The Case Against Rent Control: Bad housing policy harms lower-income people most by Robert P. Murphy

To someone ignorant of economic reasoning, rent control seems like a great policy. It appears instantly to provide “affordable housing” to poor tenants, while the only apparent downside is a reduction in the income flowing to the fat-cat landlords, people who literally own buildings in major cities and who thus aren’t going to miss that money much. Who could object to such a policy?

First, we should define our terms. When a city government imposes rent control, it means the city makes it illegal for landlords to charge tenants rent above a ceiling price. Sometimes that price can vary, but only on specified factors. For the law to have any teeth — and for the politicians who passed it to curry favor with the public — the maximum rent-controlled price will be significantly lower than the free-market price.

The most obvious problem is that rent control immediately leads to a shortage of apartments, meaning that there are potential tenants who would love to move into a new place at the going (rent-controlled) rate, but they can’t find any vacancies. At a lower rental price, more tenants will try to rent apartment units, and at a higher rental price, landlords will try to rent out more apartment units. These two claims are specific instances of the law of demand and law of supply, respectively.

In an unhampered market, the equilibrium rental price occurs where supply equals demand, and the market rate for an apartment perfectly matches tenants with available units. If the government disrupts this equilibrium by setting a ceiling far below the market-clearing price, then it creates a shortage; that is, more people want to rent apartment units than landlords want to provide. If you’ve lived in a big city, you may have experienced firsthand how difficult it is to move into a new apartment; guides advise people to pay the high fee to a broker or even join a church because you have to “know somebody” to get a good deal. Rent control is why this pattern occurs. The difficulty isn’t due to apartments being a “big-ticket” item; new cars are expensive, too, but finding one doesn’t carry the stress of finding an apartment in Brooklyn. The difference is rent control.

Rent control reduces the supply of rental units through two different mechanisms. In the short run, where the physical number of apartment units is fixed, the imposition of rent control will reduce the quantity of units offered on the market. The owners will hold back some of the potential units, using them for storage or keeping them available for (say) out of town guests or kids returning from college for the summer. (If this sounds implausible, consider just how many people in a major city consider renting out spare bedrooms in their homes, as long as the price is right.)

In the long run, a permanent policy of rent control restricts the construction of new apartment buildings, because potential investors realize that their revenues on such projects will be artificially capped. Building a movie theater or shopping center is more attractive on the margin.

There are further, more insidious problems with rent control. With a long line of potential tenants eager to move in at the official ceiling price, landlords do not have much incentive to maintain the building. They don’t need to put on new coats of paint, change the light bulbs in the hallways, keep the elevator in working order, or get out of bed at 5:00 a.m. when a tenant complains that the water heater is busted. If there is a rash of robberies in and around the building, the owner won’t feel a financial motivation to install lights, cameras, buzz-in gates, a guard, or other (costly) measures to protect his customers. Furthermore, if a tenant falls behind on the rent, there is less incentive for the landlord to cut her some slack, because he knows he can replace her right away after eviction. In other words, all of the behavior we associate with the term “slumlord” is due to the government’s policy of rent control; it is not the “free market in action.”

In summary, if the goal is to provide affordable housing to lower-income tenants, rent control is a horrible policy. Rent control makes apartments cheaper for some tenants while making them infinitely expensive for others, because some people can no longer find a unit, period, even though they would have been able to at the higher, free-market rate. Furthermore, the people who remain in apartments — enjoying the lower rent —receive a much lower-quality product. Especially when left in place for decades, rent control leads to abusive landlords and can quite literally destroy large portions of a city’s housing.

20141014_RobertMurphyABOUT ROBERT P. MURPHY

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

5 Economic Myths That Just Won’t Die by Corey Iacono

A persistent set of economic narratives still plagues us.

Most people get their economic information through Internet memes and hit pieces filled with nonsense. A common theme is that the forceful hand of government is all that is needed to make things right.

For example, everyone “knows” that government laws ended child labor, and that the New Deal ended the Great Depression, but are these actually valid claims?

Here are five such myths that too many people just accept as true.

Myth 1. The idea that economic growth helps the poor is trickle-down economics … it doesn’t actually help them.

In a 2001 paper titled “Growth Is Good for the Poor,” economists Art Kraay and David Dollar of the World Bank found that when average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This result held across regions, periods, income levels, and growth rates. In 2013, more than a decade after their original paper, Kraay and Dollar explored the relationship between economic growth and poverty again, using data from 118 countries over four decades. They came to the same conclusion. According to the economists,

This evidence confirms the central importance of economic growth for poverty reduction … institutions and policies that promote economic growth in general will on average raise incomes of the poor equiproportionally, thereby promoting “shared prosperity” … there are almost no cases in which growth is significantly pro-poor or pro-rich.

This means that policies that enhance economic growth through methods such as limiting the size of government and lowering barriers to international trade are key to alleviating poverty. Economic growth, not transfer programs, is in fact the primary driver of poverty reduction, and this empirical truth has been proved for a long time.

Myth 2. Free trade doesn’t lead to better economic outcomes in the real world.

Paul Krugman once quipped, “If there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the Principle of Comparative Advantage’ and ‘I advocate Free Trade.'” However, critics of free trade, such as development economist Ha Joon Chang, have made very odd statements such as this one:

There is a respectable historical case for tariff protection for industries that are not yet profitable. … By contrast, free trade works well only in the fantasy theoretical world of perfect competition.

Comments like these are puzzling because proponents of free trade don’t assume there is perfect competition. They simply recognize that if one country can produce a product at a lower opportunity cost than another, trade between the countries (or individuals) is mutually beneficial. (This is known as the theory of comparative advantage.)

Economists have examined countless times whether or not freer trade leads to greater economic growth. In regard to trade liberalization — reform that lowers barriers to international trade — the evidence consistently shows that such reforms improve economic performance over time.

According to one study that examined 141 trade liberalizations and compared economic performance before and after liberalization (after controlling for confounding factors), “Per capita growth of countries [after]liberalization was some 1.5 percentage points higher than before liberalization, and investment rates were 1.5–2.0 percentage points higher.”

Subsequent research from Antoni Estevadeordal and Alan M. Taylor took the analysis further by comparing growth rates before and after 1990, when a wave of trade liberalizations occurred. The economists divided countries into an experimental group (the countries that liberalized trade regimes) and a control group (those that did not). According to a summary of their research, the authors “find strong evidence that liberalizing tariffs on imported capital and intermediate goods raised growth rates by about one percentage point annually in the liberalizing countries.” Research has also shown that trade liberalization has caused greater economic performance in sub-Saharan Africa, a region desperately in need of growth.

Reforms that result in freer trade generally lead to superior economic outcomes. This is a well-documented observation. Although there may be situations in which freer trade is undesirable, these situations are not the norm, and free trade policies are still the “reasonable rule of thumb,” as Paul Krugman has put it.

Myth 3. The government ended child labor. In a free market, child labor would still exist.

The assertion that government laws and regulations ended child labor is endlessly repeated and often used as “proof” that without such laws, child labor would be pervasive in the market economy. The Economic History Association (EHA) has shown this is not the case:

Most economic historians conclude that [child labor] legislation was not the primary reason for the reduction and virtual elimination of child labor between 1880 and 1940. Instead they point out that industrialization and economic growth brought rising incomes, which allowed parents the luxury of keeping their children out of the work force.

According to the National Bureau of Economic Research, “While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness.”

Not only is there little evidence supporting the effectiveness of these laws; there is evidence that such laws actually make the families they are intended to help worse off. Research on child labor bans in India found that “along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the [child labor] ban.”

Myth 4. Countries like Sweden and Denmark prove that high taxes don’t harm economic growth.

Saying that high taxation doesn’t harm economic growth because its effects aren’t superficially visible in one country, or a few, is like saying that cigarettes don’t harm an individual’s health because many young and healthy people smoke them and there are no immediately clear detrimental effects. Many factors affect economic growth. In order to see how high taxes affect growth, researchers control for confounding variables and use large national and international data sets.

According to research published by the European Central Bank that used annual data from 1965 to 2007 for 26 economies, “the effect of an increase in taxes on real GDP per capita is negative and persistent: an increase in the total tax rate (measured as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%.”

Numerous other studies on government size and economic growth have come to the same conclusion. Furthermore, a study of the macroeconomic effects of Danish taxation found that

Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States.

However, even relatively low-taxed countries like the United States are not immune to the detrimental effects of taxation. A seminal paper by Keynesian economists Christina and David Romer found that taxes are often raised during times of economic expansion and cut during times of economic downturn. This tendency makes it harder to observe the effect of taxes on economic growth. However, the Romers found that they could accurately estimate the effects of tax changes by examining those that were undertaken for reasons unrelated to economic growth. According to the Romers’ estimates, “tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.” Specifically, they find that increasing taxation by 1 percent of GDP shrinks GDP by 3 percent!

Overall, it seems clear that higher levels of taxation stifle economic growth and that countries with a higher total tax burden have slower-growing economies than countries with smaller tax burdens, holding other things equal.

Myth 5. Capitalism isn’t economically superior to socialism.

A considerable amount of research has examined how a transition from socialism (or a repressed-market economy) to a market economy (or a freer market economy) — a process known as economic liberalization — affects economic growth.

For example, using data from 140 countries over the time period 1960–2000, economists from Bocconi University compared countries that underwent economic liberalization to those that didn’t. After controlling for other relevant variables, they found that

economic liberalization is good along all dimensions: it is accompanied by better structural policies and better macroeconomic policies, and it is followed by improved economic performance. This timing suggests a causal interpretation, at least with regard to economic outcomes.

