Category: Current Affairs
Why they call it Green Energy: The Summers/Klain/Browner Memo
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.
Efficient Markets in Everything
Sabermetrics worked but “once the casino catches on to your card-counting tricks, you can’t prosper at the table for long.”
NYTimes: The A’s, meanwhile, have tumbled back to mediocrity: the team is on its way to a losing season this year, after compiling a record of 231 wins and 254 losses over the previous three seasons. Most of the innovations introduced or popularized by Beane have been freely adopted by other organizations, thus eliminating whatever stealth advantages he once enjoyed.
… He told me baseball is moving “back to an efficient market — albeit one with some random events that don’t offer perfect efficiency — where whatever you spend, that’s where you’re going to finish.” In short, the Yankees spend a lot and make the playoffs pretty much every year. The Pirates don’t, and they don’t. There are aberrations to this pattern, but the pattern itself is unmistakable.
But the more efficient baseball becomes as a market, I asked him, the worse it is for you, right?
“Oh, yeah!” he said, and laughed.
My quick response on the Fed
I’ve been making my way to Toulouse and haven’t followed all of the details. Scott Sumner has many good posts on the topic, and I would put it thus: the Fed probably decided to do the best it could within political constraints and a framework of more or less stable prices. Which won’t do much good at all. Keep in mind:
1. The median voter hates price inflation. Don’t blame Bernanke.
2. Today price inflation will accelerate real wage erosion, or at least is perceived so, who wants to take credit for that?
3. Core CPI is already going up at a rate of two percent and 3.8 percent for the broader bundle, at least for the time being. Voters don’t know or care what is embedded in the TIPS spread, etc.
4. Some of the “inflationists” ignored supply-side factors and bottlenecks and didn’t see this price pressure coming. That has thrown their entire analysis into doubt, unjustly probably but nonetheless. In any case it is no longer the simple story where Q goes up first and only later does P rise.
5. If Ron Suskind is to be believed, our President seems not to know the difference between TFP and per hour labor productivity; in his defense a lot of economists don’t quite get that either.
6. The GOPers now send Bernanke epistolary romances.
7. Some people on Twitter were taking about “striking down Old Ben and having him come back stronger,” but a) Obi-Wan plain, flat out died, b) Obi-Wan’s younger prodigy, Luke, was a failure who relied on his dad and wouldn’t at the key moment listen to Old Ben and stay on the Dagobah system to invest in additional human capital (instead he read Caplan on the signaling model), and c) they never even made the final three movies of the planned nine, so we don’t know how it turned out with the unwinding of the fiscal stimulus on the Ewok world. People, next time get your facts straight!
Every now and then, you ought to conclude that what you see is what you get and that is because of the rules of the game. When it comes to further monetary stimulus, I’m not sure there’s so much more to say.
Irish recovery from “austerity” update, not exactly the Keynesian story
The economy expanded at a faster rate than expected in the second quarter of the year, putting in its strongest quarterly growth performance since the recession began, according to new data published today.
The seasonally adjusted figures estimated that gross domestic product – the widest measure of economic activity – rose by 1.6 per cent between the first and second quarters of 2011. Gross national product, which excludes the profits of multinational firms, increased by 1.1 per cent compared with the first quarter of the year.
Domestic demand, which excludes exports and imports, expanded too, growing by 0.8 per cent.
It is the first time since the recession began that GDP, GNP and domestic demand all grew in the same quarter.
And all that in some very bad times for the U.S. and Europe, two main buyers of Irish goods and services. The link is here, sadly this progress probably will be swept away by the forthcoming European implosion, we will see.
Addendum: Megan McArdle hits the nail on the head.
Claims about Iberia
In Portugal, non-financial companies (NFCs) have debt that is 16 times their pre-interest profit. An interest rate of little over 6 per cent would wipe that profit out. In Spain the numbers are 12 times and 8 per cent, respectively. So its entire NFC sectors are junk – a designation that kicks in at a ratio of about 10 times. The somewhat less dire Spanish ratio is exactly where Japan was in 1995-96. Japan had no real GDP growth between 1996 and 2002 – an ominous precedent – and finally emerged into growth again after a massive bank-debt write-off in spring 2003.
