to inform the President that the “338 GE wind turbines” were to be “manufactured in South Carolina and Florida.” Corporate welfare meet politicized investment.

In the Solyndra case just about everything went wrong, including bankruptcy and possible malfeasance. Caithness Energy and GE Energy Financial Services are unlikely to go bankrupt and malfeasance is not at issue. As a result, this loan guarantee and the hundreds of millions of dollars in other subsidies that made this project possible are unlikely to create an uproar. Nevertheless, the real scandal is not what happens when everything goes wrong but how these programs work when everything goes right.

Andrew' September 28, 2011 at 8:04 am

There would be a lot of broken eggs even if they were picking the right winners. I don’t see how they can pull this stuff off.

tom September 28, 2011 at 8:22 am

Given Germany’s experience with wind farms, that $130 per ton will be $390.

mw September 28, 2011 at 8:23 am

It’s totally unacceptable. All the money for clean energy should be redirected into the much more efficient oil industry federal tax subsidy system.

Andrew' September 28, 2011 at 8:51 am

orrrrrrrr….get rid of that crap too.

Andrew' September 28, 2011 at 8:56 am

What’s wrong with fundamental research, btw? I like the parabolic mirror troughs with thin photovoltaics strapped to heating water pipes, but even then, as someone has said, you aren’t really making electricity with silicon solar panels, you are just importing nuclear electricity from Japan.

Ronald Brak September 29, 2011 at 8:49 pm

Let’s see, solar panels are available for about a dollar a watt now and the price of electricity for industrial users in Japan is very roughly 20 cents a kilowatt-hour. So even if a watt’s worth of solar cell was made entirely of 5 kilowatt-hours of congealed electricity in a sunny location it could generate an average of over 5 watt-hours a day, so in less than five years it would have paid off its energy debt and would not be like importing nuclear electricity from Japan. As the price of solar cells does not consist entirely of electricity costs, the time required to produce a net amount of electricity will be much less.

Steven Kopits September 28, 2011 at 10:32 am

About oil:

In any coming downturn, oil companies may postpone projects. Our database at Douglas-Westwood indicates that only about half as many offshore floating production (FPSO, FPS) projects were approved in the 2008 and 2009 recession as we might expect during normal years. These projects re-appear in 2011, with a surge of approvals. However, the 08/09 postponement means that there is about 1-1.5 mbpd less oil on the market than there might have been in the 2011-2013 time frame. So preventing such a loss in the next downturn should be an explicit goal of policy, in my opinion. One can weigh the options.

Talk in the trade press in taking on the tones of “Who Lost Alaska?” or “Did the EPA Kill the Alaskan Economy?” Alaskan production in declining and the Trans Alaska Pipeline (TAPS) is facing a loss of economic viability later in this decade. Since lead times are long, TAPS’ capacity cannot be re-filled quickly. Thus, the industry is increasingly concerned that the pipeline could be doomed–and the majority of Alaskan production depends upon it. Look for the government to ask Shell to accelerate its plans there–and provide guarantees of several billions dollars to compensate Shell for the risks associated with accelerated production. (This suboptimal in so many ways–but that’s what you get if you dither on permitting drilling in Alaska.)

Jim September 28, 2011 at 11:05 am

>All the money for clean energy

How about “all this money for absolutely no clean energy whatsoever”?

Does that still sound all hopey-changey to you?

mw September 28, 2011 at 11:18 am

You’re absolutely right. That’s why I’ve been opposed to all this wasteful spending on cancer research. All this money for all these years, and no cure! It’s outrageous. The private sector would have solved this by now if it wasn’t being coddled.

The Anti-Gnostic September 28, 2011 at 11:53 am

Actually, it is kind of outrageous and there could be some sort of distortion at work.

Like HIV/AIDS, which political correctness insisted had nothing to do with behavior, so all these research dollars get spent chasing this supposed freight train of a virus that 99% of the population seems to avoid. So now we’ve got billions of dollars invested in AIDS cocktails and vaccines and whatnot but nobody explores why the only people getting AIDS are the people who’ve got some huge load on their immune system: blood transfusions, drug use, chronic microbial infections, hypergamous sexual contacts. So maybe it’s an immune system problem and not (or not exclusively) a virus problem? But that’s not what the research paymasters want to hear.

All these years of cancer research, they should be able to explain the biomechanics of metastasis in some detail but I don’t think they can (or maybe I’m wrong). Or maybe cancer’s just incurable past a certain level, which we would need to know as well.

Andrew' September 28, 2011 at 12:16 pm

“they should be able to explain the biomechanics of metastasis in some detail”

They can, but I guess it depends on how much detail you want. The problem is that the research hasn’t focused on this area. It seems to be mostly focused on targeting, which is hard because tumor cells are stem-like and don’t have much to distinguish them from healthy cells. The body already tries to regulate cell motility and differentiate cell niches and evolution has had a billion year head start.

question the question September 28, 2011 at 8:42 am

Interesting, but probably a drop in the bucket when compared with Blackwater waste and corruption.

Andrew' September 28, 2011 at 9:27 am

Just gimme a splinter off that fugg’n bucket. I promise not to get you investigated on the front page.

j r September 28, 2011 at 10:15 am

This is the attitude that is responsible for out present predicaments. To a Democratic partisan, whatever Dems do is fine, cause “the Rethuglicans are worse!” And to a Republican partisan, whatever the Republicans do is fine, cause “the donks are worse!”

I wonder if people will ever come to the very obvious realization that our two major politcal parties, far from adversaries, are actually partners in the project of ever-expanding corporatist government.

gil September 28, 2011 at 10:37 am

tu quoque is not an grown-up response

question the question September 28, 2011 at 7:45 pm

I didn’t say that Solyndra was fine. I’m outraged.