Subsequent research published in the Journal of Economic Surveys has found that “there are strong indications that liberalization … stimulates economic growth.” For a specific example, look no further than China.

Research from Oxford University’s economics department has found that China’s economic growth, which has been driving its massive poverty reduction, was fueled by trade liberalization, rapid privatization, and sectorial changes. As a result of these reforms, China’s GDP per capita grew 4.1 percentage points faster than it otherwise would have, lifting millions out of poverty.

A review of over 40 studies on the relationship between economic freedom and economic growth (with economic freedom measured using the Fraser Institute’s Economic Freedom of the World Index) found that research consistently demonstrates that freer markets are robustly associated with greater economic performance. Studies have shown that economic freedom causes economic growth; the relationship is not a mere correlation.

Empirical research also finds that “countries can increase the utility of their national resources by approximately 45% simply by converting to market-based economies” and also consistently finds that the private sector is more efficient than the public sector.

Conclusion

It is often assumed that government is a tool for creating better economic and social outcomes, but what if government is actually an obstacle to these ends? The evidence cited here suggests that governments cannot simply legislate problems out of existence. In fact, intervention often exacerbates the problems it was meant to solve.

Furthermore, the assertions that traditional economic theories don’t apply to reality are false. Research shows that taxes do distort the economy, growth is good for the poor, and freer trade does lead to greater economic performance.

ABOUT COREY IACONO

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

Should Google Run a City? by Mark Lutter

Let the search powerhouse experiment with governance.

Would you want to live in a private city?

No? What if Google were running the city?  Would that change your mind?  Google building and running cities is less crazy than you think.

Google has expressed interest in constructing cities, and Larry Page wants to create autonomous zones that can experiment with social rules. Combined, these two ideas have the potential to transform the world. Institutional change can jumpstart economic growth while competent, efficient administration can ensure those gains are not lost to corruption.

The idea of private cities typically invokes fears of a dystopian future, where malevolent corporations ruthlessly exploit the population for profits. Government is seen as a last defense against private tyranny. However, by replacing a nameless corporation with Google, the thinking changes. Rather than fear predation, we appreciate the benefits of efficient administration.

Companies like Google think long term. They are unlikely to sacrifice their hard-earned reputations for short-term gains. Further, Google is pragmatic. It will think outside the status quo, adopting the best policies to attract residents. Finally, Google is sufficiently big; it will not be intimidated by rent-seekers trying to live off others’ work.

Despite these benefits, many will be skeptical. People living in the United States and Europe tend to have good lives and fairly well-run cities. The recent battles between Uber and taxi cartels show the potential for improvement, but to a Westerner, the benefits of allowing Google to run cities are marginal.

The real potential for Google and others creating private cities is in the developing world. Poor countries are poor because they have predatory governments. These governments prevent their citizens from engaging in entrepreneurship. They also give monopoly privileges to their friends and family, enriching them at the expense of everyone else in society.

These restrictions typically benefit the elite of those societies, condemning the masses to poverty. Without secure property rights and the rule of law, economic development is a pipe dream. Google could offer hope.

Because Google is worldwide and sufficiently well known, it could negotiate with developing nations’ governments for institutional autonomy to run private cities. Governments would merely need to get out of the way. This may seem like a tall order: abdicating power is rare. Luckily, it is already happening.

Honduras passed a law allowing for ZEDEs (zonas de empleo y desarollo económico), or autonomous regions. ZEDEs allow Honduran regions to opt out of civil and commercial law and import a legal system of their choosing. Further, ZEDEs are able to create their own administrative systems, allowing reprieve from corruption.

Honduras is just the start. El Salvador and Costa Rica are considering creating their own autonomous regions. Whether the decision makers at Google choose to get involved is up to them. But Honduras offers a great opportunity to follow the company’s stated goals.

ABOUT MARK LUTTER

Mark Lutter is finishing his dissertation on proprietary cities at George Mason University. He is also helping to plan a ZEDE in Honduras.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Making It Easy to Predict the Next Financial Crisis

It is a cliché, but true, that history repeats itself. This is largely due to the failure of each new generation to learn anything from the past as well as the human tendency toward the bad habits of greed and power-seeking. Only the names and faces change.

That is why the next financial crisis is entirely predictable.

On October 23, The Wall Street Journal had an article, “Relaxed Mortgage-Lending Rules Clear Final Hurdle.” The financial crisis in 2008 was the direct result of relaxed mortgage-lending rules. Indeed, it was the result of government pressure on banks to make “sub-prime” loans to people who any bank might sensibly conclude could not replay them. Those loans, in turn, were sold to Fannie Mae and Freddie Mac, two government-sponsored enterprises, who then bundled and sold them as mortgage-backed assets.

As Wikipedia notes, the Federal National Mortgage Association, commonly known as Fannie Mae, was founded in 1938 during the Great Depression to expand the secondary mortgage market by securitizing mortgages by issuing mortgage-backed securities, allowing lenders to reinvest their assets into more lending. In 1970 the Federal Home Loan Mortgage Corporation, whose nickname is Freddie Mac, was created for the same reason. Both are overseen by the Federal Housing Finance Authority. Neither issues mortgages. As noted, they buy them from banks, bundle them as securities, and resell them.

Getting the government involved in the housing market has been a supremely bad idea, much as getting the government involved in education and, as we are learning, involved in the nation’s healthcare insurance sector. There are only a few things the Constitution authorizes the government to do and none of these are mentioned. That has never stopped politicians.

The Wall Street Journal article reported that “Three U.S. agencies signed off on relaxed mortgage-lending rules, helping complete a long-stalled provision of the 2010 Dodd-Frank financial-overhaul law.” Two commissioners of the Securities and Exchange Commission “warned the rules would do little to prevent a return to the kind of lax mortgage underwriting that fueled the financial crisis.”

The Economist also took note, saying “When politicians bashed Wall Street for its reckless mortgage lending in the wake of the subprime crisis, bankers retorted that it was the politicians’ enthusiasm for expanding home ownership, even if it meant small deposits and low credit standards, that had really fomented the disaster.” Suffice to say there is plenty of blame to spread around, but the banks had to play by the rules the government had put in place.

In the wake of the financial crisis “many banks have stopped lending to riskier borrowers” but the new rules simply recreate the conditions that led to it, although “the rules only affect the tiny market for securities issued without federal backing, less than 2% of the $1.58 trillion in mortgage securities issue in 2013…”

The rule changes are being hailed as an example of the how great the “reform” implemented after the financial crisis was in the form of the Financial Stability Oversight Council and Orderly Liquidation Authority, otherwise known as the Dodd-Frank Act.

Suffice to say it is a regulatory nightmare of several thousand pages of rules, often quite vague, that are still being interpreted. That said, its purpose, to prevent predatory mortgage lending, improve the clarity of mortgage paperwork for consumers, and reduce incentives for mortgage brokers to push home buyers into more expensive loans was needed. It also changed the way credit card companies and other consumer lenders had to disclose their terms to consumers.

As The Economist noted, the agreement regarding mortgage-lending rules “would permit banks to securitize and sell mortgages without retaining a 5% stake—leaving them little incentive to maintain high lending standards.”

That needs repeating: little incentive to maintain high lending standards, the very reason we had a financial crisis in 2008.

All this is largely due to the progressive notion that everyone, no matter how little they earn, should be able to purchase a home. In reality, those at the low end of the economic ladder should not be encouraged or seduced into taking on such debt. When they do and the economy goes south, leaving them unemployed, they just walk away from the debt.

Why should the rest of us—taxpayers—bail out the mortgage sector as we did in 2008 with huge loans to the banks and insurance companies that had purchased mortgage-based securities? The government had to step in with the complete government takeover of Freddie Mac and Fannie Mae. We got stuck with the bill.

It also drove up our national debt, leading to the first reduction in the nation’s credit rating in its history.

There is already talk on Capitol Hill that, should Republicans take control of the Senate and retain it in the House, they are likely, as Reuters reported, “to target the Consumer Financial Protection Bureau and capital requirements on insurance companies.” To put it another way, the Republicans are the adults in Congress while the Democrats, liberal to the core, will never admit we are being set up for another financial crisis.

© Alan Caruba, 2014

How Far Can the P2P Revolution Go? Will the sharing economy replace the State? by Jeffrey A. Tucker

How far can the peer-to-peer revolution be pushed? It’s time we start to speculate, because history is moving fast. We need to dislodge from our minds our embedded sense of what’s possible.

Right now, we can experience a form of commercial relationship that was unknown just a decade ago. If you need a ride in a major city, you can pull up the smartphone app for Uber or Lyft and have a car arrive in minutes. It’s amazing to users because they get their first taste of what consumer service in taxis really feels like. It’s luxury at a reasonable price.

If your sink is leaking, you can click TaskRabbit. If you need a place to stay, you can count on Airbnb. In Manhattan, you can depend on WunWun to deliver just about anything to your door, from toothpaste to a new desktop computer. If you have a skill and need a job, or need to hire someone, you can go to oDesk or eLance and post a job you can do or a job you need done. If you grow food or make great local dishes, you can post at a place like credibles.co and find a prepaid customer base.

These are the technologies of the peer-to-peer or sharing economy. You can be a producer, a consumer, or both. It’s a different model — one characterized by the word “equipotency,” meaning that the power to buy and sell is widely distributed throughout the population. It’s made possible through technology.

The emergence of the app economy — an emergent order not created by government or legislation — has enabled these developments, and they are changing the world.

These technologies are not temporary. They cannot and will not be uninvented. On the contrary, they will continue to develop and expand in both sophistication and in geographic relevance. This is what happens when technology is especially useful. Whether it is the horseshoe of the Middle Ages or the distributed networks of our time, when an innovation so dramatically improves our lives, it changes the course of history. This is what is happening in our time.

