Category: Political Science
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.
The perspective of the statesman and the perspective of the blogger (or scholar)
Some of you have asked me what I think of the concerted central bank effort to flood European banks with dollars. Ed Harrison noted the Fed is playing it down (no press release, perhaps a fear of treason charges), I believe Roubini viewed it as a hidden forex move.
I find it a striking dilemma and here is why. The blogger in me thinks: “This just postpones all the major decisions. Once the loans are up the banks still will be strapped, and the longer you wait to resolve financial crises, the more they will cost. There is no eurobond and no rapid economic growth at the end of that tunnel.”
If I were Trichet, or some other involved statesman, I would have done what was done, albeit sooner. The statesman in me would think: “This just postpones all the major decisions. But I can’t send everyone to their doom just yet. Maybe there is some way I am wrong and a month or two from now things will look different and we can make another decision then.”
I am never sure how to reconcile these two perspectives. Of course, in real life I am a blogger and not a statesman, for good reasons I might add.
In the meantime, the banks are lobbying the BRICS.
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.
Sentences to ponder
“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”
The article (mostly on Europe) is here. I can imagine a minimum of three theories of geopolitical influence:
1. You get it by having a nice country and it is then more or less automatic, possibly proportional to size as well.
2. It is hard to get in any case, as most countries do what they want anyway and are not much susceptible to outside influence.
3. Geopolitical influence is proportional to how much a government invests in it.
To the extent #3 is true, it does not bode well for the future of the welfare state.
The economics of bombs
As the bombs get more difficult to construct or operate, the costs rise. Bombs activated with a remote detonator like a cellphone cost a mere $345 and accounted for a surprisingly small — 12.6 percent — of attacks, perhaps owing to the U.S.’ hard-won ability to jam the detonator signal. (One would imagine the major cost component is the cellphone.) For insurgents to turn a car into a bomb or convince someone to kill himself during a detonation — or both — the cost shoots up into the thousands: $10,032 for a suicide bomber; $15,320 for a car bomb; nearly 19 grand to drive a car bomb. All together, those relatively expensive attack methods accounted for fewer than six percent of bomb attacks in 2009.
Most of those bombs have gotten cheaper to produce. In 2006, victim-operated IEDs cost an average of $1,125. Command-wire bombs were $1,266. Remote detonation bombs? The same. And as the costs dropped, victim-operated and command-wire detonated bombs skyrocketed. Back in 2006, they accounted for merely 21.3 percent and a piddling 1.9 percent of all bomb attacks, respectively.
But the sophisticated bombs have gotten more expensive. Car bombs cost $1,675 on average in 2006 — which seems absurdly low, given the cost of one involves acquiring and then tricking out a car. And the going rate on suicide bombers appears to have risen, from $5,966 in 2006 to nearly double that in 2009. Accordingly, both accounted for over 16 percent of IED attacks in ‘06. And JIEDDO says it has preliminary reporting indicating that suicide bombers cost $30,000 as of January.
Here is more and for the pointer I thank David Curran.
*Deng Xiaoping and the Transformation of China*
That is the new book by Ezra F. Vogel, excerpt:
Deng in 1978 had an equally dramatic effect on the Japanese people. In the 2,200 years of contact between China and its island neighbor, Deng was the first Chinese leader to set foot in Japan. He was also the first to meet the Emperor of Japan.
So far the main lesson I am drawing from this book is how provincial the Chinese leaders were circa 1978, but also how willing they were to absorb evidence and change their minds, especially following visits to Western Europe and Singapore, both of which had significant impacts on them. I am also learning that the 1979 war with Vietnam was a more significant event than I had thought.
The publication date of the book is listed as 26 September, but Amazon shipped my copy earlier this week.
Should our government spend (and borrow) more at negative real interest rates?
I have read so many posts saying yes. But is it so obvious? Let’s put aside the stimulus argument, I’d like to focus on the rate of return argument alone.
Let’s say I could borrow money at negative two percent real, but my seven cousins, three of whom are crazy, would get together and decide how to spend it. I would get a vote too and they would agree to spend it on me. I would have to pay it back.
I say no.
Many of the infra-marginal federal dollars are allocated by formula, such as with Social Security, and the cousins don’t have such a big say in the matter. I am grateful for that. But is it possible that the hypothetical new federal spending might be controlled by the cousins? And what if four of them are crazy?
How should I feel about the exorbitant cost overruns on California high speed rail? You know, the line connecting Fresno and Bakersfield? That wasn’t even the crazy cousins at work. (Or was it?)
I absolutely do not see this one as a no-brainer. By using the “should” language in your thought experiment you can take away the crazy cousins, at least hypothetically. But in the real world they are still there, and the non-crazy cousins screw up pretty often too.
How close in your family would the spending decisions have to get before you would accept a deal like that outlined above? How many people would turn it down, even with their spouse in charge of spending the money?
Was there ever a Chinese tea party?
