CAFE Standards: Here We Go Again

I read today that president Obama announced the new CAFE (Corporate Average Fuel Economy) standards entered into by the Department of Transportation and the automakers. The 54.5 mpg target is the largest mandatory fuel economy increase in history, and officials claim that the plan will save Americans $1.7 trillion in fuel costs by 20251. It is also expected to lower petroleum consumption by a total of 12 billion barrels and curtail the daily requirement by 2.2 million barrels a day (b/d) by 2025 (11% of current demand). Apparently, there is no downside to the new rules:
However, the new technology to get to that standard will add an additional $6000 to the price of an automobile not to mention the fact the resulting cars are lighter and therefore not as safe.
The effects of higher fuel efficiency standards are more complex than generally proclaimed. There is a lack of historical evidence to conclude that the 54.5 mpg CAFE will reduce oil demand in the absolute sense being assumed. Much more likely, oil and oil imports will stay an essential component of the energy portfolio for decades to come. Over the next 20 years, the EIA expects the U.S. to add more than two Japans to its Gross Domestic Product ($9.5 trillion) and expand its population by the size of France (65 million people).  To that end, not even the widening focus on wind and solar power will alter our fundamental need for more crude because oil-based electricity accounts for only 3% of our total oil demand. Pre-recession growth trends are beginning to reemerge. In the International Energy Outlook 2011, the EIA’s NEMS has domestic oil demand rising by as much as 21% by 2030.  Considering that 80% of the world’s proven oil reserves are controlled by a single cartel, OPEC, we need policies to enhance, not impede, the domestic suppliers of this irreplaceable liquid fuel.

Free Enterprise

"The most important single central fact about a free market is that no exchange takes place unless both parties benefit." Milton Friedman

Wealth creation is not a zero sum game. People who get rich do so by providing a good or service that other people want and are willing to exchange something of value for. In early Mesopotania it was those people who discovered that they could collect certain types of grain and cultivate those rather than collecting them from the wild. By cultivating they were able to grow more than they might have been able to collect in the traditional hunter gatherer model. Now by inventing "Farming" they were able to produce a surplus which they then could trade for something else they wanted. Others individuals could grow domesticated animals which could be traded for grain. Once the basics of food were covered other specialties began to emerge. The potter, the clothier, the tanner, the armorer all provided a service or product people could trade for grain or meat. As societies developed they were organized around this simple  system. As new needs arose someone with a new idea would strive to meet that need. In every case the exchange was mutual. If someone wanted a better bow, or sword or pot or clothes, another was there to provide it. Housing developed and with it builders. Bronze was invented and with it came founderies. Every business continued to innovate and improve their product or service. New ideas became new products. Eventually fiat money was invented as a means to exchange which improved on the barter system and commodity money. The shekel was originally a measure of weight of an amount of grain. People gained wealth (money) by providing products or services. People with no means of exchange used their labor to gain the products they needed.
The fallacy that the rich get richer and the poor get poorer assumes that you have nothing of value or that the rich have taken from you. If a farmer produces grain to sell by his work and sweat, how does that make you poorer. If a potter digs the clay, throws the pot sells, the pot and uses the money to buy grain, build a house or hire additional help to make more pots how are you worse off. He is better off by his work but you are no worse off. He has created value and increased his wealth. You have not, so your wealth is the same. Free enterprise allows for both.

Innovation is Driving our Economy

Yesterday I was on the road and needed to check my email for a quote I expected. I stopped at a McDonalds Restaurant where I plugged in to their free wireless internet, downloaded my quote and was able to continue my journey with the information I needed. As I was cruising down the Interstate I wondered how exactely that had come about. The idea that my computer could connect to a network that included my company's email server and get a document I needed is almost beyond my comprehension. The evolution of computers, networks, servers, routers, the Internet and the people who have made it all work and continuously improved it boggles my mind.
I remember when the first personal computers came about. My company had a large mainframe to do A/R computing. It was cumbersome and slow but still way faster than doing it by hand. The personal computer's first "killer ap" as Bill Gates called it was word processing. Once people learned that this system could make typing documents easier it was adopted post haste and the typewriter went the way of the buggy whip. Since now we had documents on computer disks printers had to evolve to keep up with the speed of the computers and we went from large tractor feed printers to document printers and many new companies were formed and grew quickly. One such company Xerox had been doing some research on how to get different computers to all use the same printer and ultimately the Internet was born. Now this is probably an oversimplification but the internet was originally conceived by a private company to get an edge on the competition.
Originally the internet was slow and over phone lines. As phone companies moved to fiber optics the speed got faster. With faster speeds more things became possible. Innovators saw an opportunity to access millions of customers around the world with their applications. Where once we had the local hardware store selling shovels and rakes, nails and hammers to the local populace now from your living room through the internet you can sell anything and your market is the 2 Billion people worldwide connected.
The amount of wealth created across the internet/computer universe is something to behold. What will be the NEXT BIG THING.

