Cap and Trade: Trading One Problem for Another

June 30, 2009

On Friday, barely noted by the media amid all the hubbub about the death of Michael Jackson, the U.S. House of Representatives passed sweeping “cap and trade” legislation that, over the next forty years, will slowly but profoundly change our way of life in America. 

The main goal of the legislation is to address global climate change by reducing CO2 (and other “greenhouse gas”) emissions by 83% from 1997 levels by the year 2050.  It establishes an all-encompassing energy policy and, though not stated in the legislation, also offers the added benefit of dramatically reducing our dependence on foreign oil (or so I had hoped).  The top link provided above will take you to a summary of this 1200 page bill.  (Just enter “H.R.2454” in the search window to get to the bill.  The 2nd link will take you to a Reuters article reporting on the passage of this legislation by the House.) 

I applaud the administration for tackling this urgent issue.  But, based upon my reading of the summary, I have two major concerns.  First, upon hearing that the major goal of the legislation was to reduce greenhouse gas emissions by 83%, I jumped to the conclusion that this would translate into an 83% reduction in our use of fossil fuels – eliminating our dependence on foreign oil and, with it, a big percentage of the trade deficit that has driven us to the brink of financial ruin.  But that’s not the case.  Since the law would only require that 20% of our electricity come from renewable sources by the year 2039, it’s clear that the bulk of the reductions in greenhouse gas emissions will be achieved by capture and underground sequestration.  That is, the CO2 will be removed from the by-products of combustion of fossil fuels, stored and then eventually be pumped underground. 

In fact, the legislation calls for programs to incentivize the development of the technology and even a corporation for the management of the underground storage facilities.  In other words, our strategy is to continue extracting fossil fuels from the ground, filling the voids with CO2 and other greenhouse gases, and hoping to God that it never leaks.  This is the same strategy for dealing with waste from nuclear power plants that has been such a source of concern that it has prevented any such new plants from being built in the U.S. in decades.  I think that most people, when they come to understand the strategy, will be very disappointed in this legislation.

But secondly, my bigger concern is that, as far-reaching and sweeping as this legislation is, it has a hole big enough to sail a super-tanker through it.  That is, it does absolutely nothing to address the government’s plans to increase our population by 50% by the year 2050 and indefinitely beyond.  The bill addresses total emissions but, since that’s simply a function of only two variables – per capita emissions and population – it means that if we allow the size of our population to drift higher by 50%, then per capita emissions will have to be cut not by 83% by 2050, but by 92%.  And the underground gas bubble, just waiting to explode to the surface following an unexpected catastrophe or good old corporate mismanagement, will be 50% bigger than it needs to be. 

Opponents of this legislation warn that it could dramatically lower our standard of living, cut consumption and lead to staggering job losses.  They may very well be right.  (Although the alternative of extinguishing life as we know it doesn’t seem a viable alternative.)  It doesn’t have to be this way.  By 2050 we could make dramatic progress toward cutting our population in half.  Greenhouse gas emissions would be reduced by 50% – without spending a single dime, without creating massive new government agencies requiring more taxes to fund them.  The remaining 33% reduction in emissions could easily be achieved through the conversion to renewable energy. 

Obviously, Obama’s economic advisors – avid followers of primitive, 18th century economics that relies upon population growth as an engine for economic growth – had a heavy hand in crafting this legislation.  Even when population growth has brought us to this – relying upon the creation of giant, high-pressure, underground CO2 gas bubbles to avoid cooking ourselves in our own atmosphere, they cling desperately to the mantra of economics that mankind is smart enough to overcome any obstacle to growth. 

This isn’t responsible leadership, it’s creating the illusion of action while actually kicking the can down the road, transforming today’s obstacle to further growth – global warming – into a different obstacle to further growth to be dealt with by future generations and their economists – how to deal with the threat from the rapidly growing, high-pressure, underground CO2 gas bubble.  I suspect that, if they had the opportunity to question their ancestors, they’d grab them by the throats and, barely containing their anger, would shout  “What in the hell were you thinking?!?!?”