Here is more.
China estimate of the day
As a result, the IMF estimates, China’s domestic loans equaled 173% of GDP at the end of June 2011, which the IMF called “well above the levels of credit” for developing countries of similar income level as China.
Here is more. And in the west, via Alex Kowalski:
In dozens of rural villages in China’s western provinces, one of the first things primary school kids learn is what made their education possible: tobacco.
“On the gates of these schools, you’ll see slogans that say ‘Genius comes from hard work — Tobacco helps you become talented,’” said Xu Guihua, secretary general of the privately funded lobby group Chinese Association on Tobacco Control. The schools are sponsored by local units of China’s government-owned monopoly cigarette maker. “They are pinning their hopes on young people taking up smoking.”
Haiti fact of the day
UN: Official aid disbursed to Haiti in 2010-11 was 43% of pledge. Only 1% went through Haitian government.
The source link is here.
North Korean photos
Sorry for the bad link from yesterday, find them here. I thank Yana for the pointer.
No reason not to do this
Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.
The story is here.
The Italian Job
NYTimes: With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.
The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.
“Jobs like these have kept this city alive,” said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. “You see, here we are at the bar, we support the economy this way.”
The new Brazil saying?
“Ever since I was a little girl I always heard Brazil was the country of the future. Now that the future is here, I am starting to fear it will be brief,” said Cynthia Benedetto, the chief financial officer of Brazil’s flagship manufacturing firm, Embraer SA, the world’s No. 3 jet maker.
Here is much more.
Lunch conversation on Iceland, wealth mark-downs, and national unity
A NYT piece from yesterday noted that Greece still may require a forty (!) percent mark-down in wealth/perceived wealth. Measured per capita Greek income is about 30k, for Bulgaria 14k, can Greece really be so much wealthier? It is no wonder that Greek politicians are reluctant to default and/or leave the eurozone. No matter how inevitable such courses of action may be, they are not political winners: “We pledge to cut your standard of living by forty percent, but unlike the other party, we’re going to do it right now!”
It was debated how high the mark-down must be for the United States; there was an estimate of 7-8 percent and another estimate of 3-4 percent. Ireland will have ended up facing quite a large mark-down.
How much of a mark-down has Iceland seen? I mean in terms of wealth not just per capita income. Do any of you know of figures? Their ability to “get their mark-down over with” is one fundamental reason for their turnaround. The loss is large but it is now behind them. Floating exchange rates don’t hurt either. As a quite small, fairly unified, previously used to hardship and bad fermented foods, extremely nationalist self-identifying kind of place, it is no surprise that Iceland has handled the markdown issue so well.
I find it useful to think about places in terms of how well they handle the issue of the wealth mark-down and how quickly they can get it behind them.
The anticipated Der Spiegel article on Greece leaving the eurozone
It’s now up. Maybe it’s “old news” by now, but the chances of the eurozone holding together have never looked smaller, even since two or three days ago. It’s clear, if anyone had doubts in the first place (I didn’t), that no eurobond and no major package of truly committal aid will be forthcoming. The next question is, when Greece goes, how strong a pledge do the remaining nations receive for EU/German aid? “Not so strong” is my current prediction, in which case we will work our way through a few dominoes, for better or worse. In that case, I wonder if Spain and Portugal would do better to leave with Greece or shortly thereafter. I don’t imagine that the treatment of “the Greek precedent” will make anyone have a warm and fuzzy feeling about the process of transition.
Don’t forget to note the remarks about Ireland on p.2.