The applications of these P2P networks are enormously surprising. The biggest surprise in my own lifetime is how they have been employed to make payment systems P2P — no longer based on third-party trust — through what’s called the blockchain. The blockchain can commodify and title any bundle of information and make it transferable, with timestamps, in a way that cannot be forged, all at nearly zero cost.

An offshoot of blockchain-distributed technology has been the invention of a private currency. For half a century, it has been a dream of theorists who saw that taking money out of government hands would do more for prosperity and peace than any single other step.

The theorists dreamed, but they didn’t have the tools. They hadn’t been invented yet. Now that the tools exist, the result is bitcoin, which gives rise to the hope that we have the makings of a new international currency managed entirely by the private sector and the global market system.

These new P2P systems have connected the world like never before. They hold out the prospect of unleashing unprecedented human energy and the creativity that comes with it. They give billions of people a chance to integrate themselves into the worldwide division of labor from which they have thus far been excluded.

With 3-D printing and computer-aided design files distributed on digital networks, more people have access to become their own manufacturers. These same people can be designers and distribute the results to the world. Such a system cuts out every barrier that stands between people and their material aspirations — barriers such as product regulation, patents, and excise taxes.

It’s time that we begin to expect the unexpected. What else is possible?

Entrepreneurs are already experimenting with an Uber model of delivering some form of health care online. In some areas, they will bring a nurse to you to give you a flu shot. Other health services are on the way, causing some to speculate on the return to at-home medical visits paid out of pocket (rather than via insurance).

What does this innovation do for centralist solutions like Obamacare? It changes the entire dynamic of service provision. The medical establishment is already protesting that this consumer-based, one-off service approach runs contrary to primary and preventive care — a critique that fails to consider that there is no reason why P2P technology can’t provide such care.

How much can things change? To what extent will they affect the structure of our political lives? This is where matters get really interesting. A feature of P2P is the gradual elimination of third parties as agents who stand between individuals and their desire to cooperate one to one. We use such third parties because we believe we need them. Credit card companies serve a need. Banks serve a need. Large-scale corporations serve a need.

One theory holds that the State exists to do for us what we can’t do for ourselves. It’s the ultimate third-party provider. We elect people to serve as our representatives, and they bring our voices to the business of government so that we can get the services we want. That’s the idea, anyway.

But once government gets the power to do things, it expands its power in the interest of the ruling elite. The taxicab monopoly was no more necessary than the government postal service, but the growth of P2P technology has increasingly exposed the reality of how unnecessary the State as a third-party mediator really is. The post office is being pushed into obsolescence. It’s hard to see how the municipal taxi monopoly can survive a competitive contest with P2P technology systems.

Policing is an example of a service that people think is absolutely necessary. The old perception is that government needs to provide this service because most people cannot do it for themselves. But what if policing, too, could employ P2P technology?

What if, when there is a threat, whether to you or to others, you could open an app on your phone and call the private police immediately? You can imagine how such a technology could learn to filter out static and discern threat level based on algorithms and immediately supplied video evidence. We already see the first attempts in this direction with the Peacekeeper app.

Rather than a tax-funded system that has become a threat to the innocent as much as the guilty, we would have a system rooted in consumer service. It might be similar to the private security systems used by all businesses today, except it would apply to individuals. It would survive not through taxation but subscription — voluntary and noncoercive.

How much further can we take this? Can courts and laws themselves be ported to the online world, using the blockchain for verifying contracts, managing conflicts, and even issuing securities? The large retailerOverstock.com is experimenting with this idea — not for ideological reasons but simply because such systems work better.

And here we find the most compelling case for optimism for the cause of human liberty. These technologies are emerging from within the private sector, not from government. They work better to serve human needs than the public-sector alternative. Their use and their growth depend not on ideological conversion but on their capacity to serve universal human needs.

The ground really is shifting beneath our feet, despite all odds. It is still an age of leviathan. But based on technology and the incredible creativity of entrepreneurs, that leviathan no longer seems like a permanent feature of the world.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events.

National and State Mortgage Risk Indices

Notwithstanding statements to the contrary by many public officials, credit conditions today are not tight when compared to the early-1990s (today is generally much looser) or early-2000s (some tighter, some not).  As a result, recent announcements by public officials to spur looser lending are cause for great concern.

Below is a slide which chronicles credit conditions from 1990 to the present.

credit conditions

Chart courtesy of AEI. For a larger view click on the chart.

The characteristics of these loans will likely be 30-year GSE or FHA loans with a down payment of 3-4%, a FICO score of 600-660, and a DTI of 38-50%.  These loans have an NMRI score of 30-40%–meaning under a stress scenario like that experienced in 2007, one in three of these loans will fail.  For many more of these buyers, owning a home will fail to build wealth.  Sadly, a large percentage would likely have been better off renting and creating wealth through a 401 k (if available).

First time homebuyers deserve better. We must abandon the high leverage policies that have consistently failed to accomplish the goal of reliable wealth building for low- and middle-income buyers.

Here is the link to the briefing slides for today’s NMRI briefing call–  October 2014 Mortgage Risk Index briefing presentation- Sept. 2014 data

Obama’s War on U.S. Energy

September 19th was an anniversary you did not read or hear about in the nation’s news media. It marked six years—2008—since the first permit application for the construction of the Keystone XL pipeline was submitted to the federal government. Can you imagine how many jobs its construction would have created during a period of recovery from the 2008 financial crisis? President Obama is universally credited with delaying it.

Thomas Pyle, the president of the American Energy Alliance, pointed out that World War II, the construction of the Hoover Dam, and the Lewis and Clark Expedition all took place in less time. In a September Forbes article, he noted that “Earlier this year a Washington Post/ABC News poll found that 65 percent of Americans support building the pipeline, while only 22 percent oppose it. In Washington three-to-one margins are usually referred to as mandates.”

In contrast, in March 2013 the then-Interior Secretary of the Interior, Ken Salazar, boasted “In just over four years, we have advanced 17 wind, solar, and geothermal projects on our public lands.” It is not these projects that Americans depend upon for energy. The opposite is a stark explanation why coal, oil, natural gas and nuclear energy remain the heart blood of the economy.

AA - Keytone in Perspective

Infographic courtesy of UTA Consultants. For a larger view click on the image.

The Daily Caller reported in July that the “U.S. Bureau of Land Management is currently sitting on a backlog of 3,500 applications that need approval to move forward on drilling for oil and natural gas on federal land,” just part of Obama’s war on U.S. energy.

According to the U.S. Energy Information Administration, fossil fuels met 82% of U.S. energy demand in 2013.

Petroleum, primarily used for transportation, supplied 36% of the energy demand in 2013. Natural gas represented 27%. Coal represented 20% and generated almost 40% of all electricity. In the six years since Obama took office that is a loss of 10%!

The much ballyhooed “renewable sources” of energy, justified by the false claim that carbon dioxide emissions are causing global warming or climate change, are a very small part of the nation’s power providers. Wind power represented 1.6% and solar power represented three-tenths of 1%! Hydropower supplied 2.6% making it the largest source of so-called renewable energy.

Politically, it has been Democrats advocating renewable sources and siding with the President’s delay of the oil pipeline and the Environmental Protection Agency’s assault on coal-fired plants to produce electricity. By contrast, the Republican-controlled House of Representatives has been busy putting forth legislation to fix aspects of our energy problems and needs.

Some of the bills that were introduced included H.R. 2728: The Protecting State’s Rights to Promote American Energy Security Act; H.R. 3: The Northern Route Approval Act (regarding the keystone XL Pipeline; H.R. 1900: The Natural Gas Pipeline Permitting Reform Act; H.R. 2201: The North American Energy Infrastructure Act; and H.R. 6: The Domestic Prosperity and Global Freedom Act, intended to expedite the export of liquefied natural gas to our allies around the world. The global market is growing at a colossal pace.

These bills will likely all die in the U.S. Senate, controlled by the Democratic Party. The Nov 4 midterm elections can change that if enough Republicans are elected to gain control.

It’s not just natural gas that is helping the economy improve. The Financial Times reported in late September that “The U.S. is overtaking Saudi Arabia to become the world’s largest producer of liquid petroleum, in a sign of how its booming oil production has reshaped the energy sector.” Why? “The U.S. industry has been transformed by the shale revolution, with advances in the techniques of hydraulic fracturing and horizontal drilling enabling the exploitation of oilfields, particularly in Texas and North Dakota.”

The only places you won’t find oil drilling are on federally controlled lands. The same holds for coal and natural gas.

This is in keeping with a virtual war on U.S. energy waged from the White House. Consider what we have witnessed:

  • Obama has refused to let the Keystone XL pipeline be built.
  • Billions wasted on loans to renewable energy companies, many of which like Solyndra and Solar Trust of America went bankrupt.
  • Obama made electric cars like the Chevy Volt part of his energy policy, providing subsidies but their high cost and low mileage capacity has resulted in few sales.
  • Obama and the EPA advocated a cap-and-trade tax on greenhouse gas emissions when there has been no global warming for 19 years and carbon dioxide plays no role whatever in the Earth’s climate.
  • The Obama administration terminating the construction of a nuclear waste repository at Yucca Mountain in Nevada despite nearly $15 billion already spent on this necessary repository.

These are just a few examples, but in the meantime, the U.S. still requires that a valuable food commodity, corn, be turned into ethanol, an automotive fuel additive, that (a) reduces the millage in every gallon and (b) increases its cost at the pump. As Seldon B. Graham, Jr., a longtime energy industry consultant and observer, notes that “Ethanol production peaked in 2011 at 6% of total oil demand.” Favoring replacing imported foreign oil with American oil, Graham says “Americans would have saved $64.7 billion on the oil price since 2009.”