Innovation and Tweaking

The world economy is driven by innovation. Inventors finding a better way of doing things. People finding a better way is part of our DNA and we have been doing it a long time. The Tigris and Euphrates valley which is now part of Iraq is considered the "Cradle of Civilization". In about 6500 BC the hunters and gatherers discovered that certain stalks of grain had changed (mutated) so that the seeds were held on the stalks longer and not spread by the wind. In nature, this mutation would be a death sentence as it would leave all the seeds vulnerable to weather and varmits. The Mesopotamians used this mutation to harvest more grain and when planted intentionally in prepared fields saved them days of hunting for the wild versions. This enabled a society to be built to replace the nomadic lifestyle they had enjoyed previously. People became specialists, farmers, hunters etc. With new found free time they began to invent and civilization has never been the same. Once people settled down in communities the sense of property ownership led to conflict over territory, water and natural resources. Innovation for hunting and killing evolved from killing animals for food to killing opponents in war. Bows and arrows and swords and knives led to guns. Catapults and other seige machines led to cannons and artillery and ultimately to planes and nuclear weapons. Each innovation was driven by trying to get better at killing but the ultimate goal was peace and prosperity.
Fast forward now to modern day inventions. From the spinning machines that began the industrial revolution in England to the steam boiler, to multiple farm innovations like the threshing machine, the cotton gin, the corn picker, cow milking machine, reaper, tractor, haying equipment and  crop rotation. Agricultural innovation has allowed modern farmers to feed the world. Innovation at each level and each age of society has started with inventors who saw a need for a better way but has been further developed by tweakers. These innovators have taken inventions by others and made them better. The tweakers of the world have given us personal computer that get smaller, faster, and cheaper every year, a system based on the Internet that has revolutionized communication, digital everything, solar panels, windmills, geothermal heating systems, automobiles, planes, trains and many many more. We owe our modern society to tweakers.

Energy Prices and Speculation

Energy Prices and Speculation

Nothing gets me more riled up than when the President says he has no control over energy prices, especially gasoline prices. While technically the president does not control what happens on the world market, what the US does will affect the worldwide market more than he will admit. Speculation, that is buying commodities in anticipation of selling at a profit, can only be profitable if the speculator accurately predicts what the market will do either going up or coming down. Most commodity traders will tell you that the best thing necessary to fix high prices is high prices. The market is the market. If traders feel the demand is outstripping supply they will buy now to lock in supplies for their refinery or plastic plant or power plant. If they feel that supply is outstripping demand they will either not buy or sell some of their hedged supplies. If the market anticipates increased supply in the near term then why would they buy? The market today is priced based on reduced drilling on federal lands (down 44%) reduced leases in the Gulf of Mexico (down 57%) reduced or no drilling in ANWR. permits for new drilling (down 39%) and the lack of the Keystone Pipeline which will bring North Dakota shale oil and Canadian tar sands oil to market. While none of those things would bring down gasoline prices overnight, the anticipated supply down the road would moderate prices by eliminating the anticipated shortages and thus the higher prices. The market works.