Waving a wand and crossing our fingers, hoping that future generations can come through with technologies to comply with mandates,  isn’t the kind of serious, sober handling of issues that we expected from Obama and his administration.  Is this what they teach at Harvard, that the earth beneath us is an infinite trash can into which we can just dump our problems – out of sight, out of mind?  Come on, President Obama, get real.  We want real, permanent solutions, not dodges.

U.S. Int’l Trade Commission Calls for Tariffs on Chinese Tires

June 29, 2009

As reported in the linked article, the U.S. International Trade Commission followed up an investigation into a complaint brought by the United Steelworkers’ Union by recommending that the Obama administration impose stiff tariffs on Chinese tire imports.

A majority of the U.S. International Trade Commission recommended on Monday that PresidentBarack Obama impose additional duties for three years on imports of low-cost Chinese tires the panel says are harming U.S. industry.

In a case seen as a test of how the Obama administration will cope with Chinese trade issues, four members of the six-member commission recommended that Obama impose additional duties of 55 percent in the first year, 45 percent in the second year, and 35 percent in the third year on imports of passenger vehicle and light truck tires from China.

… Trade experts are watching to see whether Obama, who criticized China for what he called unfair labor practices during his campaign and won strong labor support in his bid for the White House, will be tougher on China than predecessor George W. Bush.

Bush routinely rejected petitions for restricting Chinese imports.

Obama won a lot of votes (including mine) by campaigning against trade policy that led to an enormous trade deficit and the loss of millions of manufacturing jobs.  But since taking office, he has welched on promises to overhaul NAFTA (the North American Free Trade Agreement), has done nothing in response to the imposition of tariffs on American products by Mexico, has turned a blind eye to dumping by the Japanese and sent his Treasury Secretary to Beijing on a humiliating mission to beg the Chinese to keep purchasing American debt.  Instead, he has chosen to be a global “team player” by disavowing the kinds of protectionist measures now recommended by his own Trade Commission while jawboning foreign leaders to boost domestic consumption and rely less on exports to the U.S.  The trade deficit has declined dramatically, but that’s purely a function of the global recession, much the same as the way international trade declined during the Great Depression.  Obama can take no credit.  But the pressure to do something meaningful to address the trade deficit is building.

Reaction to the Trade Commission’s recommendation is worth of comment:

Chinese tire producers countered that U.S. companies largely abandoned the low-cost tire market before Chinese manufacturers moved in. They also noted that no U.S. tire producers had joined the steelworkers’ complaint.

The fact that no U.S. tire producer has joined the complaint should come as no surprise.  They dare not anger China, or they will be putting their Chinese operations and sales at risk.

Vic DeIorio, executive vice president for sales of Chinese tire maker GITI in the United States, said he was disappointed that four of the six trade commissioners “felt compelled to take a decidedly protectionist path.”

“If there is a barrier placed on tires produced in China, U.S. manufacturers and distributors will simply increase importation of tires from other countries, such as Venezuela. What’s more, duties will result in higher tires prices for American consumers at a time when they can ill afford it,” DeIorio said in a statement.

DiIorio makes a valid point.  Tariffs on China alone would likely drive importers to turn to other foreign suppliers.  While Venezuela is no trade threat to the U.S., there are plenty of others like Japan, South Korea, Germany, Mexico and others who are, and would happily snap up the whole U.S. tire market if given a chance.

This kind of product-by-product, country-by-country approach to trade issues is a complete waste of time.  The Trade Commission could examine every product imaginable imported from almost any overpopulated nation and arrive at the same conclusion it has reached in this tire case.  What’s needed is a complete overhaul of U.S. trade policy, applying tariffs across the board to every manufactured product exported by every overpopulated nation, leaving domestic manufacturing as the most sensible, most economic option.

The goal is to restore a balance of trade, not halt it.  Sure it’ll drive prices higher for consumers, but consumers are also laborers and the explosion in the demand for labor will drive their incomes even higher, more than offsetting price inflation.

Maintaining the status quo, the huge trade deficit that has bankrupted this nation, isn’t an option and Obama knows it.  But, just as he is learning that talking with Iran is a futile exercise, he’ll also learn (hopefully) that no overpopulated nation is going to abandon its reliance on exports to the U.S. just because he has asked them to.  Restoring a balance of trade is Obama’s responsibility – not China’s, not Japan’s, not South Korea’s, not Mexico’s and not Germany’s.  The sooner he understands that, the sooner we can look forward to real economic recovery.