…best estimates are that during the second half of the 18th century imperial taxes captured only 5 percent of the gross national product in China, compared to 12-15 percent in Russia, 9-13 percent of national commodity production in France, and 16-24 percent of national commodity production in Britain. During the 18th century in Russia, moreover, corvees and military service were far more onerous than in China, where most labor services had been commuted. If we consider that under the Northern Song in 1080, imperial revenue averaged about 13 percent of national income, and under the Ming in 1550 6-8 percent, we find some support for Skinner’s thesis that percentage of the surplus captured in imperial taxes shrank steadily relative to the share retained by local systems.
Victor Lieberman presents “philosophical commitment to low taxes” as a major reason for this pattern. Further explanations are a lack of foreign threats and that the Chinese state did not always have the capacity to collect much more.
Those points can be found in Lieberman’s quite interesting Strange Parallels, Southeast Asia in Global Context, c.800-1830, volume 2, Mainland Mirrors: Europe, Japan, China, South Asia, and the Islands. The book is even longer than that title, clocking in at 947 pp. and that is only the second part of the whole.
North Korea: The Long Coma
How has the dictatorship in North Korea survived despite mass starvation and economic failure? One factor that comes out of reading Nothing to Envy is that the North Korean iron curtain has been much more impenetrable than that of Eastern Europe. Consider:
In the nearly half a century that elapsed between the end of the Korean War and Mi-ran’s defection in October 1998, only 923 North Koreans had fled to South Korea. It was a minuscule number if you consider that while the Berlin Wall stood an average of 21,000 East Germans fled west every year.
The border with China is longer and more porous than the border with South Korea but until the 1990s there wasn’t much of an incentive to escape in that direction since China wasn’t much better off than North Korea. Moreover, if North Koreans are caught in China then even today they will be sent back,probably to a North Korean gulag; so many defectors try to cross from China to Mongolia through the forbidding Gobi desert. Mongolia will then “deport” them to South Korea.
North Korean propaganda has also been very effective because unlike leaders in Eastern Europe, Kim Il-sung “wasn’t merely the father of their country, their George Washington, their Mao, he was their God.” Here is Nothing to Envy:
Broadcasters would speak of Kim Il-sung or Kim Jong-il breathlessly, in the manner of Pentecostal preachers. North Korean newspapers carried tales of supernatural phenomena. Stormy seas were said to be calmed when sailors clinging to a sinking ship sang songs in praise of Kim Il-sung. When Kim Jong-il went to the DMZ, a mysterious fog descended to protect him from lurking South Korean snipers. He caused trees to bloom and snow to melt. If Kim Il-sung was God, then Kim Jong-il was the son of God. Like Jesus Christ, Kim Jong-il’s birth was said to have been heralded by a radiant star in the sky and the appearance of a beautiful double rainbow. A swallow descended from heaven to sing of the birth of a “general who will rule the world.”
To us this sounds ludicruous but I think Demick is correct when she writes:
…consider that their indoctrination began in infancy, during the fourteen-hour days spent in factory day-care centers, that for the subsequent fifty-years, every song, film, newspaper article, and billboard was designed to deify Kim Il-sung; that the country was hermetically sealed to keep out anything that might cast doubt on Kim Il-sung’s divinity. Who could possibly resist?
When Kim Il-sung dies, Demick describes one woman’s reaction:
Mrs. Song went blank. She felt an electric jolt shoot through her body as though the executioner had just pulled the lever. She’d felt this way only once before, a few years back when she’d been told her mother had died but in that case the death was….This couldn’t be true. She tried to concentrate on what the television broadcaster was saying. His lips were still moving, but the words were incomprehensible. Nothing made sense. She started to scream
“How are we going to live? What are we going to do without our marshal?” The words came tumbling out….She rushed down the staircase and out into the courtyard of her building. Many of her neighbors had done the same. They were on their knees, banging their heads on the pavement. Their wails cut through the air like sirens.
(See also this short video.) FYI, Demick also shows that not everyone believed and preference falsification certainly occurred, although until the regime collapses it is difficult, of course, to say by how many.
All of this works I think to explain the first few decades. Kim il-sung did help to expel the Japanese, and after the Korean war, North Korea was in fact getting better. Without knowledge of the outside world, claims of being the most developed nation on earth could be sustained. But by the 1990s it was clear things were getting worse and as China grew and starvation took hold in North Korea, the North Korean’s could see that the grass was greener on the other side. As a result, defections to China increased tremendously (see my previous post). Moreover, the transfer wasn’t only in one direction, goods and information from China came into North Korea and some North Koreans even traveled back and forth across the Chinese border. Yet, even with this increase in communication and the death of Kim Il-sung the regime held together.
Can North Korea continue to hold together after Kim Jong-il passes? It wasn’t easy to reintegrate Germany after the Berlin Wall fell and the ties there were much greater. North Koreans, it is said, still do not know that a man has walked on the moon let alone that South Korea has a far higher standard of living. What will happen when the regime in North Korea falls and North Koreans awake from their long coma?
Addendum: For more see this National Geographic video with secret footage from inside North Korea. Hat tip on the latter to Dan Klein and Fred Foldvary.
Greece fact of the day (not much of a bailout sir, is it?)