Apparently, unlike right wing-nuts who didn’t stand up during the 8 years that Halliburton and Blackwater were pillaging the tills to a far greater degree.

This is why Republicans have no credibility. It’s fiscal conservatism when the other party’s in power but spend like a drunken sailor when you’re in power. At least the Dems are (more) consistent and honest about the spending.

j r September 29, 2011 at 8:52 am

Imagine how you’d feel if someone wrote, “at least the Repubs are (more) consistent and honest about reducing the size of government. Now apply that same capacity for critical thinking to your own sentence.

question the question September 29, 2011 at 10:14 am

That would be nice if it were true – I would respect the stance a lot more. See my penultimate sentence.

Jean September 28, 2011 at 8:45 am

mw – the oil industry is ‘subsidized’ by having the same depreciation rules as every other business, and they pay a hell of a lot more in tax. Green energy is a totally corrupt scam, and it is about time we stop wasting money trying to defy the laws of physics. If you wish to make Al Gore (who recently bought oceanside property) even richer, go right ahead. Don’t waste my tax dollars doing so, however. The Europeans have been doing ‘green’ a lot longer than we have, and the results are abysmal.

The Anti-Gnostic September 28, 2011 at 9:45 am

Our breadth of vision and nobility of intent trumps all those silly laws of the physical universe.

Foo Fighter September 28, 2011 at 11:03 am

Sorry, what laws of physics does green energy break? You both do realize that green energy is being generated in this universe as we speak, right?

The Anti-Gnostic September 28, 2011 at 12:00 pm

Wind and solar = more diffuse.
Coal, nuclear, hydro: less diffuse.

Ergo, less bang for the buck. In fact, wind and solar are so diffuse that they are probably net energy consumption outside a few limited applications.

FooFighter September 28, 2011 at 12:36 pm

Oh sorry I thought you had made a sarcastic comment about physical impossibility, not cost effectiveness.
But while were at it:
You realize that coal and oil were originally solar energies right? Its stores solar energy. Since they’re finite and solar more or less isn’t, unless you have a plan to generate oil ad infinitum, oil and coal are technologies that will need to be replenished with solar power energy.

So yeah. They might not be cost effective now. That’s not a reason to not plan to use them in the future. Because they’re “diffuse”.

FooFighter September 28, 2011 at 12:39 pm

Stored*

The Anti-Gnostic September 28, 2011 at 12:50 pm

Scarcity produces rationing and innovation, but we don’t know where to put our blood and treasure unless scarcity is allowed to operate on all sides of the equation.

Physics dictate that inputs into the more concentrated forms of energy will generate greater outputs. Treating solar and wind like they’re the same as nuclear or hydro, or even increasingly scarce fossil fuels, is just gnosticism.

FooFighter September 28, 2011 at 1:18 pm

You’ll have to define Gnosticism as you understand it for me.

Physics makes no such claim. Our current technology makes that claim. And you’re right, diffuse sources of power at this point tend to be less efficient. But our uses of power is diffuse as well, mitigating that argument.

And you’ll have to explain why your scarcity argument doesn’t argue for a carbon tax. because it’s a damn good argument.

TallDave September 28, 2011 at 2:15 pm

Energy usage tends to be much less diffuse than its presence in nature.

The star we orbit is a fun example of symmetry in that respect — it produces only as much energy per mass as a compost heap (boo!) but since it has uber containment, the energy is concentrated such that it gains a very high temp (yay!), but that energy is then broadcast every which way, spreading out and diffusing and scattering to the point you generally can’t even power everything in your house with solar panels (boo!).

A carbon tax would only make sense if using carbon produced some net externalities. Since sea level rise isn’t accelerating, CO2 and warmth increase crop yields, climate models have demonstrated little long-term predictive reliability, and the next Ice Age will probably crush human civilization, there are reasons to be skeptical of such a claim.

Adam September 28, 2011 at 3:12 pm

Because energy consumption isn’t diffuse? I don’t follow.

Adam September 28, 2011 at 3:15 pm

Nevermind, I guess you and TallDave don’t mean widely distributed but instead less dense as a source.

The Anti-Gnostic September 28, 2011 at 4:07 pm

Gnosticism in the sense I use it is the belief that ideas trump reality. See Eric Voegelin.

E.g., race and gender are social constructs, green energy works, everyone is equally educable, and other fairy tales.

Itchy September 28, 2011 at 9:50 am

Where I live, (The People’s Republic of Maryland) you can opt-in and choose to subsidize “Green” energy paying about 15% more for your electricity. I take every opportunity to challenge my “Green” friends and even strangers in Prii (i like Priuses better) who give me a dirty look with I park my awesome V-8 near them. I have yet to meet one person who has opted in. Only a sample size of 20ish, but pretty clear to me that paying to be “Green” is better when someone else does it

Maybe it's you. September 28, 2011 at 11:08 am

Dude you must be a hit at all the parties. I’m honestly stunned people don’t want to engage with you on issues like this.

Itchy September 28, 2011 at 1:55 pm

Dude, I’m not trying to make friends. If someone really thinks that the world is going to end because we don’t have enough green energy and use too many “yucky” fossil fuels, they should really put their money where their mouth is. However; very few ever do. They just want to tell the rest of us what to do.

More people will switch when a “Green” technology becomes economically viable (to them personally) .

p.s. Dude, nice try on the sarcasm

mw September 28, 2011 at 11:10 am

‘According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by var-ious credits. These companies’ returns on those investments are often higher after taxes than before.’

http://www.nytimes.com/2010/07/04/business/04bptax.html

Pesky internet and its free exchange of information. If only we could go back to the days of unverifiable ranting and raving…although…if we get rid of all this “government waste” that funds disclosure agencies like the Congressional Budget Office, perhaps we can, right?