Americans are afflicted by a President and his administration that for political and environmental reasons are costing them trillions in needless, senseless energy costs, loans and subsidies, and efforts to impose laws that have no basis whatever in science.

© Alan Caruba, 2014

Have They Actually Done Something?

“You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.” – Abraham Lincoln

In 1973, my journey into the world of political activism began when I organized a group of high school friends to work as volunteers in support of partisan candidates and ballot issues. We were young, naïve and full of energy, and were confident our contributions would change the world. More importantly, we blindly believed that all the candidates and elected officials were worthy of our trust.

This was during the time that Watergate exploded and little did we know that the rose-colored glasses we so boldly displayed were about to dull. Instead of taking the time to fully research candidates, their positions and the influencers around them, we just blindly plunged ahead giving them the most precious resource any citizen can give – our time, our energy and when we came of age, our vote.

We even sent a letter of support to the then-entrenched President, and when he wrote us back, we continued down our path of blind support.

Eight months later, the President resigned in disgrace and we learned an extremely painful, yet important lesson; all is not as it seems and many who seek the people’s trust are not deserving, nor worthy. We also learned it is vital that We the People look beyond a candidate’s and politician’s political rhetoric and apply a magnifying lens against what the person does versus what they say.

Our nation is approaching another election in ten days and I am again reminded of how important those early lessons learned are to the FairTax® campaign.

Are the candidates seeking your vote truly worthy of your trust? Are they individuals of impeccable integrity? Where do they spend the majority of their time – with paid lobbyists and consultants or with the people they [will] represent?

Does the candidate wanting your vote support the FairTax legislation?

This is an important question that demands a yes or no answer – not a maybe, sorta or kinda. And if the answer is yes, does the individual support it only in word or on a piece of paper or have they actually done something to try and advance the legislation?

It’s easy to put your name on a piece of paper and say you support something.  It is much more defining when one takes a leadership position to advance a piece of legislation. Washington is full of “go-alongs to get-alongs.” These people are simply fence sitters who take up space – talk a good game and do nothing.

The FairTax legislation demands bold and decisive leaders willing to buck status quo in order to remove the shackles of a tax system that is destroying jobs, the economy and the financial livelihood of the American people who contribute their hard-earned income. 

You have ten days until Election Day. It’s not too late to really get to know the candidates on your ballot. If you candidate is an incumbent Member of Congress, they are working in their district offices. Go visit them. If you can’t visit, call. Ask tough questions.

Bring this comparison chart and ask if they support the FairTax. If they do, ask what they have done to advance it – make them give you specifics. Visit with their staff. Ask them tough questions too. Ask them if they support the IRS.  They will say no and you must then explain to them that the only way to ensure that the IRS goes away is to pass the FairTax collected by the states.  And be sure to let them know that you support candidates who support the FairTax Plan.

Our nation is in the midst of an economic and jobs crisis—things the FairTax will create. We desperately need principled leaders willing to make tough decisions like eliminating the income tax and passing the FairTax. Your vote in support of candidates who support the FairTax is a major step forward to making the FairTax the law of the land.

As former Secretary Bill Simon said, “Bad politicians are sent to Washington by good people who don’t vote.” Whatever you do, please vote. And make sure that any candidate lucky enough to get your vote is worthy of your trust. Finally, as President John Quincy Adams said, “Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost.”

Chris Christie: Justice System Becoming an “Industry Unto Itself”

New Jersey Governor Chris Christie put legal reform on the list of issues governors must tackle.

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At the Legal Reform Summit put on by the U.S. Chamber Institute for Legal Reform, Christie warned that while “everyone wants a fair system” where people are “able to sue for appropriate causes and injuries,” trial lawyers have turned the justice system into “cottage industry unto itself.”

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The New Jersey governor explained that this creates a poor business environment, puts businesses in a defensive posture, and keeps them from creating jobs and investing in their companies, as Andrew Ramonas of Corporate Counsel reports:

“Companies would have a lot more income to be able to pay to their folks in their businesses if they didn’t have to worry about putting away the billions and tens of millions of dollars they have to put away for legal fees and legal settlements in the system that we have today,” he said.

The U.S. legal system shouldn’t help “a narrow group of people in this country who either have not been truly injured” or have injuries that incentivize class actions as a way to generate revenue, not as “a true redress of grievances,” Christie said.

“Everybody in this country wants to have a fair legal system, which gives people the ability to be able to sue for appropriate causes and injuries,” he said. “What we don’t need is for that tort system to become an industry unto itself. And in America, that’s what’s happening.”

Climate Change Insanity

I went out for a walk today and enjoyed seeing how the autumn leaves are changing color because autumn, simply stated, is one of the four seasons that affects the Earth. It is part of the change that occurs as it has for billions of years.

The notion that humans have anything to do with autumn or the other seasons or that we should be spending billions of dollars to have any effect on the climate of the Earth is utterly insane.

On October 10, The Hill reported that “The U.S. might make a substantial contribution in November to an international fund that helps poor nations fight climate change, according to Peruvian Foreign Minister Gonzalo Gutierrez.” Does anyone actually believe that any amount of money will change the climate? And yet, there is a United Nations Green Climate Fund. The UN is the locus of the climate change, formerly global warming hoax.

“So far, countries have put $2.3 billion into the fund” described as “a crucial negotiating piece for developed nations trying to woo poorer ones to the table for a global climate accord.” Can you imagine how that money could be put to better use to fight the real problems of poorer nations?

“The fund was officially launched in 2013, after industrialized nations first pitched it in 2009 during the Copenhagen meeting, setting a target of $100 billion by 2020 for developing nations.” The U.S. has yet to have contributed, but the U.S. is $18 trillion in debt and can ill afford to throw millions at this absurd scam.

Climate Change LiesUnfortunately, the U.S. is being led by a President who has said that climate change is the greatest challenge facing the Earth. Our Secretary of State repeats this absurdity. There is surely an agenda behind this that I have yet to have determined except to think that this President has done everything in his power to destroy the nation’s economy and the claim is part of that agenda.

The climate change lies Obama keeps repeating are more than just obscene, they pose a threat to national security as he directs our military to address climate change. In a sane world, he would be removed from office.

As a recent October 1st Wall Street Journal noted, “President Obama prophesied at the United Nations last week that climate change is the ‘one issue that will define the contours of this century more dramatically than any other,’ and perhaps this vision of Apocalypse explains why he thinks he can disregard the law to regulate carbon.”

Obama has been using the Environmental Protection Agency as his primary means of foisting the global warming/climate change hoax on the nation via a deluge of regulations to control “greenhouse gas emissions.” Carbon dioxide (CO2) is the bogyman the EPA and environmentalists have been telling us is driving up the Earth temperature. Only the Earth has been in a cooling cycle for eighteen years and, at the same time, the CO2 level in the atmosphere has increased! Without any effect on the temperature!

As the Wall Street Journal opinion noted “The EPA wants to reorganize U.S. electric power generation and drive coal and eventually natural gas out of the energy mix under a rarely used backwater of the Clean Air Act called section 111(d), whose mandates apply state by state.”

Now, however, thanks to an Ohio-based coal company, Murray Energy, along with a dozen states, the EPA is being sued as they seek a writ of mandamus, “a type of injunction the courts only grant when the government has taken an extraordinary action beyond its statutory authority.”

The courts are beginning to reject the EPA’s expansive claims of authority under the Clean Air Act. “The courts seem increasingly alarmed by abuses of executive power.” That is the only line of defense between this outlaw federal agency and the rest of us. The EPA has succeeded thus far in driving coal-fired energy plants out of business, reducing the amount of electricity they have produced affordably and efficiently for the last century and ours.

If the EPA is permitted to continue the U.S. might as well just turn off the lights because we are being systematically deprived of sufficient energy. That is the Obama agenda for America.

© Alan Caruba, October 2014

RELATED ARTICLE: Hey, Defense Department: Focus on ISIS, Not Climate Change

“Outsourcing” Makes Us Richer by Robert P. Murphy

This short video, put out by the Million Jobs Project, currently has more than 3.7 million views. It claims that US producers have been outsourcing jobs abroad in order to fatten their profits. It urges viewers to increase their purchases of American-made products by 5 percent, since this shift would ultimately create “a minimum” of a million new jobs for Americans. Unfortunately, everything about this video is wrong.

In the first place, the video takes for granted that it is a good thing if an American gets a job at the expense of a foreigner. After all, the whole point of urging viewers to spend more money on American products is that this will cause “insourcing.” Firms will lay off foreign workers and bring those jobs back home to the United States. But other things equal, why should we hold this ethical view? The question is even harder to answer once we consider that the foreign workers who, according to the video producers, will lose their jobs are probably extremely poor compared to the Americans who will get the jobs. Since when is it a noble thing to put a desperately poor person out of work?

This obvious (but unstated) national prejudice of the video provoked the following unintentionally ironic statement in the comments at YouTube: “I am Canadian but I always try to buy north american [sic] made when possible.” I wonder if this Canadian actually means all of North America, including Mexico? Or does he just mean Canada and the United States? If he feels kinship with the members of his continent, what about the entire Western Hemisphere? Should he “buy Western” to keep jobs for his buddies in Brazil, rather than shipping them to those parasites in Thailand? Going the other way, should Americans also try to increase their purchases of items made in state by 5 percent, so that Texans keep jobs in Texas, while Floridians keep jobs in Florida? Of course I’m kidding; I am trying to show the arbitrariness of adjusting one’s spending to “create jobs at home.”