Cities as hotels
Earlier this year I posted about India’s private city, Gurgaon. Gurgaon has grown from nothing to a city of 1.5 million people in just 30 years and it has done so based almost entirely on the private provision of public goods, including transportation, utilities, and security. Gurgaon is a desirable place to live in India but it has grown haphazardly as a city of private oases, rather than as an integrated city. As a result, Gurgaon has not enjoyed all the benefits of economies of scale in infrastructure provision or the benefits that come from internalizing externalities–the types of benefits that are possible with a single owner or integrated political system. As Matt Yglesias explained at the time:
Imagine if someone owned all of San Francisco and leased the land and structures out. Well obviously he’d want to have some kind of fire department and building standards to protect his investment. And he’d want to have a security force, since crime would reduce the value of the rent. And he’d want there to be some parks, because people like parks and their presence will increase the rent he can charge. (Indeed, my building includes a small private park). And obviously he’d need schools and really all the rest. …But in order to internalize the benefits of privately provided infrastructure, parks, public safety, etc. the scale of the enterprise would have to be really big. Like the size of a whole city.
Gurgaon, however, is not unique. Private cities are growing throughout the developing world and some of them are quite large.
Renaissance Partners, the investment unit of Moscow-based Renaissance Group, plans to build a 6,400- acre city in the Democratic Republic of Congo as it seeks to benefit from Africa’s urbanization.
The Russian firm is working on a master plan for the new urban center after securing the land outside Lubumbashi, the country’s second-largest city… Renaissance is considering similar projects in Ghana, Nigeria, Senegal and Rwanda, he said.
“The West has peaked in terms of economic growth and the new markets are in Africa,” Meyer, 39, said. “And the main drivers of this growth in Africa are going to be cities.”
Renaissance’s Lubumbashi project will be more than double the size of Tatu City, the $5 billion center that the Russian firm is building from scratch outside the Kenyan capital of Nairobi. The Moscow firm, headed by Stephen Jennings, plans to take advantage of Africa’s economic growth and emergence of a growing urban middle class demanding better infrastructure.
6,400 acres is a small city, about the size of Apple’s home of Cupertino CA (pop: 58,000), but it is big enough that Renaissance partners will have an incentive to build public goods such as city-wide sewage, parks, roads (congestion pricing!), an electric plant and grid and so forth, exactly as Matt argued (see also The Voluntary City).
Private cities are happening now for a reason. Africa, India, and China are urbanizing more rapidly than has ever occurred in human history. In Africa, the number of urban dwellers is projected to increase by nearly 400 million, in India at least 250 million will move to cities and in China more than 400 million will move to cities in just the next 20 years. Not all of these people will move to older cities, which are not always in the right places and which rarely possess anything like the right material let alone the right political infrastructure. The rising middle-class want to live in first-world cities and in many of these countries only the private sector can deliver those cities.
The rapid urbanization of the developing world is an opportunity to remake cities anew. Private cities as hotels on a grand scale.
Predictions on Greece and Germany
From Yanis Varoufakis:
Greece will not be allowed to default before Germany first puts in place a decent plan for splitting Greece’s monetary system from that of the surplus countries. But if I am right that such a plan cannot involve the mere expulsion of Greece from the euro, as it will kick off a chain reaction that will eventually knock France out for a sixer before returning to Frankfurt and Berlin to haunt the ‘planners’, the only logical conclusion that I can come to is that, behind all the talk of a German plan to contain a Greek default or to push Greece out of the euro, lies the groundwork for a pragmatic plan that sees Germany bailing itself out; a plan according to which Germany will round up countries it truly deems worthy of sharing its new currency with (the other three surplus countries of the existing eurozone plus perhaps Poland, the Czech Republic and even Estonia) and exiting in the most orderly manner possible; offering, for example, to the eurozone countries that will be left behind (fretting France in particular) a few gifts (e.g. Germany may choose to foot the bill for existing bailouts), an illusion of unity (e.g. suggesting that the new Germanic currency is also minted and administered by the ECB – which will now be responsible for more than one currency at once), and some vague promises (of possible fusion of these currencies, once the ‘right’ discipline has been knocked into the hearts and minds of the undisciplined).
Here is more, interesting throughout. Maybe the Germans who resigned from the ECB basically see something like this coming, and wish to husband their political capital with the hard money factions of German politics.
Here is Yanis on Twitter, he covers Greece.