TallDave September 28, 2011 at 11:38 am

The article also says “oil producers paid or incurred $280 billion in American income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other American corporations.”

If you look at the actual study, they say oil-field equipment is taxed at 21.9%. Only the extraction structures themselves face the lower tax. The reason for this is presumably that success rates are low.

Why do some small oil companies do so well? Because others go out of business. Wildcatting is notoriously hit and miss.

Guy in the Veal Calf Office September 28, 2011 at 3:21 pm

The U.S. doesn’t tax “capital investments”, it taxes income and gains (and, more rarely, transfers (e.g., duties, estate taxes)). Investments are capitalized, amortized or deducted.

You shouldn’t cite the NYT for complicated financial stuff; the NYT time frequently makes mistakes like this, where the reporter didn’t read the CBO report cited.

Bill September 28, 2011 at 9:22 am

Loan guarantee programs have a history of this. It is good to stop them early in their tracks. Believe it or not, sometimes Congress does. Does anyone remember synoil and synthetic gas that was going to be created from oil shale in the Dakotas and Colorado. Oil companies were the big lobbyist for this one, as it would “make us energy independent”. The bill lost by one vote.

There is a role for government sponsored r&d and some support for the first commercialization of a concept but the Florida example is not one as the technology was proven and the market should either support it or not. Furthermore, if the government sponsors r&d, it should get commercial royalties back.

Andrew' September 28, 2011 at 9:31 am

“if the government sponsors r&d, it should get commercial royalties back.” And they promise not to legislate themselves (anti)competitive advantages? Path dependency and network effects invite corruption and inefficiency. I don’t think this stuff can ever work. Fundamental research is the only thing that comes close, and I don’t even like that too much.

aaron September 28, 2011 at 5:54 pm

You mean like 15% of all stock gains when sold?

Itchy September 28, 2011 at 10:08 am

Couldn’t the government sponsor research in the university system and make any “new” knowledge available to citizen or corporation that wanted to utilize it? To me this would help spur competition, by eliminating (or lowering) one barrier to entry.

What about stuff like this: http://www.cnbc.com/id/32085995/Top_Commercial_Products_Launched_by_NASA

It’s likely that most of this would have been developed anyway, but at least there was a return on investment … instead of just lining the pockets of campaign contributors.

Bill September 28, 2011 at 12:07 pm

Andew, the issue is, with repect to first commercialization, is whether it really is a continuation of the r&d due to scaling and other risks. Unfortunately, a good deal of university research and patents go unused or undeveloped for this reason. Some universities now are using their patent revenues to establish foundations to fund commercialization demo projects, while at the same time continuing r&d from that project. Sometime we have continuums without clear breaks in r&d.

Andrew' September 28, 2011 at 12:29 pm

It’s interesting to me that Solyndra went bankrupt because of LOW silicon prices. In that case it seems like we figured out a really expensive alternative to a research paper on silicon optimization and microeconomics.

Rashad MAhmood September 28, 2011 at 9:24 am

So Alex, now government tax incentives are equivalent to government spending, despite what you said here?

http://marginalrevolution.com/marginalrevolution/2011/07/the-great-fiction.html

TGGP September 28, 2011 at 10:03 am

On the one hand, in that post Alex always restricted his discussion to taxes to those taxes on saving (or perhaps more specifically, those from 529 programs). On the other, he says “I am not taking a position here on the best tax structure”, which could suggest that his argument applies to the tax incentives discussed in this post as well.

Andrew' September 28, 2011 at 10:43 am

I’m confused at how loan guarantees and loans the same as tax deductions/credits?

Anyway, it can be confusing, but the basic concept is not that hard. If today they decided to tax people named Rashad, and tomorrow they postponed that tax, they didn’t really just spend money on Rashads. Yes, it would have incentive effects (even the uncertainty), but it is not the same thing as spending.

TallDave September 28, 2011 at 9:42 am

This is not the way to create real economic growth.

Even aside from the ugly rentseeking, this will destroy wealth, because we’re deliberately putting money into inefficient energy production for the sake of infinitesimal externalities.

Dean September 28, 2011 at 10:39 am

What wealth was destroyed by the Shepherds Flat giveaway? Sure it was oversubsidized to a ridiculous extent, but where’s the loss? The money came from zero interest bonds and now some workers got paid and the Northwest has a huge part of its generation needs satisfied by zero marginal cost power.

I get that there were many, many better things to spend money on, but nothing was destroyed.

Andrew' September 28, 2011 at 10:55 am

Opportunity costs?

Dean September 28, 2011 at 11:07 am

Such as…? What actual things was the government going to spend that money on that it chose to spend on the subsidy instead? Given that the government had no spending constraint and there’s no crowding out of investment/employment/resources, the only opportunity cost is other foregone spending.

Besides, opportunity costs aren’t “destroyed wealth.” They’re the potential for future increased wealth. The subsidy may have been only a very, very small positive in terms of overall wealth creation, but it wasn’t a minus, is all I’m saying.

Andrew' September 28, 2011 at 11:18 am

I probably would have bought a cheeseburger.

TallDave September 28, 2011 at 11:18 am

By that logic, you could argue setting a pile of money on fire isn’t destroying wealth, because, hey, we roasted some marshmellows with it, so it provided some value.

Lou September 28, 2011 at 11:30 am

You know, the government does have the option of letting people and businesses keep their money and invest or spend it as they see fit. Many economists think this may be an even more efficient path to growth than taxing and spending.

What if we took the billions spent on green energy and let private businesses use it to improve fracking technology? We might end up with hundreds of thousands of jobs and clean, secure, domestic energy for the next 300 years, but at least those subsidies don’t “cost” very much.