Economics, Manufacturing and Jobs

The constant drumbeat of "outsourcing" or "offshoring" and " jobs going overseas" does a disservice to all the manufacturers here in the USA and the size and scope of our economy. For all the noise about imports from China, they only represent a small percentage of our GDP. In a recent publication (8/8/2011) by Galina Hale and Bart Hobijn, two economists at the Federal Reserve Bank of San Francisco, titled "The U.S. Content of 'Made in China." Hale and Hobijn find that the vast majority of goods and services sold in the United States are produced here. In 2010, total imports were about 16 percent of U.S. gross domestic product, and of that, 2.5 percent came from China.
Much of what China sells us has considerable "local content." Hale and Hobijn give the example of sneakers that might sell for $70. They point out that most of that price goes for transportation in the U.S., rent for the store where they are sold, profits for shareholders of the U.S. retailer, and marketing costs, which include the salaries, wages and benefits paid to the U.S. workers and managers responsible for getting sneakers to consumers. On average, 55 cents of every dollar spent on goods made in China goes for marketing services produced in the U.S.
Going hand in hand with today's trade demagoguery is talk about decline in U.S. manufacturing. For the year 2008, the Federal Reserve estimated that the value of U.S. manufacturing output was about $3.7 trillion. If the U.S. manufacturing sector were a separate economy — with its own GDP — it would be tied with Germany as the world's fourth-richest economy. Today's manufacturing worker is so productive that the value of his average output is $234,220, three times higher than it was in 1980 and twice as high as it was in 1990. That means more can be produced with fewer workers, resulting in a precipitous fall in manufacturing jobs, from 19.5 million jobs in 1979 to a little more than 10 million today. Add to that the rise in the minimum wage which drives many low skilled workers out of the workplace. And the various rules and regulations in all sectors of the economy which drive up the costs of everything including labor. Our schools are failing their students by not training them for the jobs that exist.
The bottom line is that we Americans are allowing ourselves to be suckered into believing that China is the source of our unemployment problems when the true culprit is Congress and the White House.

Renewable Energy

Renewable energy is a joke. I just received the latest numbers on the growth of renewables worldwide and the breakdown of total world energy consumption by supply. For the renewable gang it is not encouraging. The headline sounds good "Renewables supply 16.7% of global energy consumption". While that number sounds impressive, once you look at the breakdown it is less so. Let's look at it.
Global energy consumption from fossil fuels, coal, oil and natural gas is 80.6%. An additional 2.7% is from nuclear power. That leaves the 16.7% from renewables. Not too bad you say? Not so fast. of the 16.7%, 8.5% is from "traditional biomass". That means all the subsistance farmers who are cutting down the forest or using dung for cooking fuel. This source has been used for centuries. Lumping it in as a renewable is really laughable since it is difficult to measure and it is outside the traditional energy uses. I would consider traditional (acceptable) uses of energy as 1) energy for electric power 2) Energy for transportation fuels 3) Energy for heating but I digress.
Removing the 8.5% "traditional biomass" you are left with 91.8 % of energy use from fossil fuels or nuclear. Of that 3.3% is hot water from biomass/geothermal/solar, 3.3% is hydro, .9% is power from wind/solar/biomass/geothermal and .7% is biofuels.
Now, don't get me wrong, I am not against renewables as an energy source. There are many places on the planet where renewables make sense and alternative fuels will make an impact sooner rather than later. However, for the greenies to eliminate fossil fuels from the mix is not only unrealistic but it is impossible in the near term. Societies have been built on relatively cheap energy and our lifestyle and standard of living is based on that. That is why most emerging societies are trying to emulate the success of the western world. They want what we have and they will need energy to get there.
We are learning about conservation, energy efficiency, waste management, recycling and "smart" technology all of which will contribute to the overall energy picture. Ending the use of fossil fuels is not in the cards.

Economics and Energy

Economics and Energy

I often hear that we are running out of energy or we need renewable or clean energy. While I am sympathetic to the emotion and would love a system of clean renewable energy I am also a realist. In our energy dense economy and given our standard of living that has been enabled by our use of energy there is not a lot I would give up to get to a fossil fuel free world.

Let’s face it, the drive to a “renewable” energy future is based on the notion that we will run out of fossil fuels, fossil fuels are dirty and that the government should intervene in the market for our own good.