Beyond the fuzziness of the value judgment involved, the fundamental error in the video is the notion that there are a fixed number of jobs in the world. This isn’t so. If an owner closes a factory in the United States and opens a factory in India, he has only “shipped jobs abroad” in the same way that a correspondent can “ship a pen pal abroad” by switching writing partners. Other employers can rush in to offer jobs to the newly laid-off workers, or the workers can start their own businesses and become self-employed.

Indeed, so long as the government (or a union threatening violence with impunity) doesn’t artificially prop up wages and salaries, there is really no problem of unemployment in the market economy. Wages and prices eventually adjust so that everybody who wants a job can get one. Some workers might complain that their income is too low, but that’s a different problem from truly being unable to get hired at all.

To see the relevance of this point, let’s consider exactly how the phenomenon of outsourcing occurs. As the video describes it, US employers realized “about 30 years ago” that they could hire foreign workers to do the same jobs at much lower wages, so they relocated their production facilities abroad. This assertion raises the question: Why didn’t employers just cut US wages down to what the foreigners were asking?

The answer is that US workers won’t take such low-paying jobs because they have better options. For example, suppose Americans are originally employed in a TV factory in Tennessee, making $16 an hour. The owner of the plant realizes he can relocate it to India, where he can hire workers who are half as productive (meaning they only make half as many TVs per hour) but who are willing to work for $4 an hour. He would never bother relocating if the American workers would simply accept a pay cut to $8 an hour. (The American workers make twice as many TVs per hour, remember.) Suppose they won’t do that, because their next-best job option is to work in a warehouse for $10 an hour. In this case, with the numbers I’ve invented, the original factory owner would “ship jobs to India,” not because of some horrible flaw in the labor market, but because American workers had better things to do than make TVs for $8 an hour. It was more efficient for those workers to go into the warehouse sector and for the Indian workers to make the TVs.

Notice also the point about government intervention. If we cut all of the numbers in half from my scenario about TVs, then all of a sudden the outsourcing would seem to cause US unemployment. Specifically, suppose the American workers originally made TVs in Tennessee and were paid $8 an hour. Then the owner of the factory realized the Indian workers were willing to make TVs for $2 an hour. In this case, the Americans (who are still twice as productive) would need to cut their asking wage to $4 an hour to stay competitive, and their other option is to work at a warehouse where they would generate $5 an hour in value for their boss. Alas, in this scenario, the factory owner still “ships jobs to India,” but the laid-off Americans are stuck: It is illegal for them to work at the warehouse for $5 an hour, because that would violate minimum wage laws. Thus, they really have been thrown out of work, but the true culprit was government intervention, not outsourcing per se.

“Outsourcing” is simply a manifestation of the more general phenomenon of trade between countries. As a general rule, giving individuals the freedom to trade with whomever they wish, around the globe, maximizes the “real income” of the groups involved.

Looking at the issue from the other direction, we can say that if the US government imposes a barrier to trade — such as restricting imports from a particular country — then it might make some American workers richer, but only by making the average US consumer poorer. Furthermore, the losses to the consumers outweigh the gains to the “protected” workers, meaning the country as a whole is poorer when the government enacts a trade barrier. There is an entire literature of commentary on the virtues of free trade, demonstrating these truths in various ways. For those who have never read it, I highly recommend Frédéric Bastiat’s famous satirical essay, “Petition of the Candlemakers.” For those readers who can invest more time, I refer them to chapters 8 and 19 of my textbook Lessons for the Young Economist (available online for free here), which explains the standard case for free trade in terms of what economists call “comparative advantage.”

The general logic of the benefits of free trade applies to outsourcing; a particular instance of outsourcing will (obviously) hurt the domestic workers involved, but it will shower on other Americans benefits that more than offset the loss. Immediately, the owners of the outsourcing firm benefit in the form of higher profits (because they’ve cut their wage bill). But the forces of competition will soon cause those cost savings to show up as lower prices for American consumers. Indeed, the video’s producers implicitly admit this when they acknowledge that their recommendation to buy 5 percent more American-made products would be more expensive for consumers.

The logic of free trade is irresistible once a person takes the first step on its path. By effectively paying foreign workers with US dollars when they send us TVs, clothes, and other goods, we give them the purchasing power to buy American exports such as wheat and aircraft components. The opposite holds as well: If American consumers reduce their purchases of foreign-made TVs and other goods, then those foreigners will cut back on their purchases of American wheat and so forth. Ultimately, the video’s suggestion to “buy American” won’t create more American jobs in total, but instead will merely rearrange employment among sectors, making Americans poorer in the process.

To be fair, the video’s narrator does try to defuse the standard economist response to his analysis, starting around the 1:05 point. The narrator says that Americans won’t simply find other, “thinking up” jobs to replace the manufacturing jobs that have been outsourced, because those “thinking up” jobs need to be outsourced as well, in order to stay close to the manufacturing process. Whether or not this is actually true — after all, there are plenty of “thinking up” jobs being created in Silicon Valley and elsewhere in the United States — it misses the more basic point: There is no reason that the United States should manufacture a certain product within its borders for the rest of time.

As foreign governments reduce their own institutional barriers to trade, and as communication and shipping costs fall, it only makes sense that production becomes more globally integrated. To insist that Americans favor products “made in the USA” is as arbitrary and impoverishing as people in Alaska insisting that they only eat oranges grown in Alaska (in greenhouses, presumably). There are serious obstacles to prosperity for the average American worker, but the problem isn’t “outsourcing.” The problem is government mandates and restrictions that hinder the operation of the market economy.

20141014_RobertMurphyABOUT ROBERT P. MURPHY

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute.

Raise the Minimum Wage? A Socratic Dialogue by Lawrence W. Reed

The ancient sage Socrates, a giant in the foundation of Western philosophy, was known for a teaching style by which he aggressively questioned his students. He employed his Socratic method as a way to stimulate logical, analytical thought in place of emotive or superficial pronouncement. Rather than lecture or pontificate, he would essentially interrogate. The result was to force his Greek pupils to see the full implications of their conclusions or to realize that what they had accepted as solid was nothing more than the intellectual equivalent of crumbled feta.

In his January 28 State of the Union speech, President Obama called upon the U.S. Congress to enact a hike in the hourly minimum wage from $7.25 to $10.10. (The dime may have been added because a nice round number without a decimal would sound unscientific.) Economists have long argued that raising thecost of labor, especially for small and start-up businesses, reduces the demand for labor (as with anything else). But Congress may do it anyway—with the usual, oversized measure of self-righteous breast-beating about helping workers. Maybe what members of Congress need is not another lecture on the minimum wage from an economist, but rather an old-fashioned Socratic inquisition. If the old man himself were with us, here’s how I imagine one such dialogue might go:

Socrates: So you want to raise the minimum wage. Why?

Congressman: Because as President Obama says, minimum wage workers haven’t had a raise in five years.

Socrates: Can you name one single worker who was making $7.25 five years ago who is still making $7.25 today? And if you can’t, then please tell me what caused their wage to rise if Congress didn’t do it. Come on, can you name just one?

Congressman: I don’t happen to have a name on me, but they must be out there somewhere.

Socrates: Well, we’ve just been through a deep recession because successive administrations from both parties, plus you lawmakers and your friends at the Fed, created a massive bubble and jawboned banks to extend easy credit. The bust forced many businesses to cut back or close. Now we have the weakest recovery in decades as ever-higher taxes, regulations, and Obamacare stifle growth. No wonder people are hurting! Do you take any responsibility for that, or do you just issue decrees that salve your guilty conscience?

Congressman: That’s water over the dam. I’m looking to the future.

Socrates: But how can you see even six months into a murky future when you refuse to look into the much clearer and more recent past? You guys think the world starts when a problem arises, as if you’re incapable of analyzing the problem’s origin. Maybe that’s why you rarely solve a problem; you just set everybody up to repeat it. If you really look to the future, then why didn’t you see this situation coming?

Congressman: Look, in any event, $7.25 just isn’t enough for anybody to live on. Workers must have more to meet their basic needs.

Socrates: An employer doesn’t have anything to pay an employee except what he first gets from paying customers. I wonder, whose “needs” do you consider when you decide to buy or not to buy: the workers’ or your own? Have you ever offered to pay more than the asking price just to help out the guy who made the product? And if customers like you won’t do that, where do you expect the employer to get the money?

Congressman: That’s not a fair question. My intent here is purely to help.

Socrates: Sounds to me like the answer is “no,” but let’s move on. Why do you assume your intentions mean more to a worker than those of his employer? It’s the employer who’s taking the risk to offer him a job, not you. You’re only making speeches about it. Don’t you see a little hypocrisy here—you, who are personally offering no one a job, self-righteously criticizing others who are actually creating jobs and paying wages even if they’re not all at a wage you like?

Congressman: Employers are interested only in profits.

Socrates: Are you saying employees are not? Are they more interested in working for companies that lose money, and if so, then why don’t they all line up for government jobs?

Congressman: Well, we lose money here in government every year and there are plenty of people who are happy to work for us.

Socrates: You have a printing press. You also have a legal monopoly on force. When you borrow in the capital markets, you shove yourself to the head of the line at everybody else’s expense. Are you saying these are good things and that we’d be better off if the private sector could do these things too? Try to keep up with me here.

Congressman: I repeat, employers are interested only in profits. People before profits, I say! I even have a bumper sticker on my car that says that.

Socrates: So are you saying that employers would be better people if, instead of seeking profits, they tried to break even or run at a loss? How does that add value to the economy or encourage risk-takers to start a business in the first place?

Congressman: You’re trying to belittle me but I went to a state university. All of my sociology, political science and gender studies professors told us that raising the minimum wage is good.