Adam September 28, 2011 at 11:43 am

How would “people and business” “keep” the money that Treasury is borrowing at zero or negative interest rates?

Dean September 28, 2011 at 11:46 am

TallDave: well, the marginal cost for the Mint to print that pile of money counts…

Lou, the government is selling bonds with yields at zero out to 10 years. People don’t want to keep their money, they want to loan it to the feds. I’m also wondering where you think the subsidy money goes, since the whole problem here is that the feds are letting private businesses use it and those private enterprises are often losers. If you want to subsidize fracking, make the case, but you’re just trying to pick a different winner.

TallDave September 28, 2011 at 12:05 pm

Adam: You seem to be confusing “zero interest rates” with “free.” It still has to be paid back, which means it is a future tax.

The fact that high returns are difficult to find is not an indication that the government should waste money and destroy wealth. Increasing malinvestment is not the answer to anything.

Adam September 28, 2011 at 2:09 pm

No, TallDave, I’m not, but I was interested in prodding you into buying fully into Ricardian equivalence. So Mission Accomplished I guess.

TallDave September 28, 2011 at 2:21 pm

Yes, Adam, when you say “How would “people and business” “keep” the money that Treasury is borrowing at zero or negative interest rates?” you are implying people do not have to pay that money as taxes someday, hence it is free.

Even if you don’t believe in full Ricardian equivalence, the money still has some value which is being extracted from taxpayers. TANSTAAFL.

Adam September 28, 2011 at 3:17 pm

Only, TallDave, if you ignore the concept of time. People today would not be left with more money to spend. Call me crazy, but when you have a real macro problem now, I’m not sure why you should worry about someday when things are going to be different then.

Oh, and you have pretend like the debt will be fully repaid some day.

Lou September 28, 2011 at 4:32 pm

Andrew, this reminds me of an episode of the Simpsons- the pirates are burying a treasure chest, and one guy says, “maybe instead of burying this treasure, we can use it to buy things… you know, things we like.” Then the pirate captain shot him in the heart.

TallDave, apparently Adam and Dean are unfamiliar with the concept of crowding out investment. They are also unfamiliar with the Federal Reserve Bank, which is the primary source of demand for 0 interest rate Treasuries.

Dean September 28, 2011 at 7:00 pm

Lou, I love the Simpsons reference, but if you believe that there’s crowding out going on, you aren’t paying attention to the data. Interest rates are in the gutter and people are still flocking to T-Bills.

And yes, I’m aware that loans need to be paid back. I’m also aware that the only way to create wealth is to not leave resources sitting idle. The demand for electricity in the United States is pretty strong, and I haven’t seen any scenario in which it decreases. A prolonged period of weak growth does more to destroy wealth than possibly overpaying for a generator.

TallDave September 28, 2011 at 8:19 pm

Heh, no, time doesn’t make borrowed money free. It still has to be repaid.

TallDave September 28, 2011 at 8:41 pm

Dean — Did you read Tyler’s book? One consequence of decelerating gains in TFP is lower ROI. Lower ROI means lower acceptable borrowing rates. Yes, there can be crowding out at low interest rates.

TallDave September 28, 2011 at 8:47 pm

Also, it’s a flavor of Hayek’s fatal conceit to believe that gov’t can push “idle resources” into producing what they “should” be producing. You cannot create growth with malinvestment; it reduces economic productivity, and this is a time when productivity improvements are already very hard to come by. Deliberately paying too much for a generator with seized funds does nothing but further misallocate resources and reduce growth.

TallDave September 28, 2011 at 11:13 am

That which is not seen — they could have used the money to build a power plant that produced power much more cheaply. That difference in value is lost forever; it’s wealth that’s been destroyed by malinvestment. And people who are forced to buy this power will pay more than they otherwise would. As a society we are poorer than we would have been had this not been built. It’s a field of broken windows.

Wind turbines do not have zero marginal cost, they have zero fuel cost. They still depreciate, need repair, etc.

Adam September 28, 2011 at 11:45 am

They have much closer to zero margin cost than coal or oil power plants. Given that, and given that the fixed costs are essentially covered by subsidies, how do you reach the conclusion that the people buying this power will pay more?

TallDave September 28, 2011 at 11:55 am

Subsidies aren’t magical manna that fall from the heavens, someone has to pay for them.

Adam September 28, 2011 at 12:08 pm

Yes, but here most of the subsidies are from the Feds, not from the people buying the electricity. If you want to stick to Ricardian equivalence, you can complain that the tax payers of Minnesota are paying more, but they aren’t the one’s buying the electricity.

Or if you want to deal with reality, you have to think about what it means when the subsidies are actually paid for by federal borrowing at zero or negative real interest rates.

TallDave September 28, 2011 at 12:29 pm

The “people who are forced to buy this power” includes everyone paying for it.

Irrespective of whether local citizens may benefit at the expense of others, this project makes society poorer.

Again, you seem to be confusing “zero interest” with “free.” The reality is that spending is a future tax.

Adam September 28, 2011 at 2:10 pm

Question for you: Do you honestly think that all of today’s borrowing will eventually be paid back?

TallDave September 28, 2011 at 2:23 pm

Do you honestly think borrowed money has no cost?

If nothing else, it limits your future ability to borrow.

TallDave September 28, 2011 at 2:35 pm

And, do you really think real interest rates will be zero forever?

TallDave September 28, 2011 at 2:46 pm

And, do you really think debt as a % of GDP will stay over 100% forever (remember, those are marginal dollars you’re borrowing)?

Adam September 28, 2011 at 3:23 pm

Of course I don’t think borrowing has no cost. But it’s as cheap as it’s ever going to be right now.

And now, real rates will not stay at zero or negative forever. But they are now, and look like they will be for awhile.

