Energy

On my way home tonight I caught an extraordinary NPR investigative report on Massey Energy and its recent Big Branch Mine disaster.  While formal investigations continue there sure is a lot of evidence that Massey was struggling to make this mine work safely, but continued each day to put regular people in conditions which could, and did, result in more than two dozen deaths. 

This report comes, of course, as the BP oil spill continues for almost its thirtieth day, in what may be the single largest coproration-induced environmental disaster in history. 

Each of this cases raises basic questions about the role of corporations in broader civil society.  If Massey execs are shown to have taken actions that they knew could have resulted in the death of their employees, could they be tried for murder?  And what about BP? Should a corporation really have the kind of power to engage in activity that could kill dozens of people through their negligence, or ruin an entire region of the planet?  If they are given the right by society to conduct these dangerous and potentially lethal activities what ultimate responsibility do they have to all of us to do everything within their power to avoid the very worst? And what happens in the case of a Massey when there is evidence the company did not do what the government asked to make things safer for the people in the mine?

What is perhaps most disturbing in each of these cases (and with the recent financial crisis) is that there is evidence that the governmental agencies set up to monitor these dangerous activities were ineffective or compromised.  This week the head of the agency (MMS) who approved the BP rig, who had enough in his record to draw questions about his abilities, retired.  Much has been written about the corruption and scandals which plagued this agency, and Massey has been cited repeatedly for safety violations at Big Branch (NYTimes had a great story on MMS Friday).

In the Bush years I often wrote about how the modern conservative movement had lost its way, and had become a craven advocate for those with power and privilege against the interests of every day people and the common good.  These two disasters remind us of how our government lost touch in the Bush era with that special balance between private and public interest which has made America so admirable and successful, tilting way too far in recent years towards the private at the expense of the public. 

Finding that new and better balance between public and private good should certainly be a goal of those in power in the years ahead.  And what one does about a Massey or a BP - companies whose actions have caused so much societal harm - will be one of the great questions which will need to be answered.  Fines and payments seem inadequate now for both of them given the damage they've caused.  

If you can be sure to listen to the NPR piece I link to above - it is a remarkable, and terribly tragic, story.

The most dispiriting feature of this year’s economic debates, apart from their fierce partisanship, is the absence of a broad and encompassing view of what the American economy needs. In this series of essays, we’re laying out a new, progressive strategy to advance the central goal of economic policy – namely, to ensure ample job opportunities, strong and widespread income gains, and upward mobility for most people. The previous two blog-essays described, first, a series of initiatives to equip businesses and workers with much of what they need to succeed economically, and second a new approach to contain the growth of federal spending so we can control long-term budget deficits. This week, in part 3, we turn to taxes. The challenge is to rethink and reconfigure the federal tax system, so we can raise the revenues we need in ways which reinforce job creation and income gains.  

Progressives should approach this challenge in three ways, covering in turn corporate taxes, personal income taxes, and energy taxes. The first step involves ending the major corporate tax subsidies for influential industries, much as our spending initiative would end large, industry-specific spending subsidies. These corporate tax entitlements range from tax breaks crafted for oil, gas and wind energy producers, and special inventory rules for certain exporters (and not for U.S. firms producing the same products for the American market), to billions of dollars in privileged treatment for insurance companies, credit unions, and housing developers. Ending these and other corporate tax breaks could not only set back influence-peddling for a while and simplify the corporate tax code; it also would raise a boatload of new revenues. Half of those new revenues should go to deficit reduction, while the other half goes to lower a corporate tax rate that’s currently one of the world’s highest. To the modest degree that the lower corporate taxes in Europe and East Asia encourage American multinationals to shift more of their operations abroad, this approach should help create more conditions for domestic job creation.  And we can amplify this effect with a measure described earlier in this series, sharp cuts in the payroll taxes of employers who expand their overall workforce and payrolls. In any case, ending tax subsidies for influential interests will make the entire economy more efficient, because companies that never qualified for special treatment would no longer have to compete at a disadvantage with tax-protected companies for capital and skilled workers.  