Socrates: Were any of those tenured, insulated, and government-funded pontificators actual job-creating, payroll tax-paying entrepreneurs themselves, ever?

Congressman: That’s beside the point.

Socrates(Sigh.) Figures.

Congressman: Look, $10.10 isn’t much. I think you must be mean-spirited and greedy if you don’t want people to be paid at least $10.10.

Socrates: Yeah, like you guys in government check your personal ambitions at the door when you take office. I’d like to know how you arrived at that number. Was it some sophisticated equation, divine revelation or toss of the dice? Why didn’t you choose $20.00, which is not only a nice round number but also a lot more generous?

Congressman: Well, $20.00 would be too high, for sure. Too much of a jump at once.

Socrates: It sounds like you think the cost of labor might indeed affect the demand for it. Good! That’s progress. You’re not as oblivious about market forces as I thought. What I want to know is why you apparently don’t think higher labor costs matter when you raise the minimum wage from $7.25 to $10.10. Do you think everyone, regardless of skill level or experience, is automatically worth what Congress decrees? Do you believe in magic, too? How about tooth fairies?

Congressman: Now hold on a minute. I’m for the worker here.

Socrates: Then why on earth would you favor a law that says if a worker can’t find a job that pays at least $10.10 per hour, he’s not allowed to work?

Congressman: I’m not saying he can’t work! I’m saying he can’t be paid less than $10.10!

Socrates: I thought we were making progress, but perhaps not. Can you tell me, if your scheme becomes law, what happens to a worker whose labor is worth only, say, $8.10 because of his low skills, lack of education, scant experience, or a low demand for the work itself? Will employers happily employ him anyway and take a $2.00 loss for every hour he’s on the job?

Congressman: Businesses need workers and $2.00 isn’t much, so common sense and decency would suggest that of course they would.

Socrates: So employers who employ people are too greedy to pay $10.10 unless they’re ordered to, but then when Congress acts, they suddenly become generous enough to hire people at a loss. Who was your logic instructor?

Congressman: Can we hurry this up? I’ve got other plans for other people I have to think about.

Socrates: I give up. You congressmen are incorrigible. You’re the only people on whom my teaching method has no discernible impact.

Congressman: You ask too many questions.

At this point, in utter frustration, Socrates drinks the hemlock. The congressman votes to price many of the nation’s most vulnerable employees out of work and gets reelected.

Whoever warned us to beware of Greeks bearing gifts apparently never met a congressman.

larry reed new thumbABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

The Minimum Wage Poison Pill

As we approach the 2014 General Election, with president Barack Obama set to occupy the White House for two more years, the stakes are higher than ever. As usual, Democrats across the country focus on phony issues, such as a Republican “War on Women,” the widening income gap between the rich and the non-rich, and bogus claims of being champions of the middle class.

In terms of domestic policy, they express support for the “middle class,” while doing everything in their power to turn America into a two-class society: the very rich… whose wealth they only wish to plunder… and the very poor, who, in return for an endless array of government handouts, will be expected to do nothing more than to pull the Democrat lever on Election Day.

In foreign affairs, they express outrage over the gruesome crimes of radical Islam… such as the recent beheading of an Oklahoma City woman by a radical Muslim co-worker… yet they oppose any and all effort at what they see as “racial profiling.” They find moral equivalency between the anti-Christian genocide of radical Islam throughout the Middle East, and the bombing of a Birmingham, Alabama abortion clinic in years past.

They express support for high quality public education, but the teachers unions… who own a controlling interest in the Democrat Party… dictate that Democrats oppose any and all voucher proposals, causing the greatest damage to the hopes of minority parents who want to see their children receive a quality education. They ignore the fact that throwing more money at public schools does nothing to increase the quality of a public school education. Instead, at the behest of the teachers unions, they demand that class sizes be reduced, that new school buildings be constructed, and that teacher salaries be increased… all the while regaling their low-information voter base with the cynical lie that Republicans want to “cut benefits to kids.”

They express a desire for the budget discipline of the 1990s… a direct result of Ronald Reagan’s “trickle down” economic policies and the election of a Republican Congress… and they support the notion of cutting the deficit in half, while supporting every new spending scheme hatched by liberal social planners. (In their 2000 platform, they announced that Democrats would entirely eliminate the public debt by the year 2012. Clearly, they had not heard of Barack Obama.)

While expressing a desire to curb the influence of lobbyists, they attempt to convince low-information voters that Republican administrations are dominated by lobbyists for business interests. Yet, no previous administration has been as heavily staffed and influenced by special interests as is the Obama administration. And while they express strong support for an electoral system that is “accessible, auditable, and accurate,” they insist that every attempt to curb vote fraud is nothing more than a Republican scheme to oppress the black vote.

On the healthcare front, they express a desire to provide healthcare insurance for 30-40 million uninsured, to improve the access to and quality of healthcare for all Americans, to substantially reduce the cost of healthcare for everyone, and to do it all without increasing the number of doctors, nurses, and hospitals. Like president Barack Obama, they see no contradictions in any of this. These are obviously people who would promise, with a straight face, that they could stuff 10 lb. of (excrement) into a 5 lb. Bag. All we need to do to make these magical things happen is to elect more Democrats to public office.

Democrats want to use the tax code to discourage the outflow of jobs overseas. Yet they have no problem with the fact that the United States has the highest corporate tax rate of any developed nation. They express a desire to cut taxes for every working family, including those who pay no federal or state income tax, but they exclude tax relief for the “millionaires” who are expected to provide good-paying jobs for the poor and the middle class.

And finally, while fast food workers go on strike demanding a $15.00 per hour minimum wage, a 107 percent increase, Democrats prescribe a poison pill for the U.S. economy with a proposed increase in the federal minimum wage standard from $7.25 cents per hour to $10.10 per hour a 39.3 percent increase. In doing so, they scoff at studies which show that, for each 10 percent increase in the minimum wage, 1-2 percent of jobs in the nation simply go away. For unskilled entry-lever workers, each 10 percent increase in the minimum wage results in a decrease of 4-5 percent in the number of entry-level jobs available… the jobs most often held by teens, the poor, and the unskilled.

According to a recent report by the Bureau of Labor Statistics, a majority of those who worked at minimum wage jobs in 2013 were 24 years old, or younger, while only 0.8 percent, less than one in a hundred, of those 24 years old, or older, work for a minimum wage.

Minimum wage increases are major job-killers. According to a 2014 report by the non-partisan Congressional Budget Office, an increase in the minimum wage from the current $7.25 per hour to $10.10 per hour would reduce the total number of jobs available by approximately 500,000. For the most part, these are the jobs currently held by all those fast food workers who fill the streets, demanding a $15 per hour minimum wage. And if those who clamor for a $15 per hour minimum wage are anxious to learn what happens to a job market with a minimum wage of that magnitude, they won’t have to wait long. In early June 2014, the Seattle city council voted to increase the minimum wage in that city to $15 per hour, the highest in the nation.

A report by the National Restaurant Association (NRA) tells us that, of every dollar of revenue coming into restaurant cash registers, approximately 33 percent goes to salaries and wages. The remainder of that dollar of revenue goes to cover the cost of food and beverages, other costs of doing business, and a small net profit for the owner. According to NRA statistics, the profit margin of restaurants varies, depending on the size of the average check per patron. Those with average checks under $15 per person… e.g., McDonalds, Burger King, Taco Bell, etc… produce average profit margins of 3 percent, while those with checks of $15 to $24.99… e.g., The Olive Garden, Red Lobster, The Cheesecake Factory, etc… produce profit margins of roughly 3.5 percent, the highest in the industry.

According to a recent report by Gingrich Productions, a good measure of the impact of minimum wage laws can be found in the European experience. Among those countries with no minimum wage… Austria, Germany, Sweden, and Switzerland… the median unemployment rate is just 5.2 percent, while the median jobless rate stands at 11.1 percent in countries with minimum wage laws… more than twice that of those without minimum wage laws.

But there is a much larger issue than the question of whether we should have a statutory minimum wage of $10.10 or $15 per hour… an issue that Barack Obama and congressional Democrats are not anxious to talk about. I refer to the question that more and more minimum wage workers are asking themselves, which is, “Why should I work 40 hours a week at $10.10 per hour, when I can earn more by staying at home and living off the public dole?”

A 2013 Cato Institute study tells us that, in 33 states and the District of Columbia, welfare benefits pay more than the current $7.25 per hour, while in 13 states, welfare benefits pay more than $15 per hour. In Hawaii, for example, the pre-tax “salary” of stay-at-home welfare recipients is $60,590 per year, or $29.13 per hour when compared to a 40-hour work week, while in Washington, DC, the hourly rate for just staying at home is $24.43 per hour. At the lower end of the spectrum among states where sloth is more lucrative than honest toil, the hourly rate for stay-at-home welfare recipients in South Carolina is $10.53 per hour… 43 cents more than the $10.10 minimum wage proposed by Democrtats.

So what do we do to fix the problem?

Instead of catering cynically to the poorest of the poor as a political constituency, as Democrats do, we should be asking exactly how an individual in this, the land of opportunity and economic freedom, can still be working at a minimum wage job when he/she is 24 years old, or older. That circumstance can only be explained by pointing out that a great many people simply make very bad choices in their lives.

But Democrats are clearly more interested in purchasing a “nanny state” constituency than they are in doing what is necessary to really help people lift themselves out of poverty. As one writer, Charles M. Blow, has said, “Much of what happens in Washington occurs at the intersection of political advantage and earnest intentions.”