As for limiting our future ability to borrow, maybe eventually. But again, for now, it doesn’t seem to be an issue. Maybe things are different for a sovereign issuer with global reserve currency.

And no, of course debt won’t exceed GDP forever, but that doesn’t mean it will get paid back in full either. Much more likely (hopefully) is that eventually we will run balanced budgets and government debt will “shrink” in relative terms due to growth.

The point is believe that a deficit today has the same immediate impact as a similarly sized tax increase is silly, reverse-engineered dogma.

TallDave September 28, 2011 at 8:36 pm

Cheap borrowing is not a reason to malinvest. Quite the opposite — the fact better returns on investment are getting harder to come by means wealth we destroy now will be even harder to replace later (TGS).

The ability to borrow is obviously finite, so any borrowing has a cost in terms of future ability to borrow — and we’ve already been downgraded once. If we continue borrowing there may come a point when our massive short-term debts suddenly become very, very expensive — perhaps even pushing us into technical default, which could make the last financial crisis seem a picnic by comparison.

And remember, you are borrowing marginal dollars. If debt ever goes back below today’s levels, you are repaying today’s dollars. You don’t have to repay the entire debt to be repaying those dollars.

I don’t think anyone here is arguing for full Ricardian equivalence, but it’s at least as silly and dogmatic to assume low interest rates mean borrowing is so low-cost we can throw money at malinvestments without consequence.

Dean September 28, 2011 at 11:54 am

You’re right, I oversimplified on marginal costs. They have no short run marginal cost but do have medium term marginal costs for repairs. My point is that (1) no windows have been broken, someone just built a house with overpriced windows and (2) the opportunity cost here is what the federal government would’ve spent on without this program. The universe of options of spending that was allowed to be in the stimulus bill is pretty small. The alternative is probably a few more miles of highway, and in that case I’d much rather have the cheap, clean electricity.

Moreover, thanks to the giant subsidy, the power produced by the wind farm will be extremely cheap, especially since it will have a major incentive to sell 100% of output to maximize the value of its production credits. Wind power is usually the lowest bid in an auction, and those generators have no problem going to $0 for off-peak hours.

Cliff September 28, 2011 at 12:07 pm

Regardless of the interest rate, they have to pay the money back. That means higher taxes at some point in time. So maybe the true cost is a few years in the future, but are you really willing to sacrifice future growth for a complete boondoggle?

Adam September 28, 2011 at 12:10 pm

“They have no short run marginal cost but do have medium term marginal costs for repairs.”

These are normally referred to as fixed costs I think.

TallDave September 28, 2011 at 12:43 pm

“Marginal” would mean “what is the additional cost per additional kilowatt hour produced?” Anything that costs more when more kwh are produced is a marginal cost (bushings wearing out, etc). Like hydropower, marginal costs are lower than things that need fuel, but not zero.

The big downside of wind is that, unlike moving water (by far the cheapest source of power), it doesn’t flow as reliably. So your utilization rates are much lower, which is very bad when your fixed costs are high and marginal costs are low. Plus, unreliable power sources are a major planning problem for utilities, which reduces their value considerably. That’s why the country isn’t already covered with wind farms.

Anyways, you can’t just ignore fixed costs when you’re talking about the total cost of the electricity produced. All the costs matter, which is why we invented depreciation.

TallDave September 28, 2011 at 12:00 pm

As Lou noted above: “You know, the government does have the option of letting people and businesses keep their money and invest or spend it as they see fit.”

Yes, deliberate malinvestment destroys wealth. It’s no different than breaking windows, it’s just less obvious.

And again, it is NOT cheap electricity. If it was, it would have been built long ago by people seeking profit, i.e. without massive subsidies. The performance of these wind farms rarely meets expectations which is why the party building them sought to limit their equity exposure on the deal.

AlanW September 28, 2011 at 12:41 pm

I have no knowledge of the performance of Washington wind farms, but here in Colorado, the actual performance of wind farms has generally been very favorable – as high as 50 percent capacity. Xcel just signed a deal for a 200 mw farm for $27.50/mw. Yeah, you have to back it up in some fashion, but that is still extremely cheap power (with the federal subsidy, of course, but not terrible without it).

I have mixed feelings about wind. I don’t see how you can power a country with it unless you get very creative on the consumption end. On the other hand, it’s straight-up competitive on costs with fossil fuels (in the west, at least) and only getting better. The economics are becoming good enough that I think there’s a strong argument for seeing if we can find ways to make it work.

Andrew' September 28, 2011 at 1:22 pm

Wind simply isn’t the energy answer long or short term. We don’t have an answer yet (that may be why some people are confused about wind and the like) so that means basic fundamental research.

TallDave September 28, 2011 at 2:05 pm

AlanW — Typically what happens is that things look good initially, but over 10-20 years costs turn out to be higher than expected.

Wind farms are very vulnerable to adverse events, another difference from hydro (adverse events aren’t totally unknown in hydro, but are minimal since we gained better understanding of issues like cavitation). They tend to fail ungracefully in high winds, so you need an area that has strong, steady winds but not too much variability.

Andrew' September 28, 2011 at 4:18 pm

My guess is it’s not very scalable, but the bigger point is that wind is known and the issues are known, and someone knows the economics of it. If you want a GE windmill, buy one, they’ll even finance it for you. I don’t understand what sticking point the government is helping people get over.

The signals from the bond market I think are not as clear as people think. It’s partly a flight to quality, which means everyone else is already suspect. Just because you are the least suspect doesn’t argue for a lower required return on investment.

AlanW September 29, 2011 at 11:13 am

What are you basing that on, Tall Dave? Modern turbine designs are, well, modern – none of them have been around for 15 or 20 years. I’m open to the argument that lifetime costs will exceed projections or that turbines are more vulnerable to adverse events than other power sources (although I’m not sure what those events would be on the plains of Colorado), but I’d like to see some evidence.