I am not an economist. I do, however, understand supply and demand and that economic concept in a free society means everyone responds in their own best interests to market realities. Those realities mean that oil drillers will search for oil or natural gas and coal mining companies will search for and dig coal as long as the revenue produced is enough to offset the cost of production and produce a reasonable profit for the stockholders. You and I will buy their oil, gas or coal or the power produced from it as long as we perceive the price to be worth giving up our money for. Is it worth paying for that electric to have air conditioning in my house? Yes, so far. Is it worth paying for that natural gas so I will have heat and hot showers. Yes, so far. Is it worth paying $4.00/ gallon and getting 20 mpg to travel for my work? Yes, so far. What about using the electric stove or my coffeemaker or charging my cell phones or the TV or VCR or lights after dark or the blender for my smoothies or my computer and laptop and kindle? Yes, so far. We all trade money, which we value, for stuff we value more. And we all make choices every day about what we value more. Do I trade my money for $12.00/lb Filet Minion or $3.99/lb pot roast? Do I buy the $5.00 bottle of wine or the $50.00 bottle?

Energy is a commodity and as such is priced by worldwide demand. As demand increase and supply stays the same the price necessarily increase because more people (customers) are chasing the same supply. If you own a commodity do you sell it for $75.00 if someone will pay $100.00. Nope. The reverse is also true as we have seen in Natural Gas. Large increases in supply from the Marcellus and Utica Shale plays have driven the price down.

Now, with this basic economics in mind will we run out of fossil fuels? Let’s look at it. As the supply declines then the price will necessarily go up as customers who need the fuel will bid up the price. As prices go up, two things happen. 1) there is more of an incentive to look for more where it hasn’t previously been economical to look and 2) people will cut back on uses of fuel that they don’t deem economical ie buy smaller cars, set the thermostat warmer in summer and cooler in winter etc etc. This actually mitigates the price rise until continued higher demand stabilizes prices at the higher rate. The other thing that happens is that the alternatives to traditional fuels begin to look better. If coal fired electric is at $.10/KWH as mine is and Wind Generated electric is $.40/kwh, which one do I choose? If coal goes to $.40/kwh then I would choose Wind. Until then I’ll use coal.

My point here is that the market will decide. The best thing to cure high prices is high prices. Higher fossil fuels costs not only will discourage demand but will encourage lots of alternatives. Artificially raising prices by fiat or regulation or tax credits ultimately will fail because the market is the market. People will find ways around the regulations or the economics just don’t work. Entrepreneurs and innovators have been finding better ways to do things for centuries. That innovation is driven by self-interest.

Economics and Insurance

This is a good stepping off point for a lesson in basic economics. Mr Obama's recent foray into the religious contraception business is a case in point. His compromise to "Make" the insurance companies pay for the coverage is disingenuous at best. Who does he think pays for the coverage? An insurance company's business is managing risk and assuring its policyholders that they will have enough money from premium collections to pay all the claims. To do that the actuaries determine the probability of various claims, their cost and determine premiums based on the exposure to the loss (claim) There is no free lunch, if the insurance company has to pay the claim then the policyholder has to pay the premium. The reason insurance premiums are as high as they are is because politicians continue to insist that people have a right to this treatment or that treatment and they shouldn't have to pay for it. Why is it that if I have fire insurance on my house I consider it protection but if I have health insurance I feel like I am getting cheated if I don't use it. Health insurance originally was invented to get around another government intervention, wage and price controls during WW2. Since the government did not allow wages to increase businesses offered health insurance to attract employees. Government intervention in the free market never works. Insurance was invented to mitigate risk. We have made it something it was never intended to be and in the process have driven up the costs of health care. We equate not having health insurance with not having health "care" and continue to insist that those who don't have health insurance are having their care paid for by everyone else. Please Mr. Liberal stop helping me.

And for the so called “trickle down” policies that caused the 2008 meltdown, we all know or should know by now that the Community Reinvestment Act of 1977 was the beginning of the problem. Over the years it morphed from a relatively hands-off law focused on process into one that focused on outcomes. Then in the 90s the Fed pushed interest rates down. This made refinancing more attractive, and created an investor demand for yield. Fannie and Freddie popularized low-income securitization. Home owners traded high interest credit card debt for low interest mortgage debt. Banks loosened lending standards to comply with the CRA. The housing boom which was fueled by the loose credit ground to a halt as it became clear that the economy was softening and would no longer support the price inflation that was caused by loose credit, no down payment and no-doc or lo-doc loans. To say that all this was caused by the Republicans is just laughable.