G.E. CEO Immelt’s Comments a Glimpse into Economic Policy?

June 29, 2009

General Electric CEO Jeffrey Immelt was in Detroit on Friday to announce the opening of a new G.E. facility intended to boost G.E.’s U.S.-based manufacturing and software development.  In prepared remarks, Immelt said that a rebirth of manufacturing was critical to the U.S. economic recovery and called for a doubling of manufacturing employment in the U.S.:

General Electric Co Chief Executive Jeff Immelt said on Friday the United States needs to refocus its economy on manufacturing and exporting if it wishes to recover from a brutal recession.The world’s largest economy can no longer count on consumer spending to drive demand, nor can it rely on Wall Street financial wizardry if it wants its population to continue to enjoy a high standard of living, the head of the largest U.S. conglomerate said.

“We should clear away any arrogance, false assumptions, or a sense that things will be ‘OK’ just because we are America,” Immelt told the Detroit Economic Club. “Our competitive edge has slipped away and this has hit the middle class hard.”

The U.S. should work to have manufacturing represent about 20 percent of employment, more than double its current level, he said.

Immelt then followed with an unusual “mea culpa” for G.E.’s role, and indeed the role of corporate America in general, in ruining the manufacturing sector of our economy.

“In some areas, we have outsourced too much,” Immelt said, according to a copy of his prepared remarks. “We plan to ‘insource’ capabilities like aviation component manufacturing and software development.”

The United States needs to reduce its reliance on financial services to drive economic growth, Immelt warned.

“While some of America’s competitors were throttling up on manufacturing and R&D, we de-emphasized technology,” he said. “Our economy tilted instead toward the quicker profits of financial services.”

This story may have received little coverage beyond Southeast Michigan, but it’s significant because elements of his comments seem to emanate from somewhere well beyond Immelt’s pay grade.  His call for manufacturing employment in the U.S. to more than double to 20% of the U.S. work force (as of May, it’s approximately 12 million, or about 9% of non-farm employment of more than 132 million) may be a glimpse into economic policy discussions that the Obama economic team has had with major U.S. corporate executives.  As CEO of a company that’s a significant beneficiary of contracts with the U.S. government, it’s unlikely that Immelt would delve so deeply and specifically into U.S. economic policy on his own and risk the ire of the administration without knowing that his comments are in alignment with current administration thinking. 

So I believe this is a signal of a major shift in U.S. economic thinking and policy.  Regardless of whether you’re Democrat or Republican, or how you feel about the Obama administration, you have to recognize that this is a departure not just from the economics of the previous Bush administration but from administrations, Democrat and Republican, dating back several decades – thinking that the loss of manufacturing was no big deal and that it could simply be made up with gains in high tech, financial services, services in general, or whatever was in vogue at the time.   

That’s the good news.  But, if you read the full article (link included above), you’ll see that Immelt blames the decline in manufacturing on a loss in our competitive edge.  That may also reflect the thinking of the Obama administration.  If so, while there is some truth to such a statement, it implies that we can simply “compete” our way back to being dominant in manufacturing.  That would also be consistent with his administration’s statements disavowing the use of protectionist measures in correcting trade imbalances.  Such an approach is doomed to failure because it fails to recognize the role of population density disparities in driving trade imbalances and manufacturing job losses.  Obama may see the need to eliminate the trade deficit and restore the manufacturing sector of our economy but, without real action on trade policy, including protectionist measures such as tariffs applied to imports from badly overpopulated nations, it’ll never happen.  The question is, how long is Obama willing to stick with a failed policy based on faulty economics?

Immelt’s comments and the creation of 1100 jobs in Michigan is welcome news, but they amount to nothing more than a single breath of fresh air into the face of a hurricane of economic headwinds.  We need real action on trade policy by the administration, not just talk.

Thoughts from the North Woods

June 28, 2009

Just letting  my readers know that I’ve returned from a three-week hiatus in the north woods of Wisconsin and will resume posting on current events. 