Gabe September 28, 2011 at 9:46 am

But we need to government to get involved to help break up the powerful big corproartions otherwise the big companies would just get too powerful. Oh GE uses the government to increase their power and profits? and they don’t care if the gas turbines they made last decade are made defunct by regulations as long as we taxpayers are forced to buy all the new wind turbines they make? weird it seems I misunderstand how government policies actually differ from the stated progressive goals I see talked about on the TV programming and in high school history.

Andrew' September 28, 2011 at 10:06 am

You skipped the class where they explained that democracy makes it okay.

Dean September 28, 2011 at 10:42 am

Get ready to have your mind blown: despite the fact that liberals oppose corporate power, corporations still successfully lobby the government! Crazy, I know, that hippies don’t actually run the government.

Andrew' September 28, 2011 at 11:04 am

Green energy, recession, Hope and Change…

At what point could you not make that claim?

Dean September 28, 2011 at 11:12 am

I’m confused by this game. Hot dog, Flat Tax, Thousand Points of Light? Am I doing it right?

I think we agree though, that corporate influence on government has always been around. I’m not stunned when companies try to profit from liberal political objectives, the same way I expect them to do the same with conservative political objectives.

Andrew' September 28, 2011 at 11:22 am

No, the question is, you had Larry Summers who served under Clinton, Barack Obama, et. al. Who could you “put in charge” to get a better result? As Alex says, this is what happens when the system “works.” Do you criticize the strategy or the execution?

TallDave September 28, 2011 at 11:30 am

Rentseeking behavior is an unethical subset of corporate influence, which on its own is neutral — corporations are just an agglomeration of personal interests.

Are you just “not stunned” that people try to influence the government, or are you endorsing rentseeking behavior as long as it serves progressive purposes?

Dean September 28, 2011 at 11:38 am

I’m not endorsing rent seeking; I’m saying that it’s an accepted reality. As to Andrew’s (Andrew”s?) question, the only way I can see to get a better result is to have more staff devoted to the issue. If you’re going to establish a program that uses federal money as a bank to guarantee loans, then you need a banking staff to administer that program.

The real conflict I see here is that there are so, so many overlapping corporate welfare programs already built in. Larry Summers (or whoever) can’t do anything about the laws Congress passes, especially those that have already passed. I think cases like this are great evidence for paring back the current subsidy regime, especially as it relates to the tax code. Ideally I’d like a clean tax code and a simple per-ton carbon tax that acts as the only energy subsidy (if you want to call it a subsidy). Since that’s not going to happen, I’m going to just deal with the fact that messy laws lead to messy outcomes and the messier it is, the more opportunities there are for a sophisticated party to exploit.

TallDave September 28, 2011 at 11:51 am

So, you’re against rentseeking? Or not? You can accept something will happen in society (say, armed robbery) and still oppose it.

Let’s say GE comes up with an allegedly great new renewable energy concept. Do you support or oppose government regulations forcing people to use it?

rif September 28, 2011 at 10:11 am

One thing that confuses me here. How do they calculate the value of the loan guarantee? Does the word ‘guarantee’ also somehow imply “well below market interest rates?” What is the guarantee exactly, and why does it have value if the project is financially viable without the guarantee?

The Anti-Gnostic September 28, 2011 at 10:50 am

Since default risk is a component of the interest rate, a loan guarantee will necessarily mean a loan with interest below what the market would charge. Absent this externality, nobody would make this loan at that rate so the beneficiaries are dependent upon continued externalities to sustain the unsustainable. Interest rates are not being allowed to reflect the project’s true risk of the project and actual ROI. This artificial activity diverts capital and other production inputs from actually sustainable activities. Broadly and bluntly stated, government beneficiaries are engaged in wealth-destruction by their very existence. And once the subsidy ends, this seemingly profitable activity vanishes. Poof. Gone.

Artificially low interest rates for housing: same result.

Artificially low interest rates for higher ed: same result.

Artificially low interest rates across the board, and one wonders what real wealth is left in the US economy. Eventually creditors will recognize the rate of return is not adequate and our free ride will be over. The contraction in the economy will be enormous. Fall of the Soviet Union-type enormous.

Adam September 28, 2011 at 11:48 am

“Does the word ‘guarantee’ also somehow imply “well below market interest rates?”

Yes. You are less of a credit risk if the government promise to pay if you do not.

Andrew' September 28, 2011 at 2:18 pm

But maybe more of a failure risk, with the taxpayer on the hook.

ThoamasH September 28, 2011 at 10:42 am

Those advocating green energy projects skipped the part of economics about matching instrments to objectives.

Floccina September 28, 2011 at 10:52 am

A simple carbon tax (and payout for removal of co2 from the air) would be so much better but that is no fun and is too visible to the median voters, so let the games continue.

The Anti-Gnostic September 28, 2011 at 10:57 am

No thank you. I like having plant food in my atmosphere.

Margin1522 September 28, 2011 at 10:58 am

To green energy advocates, it’s kind of frustrating to see the double standard being applied to green energy projects. A wind farm is a public utility. Virtually all energy infrastructure projects are subsidized by the government. What is the marginal cost of a green energy subsidy vs. the default energy subsidy? I would expect a site like MR to pick up on that.

As for putting a dollar value on carbon reduction benefits, that depends on your assessment of the risks. Most green energy advocates would say although $130/ton may be a bit high, the current interagency estimate is far too low (http://www.grist.org/article/2010-04-23-what-is-the-social-cost-of-carbon).