Next, progressives should apply a similar and more sweeping approach to the personal income tax. The current, staggeringly complicated system is unsalvageable. Nearly 43 percent of all households pay no income taxes at all; and few of the 90 million households that do pay income tax can figure out their own liability. The responsiveness and accountability of a democracy can erode quickly when government is financed by a system that doesn’t affect more than two-fifths of the people and isn’t understood by the rest. The current income tax also is plainly unfair:  Since different forms of income and spending are taxed differently, people with the same incomes, but earned or spent in different ways, bear very different tax burdens.   

Progressives should make a clean sweep of this entire mess by creating a single personal exemption of $100,000 to $150,000 that would supplant all current personal deductions, from mortgage interest and child care expenses to capital gains and employer-provided health insurance. In one swoop, between 84 percent and 95 percent of all families would owe no income taxes, and the system would return to its origins, when it affected only the very well-to-do. The affluent also would claim the $100,000 to $150,000 exemption, plus an unlimited deduction for new retirement savings. But every other dollar would be taxed at 25 percent rate, regardless of whether the taxpayer earned or received it as salary, dividends, stock options, the “carried interest” of hedge and private equity fund managers, foreign royalties, or lottery winnings. This is progressive tax simplification with a vengeance.  

Of course, a 25 percent tax on the income of only a small share of Americans will produce much lower revenues than the current system; and taking most people off the income tax could create powerful new pressures for more spending, if they know they won’t have to pay anything for it.  So a new tax has to take the place of the income tax for most people; and the best candidate is an 8 percent to 10 percent value-added tax (VAT) that would cover everything people consume, except home purchases and rent, medical care, educational costs, and energy. Since the VAT would fall only on what people consume, not on what they save, it should have the same economic effect as the unlimited deduction for new retirement saving for higher-income people.  Together, these provisions come close to eliminating taxes on new savings, enabling the country to finance more of its own investment and deficits without borrowing hundreds of billions of dollars a year from China, Japan, and Middle Eastern oil states. And the Earned Income Tax Credit can be scaled up to offset the cost of the VAT for lower-income families.  

We exempt energy from the VAT, because energy is the focus of a third major tax reform, the enactment of a carbon-based tax to address climate change. Economists have long favored this approach over a cap-and-trade program, mainly because cap-and-trade creates more volatility in energy prices, which in turn harms the overall economy and weakens the incentives to develop new climate-friendly fuels and technologies. A direct, carbon-based tax, which will adjust the prices of different forms of energy in direct proportion to their harmful effects on the climate, makes more sense economically and environmentally. The last question for progressive tax reform is what we do with the $200 billion a year in new revenues which a serious commitment to address climate change would generate. Since the point of climate policy is not to make people poorer, but only to induce everyone to use less climate-damaging forms of energy – most notably, phasing down coal – the answer is to recycle the carbon-tax revenues through other, progressive tax cuts.  One obvious candidate is payroll tax cuts, which would further reduce the costs for businesses of creating new jobs or raising the pay of existing jobs.

How much of these carbon-tax revenues could ultimately go to cutting payroll taxes, and how much might be reserved for deficit reduction, will depend on how successful we are in the other parts of this economic plan. If progressives can unwind special-interest spending and tax subsidies, contain health care costs, and put in place a broad VAT, the vast majority of carbon-tax revenues can go for tax cuts. Yet, the final results of all of these changes will also depend on how well we navigate the final issues for this plan, involving our role in the global economy. Those matters, including financial regulation, will be the focus of part four, next week.

For background on this series on a New, Progressive Economic Strategy, please read:

• A New, Progressive Economic Strategy, Part 1

• A New, Progressive Economic Strategy, Part 2: Spending Reforms

New York City -- In perhaps the most significant energy speech he has given to date, President Obama declared his preference today for legislation, not regulation, to address climate change. In his speech, touching on the whole panoply of energy issues, he also highlighted elements of the Recovery Act aiding clean energy, such as money for the smart grid, and discussed new initiatives to harvest offshore wind, tap water currents for energy and encourage states and localities to purchase clean energy vehicles.

