Cap and Trade: The $9.6 Trillion Growth Killer

The Obama administration and its congressional allies seem prepared to sacrifice the American economy on the altar of global warming. Specifically, the Waxman-Markey cap-and-trade proposal represents a crusade to drastically diminish carbon emissions in the United States.

I'm not going to debate the scientific arguments; instead, I want to make it abundantly clear that the purported benefits of this plan do not justify its excessive costs.

The purpose of cap and trade is simple: to reduce CO2 emissions by issuing permits that ration the amount of emissions a producer may generate. This gives each company an incentive to implement new technologies to reduce their emissions so it can sell its leftover permits to less efficient companies.

These permits are worth money, so their use diminishes their value (just as depleting a Starbucks gift card of its credits diminishes its value). The logical implication is that using a permit levies a cost upon its user. In order to achieve compliance with permit restrictions, the user must reduce production (and lose revenue), increase efficiency (an extra cost), or purchase another user's remaining credits (an extra cost). No matter how you look at it, this plan is expensive.

The Cost
The Heritage Foundation just released a study estimating the cost of the Waxman-Markey cap-and-trade proposal to be $9.6 trillion in lost GDP over the next twenty-five years. I repeat—$9.6 trillion in economic loss.

The Heritage report reasoned that the economy would respond to cap and trade as it would respond to an energy crisis: "The price on carbon emissions forces energy cuts across the economy, since non-carbon energy sources cannot replace fossil fuels quickly enough. Energy prices rise; income and employment drop."

How bad would this be? According to the report: a 55-90 percent increase in energy prices; an annual $1,500 increase in family electric bills; a $596 annual increase in gasoline prices; an average annual loss of 1,105,000 American jobs; and national debt increase of $29,150 per person. All within the next twenty-five years.

This program will also invite the government to further direct the American economy. The cap-and-trade program will empower the bureaucrats who administer it, and this will open the door to new forms of corruption.

As Thomas Sowell notes in Basic Economics, "bureaucrats' ability to create delay often means an opportunity for them to collect bribes to speed things up . . . . This in turn means higher prices to consumers, and correspondingly lower standards of living for the country as a whole." If you think it's hard regulating the money received by public officials, imagine trying to keep tabs on the bribes received by anonymous bureaucrats!

Arthur Laffer and Stephen Moore pointed out in The End of Prosperity that "bureaucrats will be regulating all sectors of the industrial economy and all activities of every business in America." Intrusive government entanglement is not far fetched, since the White House is now effectively telling General Motors how to run a car company.

The mere administrative compliance costs may also be staggering. As Laffer and Moore quipped, "[i]f you think the IRS is heavy-handed and intrusive, wait till companies have to comply with the new Green Police."

Of course, it's unclear how much of this accounts for American companies that will duck these insane requirements by moving their operations overseas, and taking their economic contributions and tax revenues with them.

The Benefit
The costs are tremendous, so what is the benefit? Apparently, not very much.

Climatologist Chip Knappenberger recently concluded that if Waxman-Markey yields an 83 percent emissions reduction by 2050, "the temperature reduction is nine hundredths of one degree Fahrenheit, or two years of avoided global warming."

In other words, the government is sacrificing trillions of dollars to reduce the temperature by less than one degree? Seriously?

Maybe each of us should purchase a T-shirt that reads, "We lost $9.6 trillion, and all I got was this lousy T-shirt."

But Think of the Children! (No on Prop. 1A)

California voters are voting today on whether to "fix" the budget by extending the "temporary" tax increases imposed in the latest budget—of course, tax increases are rarely temporary and hardly ever fix anything.

But the tax issue always incites from the usual suspects the same indignant response that we are letting our children down by failing to increase taxes, which is the purported panacea for our poor education system.

The first problem with this theory is that raising taxes does not necessarily increase revenues.

Dr. Arthur Laffer and Stephen Moore recently wrote in the Wall Street Journal that punitive state income tax schemes fail because Americans are inherently mobile creatures---we know how to move. They pointed out that between 1998 and 2007, "more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states . . . and relocated to the nine tax-haven states with no income tax . . . ."