What is clear is that we cannot perpetuate a system in which it is more lucrative to take a welfare check than it is to earn an honest living. In order to throw off the bonds of that insanity our options are only two. First, one might ask, why not raise the minimum wage to $25 or $30 per hour so that those who work can earn more than those who don’t, or won’t? The answer is, a $25 or $30 minimum wage would literally wreck whatever is left of our fragile economy and price us completely out of world markets.

The one remaining option is to do what we did in the mid-90s when a Republican-controlled Congress forced a Democrat president, Bill Clinton, to sign what was called “welfare-to-work” legislation, requiring those on public assistance to also find honest employment. The country experienced real economic growth, balanced budgets, and a pay-down in the national debt.

The choice is ours. What was done in the 1990s can be done again. But in order to do that we must first have a president who understands at least a “smidgen” about the intricacies of the U.S. economy. That means that our first priority must be to rid ourselves of Barack Obama, sending him back to his Kenyan roots where he can actually learn a thing or two about micro-economics.

RELATED ARTICLES:

Wages and the Free Market, Part 1 — Dispelling labor market myths with theory and data

Wages and the Free Market, Part 2 — Innovation Is the Lifeblood of a Healthy Economy

Raise the Minimum Wage? A Socratic Dialogue

Why Keystone XL Opponents are So Wrong: Canada Exports Record Amount of Oil to U.S.

Opponents of the Keystone XL pipeline want you to believe that stopping the project will ensure that Canada won’t develop its oil resources. Well, someone forgot to tell Canada. From Reuters:

Canadian crude exports to the United States topped 3 million barrels per day last week for the first time, suggesting delays to new export pipelines such as TransCanada Corp’s Keystone XL were failing to check oil sands development.

Environmental groups are fiercely opposed to new pipeline projects connecting Alberta’s oil sands to the United States and the east and west coasts, reasoning that without market access crude production will slow.

But the latest weekly data from the U.S. Environmental Information Administration shows Canadian crude exports are ramping up rapidly despite the pipeline impasse.

Canada, the No. 1 supplier of crude to the United States, exported 3.248 million bpd of crude to its southern neighbor in the week ended Oct. 3, up 18 percent from the previous week and up 35 percent from the same period a year earlier.

The four-week average to Oct. 3 was 2.977 million bpd.

“It’s a pretty clear indication that crude will find its way to market around various constraints,” said Sandy Fielden, analyst at RBN Energy.

The State Department came to the same conclusion in its economic analysis of the Keystone XL pipeline:

[A]pproval or denial of any one crude oil transport project, including the proposed Project, is unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States based on expected oil prices, oil-sands supply costs, transport costs, and supply-demand scenarios.

Much of this oil is moving by rail right now, but plans are in the works for additional pipeline capacity. Earlier this year, the Canadian government approved a pipeline to transport oil west from Alberta to British Columbia. It awaits approval from Aboriginal groups. Then there’s the proposed Energy East pipeline:

The proposed $12 billion project would send 1.1 million barrels per day of western Canada’s oil-sands crude 2,900 miles east to Saint John, New Brunswick, on the country’s North Atlantic Coast. The project would convert a 1950s-era underutilized natural gas pipeline and add extensions to each end: one to a terminal south of Alberta’s oil sands in the oil town of Hardisty and the other extending the reach of the pipeline from Montreal to a refinery in Saint John, which has supertanker access that would allow the crude to be transported globally, including to the refineries in Louisiana and Texas that the Keystone XL pipeline would be intended to serve.

It’s obvious that Canada will get oil to hungry global markets anyway it can. It continues making the case for the Keystone XL pipeline because it’s a valuable conduit, but at the same time, it’s not waiting for a decision by the President.

The fact of the matter is while Canada continues developing and transporting its oil, America is losing out on the jobs, economic growth, and local tax revenue that would be generated by the Keystone XL pipeline.

Pipeline opponents are so rigidly fixed to their anti-energy ideology that they reject the economics and science surrounding the pipeline. Facts don’t matter to them. President Obama should ignore their hysteria and approve the Keystone XL pipeline.

EDITORS NOTE: The featured image is of opponents of the Keystone XL pipeline march on the National Mall in Washington, D.C. Photographer Pete Marovich/Boomberg.

Is Obama shutting down a power plant near you?

Six years ago, President Obama threatened thousands of hard-working Americans livelihoods with two sentences. “So if somebody wants to build a coal-fired plant they can. It’s just that it will bankrupt them…

And now, the President is trying to make good on his promise. The EPA’s new climate regulations would close down enough electrical generation capacity to reliably power 44.7 million homes. That’s enough power for twenty-one states west of the Mississippi.

More than 72 gigawatts (GW) of electrical generating capacity have already, or are now set to retire because of the Environmental Protection Agency’s (EPA) regulations. The regulations causing these closures include the Mercury and Air Toxics Standards (colloquially called MATS, or Utility MACT)[1], proposed Cross State Air Pollution Rule (CSAPR)[2], and the proposed regulation of carbon dioxide emissions from existing power plants.

Energy-InventoryFINAL

To put 72 GW in perspective, that is enough electrical generation capacity to reliably power 44.7 million homes[3]—or every home in every state west of the Mississippi River, excluding Texas.[4] In other words, EPA is shutting down enough generating capacity to power every home in Washington, Oregon, California, Idaho, Nevada, Arizona, Utah, Montana, Wyoming, Colorado, New Mexico, North and South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, and Louisiana.

Over 94 percent these retirements will come from generating units at coal-fired power plants, shuttering over one-fifth of the U.S.’s coal-fired generating capacity.[5] While some of the effected units will be converted to use new fuels, American families and businesses will pay the price with higher utility bills and less reliability for their electricity.

This report is an update of a report we first issued in October 2011.[6]  In the original report, we calculated that 28.3 GW of generating capacity would close as a result of EPA’s regulations. At the time, we warned, “…This number will grow as plant operators continue to release their EPA compliance plans.” Unfortunately, this statement has proven to be true and will continue to grow in the future as new EPA regulations continue to be released. This latest update shows that 72.7 GW of electrical generating capacity will now close—a 44.4 GW increase.

To calculate the impact of EPA’s rules, we first assumed that EPA’s modeling of the regulations correctly predicted which power plants would close as a result of the regulations. Then, we looked at statements, filings, and announcements from electrical generators where they stated they would be closing power plants and in which they cited EPA’s regulations as the precipitating cause of the plant closures. We then compared EPA’s modeling outputs with the announcements and created a master list of plant closures as the result of EPA regulations (the master list is below).

Combining actual announcements with EPA’s modeling shows that EPA’s modeling grossly underestimates the actual number of closures. Originally, EPA calculated that only 9.5 GW of electrical generating capacity would close as a result of its MACT and CSAPR rules. Before President Obama’s newly proposed regulations on existing power plants even begin take effect, however, it is clear that actual number will now be much higher. We predict that over 72 GW of power generating capacity will likely close—over seven times the amount originally predicted by EPA modeling. Worse, as utilities continue to assess how to comply with EPA’s finalized rules, there will again likely be further plant closure announcements in the future. In our original 2011 report there were 30 states with projected power plant closures. Today, that number has risen to 37.

NERC is Concerned about Reliability even though It Underestimates the Amount of Closures

It should be further noted that the North American Reliability Corporation’s (NERC) original modeling of the MACT rule and original CSAPR rules estimated that under the worst case, or “strict” scenarios, 16.3 GW of electricity capacity would be closed due to the regulations, and the Department of Energy’s (DOE) “stringent” test showed that only 21 GW of generating capacity would be closed. [7] More recently, however, NERC has admitted that, “Since January 2011, the introduction and implementation of several environmental regulations combined with increased natural gas availability has contributed to the closure of nearly 43 GW of baseload capacity.”[8] NERC has shown concern that the closures will cause electricity reliability problems.

According to their 2013 Summer Reliability Assessment, some areas of the country have not been able to build enough generation capacity to meet recent load growth. A major reason for this is uncertainty surrounding environmental regulations.[9] Because of these deficiencies, some areas will see their generation reserve margins fall below target levels that can jeopardize power reliability. According to NERC, “Insufficient reserves during peak hours could lead to increased risk of entering emergency operating conditions, including the possibility of curtailment…and even rotating outages of firm load.”[10]

How much greater will the reliability problems be, given that retirements appear to be higher than initial NERC estimates, and additional burdensome regulations are continually being added? 

Announced and EPA Projected Retirements Are Significantly Higher than DOE’s Worst Case Scenarios

As noted in our previous update, public statements and the Utility MACT itself showed that EPA relies heavily on a DOE study claiming that even under a theoretical “stringent” test, EPA Utility MACT and CSAPR regulations would only close 21 GW of generation. EPA then claimed this study proves regulations will not threaten reliability. Our analysis, however, shows that with the addition of President Obama’s newest proposed rules, EPA projections and operator announcements will total more than 72 GW of generation retirements—over 50 GW more than DOE’s supposedly ultra-strict test scenario.

In fact, the initial reliability assessment released by the EPA with their new CO2 restrictions on existing power plants even points out that regions in the Southeast and Northeast may experience effects from the regulation that “…raise concerns over reliability.”[11]

EPA Regulations are Already Causing Electricity Prices to Dramatically Rise

Unfortunately, recent EPA regulations are already greatly reducing U.S. coal power capacity and raising electricity prices for homes and businesses across the country. According to Dr. Julio Friedman, Assistant Secretary for Clean Coal at the U.S. Department of Energy, wholesale electricity prices could end up rising as much as 80 percent from the effects of these rules.[12]

This past winter demonstrated in real time the value of the existing coal fleet. During the winter of 2014, coal was the only fuel with the ability to meet demand increases for electricity, providing 92 percent of incremental electricity in January/February, 2014 versus the same months in 2013. Americans were harmed as the relentless cold indicated that prudent utility practices require large, baseload coal plants to stabilize the grid, keep society functioning, and maintain electricity availability. Many regions suffered; for example, in late January and early February 2014 some locations in the Midwest experienced gas prices as high as $35/MMBtu, and the Chicago Citygate price exceeded $40/MMBtu. Those figures are nearly 10 times higher than EIA’s estimated average price of $4.46/MMBtu for natural gas in 2014.