A speech on energy and the environment is not unusual on Earth Day. What I found most interesting about the speech, however, is that the President unequivocally stated he is squarely behind a "market based cap" or cap and trade approach to limiting emissions as outlined in legislation recently proposed by House Energy and Commerce Chariman Waxman and Subcommittee Chairman Ed Markey. Saying he supports "comprehensive energy legislation", the President signaled this will be a major priority this year.

The fact is, this is precisely the form of leadership needed to move forward on clean energy. Absent real presidential leadership, the power of incumbency enjoyed by our existing, heavily regulated energy infrastructure could easily stymie efforts to reform the industry.

But reform energy we must if we are to make good on the economic promise of clean energy, let alone the benefits for our climate and security. Today's speech significantly increases the likelihood that America will move toward a clean energy future as opposed to giving into the inertia of the status quo.

Always fact-check - I appreciate the AP's efforts in correcting the "errors" in several RNC speeches:

Attacks, praise stretch truth at GOP convention

By JIM KUHNHENN, Associated Press WriterWed Sep 3, 11:48 PM ET

Alaska Gov. Sarah Palin and her Republican supporters held back little Wednesday as they issued dismissive attacks on Barack Obama and flattering praise on her credentials to be vice president. In some cases, the reproach and the praise stretched the truth.

Some examples:

PALIN: "I have protected the taxpayers by vetoing wasteful spending ... and championed reform to end the abuses of earmark spending by Congress. I told the Congress 'thanks but no thanks' for that Bridge to Nowhere."

THE FACTS: As mayor of Wasilla, Palin hired a lobbyist and traveled to Washington annually to support earmarks for the town totaling $27 million. In her two years as governor, Alaska has requested nearly $750 million in special federal spending, by far the largest per-capita request in the nation. While Palin notes she rejected plans to build a $398 million bridge from Ketchikan to an island with 50 residents and an airport, that opposition came only after the plan was ridiculed nationally as a "bridge to nowhere."

PALIN: "There is much to like and admire about our opponent. But listening to him speak, it's easy to forget that this is a man who has authored two memoirs but not a single major law or reform — not even in the state senate."

THE FACTS: Compared to McCain and his two decades in the Senate, Obama does have a more meager record. But he has worked with Republicans to pass legislation that expanded efforts to intercept illegal shipments of weapons of mass destruction and to help destroy conventional weapons stockpiles. The legislation became law last year. To demean that accomplishment would be to also demean the work of Republican Sen. Richard Lugar of Indiana, a respected foreign policy voice in the Senate. In Illinois, he was the leader on two big, contentious measures in Illinois: studying racial profiling by police and requiring recordings of interrogations in potential death penalty cases. He also successfully co-sponsored major ethics reform legislation.

PALIN: "The Democratic nominee for president supports plans to raise income taxes, raise payroll taxes, raise investment income taxes, raise the death tax, raise business taxes, and increase the tax burden on the American people by hundreds of billions of dollars."

THE FACTS: The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, concluded that Obama's plan would increase after-tax income for middle-income taxpayers by about 5 percent by 2012, or nearly $2,200 annually. McCain's plan, which cuts taxes across all income levels, would raise after tax-income for middle-income taxpayers by 3 percent, the center concluded.

Obama would provide $80 billion in tax breaks, mainly for poor workers and the elderly, including tripling the Earned Income Tax Credit for minimum-wage workers and higher credits for larger families. He also would raise income taxes, capital gains and dividend taxes on the wealthiest. He would raise payroll taxes on taxpayers with incomes above $250,000, and he would raise corporate taxes. Small businesses that make more than $250,000 a year would see taxes rise.