These individuals tend to be job creators. Over that same period, the no-income tax states "created 89% more jobs and had 32% faster personal income growth" than the high tax states. 'Taxing the rich' may seem like a good idea, but you can't tax them once they move to another state. To the contrary, this scheme deprives California of vital economic productivity, including tax revenue and job creation.

Second, even if raising taxes would solve the situation, are the taxpayers really at fault?

Education spending within the budget increased by over a third between 2003 and 2008, keeping pace with the overall budgetary increase. Are our schools 35 percent better off today than they were in 2003? Why should we believe that throwing more money at the problem will work any better than in the past?

Perhaps the problem isn't a lack of resources, but misallocation of those resources. California is already one of the highest taxing states in the country; rather than blame the greedy taxpayer, perhaps we should ask why we're receiving so little for the money we already spend.

So, where does the problem lie? Maybe with the bureaucrats who misallocate the money budgeted by the legislature, or perhaps with the legislature for sacrificing education spending in favor of their own legislative agendas. Most likely, it is all of the above, plus any number of rules and regulations that diminish the level of service our students receive.

Let's make the money we already spend work more efficiently; until then, don't ask me for another dime, because I don't feel the least bit bad about saying no.

Obama "to get the economy off the of bubble-and-bust cyle" (???)

I have some exciting news to report: the Obama administration plans to abolish the boom-and-bust economic cycle! Austan Goolsbee—member of the Council of Economic Advisors—matter of factly declared so much during an interview with CNBC's Erin Burnett:

In [President Obama's] budget, he is trying to design a framework to get the economy off of the bubble-and-bust cycle.

Perpetual economic growth—how exciting! Now, we need only address the minor point that we attempted this in the 1960s, and failed miserably.

President Johnson declared, "I do not believe recessions are inevitable." Why should he have? Arthur Okun—the chairman of his Council of Economic Advisors—wrote that "[r]ecessions are now considered to be fundamentally preventable, like airplane crashes and unlike hurricanes."

Keynesian economists believed they could sidestep the classic boom-and-bust business cycle by using brand new computer-driven economic models to outsmart natural market forces. Robert J. Samuelson explained their folly in The Great Inflation and Its Aftermath:

They could determine how far the economy was straying from "potential output." They could also predict recessions and inflation, it was believed. Thus, corrective policies could be adopted. If the economy was below full employment, it could be nudged up. If it were in an inflationary zone, it could be nudged down. With better information and theories, economics seemed a reliable form of social engineering.

Unfortunately, the Great Depression—a deflationary crisis—conditioned economists not to worry very much about inflation. This mental blindspot was politically fortuitous, because politicians preferred rising prices over declining employment. President Nixon acutely summarized the political sentiment: "When you start talking about inflation in the abstract, it is hard for people to understand. But when unemployment goes up on half of one percent, that's dynamite."

Combine (1) economists initially apathetic about inflation with (2) a population that doesn't understand inflation and (3) elects politicians who are willing to induce inflation in order to prevent a recession, and the result was the stagflationary quagmire of the 1970s.

Mr. Samuelson describes this through the perspective of Arthur Burns, the Fed chairman from 1970-1978:

Burns conceded [in 1979] that the Fed "had the power to abort inflation at its incipient stage fifteen years ago or at any later point." If inflation is too much money chasing too few goods, the Fed could have fought it by supplying less money. Indeed, the Fed had stepped "hard on the monetary brake" in 1966, 1969 and 1974, Burns said. Unfortunately, the initial effects were a slower economy and higher unemployment---cardinal sins in the new political climate. So each time the Fed had relented too quickly before inflation was broken, bowing to criticism from Congress and the administration.

Fed Chairman Paul Volcker and President Ronald Reagan eventually slayed the inflationary beast, but the price was the severe 1982-83 recession. This required a courageous Fed chairman determined to suffocate inflation by contracting the monetary supply, and an American president willing to provide the political support necessary for the Fed chairman to do his job.