And speaking of risks, there is a non-neglible risk that sometime around 2032 a Democratic president will be swept into office on a wave of panic over, say, disasterous weather in the corn belt. If there is a sudden WWII-style crash transition to green power, Oregon and California will be glad to have that wind farm in place. Not saying it is inevitable, but there is certainly a risk involved in neglecting green power now.

TallDave September 28, 2011 at 11:46 am

What is the marginal cost of a green energy subsidy vs. the default energy subsidy?

You’re not going to enjoy the answer to that question, but it’s a fair one to ask.

Most green energy advocates would say although $130/ton may be a bit high, the current interagency estimate is far too low

I’m sure they do. Others think zero may be too high.

Andrew' September 28, 2011 at 1:36 pm

I can’t put it into math, but I don’t see a marginal improvement like wind energy saving us from certain doom. Wind only addresses the carbon side, not the energy demand side. It’s almost a complementary good to fossil fuel. Any green energy has to be superior to the fossil fuel alternative. Ideally it is so good that we don’t even want to hassle with fossil fuels anymore.

I think democrats require a lower rate of return, but these may be ZMP or negative return environmental investments. If we already know how to do it, it probably isn’t the solution.

David September 28, 2011 at 10:59 am

Stellar post, thank you.

Mike September 28, 2011 at 11:03 am

This loan guarantee had the same underwriting practices as commercial real estate loans during the crisis. And we wonder why we had a financial crisis?

Adam September 28, 2011 at 11:36 am

Sorry, what’s the scandal? That maybe a good thing cost too much?

DaYooper September 28, 2011 at 11:43 am

The carbon benefits of this project will be much worse than the stated carbon benefits. If you look at the wind generation curves (each of the RTO’s publishes the MW of wind generation each hour) they are generally peaking during the overnight (3-6 am) and at their lowest during the middle of the afternoon. The problem with this in the pacific northwest is that there is a ton of water resources. BPA and the wind owners are currently in a battle over who has the right to dump their power to the grid when supply exceeds demand (supply generally exceeds demand off peak from around late Apr to mid Jun due to the snow run off). The argument from the wind generators is that even if you send us a $0.00 per MWh price signal we are still $22/MWh in the money due to the production tax credit and would like to keep generating even when the mkt says the electricity has zero or even slightly negative value. The argument from BPA is that they can not violate federal regulations and spill water inceasing the nitrogen content in the water during the salmon spawn. This wind farm will only exacerbate this problem and last I checked, taking hydro generation offline and replacing it with wind power does not have an impact on the carbon intensity of the stack as a whole.

AlanW September 28, 2011 at 12:50 pm

This. Still, there has to be a better way of handling it. National grid? Electric cars? Making hydrogen? It’s unfortunate that some of the most successful wind locations are in the Northwest, where hydro is cheap, and in the west and midwest, where coal is cheap. People in California and the Northeast would kill to get those electricity rates.

Bill September 28, 2011 at 5:42 pm

Can’t the displaced water energy be saved in storage and released at peak.

Dean September 28, 2011 at 7:05 pm

Generally it can, but not during the peak Spring season. Irrigation also gets priority over power generation in terms of scheduling releases.

Black Death September 28, 2011 at 12:45 pm

Some of the locals don’t think this “green energy” is such a good deal. But Caithness Energy is trying to buy them off:

In eastern Oregon, where hundreds of wind turbines are being built to capture the big winds that blow through the Columbia River Gorge, some residents are now complaining that the wind farms, rather than the howling wind, make too much noise. They cite an Oregon law that specifically limits the amount of noise wind farms can make.

“It sounds like there’s an airplane up there that’s starting to take off but never takes off,” said Sherry Eaton, whose house backs up to the Willow Creek wind farm, just of Highway 74 near Boardman.

While Ms. Eaton and her husband are part of a small group that is challenging the Willow Creek project, completed more than 18 months ago, noise is also an issue at projects under construction. One company working in Oregon, Caithness Energy, has been offering some residents $5,000 if they agree not to challenge noise levels from its new Shepherd’s Flat project, which will be one of the nation’s largest when it is completed. (The target date is 2013.)

http://green.blogs.nytimes.com/tag/caithness-energy/

Dean September 28, 2011 at 2:46 pm

“Buying off” = Coasian bargaining, and it sounds like a great idea.

Alan September 28, 2011 at 12:53 pm

Would someone please post a pointer to a similarly detailed analysis of government subsidies for coal powered electricity.

DKF September 28, 2011 at 3:26 pm

The “Accelerated depreciation on Federal and State taxes” of $200 Million seems fishy…accelerated depreciation changes the timing of tax payments, but not the total. Seems like the right calc would be the difference in present values of the two schedules (accelerated and non-accelerated). I’ve often suspected that the “cost” attributed to these “tax breaks” is just the difference in tax revenues in some arbitrary budget window (5-year, 10 year), but I’ve never seen the backup for the numbers. Anyone else seen how they derive?

Brian J September 28, 2011 at 5:19 pm

So the point is to simply make some changes to the program so that the implementation is better, or do you feel it’s better to simply stop it altogether? If big changes need to be made, why didn’t officials in the administration, probably the same who were wary that huge problems could appear, do anything to see they were enacted?

JasonL September 28, 2011 at 5:40 pm

It strikes me that there are several versions of “there’s nothing wrong with this deal, it is literally impossible to waste money if the government is borrowing cheaply.” floating around the comments.

Given that framework, I’m at a complete loss as to how to judge any government project. Is even trying an invalid exercise?