Global Warming and Climate Change

I am a denier. I make no bones about it and will take every opportunity to challenge the ACG school about it. I have seen much of the data and read a lot of the"sky is falling" rhetoric but have not seen any definitive cause and effect documentation. Is the CO2 concentration increasing in the atmosphere? Yes, I think it is based on empirical evidence. Does that mean the Earth will get warmer? I am not convinced that there is a cause and effect there. All the subjective conclusions are based on computer models and my xperience with computers is "garbage in garbage out". There are too many variables to depend on a computer model. The assumptions you must make are too numerous and our knowledge base doesn't give us enough information. Even ice cores which we can examine for CO2 levels have shown that CO2 levels actually trailed warming historically. Besides CO2 is only 0.038% of the atmosphere and is an integral part of all life based on earth. Are we so sure it is bad?
Well, what about glaciers melting? I am sure some glaciers and some sea ice is melting. Given that there are 160,000 glaciers worldwide and only 37 have records going back 30 years and only 120 have been directly measured. I doubt that they can extrapolate to the extent they have accurately. In the Hidu Kush Himalayan Range there are estimated to be 54,000 glaciers of which only 10 have been studied regularly.
If you assume that all the glaciers are melting then it is logical to assume sea level will rise but they aren't and it won't. No one has been able to show definitavely that sea levels are rising and Nils-Axel Mörner, Swedish geologist and physicist, who for 35 years has been using every known scientific method to study sea levels all over the globe, says that all this talk about the sea rising is nothing but a colossal scare story.
When I see that CO2 is only 0.038% of the atmosphere and is necessary for all life forms on earth. When I see global warming computer models showing glaciers melting and sea level rising when they have only studied less than 1% of total glaciers and they can't demonstrate sea level rising I guess I would say I am skeptical.
I have an open mind and if I see more empirical evidence I might be swayed but assumtions based on computer models and supposition probably won't do it.

Liberals versus Conservatives

 It is interesting how the liberals only hear what they want to hear, disregard the reasonable arguments to the contrary and continue to reiterate the half-truths and lies.

Let me start with the needless war. Have we forgotten Saddam Hussein and his weapons of mass destruction? Granted they didn’t find any WMD but given Saddam’s history and predilection for violence against his own people could we afford to take a chance especially after 9/11. I think not.

The tax cuts… generally tax cuts stimulate economic activity and increase the total revenue to the government as happened under Reagan. After 9/11 the effect on our economy could not be predicted but with the tax cuts, revenue to the government rebounded to year 2000 levels by 2006.

Rather than being caused by the lax regulation, the economic collapse was principally caused by the government intervention in the free market with the Affordable Housing Act 1990. This forced banks to lend money in areas and to people who they might not otherwise lend. In order not to end up with that bad loan they sold it to Fannie Mae or Freddie Mac. Then they invented Mortgage Backed Securities to further insulate themselves from the government demanded risk. Many people used the freer credit to refinance their mortgages to pay off credit card debt and many people got interest only or low or no-dock mortgages. When these risky loans began to default, the whole house of cards came crashing down.

Reagan presided over 11 tax increases for a cumulative total of $132.7 Billion. He also presided over 4 tax cuts for a cumulative total of $275.3 Billion. Net effect?  More revenue.  And to be fair some of the tax increases he agreed to were in conjunction to the Congress agreeing to spending cuts which they reniged on.   Historically tax revenues have been steady at 18% of GDP since 1960 even during Jimmy Carter’s presidency when marginal rates were 71%. As the tax rates increase, people change their behavior and tax revenue stays relatively the same. The solution is increased economic activity.

If it comes down to liberalism, belief  in government action to achieve equal results or conservatism, belief in personal responsibility, limited government, free markets, individual liberty, traditional American values and a strong national defense, I’ll take conservatism every time.