That was what happened last time the political elites assured us they could end the boom-and-bust cycle. I can only imagine how it will work out this time around . . . .

Bailing Out Responsible Homeowners (who treated their homes like ATMs)

CNBC's Diana Olick reported today that President Obama's plan to bail out "responsible homeowners" will provide incentives for lenders to forgive secondary liens---including home equity loans.

The proposal posted on the Treasury web site provides that "the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance." Page 5, paragraph vi.

So, in other words, the Obama administration has crafted a plan to assist responsible homeowners---who just happened to suck money out of their properties like ATMs. Since they are unable to pay that money back, it looks like the American taxpayers will foot the bill. Does that mean we also get to use the stuff they purchased with our money?

Deficit Spending: the New Voodoo Economics?

Rep. Linda Sanchez (D-CA) summarized Congress' apparent attitude toward deficit spending in this question/statement directed toward Treasury Secretary Tim Geithner:

Do we really need to balance the budget in order to reduce our future [] debt burden, or can we reduce our debt burden while still running deficits? Because some people would have you believe that the two must go hand in hand.

I'm of the personal opinion that deficit spending tends to increase the national debt, but what do I know?

Geithner Calls the Kettle Black

There's an old saying about the pot calling the kettle black, which is used to attribute hypocrisy to an individual who alleges another of behavior which he too is guilty of. Treasury Secretary Tim Geithner epitomized this idiom during an interview with Jim Lehrer:

I am deeply offended by the quality of judgments we've seen in the leadership of our nation's financial institutions. They've caused a very damaging loss of confidence. Financial systems require confidence; they're built on confidence. They've created a deep hole of public distrust and anger, which is enormously damaging.

Mr. Geithner, please meet the kettle. There is no doubt that the banks' horrible decisions over the past few years are key to our economic problems. However, Mr. Geithner is in no position to claim moral indignation at the banks' lack of leadership when he has provided zero leadership ever since he crashed and burned before Congress two weeks ago.

In case you missed it, Wall Street thumbed its nose at Mr. Geithner's purported plan to stabilize the financial sector through a 421-point crash of the Dow Jones Industrial Average---about a 5-percent decline. The reason? The administration led us to believe that Mr. Geithner would deliver a comprehensive plan; in fact, President Obama announced the night before that Mr. Geithner would announce "very clear and specific plans for how we are going to start loosening up credit once again."

Instead, Mr. Geithner only delivered a broad outline which did not sound much different than the Bush/Paulson plan, but for a "stress test" which---left undefined---seemed like a doorway to nationalization. Mr. Geithner highlighted his plan's ambiguity when he stated, "We're not going to put out details until we are confident that we've got the right structure that's going to achieve these objectives to try and bring private capital in, alongside government financing to help these markets get working again."

As market pundit Larry Kudlow quipped, "President Obama, please meet Treasury man Tim Geithner; Mr. Geithner, this is Mr. Obama; we'll all shake hands and have a cup of coffee together."

Alan Greenspan liked to say that the maxim First, do no harm applies just as much to the Federal Reserve chairman (and, by extension, Treasury secretaries) as it does to doctors. Well, Mr. Geithner did tremendous harm to the financial sector. His purported goal is to ensure the survival of our major financial institutions to maintain a viable credit market, but Mr. Geithner has only hastened their demise by scaring private capital away from those institutions---thereby increasing their need of government assistance.

How, then, did Mr. Geithner attempt to make amends? Well, he really didn't. Instead, he seemingly went into hiding and refused to provide any clarification. Mr. Geithner could have said any number of things; in his Lehrer interview, he stated that "these banks now have very substantial amounts of capital relative to what you would have seen in the U.S. economy going into previous recessions," and "I think [nationalization] is the wrong strategy for the country, and I don't think it's a necessary strategy." Mr. Geithner could have dramatically improved the situation by saying that two weeks ago, but he simply chose to say nothing.