MCCAIN: "She's been governor of our largest state, in charge of 20 percent of America's energy supply ... She's responsible for 20 percent of the nation's energy supply. I'm entertained by the comparison and I hope we can keep making that comparison that running a political campaign is somehow comparable to being the executive of the largest state in America," he said in an interview with ABC News' Charles Gibson.

THE FACTS: McCain's phrasing exaggerates both claims. Palin is governor of a state that ranks second nationally in crude oil production, but she's no more "responsible" for that resource than President Bush was when he was governor of Texas, another oil-producing state. In fact, her primary power is the ability to tax oil, which she did in concert with the Alaska Legislature. And where Alaska is the largest state in America, McCain could as easily have called it the 47th largest state — by population.

MCCAIN: "She's the commander of the Alaska National Guard. ... She has been in charge, and she has had national security as one of her primary responsibilities," he said on ABC.

THE FACTS: While governors are in charge of their state guard units, that authority ends whenever those units are called to actual military service. When guard units are deployed to Iraq or Afghanistan, for example, they assume those duties under "federal status," which means they report to the Defense Department, not their governors. Alaska's national guard units have a total of about 4,200 personnel, among the smallest of state guard organizations.

FORMER ARKANSAS GOV. MIKE HUCKABEE: Palin "got more votes running for mayor of Wasilla, Alaska than Joe Biden got running for president of the United States."

THE FACTS: A whopper. Palin got 616 votes in the 1996 mayor's election, and got 909 in her 1999 re-election race, for a total of 1,525. Biden dropped out of the race after the Iowa caucuses, but he still got 76,165 votes in 23 states and the District of Columbia where he was on the ballot during the 2008 Presidential primaries.

FORMER MASSACHUSETTS GOV. MITT ROMNEY: "We need change, all right — change from a liberal Washington to a conservative Washington! We have a prescription for every American who wants change in Washington — throw out the big-government liberals, and elect John McCain and Sarah Palin."

THE FACTS: A Back-to-the-Future moment. George W. Bush, a conservative Republican, has been president for nearly eight years. And until last year, Republicans controlled Congress. Only since January 2007 have Democrats have been in charge of the House and Senate.

Following on Simon's post, it's clear that the RNC not only has a flare for drama, but will straight up lie if necessary. Throughout the RNC Convention we have heard eloquent stories, partisan attacks, but no real solutions. The RNC is doing exactly what they criticized Barack Obama for doing: giving nice speeches with no substance. While during the DNC Convention, not a single speaker focused on the RNC - they might have made differences known on issues, but at no time were speakers condescending or snide about Senator McCain.  Instead, they focused on presenting their candidate and on Barack Obama's specific proposals in the areas of Energy Reform, Immigration, the Economy, and Health Care. Stories can be entertaining for awhile, but in the end, voters will ask for substance. As Gov. Sebelius stated in the Huffington Post, hockey moms may be moved by speeches, but in the end they want to know exactly how the next President will make health care affordable, increase their wages, or improve schools. As Barack Obama pointed out at Mile-High Stadium, "it's not about me" - this election should be about the American people, but the GOP strategy is precisely to make it about stories and characters. Rep. Wasserman-Shultz put it best: "Where is the beef? Where is the evidence? Sarah Palin is not a reformer...If her best example of being a reformer was trying to sell a plane on E-Bay, that is not my definition of reform." Reform is not found in the usual stretching of the truth in politics. To be successful tonight, John McCain will have to shift from this strategy of making it about Barack Obama and instead focus on how he proposes to pay for the pipelines, nuclear power, solar, and expensive alternative energy sources that Gov. Palin spoke about. He will have to explain the incentives to businesses to conserve energy, to have acessible health care for employees, and how he will make the U.S. competitive in a global, 21st century, marketplace.