Since my concern for overpopulation and the eventual development of my economic theory relating it to deepening unemployment and poverty was inspired, at least in part, by my fear of the consequences of overpopulation for my little retreat in the woods, you may be interested in an update on what I see going on up there.  Since this was my first visit back to my cabin since the fall, at which time the collapse of our financial system and the stock market were just gathering steam, I was curious to see what effects there might be on the pace of development up there. 

I’m sad to say that, to the naked eye, there appears to be no effect whatsoever.  While I’m sure that developers and home-buyers are in more of a scramble to obtain financing, there’s no let-up in the rate at which forest is being cleared to accommodate new subdivisions and business sites.  There seems to be an endless supply of retirees from Chicago and Milwaukee looking to build a summer home “up north” to escape the heat of their other new digs in Florida. 

And among them all, carved from the forest,  is a huge new church with a sprawling asphalt parking lot.  It was a weekday when we drove past and it was completely empty, as it is for probably 166 hours out of every 168 every week.  During those two hours of services on Sunday every week, I’m sure that God is pleased by the gathering of voices raised in prayer, joyful song and praise.  But you have to wonder:  what about the rest of the time?  Does God miss the songs of the birds, the beauty of the wildflowers and all of the flora and fauna now displaced by two acres of asphalt?  Or does He think to Himself, “Aaah, good riddance!  They weren’t my best work anyway?”  It doesn’t seem likely.  That’s not the God that I think I know.  If He saw as little value in them as we seem to, why would He have bothered to create them in the first place?  Or, instead, does He think to Himself, “Thanks for all the songs and prayer, but couldn’t you find a way to give thanks and praise without leveling two acres of my forest just so that you have a place to park your cars while you park your butts in air-conditioned comfort?”  “Do you not see that I created all of this for a purpose, to enhance the quality of your lives, and not just so much rubble to be bull-dozed out of the way for your convenience?”  I wonder.

Which brings us to the logging.  There’s been no let-up in the pace, and the air is punctuated by the sound of chain saws and machinery rumbling through the forest, Monday through Friday, dawn to dusk.  Of course, it’s nothing like what took place in this area in the late 1800’s and early 1900’s, when the whole northern forest was clear-cut to provide lumber for the construction of Chicago.  Forestry practices have come a long way since then.  Nevertheless, it seems that, as the economy worsens, land owners more and more turn to  the forest as a stream of income.  An acre of trees that are more than a foot in diameter doesn’t stand a chance. 

Anyway, there’s lots in the news to comment on – cap and trade legislation, the June unemployment report, trade news – so watch for a flood of new posts this week, including my 2nd quarter update of my 2009 Predictions.  So stay tuned.

Hope you’re all enjoying the summer!

Health Care Reform an Unintended Consequence of Trade Deficit

June 8, 2009

You’ve heard me speak of the linkage between the trade deficit and the federal budget deficit – the latter driven by the need for spending to offset the consequences of the former.  Unemployment insurance is the best example.  But it will soon be dwarfed by another:  the price tag for health care reform. 

First of all, I should point out that there is no health care crisis in America.  Health care is top quality and abundant.  There are clinics, hospitals and drugstores at practically every corner.  They advertise incessantly, begging you to choose this hospital, that insurance plan and to stock your medicine cabinet with every drug imaginable. 

What we do have is an income crisis – income meaning both wages and benefits.  The median income, adjusted for inflation, has been declining for decades as millions of manufacturing jobs have fallen by the wayside, thanks to intense foreign competition while our manufacturers get no access to equivalent markets.  As a result, anything whose price has risen faster than inflation has become more unaffordable – health care being at the top of the list. 

Now the wealthy few who have benefitted the most from our idiotic trade policy will face an unintended consequence – footing the bill for Uncle Sam’s tab for health care.  Taxes will have to rise dramatically for the upper income brackets, since there’s not much left to be squeezed from the middle and lower class. 

Economic collapse, high unemployment, deficit spending and government-run health care – all thanks to our economists’ love affair with their 18th century theories, their closed minds toward the economic consequences of overpopulation (especially the imported consequences of free trade with badly overpopulated countries) and their inability to question their own conventional thinking.  The future of the U.S. isn’t looking good.