Spending is Taxing

As the presidential election heats up we hear continually the Democrats cry "fair share" and "tax cuts for the rich" and the Republican cry "cut spending" "cut taxes". Since all spending is a form of taxing I will take the high road. Cut the size of government and you need fewer taxes on the rich or anyone else for that matter. Art Laffer has been instrumental in helping explain via the "Laffer Curve" that increasing taxes "on the rich" actually decreses revenue. President Obama chalks this up to a fairness issue but the fact is "the rich", the top 10% pay 70% of all personal income taxes.
Leaving taxes aside for a second, let's talk revenue. The total revenue to the US Government is estimated to be 5.1 Trillion dollars in 2012. My vote would be to make Congress (and the President) keep spending within that estimate. Part of our problem has been and continues to be baseline budgeting which assumes baseline at last years spending and allows an increase over that number supposedly for inflation. This is how we get the GSA scandal and other reckless spending. No one looks at how they can reduce spending. They just see additional revenue in their budget each year and figure out ways to spend it. Baseline budgeting goes back to the Congressional Budget Act of 1974 and presently assumes a 6% growth rate. That is why whenever Congress talks about a "cut" it is never a reduction in spending but a reduction in the built in growth of spending. This growth in spending which is automatic has forced continual growth in taxing to keep up.
Government spends too much and therfore we are all taxed too much. By increasing spending when revenues were decreasing due to the recession we have built up a debt we cannot pay. Stop the madness. We need to get back to 0 based budgeting. Every department in the government should have to justify their spending for budgetary approval and Congress should not increase ANY spending until that happens.
This Presidential Election will be about big ideas. This is the biggest one and the most important one. Let us hope and pray that the smart people who want to be President can see that.

Presidential Elections

Our presidential elections should be about substance, not demagoguery, inuendo or classless attacks based on lies, distortions and falsehoods. We are better than that. Great ideas are what built this country from the start. The founding fathers had seen what happens in a top down monarchy government and wanted something better and more free. The system they came up with, a constitutional republic was different than any other government on the planet and was based on the assumtion that man was free first and mutual free exchange was the best system of managing our affairs. In the process they allowed for government to provide for the common defense as well as the rule of law and private property. In the process they put in place checks and balances which were intended to keep any one branch of the goverment from getting to powerful over the rest of government and the process should proceed slowly.
We have lost our way. We have allowed our Congress to become permanent residents of Washington DC instead of the citizen legislators the founding fathers envisioned. We have allowed the Executuve branch to run roughshod over the Constitution with czars outside the purview and oversight of Congress and the use of Executive orders that counter the will of the people. We have allowed the Executive Branch under whom the Attorney General works to selectively enforce laws they agree with and not enforce laws they don't agree with, completely turning the Congressional lawmaking authority on its head. We have allowed influence peddling on Captal Hill and a revolving door from Congress to lobbying. Congressmen and women have gotten rich by special favors and sweatheart deals not available to the common man.
This election is shaping up to be a turning point where we talk about big ideas. The Republicans will be talking about big ideas, fixing our problems and taking us to the next level. All the Democrats have is race baiting, scare tactics, tax more, spend more and demegogueing everything said on the right. It is time we stuck to the big ideas and not get dragged down in the gutter with the liberals and progressives. We get the government we deserve. We deserve better.

Milton Friedman: Capitalism and Freedom

   Today I'm wondering, after listening to a number of Milton Friedman's videos on the 100th anniversary of his life, how we managed to muck up our government so bad. Dr. Friedman's ideas about Capitalism and Freedom resound so solidly I can't believe that we have strayed so far from his ideas that freedom makes us all better off. When you look at the 19th Century and the Industrial Revolution you see that the free markets improved the lot of most Americans and in the process things got cheaper. When Vanderbuilt was plying the Hudson River providing his passenger service to people wanting to go to Albany he became rich. In the process fares to Albany became cheaper. When mechanization improved farming and allowed individual farmers to farm more land and produce more crops, food became cheaper. In every case where a need was met and a voluntary exchange was made between two parties usually both parties were better off. Products and services were created as needs developed and entrepreneurs built businesses around those products and services.
  As businesses grew, thay wanted protection from unfair competition and asked the government for protection. As soon as the government began to "protect" us we began to give up our freedom and the slippery slope began. When we asked that the government "protect" us from inexpensive steel imports they complied and put tariffs on steel. While the tariff protected steel companies and steelworker unions, the higher price of steel cost jobs in other areas of the economy that would have benefited from cheaper steel. When free trade is entirely free both parties benefit and there is a free exchange. When controls are put in place someone loses. Little by little we have given up our freedom as we have allowed controls to become more and more pervasive on more and more things.
   We have done it to ourselves. In an effort to have equality in everything we have give up freedom little by little. As Milton Friedman said, "A society that puts equality before freedom will get neither."