As the Senate begins to debate climate change following a 74 to 14 vote to proceed, the strategy of opponents is already clear. They are painting the bill as a huge tax hike. A Wall Street Journal editorial salvo led off the barrage yesterday, describing it as a vast tax-fueled expansion of government. In turn, Republican leader Mitch McConnell of Kentucky dubbed the bill a "giant tax on virtually every aspect of the economy" and later in the day, President Bush duly termed it a "huge spending bill that... would impose roughly $6 trillion in new costs on the American economy."

Conservatives have used the expansion of government argument to great effect before, for example, in killing President Clinton's health care initiative. And the tax and spend charge is a Republican staple going all the way back to Reagan But will it fly, this time around?

It will only if proponents allow the bill to be framed in terms of the present. In present terms, a price on carbon costs money--although this legislation captures the cost and recycles it back into the economy. But the bill is not, really about the present, it's about the future. To ward off the tax charge, proponents need to show that the bill is not about taxes which people don't like but about protecting our environment--which they do--and moving our economy forward toward a better future.

The incentives created by putting a price on carbon will help create a whole new 21st Century post-carbon economy, wholly outside of government regulation, dynamic and fueled laregly by innovation that can restore America's technological leadership and economic strength. That's the argument proponents need to make.

In short, if opponents can keep the focus on the present, they can kill the bill. If proponents can make the debate about building our economic future, they can move it, if not this year, then next.

George Soros will throw his considerable weight behind the theory that hedge funds are driving up oil prices in testimony before the Committee on Commerce, Science and Transportation today. According to Soros, allowing large funds to invest in indices is new and their financial heft on the buy side is helping to push markets up beyond what fundamentals justify. If the hedge funds were to switch to the sell side, it could lead to a huge market crash.

Crashing oil and gas prices may seem like a good thing to you and me--but a potential crash is the sort of thing that makes regulators pay attention. The committee is gathering information for the FTC to use in devising rules to prevent market manipulation.

This is not the first time Soros has sounded the alarm on commodities market manipulation which he has said is creating the mother of all bubbles. But in supporting the testimony of Michael Masters in hearings by a different committee, a few weeks ago, he gives additional credibility to the hedge fund theory of skyrocketing prices. Of course the underlying fundamentals, rising demand in Asia and a falling dollars remain supportive of high prices.

Patrick Duffy of the Chicago Mercantile Exchange will argue just that in his testimony. So while Soros' testimony may set some regulatory wheels in motion, it's probably not yet time to short oil.

In other words, keep working on those electric cars, guys... we're going to need them one way or the other.

I would like to know (and if any readers know please email me) how it came to pass that the White House finally released a four year late report on the impact of climate change on the eve of Senate consideration next week of the Lieberman Warner Climate Change legislation.  The Bush Administration has fought release of the report for four years and from its contents it is clear just why.  Perhaps someone in the Office of Science and Technology Policy cared deeply enough about the climate change issue to release the report in time for next week's debate.  In any case, the picture of the future it paints is brutal.  Essentially, it predicts the end of the America we know today.

A few tidbits: By 2080, heat related deaths will soar particularly among the old and frail, streams will warm, sea levels will rise, wildfires will rage, droughts will afflict the Southwest, pests will threaten crops and billions will need to be spent both to combat flooding and air condition a hotter country.

The report only summarizes dozens of other studies but the overall effect, particularly, released on the eve of Senate debate of climate change legislation is stunning.   You can read it here. 

mmoynihan@ndn.org

In advance of Senate consideration next week of the Lieberman Warner legislation on climate change, Tony Blair has penned a thoughtful and compelling op-ed in today's Washington Post that puts forth the case for a cap and trade system in the United States. 

Why is a former British PM writing editorials in a Washington paper?

As members of the Brown government in the UK told me in London recently, Europe views US leadership as critical to global action on climate change.  The US withdrawal from Kyoto was harmful to the world's climate.  By passing strong climate legislation now, the US can set the stage for a real global accord next December in Copenhagen when the UN will lay out a successor accord to Kyoto to take effect in 2012.