May Job Losses Evidence that Obama Strategy is Failing

June 7, 2009

The Bureau of Labor Statistics announced Friday morning that another 345,000 jobs were lost in May, raising U3 unemployment to 9.4%.  (U3 is one of the most narrow measurements of unemployment, but also the most widely reported.  U6 unemployment, the BLS measure that includes workers who have given up looking for work and those that have taken part-time jobs while continuing to seek full-time employment, rose to 16.4%.)  Ten percent unemployment, a figure scoffed at only months ago by most economists but predicted as a likelihood this year in my 2009 Predictions, is now only two months away. 

In all likelihood, the news is worse than admitted to in this report.  It isn’t corroborated by the weekly filings for unemployment.  They’ve held steady above 600,000 per week, yet the monthly job loss figure drops by half?  It doesn’t add up.  This would require employers to be re-hiring laid-off workers at a frantic pace.  Other surveys have found that there is little or no hiring taking place anywhere.  So don’t be surprised to see this 345,000 figure quietly and significantly revised upwards when next month’s figures are released.

But the worst news is found in the breakdown of these job losses.  The manufacturing sector of the economy, representing only  9% of the job market, gave up 156,000 jobs in May, more than the entire services sector, which accounts for 86% of non-farm civilian employment.  For a president who has been cajoling other nations to rely less on exports and start importing more from the U.S. in the hopes of manufacturing leading our economy out of the recession, this is terrible news.  The president’s approach – trying to talk his way out of the trade deficit – is failing, just as I predicted it would.  Toyota dealers aren’t turning away customers and directing them to a Ford, GM or Chrysler dealership.  Walmart hasn’t pulled their Chinese imports from the shelves.  There’s been no boost in exports.  The notion that these export-dependent nations will voluntarily fall on the sword and wreck their own economies just because Obama or Geithner have politely asked them to do so is laughable. 

Any deficit spending-fueled recovery is only going to exacerbate the conditions that led to our economic melt-down in the first place, the trade deficit foremost among them.  Sooner or later, Obama will have a choice to make:  whether to put his own people back to work or allow other nations to put their people to work at our expense.  He’ll have to choose between being just one more in a long line of presidents who stood by and watched America’s economic demise while being admired by the rest of the world for his eloquence and alliance-building skills, or as a president admired by Americans for putting our country back on a path to prosperity and fiscal balance while being despised by many in the world as a nationalist.

Christian Science Monitor Endorses Immigration Cuts

June 5, 2009

When a respected publication like the Christian Science Monitor calls for cuts in immigration to slow population growth, it may be time for the administration to sit up and take notice.  

President Obama has encouraged Americans to start laying a new foundation for the country – on a number of fronts. He has stressed that we’ll need to have the courage to make some hard choices. One of those hard choices is how to handle immigration. The US must get serious about the tide of legal and illegal immigrants, above all from Latin America.It’s not just a short-run issue of immigrants competing with citizens for jobs as unemployment approaches 10 percent or the number of uninsured straining the quality of healthcare. Heavy immigration from Latin America threatens our cohesiveness as a nation.

The political realities of the rapidly growing Latino population are such that Mr. Obama may be the last president who can avert the permanent, vast underclass implied by the current Census Bureau projection for 2050.

… Population growth is the principal threat to the environment via natural resource use, sprawl, and pollution. And population growth is fueled chiefly by immigration.

It’s no mystery why the U.S. continues to import people at an alarming rate. Our nation’s leaders take their cues from economists who continue to see population growth as the main driver of economic growth, blind to the relationship between excessive population densities and unemployment and hoping that no one will ask what happens when such a policy inevitably fails, since never-ending population growth is a physical impossibility.  More people means more customers, more sales volume, more corporate profits and – yes- more jobs.  But no one stops to consider whether the growth in jobs keeps pace with the growth in population, resulting in rising unemployment and poverty.  

The Christian Science Monitor can hardly be faulted for not including in their reasoning the cancerous effects upon the economy of a worsening population density, since my fledgling theory has yet to gain widespread acceptance.  It would have been nice if they had also pointed out that rampant population growth also makes the challenges of breaking our dependence on foreign oil and cutting greenhouse gas emissions nearly impossible.  But it’s refreshing that more and more mainstream media are awakening to the perils of our preposterous immigration policies.