The uncertainty caused by the deal has led Greek bonds to plummet in recent days, with yields on Greece’s benchmark 10-year bonds breaching 18.5 per cent on Thursday, a new euro-era high, wiping away all gains achieved after the bail-out deal was reached.
There is more interesting information at the link, which is about whether there will be a bailout deal at all.
Nothing to Envy
Based on hundreds of interviews with escaped North Koreans, the novel-like Nothing to Envy is a fascinating portrait of North Korea, a sociological investigation of how a totalitarian state operates and a love-story with an O. Henry like ending. Here is one stunning excerpt that describes a defector as she crosses over into China.
Dr. Kim staggered up the riverbank. her legs were numb, encased in frozen trousers. She made her way through the woods until the first light of dawn illuminated the outskirts of a small village.…
Dr. Kim looked down a dirt road that led to farmhouses. Most of them had walls around them with metal gates. She tried one; it turned out to be unlocked. She pushed it open and peered inside. On the ground she saw a small metal bowl with food. She looked closer – it was rice, white rice, mixed with scraps of meat. Dr. Kim couldn’t remember the last time she’d seen a bowl of pure white rice. What was a bowl of rice doing there, just sitting out on the ground? She figured it out just before she heard the dog’s bark.
Up until that moment, a part of her had hoped that China would be just as poor as North Korea. She still wanted to believe that her country was the best place in the world. The beliefs she had cherished for a lifetime would be vindicated. But now she couldn’t deny what was staring her plain in the face; dogs in China ate better than doctors in North Korea.
Highly recommended. I will say more in future posts.
Hat tip: Bryan Caplan.
Who will receive the next national holiday?
Adam Burns, a loyal MR reader, asks:
Who do you think will be the next person to receive a national holiday in the US?
Or, if they are currently unknown, what characteristics/achievements will this person have to earn themselves that recognition?
Someone Latino sounds about right, since there is a growing number of Latino voters. Yet who exactly should that be? It’s been a long time since Cesar Chavez and in any case his cause is no longer fashionable. Picking “an invisible Latino” won’t quite do the trick either. American Latinos seem to have less mainstream canonicity, at least qua Latino. There is no equivalent of Martin Luther King. Nor are we about to dedicate a day to all the people who run across the border, no matter how persuasive Michael Clemens may be.
How about a day named after a generic old person? They vote too, and this could be done while limiting the “doc fix” to trick them into submission before preparing the ice floes. But how to make it polite? “Oldies Day” won’t cut it, even if they can get away with a version of that in baseball or on the radio.
Most likely is that a naming opportunity will be sold to the highest bidder, in the midst of our forthcoming fiscal crisis, 侯逸凡 Day anyone?
Toward a theory of autocracy
The Russian head of the World Chess Federation said he spoke Tuesday with Libyan leader Moammar Gadhafi and that he remains in Tripoli and defiant.
Kirsan Ilyumzhinov has known Gadhafi for years. His visit to Tripoli in July was among the last times the Libyan leader was seen in public after NATO airstrikes began.
…He said Gadhafi sounded full of vigor and told him he was “certain we will win.”
Ilyunzhinov said he also talked to Gadhafi’s son Mohammed, Libya’s Olympic chief, who said his father’s forces would “drive the rats out of
the city.”
The link is here, via @JamesCrabtree and Natasha. Of course I also could have titled this post “Toward a theory of the World Chess Federation.”
Eurobond points
How many Op-Eds can people write saying that without a eurobond the eurozone will fall apart? I don’t think SPD would support the idea if they were in power; it is instead a way to set up an “I told you so” on Merkel, when things go badly, as they will. It is hard to imagine that all the eurozone countries would sign off on it, and how does the market handle the political uncertainty in the meantime? Finland has been demanding collateral for its loans to Greece and other countries wish to follow suit, and that is what any agreement would look like ex post. That’s assuming every country finds it constitutional, a heroic leap. Or what if German bond rates skyrocket after a eurobond announcement? Does everyone go read Jean Tirole on renegotiation-proof agreements? A eurobond without Germany, and possibly without France, also collapses inductively. Or say Merkel agreed tomorrow to a eurobond and managed to hang on to power. What fiscal management conditions would be demanded in return and would anyone expect Greece to accede to them? How long does it take seventeen nations to agree anyway? Does all borrowing get run through the eurobond or just some? How are borrowing adjustments at the margin to be settled? What if a country won’t put its fair share into a eurobond reimbursement fund, instead preferring to prioritize its individual creditors? Who or what punishes them? Are markets these days good at picking apart bundled assets?
It’s easy fodder to criticize Merkel for saying no to the eurobond idea, but it’s a non-starter which could not make it off the drawing board. I haven’t even considered the extreme moral hazard problems which would result from actually doing the idea.
War and Peace
In fact, the last decade has seen fewer war deaths than any decade in the past 100 years…If the world feels like a more violent place than it actually is, that’s because there’s more information about wars — not more wars themselves.
From Joshua Goldstein in Foreign Policy. Cato Unbound covered some of the reasons for the outbreak of peace earlier this year.
Hat tip: Mike Makowsky.