Brian J September 28, 2011 at 6:21 pm

There’s a legitimate debate about what, if any, industries the government should be subsidizing, but it’s hardly controversial that the government should be spending on infrastructure. The fact that it’s very cheap, if not close to being free, for the government to borrow is more about the timing of the project than the worthiness. I can’t speak for anyone but myself, yet I haven’t noticed anyone major, or perhaps even anyone at all, suggesting we build and repair stuff without abandon just because it’s a good time to borrow. (This is not to say that people haven’t suggested having one person build something and another taking it down wouldn’t be a form of stimulus; they have, because it would be. But that’s just an example.) I certainly don’t sign on to that.

Of course, the excuse that we need time to make sure the projects are worthwhile is getting tiresome. It’s not wrong, but it’s old. Even if projections from engineering societies and other groups are way too high, there are certainly legitimate projects out there. And while we should be going through the proper review processes to make sure the money is well spent, there’s no reason to delay. If they are good projects at any point, they are still good projects now. The fact that we are likely to be in a pro-longed slump is all the more reason to get cracking.

TallDave September 28, 2011 at 8:56 pm

JasonL. — Yep, it’s a real problem Japan went through the same issues, and they learned to their sorrow that malinvestment really does have a cost, even at zero interest rates — when you do thing like spending billions on a bridge used by only a couple dozen people per day, you’re destroying weath.

The Anti-Gnostic September 29, 2011 at 9:00 am

Indeed. I’m always surprised at all the non-Austrian economists who would reject price fixing in any other context yet have no problem with fixing the price for capital itself.

Newman September 28, 2011 at 10:56 pm

Re: Non-incremental investment, I am sure there are hundreds of examples, but the project below was so shovel-ready that it was already well underway under state initiative when the Fed. Gov’t graciously decided to subsidize it with the rest of your money. Thanks to the other 49 states for you contribution. The description makes it sound like it can divert hurricanes — I’m pretty sure the meters are not that smart.

=============================================

CenterPoint Energy, as part of the American Recovery and Reinvestment Act of 2009, was selected to receive $200M in funding to improve the current smart meter project and begin building a smart grid.[2]

The project has plans to complete the installation of 2.2 million smart meters and further strengthen the reliability and self-healing properties of the grid by installing more than 550 sensors and automated switches that will help protect against system disturbances like natural disasters. [1]

Steve at CenterPoint September 29, 2011 at 9:50 am

Newman: thanks for the CenterPoint mention. Our Smart Grid Investment Grant has two parts: $150M is helping us complete our rollout of 2.2 million smart meters in 2012 rather than 2014 as originally planned. Smart meters will automatically notify CenterPoint Energy when the power goes out, so they will help us restore power more quickly. The “self healing” Intelligent Grid is being built with help from the other $50m (which is less than half the cost of phase 1 of the project), and while indeed it can’t divert hurricanes, it will allow us to locate and isolate outages more quickly and easily to restore power to many customers much more quickly than today and eventually even prevent some outages by anticipating equipment failure. It can’t keep trees from falling on power lines in a storm, but it will be able to help us reduce the impact of such outages and respond to them more quickly and efficiently. You can see an animated demo at http://www.CenterPointEnergy.com/EnergyInSight under Resources or at http://mfile3.akamai.com/25455/wmv/centerpoint.download.akamai.com/57831/videos/SelfHealingGrid.asx.

TallDave September 29, 2011 at 10:15 am

I believe some flavor of that is proposed for my network in IL. They were asking for a small rate increase, but I think that was turned down. They’re weighing whether to do it anyway.

Duracomm September 29, 2011 at 8:17 am

“Renewable” energy is the corn ethanol of electrical power, corporate welfare astroturfed green.

It is government mandated, taxpayer subsidized and more environmentally destructive than existing sources of electricity it is supposed to replace.

Obama passed out more solar subsidies this week. If Obama keeps dishing out the solar subsidies he will successfully destroy large populations of the threatened desert tortoise.

Helpfully eliminating an obstacle to the permitting of future government mandated, taxpayer subsidized, “green” energy boondoggles.

Parts of Ivanpah Solar Construction Temporarily Halted

The Department of Interior ordered BrightSource Energy LLC to temporarily halt construction on phases 2 and 3 of the Ivanpah Solar Energy Generating System since the project’s impacts on the endangered desert tortoise have exceeded initial estimates.

Washington and Sacramento were intent on approving the project in time for BrightSource to qualify for taxpayer-backed financing.

During the environmental review last year, the Department of Interior estimated that the Ivanpah project would displace or kill 34 desert tortoises, which was still a phenomenally high number for a species that is in decline throughout its range and a testament to the pristine habitat targeted for destruction by the company.

When BrightSource Energy bulldozed phase 1 and part of phase 2, however, the company displaced 49 tortoises, prompting the Department of Interior to revise its estimates.

As of late March, Interior announced that it now expected the project to displace or kill as many as 140 desert tortoises.

sdfwef September 29, 2011 at 11:11 pm

ONLINE STORE :

—–( http://x.nu/f9CB3 )——

!free shipping!j0rdan sh0es…….. 28 dollarc0ach p-u-r-s-e…… 25 dollar

c00gi cl0thes…….. 20 dollar

U.G.G B00ts………. 39 dollar

Dear Friend:

We can supply all kind jersey with good quality and low price. contact me, let’s talk details.

Delivery time: 5-6days, Shipping Method: EMS
Newest stock list: every 3-5days updated

Warm Regards,

Carolyn

gamesliga October 7, 2011 at 2:50 pm

gamesliga bahis sitesi.
gamesliga yüksek oranlı iddaa oyna.
gamesliga gamesliga referans kodu servisi.
gamesliga gamesligaya üyelik üye olma
gamesliga referansı bahis sitesi.
gamesliga referans yüksek oranlı iddaa oyna.
gamesliga üyelik gamesliga referans kodu servisi.
gamesliga referans gamesligaya üyelik üye olma

Comments on this entry are closed.

Previous post:

Next post: