Saturday, February 27, 2010

A Chance for Bipartisan Tax Reform?

Bipartisanship is not often found in the U.S. Senate. Jim Bunning (R-KY) has prompted a one man shutdown of unemployment benefits and the Federal Highway Administration, adding insult to injury by complaining about missing a basketball game.
But as Floyd Norris writes in the New York Times,
two senators, are collaborating on overhauling the tax code. Judd Gregg (R-NH) and Ron Wyden (D-WI) are co-sponsoring a bill that would bring some much needed reform to personal and corporate income taxes. The bill would clean up some of the clutter that has accumulated over the last thirty years, particularly from the Bush tax cuts, which Norris describes as leaving us "a legacy of some of the least responsible tax legislation ever passed."
Wyden-Gregg Bill has the makings of an effective and useful bipartisan agreement on reform:
The bill reflects preferences of the two senators. Mr. Gregg is worried about capital formation and about reducing tax reasons for capital to flow to areas that might be less productive. Mr. Wyden wants to preserve progressivity and to assure that the tax breaks that remain are available to all.
One result is a change that keeps preferential tax rates for capital gains, but adjusts the
computations so that people in the two lower tax brackets they propose — 15 and 25 percent — actually pay lower rates than do those in the upper bracket. Another is a change in the break for municipal bond interest that assures a middle-income taxpayer would get the same benefit, in dollars, as would a taxpayer in a higher bracket.
One interesting proposal is to reduce the tax incentive for companies to borrow money by reducing the deduction for interest payments. That reduction would be based on the inflation rate, and is too complicated to explain here, but the important point to Mr. Gregg is that it could encourage companies to raise equity rather than debt.
We'll see if this effort can survive in the Senate's poisonous atmosphere.

Thursday, February 25, 2010

Toyota's Woes

I've got a piece up at the Guardian on Toyota's "stunning fall from grace."

For decades, auto executives from around the world made the pilgrimage to Toyota's factories to learn its methods of lean production and continuous improvement. The famed quality guru W Edwards Deming helped Toyota set up its manufacturing methods after being spurned by complacent US auto makers. Detroit thought its dominance could never be challenged, and certainly not by the Japanese with their fleets of small, cheap compacts. Since then, a generation of business school students has studied Toyota's management and manufacturing techniques. Now its safety woes are certain to find their way into business school case studies on how to ruin a company's reputation.

Toyota's woes have come as GM and Ford have been making a comeback in quality and market share, a year after skeptics were wondering whether the U.S. auto makers were done for:
It is worth remembering that a year ago, the question of whether there would even be a US auto industry was being hotly debated. GM's annual report included a caution that the company's ability to carry on as a "going concern" was in doubt. Even those who supported the rescue of GM and Chrysler wondered whether it would simply postpone the inevitable.

Ron Paul, the Fed and Watergate

This New York Times article on Fed chairman Ben Bernanke's appearance before a congressional committee was notable for several reasons.
First, he made headlines, and reassured markets, by saying that interest rates would remain low for some time to come.Second, the chart behind him shows the collapse and slow recovery of wealth over the last 30 months. The Fed's extraordinary extension of its balance sheet is just a fraction of the $17.5 trillion in lost wealth. The fact that only $5 trillion has been regained is one reason why monetary and fiscal policies have not triggered inflation so far, and won't for a while.
But what really struck me was this exchange between Bernanke and Congressman Ron Paul:

After Mr. Paul suggested that money used in the 1972 Watergate break-in came from the Federal Reserve, and that the Fed had loaned $5.5 billion to the regime of Saddam Hussein of Iraq, Mr. Bernanke replied, “The specific allegations you have made are absolutely bizarre. I have no knowledge of anything remotely like what you’ve described.”
A healthy skepticism towards our institutions is an enduring part of our political tradition, but this sounds more than a little nutty to me. Woodward and Bernstein followed the money in breaking the Watergate story, but the money trail never led back to the Fed. Unless you think they were in on the conspiracy too.

Tuesday, February 23, 2010

Five Years of TommyWonk

TommyWonk first went live five years ago with a post about this famous conceptual art parody:

Not that anyone was paying attention at the time.
Since then I have published 1,615 posts and I don't know how many words. My posts have gotten longer and my focus more narrow: climate change, the economics of renewable energy and most notably the Delaware wind power saga.
While I have made a few minor mistakes, I don't think I have ever had to walk back or retract anything I have written. The worst factual mistake I can recall is naming the wrong subsidiary of Babcock & Brown as the owner of Bluewater Wind.
Many like blogging because of its immediacy, but I don't believe that blogging is about the moment. I prefer to take my time. As evidence that blogging can have staying power, consider the following Google searches, all of which feature TommyWonk in the top ten results:
Thanks to this blog, I have had the chance to go to the 2008 Democratic Convention in August, 2008, become a contributor to the Guardian's opinion website, Comment is free, and go on the air with WDEL's Alan Loudell now and then.
Two things I haven't done: I haven't used profanity, though I have posted a couple of quotes with the offending words deleted. I haven't signed on to Twitter. I have a hard time confining myself to 140 words, let alone 140 characters.
As gratified as I am that this little blog has had some influence on the public discourse, I have not confined my advocacy to this blog. I am now affiliated with a variety of committees, boards and working groups, taking the unique approach of applying financial and economic analysis to environmental issues, from recycling to renewable energy.
If you want a snap reaction to the events of the day, there are plenty of blogs out there to read. But if you want to go a little deeper, come on over. As I have said before, whether you agree with me or not, I hope that you come away from my blog with a little more clarity of thought on issues that matter.
Thanks for reading, and keep coming back.

Monday, February 22, 2010

Ted Kaufman on Renewable Energy

While the skeptics argue about snowstorms and climate change, the U.S. is in danger of watching a growing industrial revolution in energy technology from the sidelines. Senator Ted Kaufman writes in the News Journal that "the future lies in growing the green economy."
Kaufman says that's where the smart money is:
Many of our smartest investors see this and are betting on clean energy. John Doerr, who helped fund small startups with names like Amazon and Google, believes it. Vinod Khosla, who founded Sun Microsystems, believes it. Companies that have been on the forefront of innovation for more than a century, like General Electric and Delaware's homegrown champion, DuPont, believe it.
Last summer, I joined a group of environmental leaders who met with our two senators to talk about climate change. I made the economic case for renewable energy, and mentioned an op-ed that John Doerr and GE CEO Jeff Immelt wrote. Our senators' ears perked up at the names; Doerr had met with senators last summer about using energy technology to rebuild our industrial economy. It so happens that Delaware's two senators have MBAs, and understand what Doerr was saying. Kaufman said at the meeting that the U.S. has to be in the business of building something. Unfortunately, Kaufman writes, China is leaping ahead of us:
Last year China became the world's biggest manufacturer of wind turbines. China had already become the leading source of solar panels, and is now working around the clock to expand green technologies -- from nuclear power and carbon capture and storage to more efficient lighting and heating.
Kaufman concludes the renewable energy is a smart investment:
Green technology is not just an environmental movement anymore; it is a wise financial investment and a linchpin in ultimately putting Americans back to work.

Sunday, February 21, 2010

Obama on Warm Weather in Vancouver

The global warming skeptics have made a great deal out of the big snowstorm that socked the east coast recently, as if winter snow in the northern hemisphere is somehow unusual. Last week, I once again tried to explain that weather and climate are not the same, and pointed out that it has been unseasonably warm in Vancouver.
As Think Progress reports, Barack Obama also noticed that it's warm in Vancouver:
I want to just be clear that the science of climate change doesn’t mean that every place is getting warmer. It means the planet as a whole is getting warmer. But what it may mean is, for example, Vancouver which supposed to be getting snow during the Olympics, suddenly is at 55 degrees and Dallas suddenly is getting seven inches of snow.
Once again, weather and climate are not the same. Weather is what’s happening in a specific place at a specific time and changes moment by moment, sometimes dramatically. Climate encompasses the entire planet and changes slowly and incrementally.
The earth is a big object. It takes a lot of energy to change the earth's overall temperature, even by a couple of degrees.

Friday, February 19, 2010

Yard Waste Diversion Going Statewide

New Castle County residents have been diverting their leaves and grass clippings from the Cherry Island Landfill for two years now. Now, as the News Journal reports, the ban is being extended to the rest of the state.
The Department of Natural Resources and Environmental Control
has issued a secretary’s order barring the landfilling of yard waste as part of a new operating permit for the Sandtown Landfill in Sussex County.
Hopefully, we won’t see bills introduced in the General Assembly to overturn the ban as we did in 2007 and 2008, when House Republicans made it a top priority. Wayne Smith made HB 1
the first bill the GOP introduced in the new session in 2007. A year later, Greg Lavelle's attempt to overturn the ban didn't make it out of committee.
This is not just about being green; it’s a matter of sound management of public resources. Landfills are expensive, and should be used to accumulate trash that can’t otherwise be diverted. Leaves and grass clippings can easily be mulched, either in your backyard or in one of the yard waste sites DNREC has set up to accommodate residents.

Wednesday, February 17, 2010

Snowstorms and Climate Change

It seems that whenever we get a snowstorm these days, we hear the same old argument: If global warming is real, why is it snowing? Those who seem to think that snow in winter is a meaningful measure of climate change repeat the fallacy of equating weather with climate. Tom Toles is right to ridicule the argument. For instance, while we have had an unusual amount of snow here on the east coast, we are reading reports that the weather is too warm for the Winter Olympics in Vancouver:
VANCOUVER (Reuters) - The weather gods cursed the Vancouver Winter Olympics again on Tuesday, forcing delays to Alpine skiing, snowboarding and ski jumping, with rain near Vancouver and snow and fog shrouding the mountains.
Weather is what’s happening in a specific place at a specific time. Weather changes moment by moment, sometimes dramatically. Climate encompasses the entire planet and changes slowly and incrementally.
The overall temperature of the planet Earth might change by a fraction of a degree over the course of a decade. The Earth is a big object; as such the laws of thermodynamics tell us that it takes a significant event to upset its thermal equilibrium.
I have not heard that any climate scientist is predicting that it would stop snowing in North America in the winter. You might call it a snowman argument instead of a straw man argument.

Tuesday, February 16, 2010

Talking Snow with Alan Loudell on WDEL

I will be going on the air with Alan Loudell of WDEL, 1150 AM, to talk about (what else) the weather.
Specifically, we will discuss the economics of parking on snow clogged streets and the challenge of clearing the streets. If we have time, we might even discuss whether the latest storms have any bearing at all on the global warming debate.

Monday, February 15, 2010

The Economics of Parking in the Snow

I have been thinking about how several feet of snow changes the balance of economic forces governing parking in city neighborhoods. Any city resident has seen the phenomenon of reserving parking spaces with trash cans and lawn chairs over the last ten days.
Normally, the price of parking in a residential neighborhood is stable. Most Wilmington residents can park in their neighborhoods for free, though some streets require a residential sticker, which is meant to keep commuters from parking on city streets to the detriment of residents. I live in a mixed use neighborhood, which means that streets provide parking for residents at night, and workers and customers during the day.
Instead of adjusting to balance supply and demand, markets can become less efficient when faced with the stress of sudden scarcity.
For instance, the practice of reserving parking spaces with lawn chairs illustrates the concept of hoarding. When goods or services become sharply scarcer, consumers tend to hoard them, further reducing the supply. A hoarded parking spot is not available for other drivers, especially in a mixed use neighborhood like mine, which is why I didn’t try to save my space while I was at work today.
In this case, I was lucky; there were several spots available when I got home this evening. And yet, on other snow days, I have been forced to park a block or so away, which points out another feature of scarcity, that of volatility. In volatile markets, supply and demand fluctuate wildly, making availability and price hard to predict.
While the scarcity of parking in my neighborhood will dissipate with the melting snow, the scarcity of fossil fuels is inexorable. The balance of supply and demand for parking will be restored in the spring. But the supply and demand of fossil fuels will continue to gyrate from season to season.

Saturday, February 13, 2010

Back from Denver

I woke up on the east coast today for the first time in a week. This is how Denver looked at 7:00 a.m. two mornings ago:
We got a couple of inches of snow in Denver over the last week. When I got home, I found my car safely embedded in a bank of snow.
As for those who somehow see the last two snowstorms as refuting the evidence of global warming, I would point out that no scientist (at least that I know of) is arguing that snow would stop falling in the winter.

Wednesday, February 10, 2010

Renewable Energy and Neoclassical Economics

Charles Weiss and William B. Bonvillian offer a telling anecdote in their book, Structuring an Energy Technology Revolution:
A bus is traveling along the California coast packed with neoclassical economists attending a convention. They are accompanied by one reporter. Suddenly, the bus crashes through the guardrail over a 300-foot cliff toward the sea. The reporter starts screaming, but the economists are all silent. The reporter asks the economist seated next to him why he and his colleagues are not screaming since death is imminent. The economist responds, “My friend, there is so much pent-up demand that a parachute will appear.”
Of course, it's too late to invest in a parachute factory when the bus has flown off the cliff. Likewise, it is too late to invest in renewable energy and energy efficiency technologies when fossil fuel supplies go off the cliff.
The real world is different from the idealized world of the free market fundamentalists in that new business requires time, innovation and capital, all of which are subject to scarcity. If we lived in a world with infinite capital, then no bank would ever go broke and no family would ever go hungry.