The result of these and ongoing EPA rules, if put into force, will be no new coal-fired plants in the United States and massive closures of existing coal plants. Since coal is our single largest source of electricity generation, replacing these units will require the construction of higher-cost renewable generating technologies and/or natural gas units that will need massive infrastructure improvements to meet the higher demand. And, consumers will need to pay for these changes. Those added costs will make utility bills unaffordable for many families and force industry to curb production, relocate, or shut down altogether slowing any further recovery in an already lagging economy.

POWER PLANT RETIREMENT LIST

BACKGROUND INFORMATION

LIST SOURCES

This list is derived from three sources: (1) EPA’s parsed modeling files, which identify the power-plant units that EPA models say will close as a result of either the Cross State Air Pollution Rule (CSAPR) or Mercury and Air Toxics Standards (MATS Rule); (2) news releases or press stories where a power-plant operator says a unit will or is likely to close due to EPA regulations; and (3) filings with state public utility commissions where a power-plant operator says a unit will or is likely to close due to EPA regulations. This list does not include the EPA’s parsed modeling files for the 111(d) rule. All sources are publically available information. Note that many of the plants originally projected to close by EPA modeling have already been retired.

EPA PARSED FILES

Process to Identify Units Closed by EPA Regulation

Individual power plants often have multiple boilers, called “units,” that generate electricity. EPA, in addition to overall modeling, models the impact that the Agency believes its regulations will have on each unit, at each power plant in America. EPA lists these results in “parsed files.” When producing parsed files for a regulation, EPA will first create a business-as-usual “base” case parsed file where the Agency details what it believes will happen absent EPA’s new regulation. Next, EPA creates a “policy” or “remedy” case parsed file showing how EPA believes plants will respond to a regulation. Thus, one can find the difference between these two cases, and figure out the impact EPA believes a regulation will have, by comparing the policy/remedy case parsed file to the base case parsed file. As such, the following steps were CSAPR and MATS Rule:

  1. For CSAPR, data from the parsed files for the CSAPR’s base case and remedy case were put on a single spreadsheet. The combined results were organized by plant name. Each plant listed in both the base case and remedy case was removed. Thus, the resulting list only shows those plants that EPA believes will close because of the

CSAPR. Plants projected to close under CSAPR rules were retained in this update despite the uncertain legal status of the rule. Regardless of the legal status, many of the plants that were originally projected by EPA modeling to be impacted have already been retired or converted. In these instances, some of the citations will reflect the public statements or announcements made stating these impacts rather than the original EPA modeling.

  1. For the MATS Rule, data from the parsed files for the MATS Rule’s base case and policy case were put on a single spreadsheet. The combined results were organized by plant name. Each plant listed in both the base case and policy case was removed.

Thus, the resulting list only shows those plants that EPA believes will close because of the MATS Rule.

  1. The resulting base case-free CSAPR list and MATS Rule list were then put on a single spreadsheet. The combined results were organized by plant name. In each instance where the CSAPR and the MATS Rule independently said the same plant would retire, one of the entries was deleted so as to not double-count it. The citation was modified to attribute the unit closure to both the CSAPR and MATS Rule.

POWER-PLANT OWNER PUBLIC ANNOUNCEMENTS

Ensuring that Retirements are Result of EPA Regulation

All retirements announced by plant owners in news releases or through public filings on this list were due to EPA regulation. In each such case, the source cited directly identifies EPA regulations as the sole or main reason for the power plant’s retirement.

Avoiding Double-Counting

If a unit was identified to close by both EPA parsed files and public announcements, then the duplicate entry was released. The unit’s citation was modified to indicate that both EPA and public announcements slated the unit for retirement.

FREQUENTLY ASKED QUESTIONS

Why is this list’s total retired capacity higher than EPA’s total?

The total retired capacity for this list is higher than EPA’s total because this list includes EPA’s projected unit retirements and unit retirements announced by power-plant operators. No unit cited by both sources was double counted.

Does this list include plants that will close even without the CSAPR or MATS Rule?

No. The parsed file results used in this list do not include business-as-usual base case results. In other words, if EPA modeled a unit to close even if the CSAPR or MATS Rule were not implemented, then that unit was not included.

EPA said only 4.7 GW will close, so why are these numbers higher?

The 4.7 GW retired coal-plant capacity figure is from the EPA Regulatory Impact Analysis (RIA) for the MATS Rule alone. The CSAPR RIA projects an additional 4.8 GW of coal-plant capacity to retire due to the CSAPR. When combined, the RIA’s project 9.5 GW of coal-plant capacity to retire due to the MATS Rule and CSAPR. As noted above, additional plant retirements are due to actually announced retirements.

When a power-plant operator announces that it is closing a certain unit, how do you know that is because of EPA regulations?

In each case where a retirement is attributed to public announcements, the cited source material lists EPA regulations as the sole or main reason for the plant’s retirement.

Some groups have said EPA regulations will retire up to 103 GW of coal-fired generation, but this list only shows 72 GW. Does this mean those projections are wrong?[13]

No. If anything this list gives more credibility to those higher retirement projections. This list is very conservative; it merely shows what units EPA says its regulations will close, plus specific units that plant-operators have said will close because of EPA regulations. Those analyses that show higher power-plant retirements than this list lay out what the final overall impact of EPA’s regulation will be. On the other hand, this list focuses just on the currently disclosed impact. Thus, this list will likely grow far higher, especially as states realize what will be needed to comply with recently announced 111(d) regulations. However, because this list already finds many more retirements than EPA projected, the Agency’s claim that its regulations will have minimal impact on electric generation are clearly incorrect.

EPA has said that other projections showing a high coal generation retirements were based on incorrect assumptions. Is that the case for this list?

No. The only modeling in this list is from EPA. Thus, any mistaken assumption would be EPA’s mistaken assumption. Otherwise, the remaining data is from actual public announcements detailing the imminent or highly possible closure of specific units at specific power plants. Since our initial release in 2011 it is evident that any claims of incorrect assumptions regarding coal plants were unfounded.

Does this list account for other EPA regulations that may impact power plants?

This list only includes the parsed files for EPA’s CSAPR and MATS Rule modeling. No other specific EPA models were consulted to compile this list. While some of the public statements from power plant operators cite specific EPA regulations like CSAPR, MATS and 111(d), many times the statements are more general and broadly cite EPA as the catalyst for retirement. Regardless, all of the publically announced plant retirements listed are due to EPA regulations.

REFERENCES

[1] Environmental Protection Agency, Regulatory Impact Analysis of the Proposed Toxics Rule, Mar. 2011, http://www.epa.gov/ttn/atw/utility/ria_toxics_rule.pdf.

[2] Environmental Protection Agency, Regulatory Impact Analysis (RIA) for the final Transport Rulehttp://www.epa.gov/airtransport/pdfs/FinalRIA.pdf. *** Note: At the time of this release, CSAPR is in legal limbo. In 2011, The D.C. Circuit issued a stay on CSAPR, but the D.C. Circuit’s opinion was vacated by the Supreme Court in 2014. EPA has filed a motion to have the stay on CSAPR lifted, but the D.C. Circuit has not yet ruled on the motion according to EPA’s website: http://www.epa.gov/airtransport/CSAPR/bulletins.html

[3] Assuming the 72 GW is made up solely of coal retirements with an 80 percent capacity factor

[4] http://quickfacts.census.gov/qfd/states/53000.html.

[5] Energy Information Agency, “Existing Net Summer Capacity by Energy Source and Producer Type, 2002 through 2012 (Megawatts)”, http://www.eia.gov/electricity/annual/html/epa_04_02_a.html

[6] Institute for Energy Research, IER Identifies Coal Fired Power Plants Likely to Close as Result of EPA Regulations, Oct. 7, 2011,http://instituteforenergyresearch.org/2011/10/07/ier-identifies-coal-fired-power-plants-likely-to-close-as-result-of-epa-regulations/.

[7] see North American Electric Reliability Corp, 2011 Long-Term Reliability Assessment, Nov. 2011, http://www.nerc.com/files/2011LTRA_Final.pdf.

[8] North American Reliability Corporation, “2014 Summer Reliability Assessment”, May 2014,http://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments%20DL/2014SRA.pdf.

[9] North American Reliability Corporation, “2013 Summer Reliability Assessment”, May 2013, http://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments%20DL/2013SRA_Final.pdf.

[10] ibid.

[11] Environmental Protection Agency, “Technical Support Document: Resource Adequacy and Reliability Analysis,”http://www2.epa.gov/sites/production/files/2014-06/documents/20140602tsd-resource-adequacy-reliability.pdf. Pg. 6.

[12] Aaron Larson, “CCS Could Increase Coal-Fired Electric Generation Costs By 70%–80%,” Power Magazine, February 13, 2014.

[13]http://www.ucsusa.org/sites/default/files/legacy/assets/documents/clean_energy/EPA-standards-and-electricity-reliability.pdf

EDITORS NOTE: The featured image is of the Big Bend power plant emits plumes of smoke and steam. TECO Energy-owned Tampa Electric still generates 55 percent of its electricity using coal. Source: SKIP O’ROURKE | Times (2002).