If the US fails to take action on climate change by next year, it will go into the Copenhagen meeting in a considerably weakened position.  The US would then be following, equivocating and reacting, rather than leading.  Alternatively, if the US passes climate change legislation before then, we will have the opportunity to shape the Copenhagen accord and resume our rightful leadership position on the issue as the world's largest economy.  Without meaningful US leadership, it is doubtful developing countries such as China and India can be brought in, further raising the stakes for legislation and the future.

President Bush has threatened to veto the Lieberman Warner legislation and the bill the Senate will debate next week faces clear obstacles.  However, the debate next week--even if the final vote falls short--will help set the stage for action next year.  Since all three remaining Presidential candidates support climate change action, the prospect of getting a bill done will increase dramatically on January 20th.  But so will the stakes.

The urgency Blair expresses is well considered.  The Senate should do its best to move the ball forward because, on this issue, there is a deadline.

Last week I wrote about two causes of what I am calling the Third Oil Shock: 1) increased demand from China and India combined with flat supply as the world approaches its peak oil production and 2) the impact of the falling dollar which is responsible for almost half the rise in the dollar price of oil compared to the Euro price. This week I want to discuss a third possible cause: hedge fund speculation. While the first two causes suggest high oil prices are likely to be here for some time, if high oil prices reflect speculation, then there is a chance prices may come down. The role of speculation in skyrocketing prices lies behind the belief of some that we are in the midst of a commodities bubble. However, there is a lot of debate about this point. Here are a few obervations.

First, my own informal poll of hedge fund managers, none of whom invest in oil futures themselves but who track the strategies of others, suggests there is something to the speculation theory of skyrocketing prices. The word among traders and analysts is that hedge funds are driving up prices--both by bidding up oil index futures or, when they do go short, having to cover positions if bets turn sour. Hedge funds, of course, have huge leverage at their disposal...a $5 billion hedge fund can command $50 billion in capital through borrowing. And by buying futures which are already highly leveraged, the leverage becomes enormous. This was the thrust of a much talked about Barrons article that appeared about a month ago. That article and others in Seekingalpha and other investor-focused publications have detailed the strategies Hedge Funds are using to play in oil.

Second, a number of influential Senators seem to think speculation is part of the problem. Senator Lieberman has been holding hearings on the subject this past week.

While one would not expect traders to come out and talk about how they are destroying the American way of life, one hedge fund manager, Michael Masters of Masters Capital did put the blame for prices on what he called "index speculators", hedge funds buying futures of indices. His testimony included a primer for Senators on commodity speculation and graphs showing how speculators are moving the market.

The Lieberman hearings prompted a rebuke from John Dizard in yesterday's Financial Times in which he cited studies by the Commodities Futures Trading Corporation in Chicago that speculation can not lead to sustained higher prices because the participation in the markets of users--like industrial companies and the airlines--is sufficiently great to outweigh speculation. Speculators who bet against the real world, the CFTC, argues will eventually lose their shirt. The operative word, however, is eventually. It is quite possible that speculation may exacerbate spikes and how long speculation-induced bubbles continue can be anyone's guess. After all every market, even the housing market for example, eventually must reckon with supply and demand--but the reckoning may be put off for years if capital is sufficienlty abundant. And capital is certainly abundant in the oil business today--especially with money having flowed out of other asset classes such as property and structured debt.

My own guess is that there is something to the speculation theory. The history of financial markets for many years has been a pursuit of what investors consider their God-given right to double digit returns. When any one market slows, this has led them to seek out a a series of alterantive investments--from tech stocks to real estate to now, perhaps, commodities-- that by virtue of the inflow of capital alone eventually turn into bubbles.

However, the other two causes of rising oil prices, skyrocketing demand from China, India and the developing world as well as a falling dollar are still with us. If a correction does ensue as a result of the real economy intervening, it is not likely to happen until after the summer driving season. And it will not address the long term force of increasing demand for a finite resource.