Tuesday, February 09, 2010

Wonk Meets Wonk

Here in Denver, I have had the pleasure of meeting Tom Konrad, who can be found online as the Clean Energy Wonk. Tom is a serious quant; he has a PhD in mathematics and a CFA (Certified Financial Analyst), and writes about green energy investment opportunities at Alt Energy Stocks.
As fellow wonks, we have traveled eerily similar paths. We have both been active in promoting clean energy, and have offered testimony to our respective legislatures and utility commissions. We agree on the economic potential of investing in energy efficiency, including job creation. When we discussed the ACEEE report that priced the average value of energy efficiency at 3.0 cents/kWh, he pointed out that some demand side management programs have a net cost far below that.
Talking with Tom reminded me how much innovation in clean energy policy is moving ahead state by state, and that others are thinking and working along similar lines.

Sunday, February 07, 2010

Economic Progress?

Is the stimulus plan making any progress? Dave Roberts of Grist connected me to this admirably clear chart showing monthly job losses (or gains) from Nancy Pelosi's office:The numbers are from the Bureau of Labor Statistics.

Friday, February 05, 2010


My flight out of Philly got off just before the snow started. By the time the plane set down in Denver, Jack Markell had declared a state of emergency and ordered all cars off the roads.
I'm back in Denver for the first time since the convention in 2008. The forecast for tomorrow is 48 degrees and partly cloudy.
Stay safe and have fun.

Tuesday, February 02, 2010

Energy Efficiency and GDP

Opponents of reducing energy consumption tell us that conservation and efficiency measures will hurt the economy. But a look at historical energy usage clearly demonstrates that energy efficiency does not require a sacrifice in our quality of life.
Matt Yglesias pointed me to this chart from the U.S. Department of Energy that shows energy intensity – the amount of energy compared to economic output – has declined consistently over decades:
The DOE describes how the chart was generated:
Taking a long-term perspective, and using the simple Energy/Gross Domestic Product (E/GDP) ratio, the amount of energy needed to produce a dollar's worth of goods and services in the U.S. economy fell by more than half between 1949 and 2004.
Think about how our standard of living has changed since 1949: American households have more cars, more appliances, and certainly more computers today than when Harry Truman was president.
Energy efficiency is not about reducing our standard of living. To the contrary, if GDP has grown twice as fast as energy consumption, then we can conclude that our current standard of living would not be possible without the gains in energy efficiency since 1949.

Monday, February 01, 2010

Berkshire Hathaway's Stock Split

Last week, I and a lot of other investors bought shares in Berkshire Hathaway for the first time in our lives, and were rewarded with some lucky timing. Berkshire Hathaway's A shares climbed to an inaccessible price years ago (they closed at $114,600 on Friday), and the B shares closed at $3,376.00 before the split, so most investors have never had the chance to buy into Warren Buffett's famous money making machine.
First, the company's B shares (BRK.B) split 50 to 1 on January 21, bringing the price down to an affordable $71.00. As word spread that investors could buy a few shares in the famous investor's company, the price started to go up. The new split price opened 5.1 percent higher on Monday than it had closed the previous Friday.
But the fun didn't stop there.
On January 26, Standard & Poor's 500 announced that Berkshire Hathaway would be added to the S&P 500 index, replacing Burlington Northern, which it had acquired. I learned in business school that being added to a big index adds a bit to a stock's value, as mutual funds add the stock to their portfolios. You can see the spike in price and trading volume last Wednesday morning. But the BRK.B share price continued to climb, as more investors bought the shares; volume remained high the rest of the week.
Last week's trading activity illustrates several important points about finance. Except for a quick bump from being added to the S&P 500 (which institutional investors probably knew was going to happen), finance theory teaches that BRK.B should not have climbed 7.0 percent in one week when the index fell 1.7 percent. There wasn't that much news about the underlying business. The efficient market hypothesis claims that, given perfect information, no security would behave in such an anomalous fashion. (Of course, stocks do that all the time, which even the most famous finance professors struggle to explain.)
Buffet's success over the years may be the most decisive exception to the efficient market hypothesis of our lifetime. He just shouldn't be that good.
How then can one explain Berkshire Hathaway's performance last week? Small investors drove the price up as they took the opportunity to buy into Buffett's legendary portfolio of companies. Warren Buffett didn't become a smarter investor in the course of the week (except that the stock split seems like a winning move).
What sets Buffett apart is that he buys businesses, not stocks. He doesn't acquire a company until he has taken a very close look, and decided he likes the management, which he rarely changes. He knows more about the companies he buys than the rest of the market, and he has learned to use his considerable market information and buying power to cut good deals. So the efficient market hypothesis holds; it's just that Buffett has better information and the means to exploit it.