The result, therefore, was what Wall Street considers a four-letter word: uncertainty. Private investors were left speculating without clear guidance about whether the White House would nationalize our banking system, and wipe out the shareholders in the process. The speculation increased as Mr. Geithner remained silent.

Mr. Obama did not help matters because, as blogger Paul Kedrosky noted, Mr. Obama talked himself into---and out of---nationalization within the course of the same speech: Mr. Obama first stated that Japan prolonged its decline by initially refusing to nationalize, whereas Sweden quickly nationalized and recovered much more quickly. This sounds like a clear endorsement of nationalization. However, he then reversed himself by pointing out that our banking system is far more complicated than Sweden's, so nationalization may not work here. His so-called conclusion:

And so what we have to do is we have to pull the Band-Aid off so we don't duplicate what happened in Japan. But we've also got to make sure that in pulling the Band-Aid off we don't just start doing so much damage that things end up getting much, much worse.

Someone needs to gently remind Mr. Obama that while deliberating out loud works well for Senators, the President of the United States is in no position to appear so wishy-washy. He is the leader of the free world, and everyone looks to him for leadership. Statements like these imply that the administration has no idea what to do.

Therefore, it is clear that the administration failed to lead the way to financial recovery following Mr. Geithner's failed speech. Who, then, was in charge? Simple: the rumor mill ran Wall Street, and the financial sector led a broad market sell-off. There was little change in fundamentals; the dominant factor was increasing fear that the White House would nationalize our banking system. This affected not only the "bad banks," but the entire sector, as fear of a domino effect caused investors to flee from the more stable banks---thereby diminishing their stability. This fear spread to all other sectors, largely because no one wants to say the government running our banks. The major stock indices have crashed about 15 percent since Mr. Geithner's testimony. Only one investment did well: gold, which is viewed as the ultimate hedge against uncertainty.

This does not mean that Mr. Geithner should have rushed into a poorly deliberated plan just for the sake of acting. The problem is that Mr. Geithner appeared to have ample time to conjure up a more detailed plan. After all, he was the President of the New York Fed and Vice Chairman of the Fed's Open Market Committee prior to his Treasury Secretary nomination; this means that he worked very closely with Ben Bernanke and Hank Paulson in their initial attempts to stabilize the financial markets. Moreover, one would think that he would have taken full advantage of the "Office of the President-Elect" to get off to a running start. Instead, it appears that he did little or no footwork prior to his confirmation. At the very least, if he had so little to say, he should have done more to control our expectations.

We saw a brief stock market respite this week when Mr. Bernanke quelled fears of nationalization, even though Mr. Bernanke is not even part of the administration: frankly, it reached the point where any guidance whatsoever was better than no guidance. Unfortunately, this respite appears to have been short lived as we now creep back to 12-year lows. Mr. Geithner claimed during the Lehrer interview that the initial sell-off following his testimony two weeks ago was really not his fault:

Well, I think it's important to see this happened against the backdrop of a deepening recession here and around the world, and that is the fundamental cause of the uncertainty you're seeing in markets everywhere and the fragile confidence we see generally.

Well, Mr. Geithner, there is no doubt that we're facing a terrible economic climate. However, inherent in the Obama administration's claim that it can make things better is the reality that it can also make things much worse. You, sir, did make things worse. Even if you refuse any responsibility for the current uncertainty, I would implore you to at least show some leadership and remember that every dollar of private capital you scare away from the banks is a dollar that the taxpayers will wind up replacing.

President Obama, please meet President Karzai

The Associated Press reports that President Obama apparently just spoke to Afghan President Hamid Karzai for the first time. Ever.

Ronald Neuman, former U.S. ambassador to Afghanistan under President Bush, speculates: "Holding off on a presidential call may be no more than a sensible decision to wait until the president really knows what he wants to say on crucial issues."

No hurry, Mr. President; it's not like the United States has deployed tens of thousands of American G.I.s to fight a war within President Karzai's borders or anything.

(Note: I know I promised I would shy away from matters of foreign policy. But this is just too ridiculous to ignore.)