Nuclear Politicians

March 24, 2011

Yesterday my wife and I were out for lunch, and she was enthusiastically telling me about the fine work her marketing students are doing. Her students are examining many companies that have an entrepreneurial culture. In every case, these companies have found consumer needs that were going unfilled; and they built their company by satisfying those needs.

The conversation turned to business people who instead of satisfying needs turn to government for subsidies. My wife responded, “I don’t call those individuals businessmen, I call them politicians. If a business does not have to meet the test of the marketplace, those who run the business are not businessmen.”

I thought of nuclear power. One of the biggest misconceptions in contemporary America is that nuclear power is a safe, cost-efficient form of energy that would flourish in the free market if it were not hampered by environmentalists and overzealous government regulators. Nothing could be further from the truth. In the absence of government regulations and subsidies, the nuclear power industry would not exist at all.  My 1984 Cato Institute study explains why.

The Price-Anderson Act places a cap on damages that a nuclear power plant operator will incur should the plant have an accident. In other words, for over fifty years the government has introduced the same type of systemic risk into the nuclear power industry that we have seen in financial industry. The industry gets the rewards; the rest of us absorb the risks.

The single best judge of the safety of nuclear power plants is the insurance industry. The insurance industry has an incentive to properly assess risks as they determine appropriate premiums. If they overestimate the risk involved in an activity, their premiums will be too high; a competing company will take their underwriting business away. If they underestimate the risk, they make their shareholders vulnerable to huge losses. Thus, when determining the risk of nuclear power, insurers have an incentive to listen to all voices and all scientists on all sides of the issue.

The bottom line is that the insurance industry says that nuclear power is unsafe. This is demonstrated through their unwillingness to sell operators of nuclear power plants anything more than a small fraction of the insurance they would need in the event of a major accident. Absent adequate insurance, the financial markets would simply not accept the risk of holding the stocks or bonds of a nuclear power utility.  In its wisdom, the marketplace has judged nuclear power to be unsafe.

My Cato Institute study explains why the proponents of nuclear power, who understood this, sought the protection of the Price-Anderson act all the way back in the 1950s:

Consider the following statements from the 1956 and 1957 hearings on the then-proposed Price-Anderson amendment.

A vice president of Westinghouse, Charles Weaver, stated: “Obviously we cannot risk the financial stability of our company for a relatively small project no matter how important it is to the country’s reactor development effort, if could result in a major liability in relation to our assets.”

In further testimony Weaver indicated that even Westinghouse’s suppliers were unwilling to go ahead with the contract unless Westinghouse agreed to indemnify them against risks. General Electric also indicated during the hearings it was prepared to halt its work in the nuclear industry should a limitation on liability not be passed. Suppliers of reactor shields also indicated their unwillingness “to undertake contracts in this field without being relieved of uninsurable liability in some way.”

There are of course other reasons why nuclear power would not exist without the umbrella of government. We are seeing in Japan that the storage problem of spent fuel rods has never been properly addressed. The same spent fuel rod problem exists in the United States too, with, according to the Los Angles Times, “about 65,000 tons of the material spread from the East Coast to the West Coast and from the northern woods to Mexican-border states.”

General Electric designed the Fukushima Daiichi nuclear plant.  According to the New York Times “G.E. began making the Mark 1 boiling-water reactors in the 1960s, marketing them as cheaper and easier to build — in part because they used a comparatively smaller and less expensive containment structure.” Early on the risks were clear: “In 1972, Stephen H. Hanauer, then a safety official with the Atomic Energy Commission, recommended that the Mark 1 system be discontinued because it presented unacceptable safety risks.”

So who are the nuclear politicians? They include all those who believe they are smarter than the collective wisdom of the marketplace. In his State of the Union address in 2010, President Obama called for “building a new generation of safe, clean nuclear power plants in this country.” Despite their professed claims of support for the free market, Republican politicians join him in their own pro-nuclear madness. Presidential hopeful Newt Gingrich advocates, “We should also create a streamlined regulatory and tax regime for the creation of more nuclear power plants.” 2012 Front runner Mitt Romney wrote, “I confess that I don’t understand why some environmental activists still consider nuclear power such a bogeyman.” House Speaker John Boehner maintains, “Nuclear energy in the 21st Century is the safest, cleanest source of energy you can find.”

But, it is also important to list the nuclear politicians that may not be so obvious. For decades, the leadership at General Electric has acted on the belief that it is important for General Electric to earn profits by selling nuclear reactors. General Electric’s legendary CEO Jack Welch, lionized by many, led the way for approximately two decades. Fortune magazine named Welch “manager of the century” in 1999.

In a free market—pursuing and earning profits is necessary for the good of both the firm and its consumers. In a free market, earned profits are a signal that a firm is utilizing resources in a way that satisfies the most urgent needs of its customers. Thus in a free market, firms and consumers happily share the same interests.

Of course, markets are often not free. When a firm or an industry seeks privileges and subsidies from government, they are operating outside of a free market—their interests and the interests of the consumers are divorced. Instead of having an entrepreneurial culture that stands the market test by serving its customers, the firm thrives by having a political culture where success is measured by the latest government subsidy.

One way to put an end to this destructive behavior is for the public to see that true business leaders are entrepreneurial heroes; they are not mere politicians. Why lionize someone like Jack Welch? Isn’t it better to shun or ignore those who choose to harm rather than to serve?

Perhaps you think those are harsh words. Jack Welch and other nuclear politicians may never have dreamt that in a first-world capitalist society, like Japan, a nuclear accident would be so catastrophic.  Perhaps so, but they consciously chose to override the wisdom of the marketplace by their support of government interventions like the Price-Anderson Act. They chose to earn profits by using the coercive power of government against consumers. Ask the people in Japan about the consequences of their conduct.


Let a Billion Blooms Bloom

June 10, 2010

Bloom Energy builds energy servers. An energy server runs on clean fuels cells. An energy server provides “100kW of power, enough to meet the baseload needs of 100 average homes or a small office building… day and night, in roughly the footprint of a standard parking space.”

Science fiction? Not at all. For 8 years, Bloom Energy has been in development mode; they have just started to deploy their servers to companies such as  Google, Walmart, Staples, and FedEx.  Each server currently costs $750,000; the goal is to slash the cost to $3000 within a decade.

A price of $3000 for a locally distributed, clean energy source would obviously revolutionize power generation. Will Bloom Energy be successful? We do not know. They have been successful in generating publicity, and the early results for their product are promising. Yet, for every Bloom Energy we hear about, a 1000 more Blooms are still in stealth (development) mode. Most will never be successful, but the few who are will transform world. And no one can predict which Blooms will succeed.

In the months to come, politicians, the economically illiterate, and those who support a larger role for government will chant louder and louder:  We need a new energy policy. The government owes it to the people to do something about the coming energy crisis. Someone needs to do something to secure our energy future.

The federal government was designed by the framers of the Constitution to be slow-moving. Legislation was to be hard—not easy—to pass. The Senate was designed to be the place where bills without broad support would die.

Why would the Founders design our system of government in this way? They understood that a free society innovates and creates wealth —politicians and planners are unable to do that. Elected officials were to be stewards of the founding principles of the country and not central planners meddling in every aspect of our lives. The Constitution was designed to bind the government to very limited and enumerated powers.  Thomas Jefferson wrote clearly, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.”

There is seemingly no end to the mischief that politicians propose. And, about the effects of what they propose, they are seemingly ignorant. In his book The Fatal Conceit, Nobel laureate in economics Friedrich Hayek observed, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Having written The Road to Serfdom, his seminal cautionary book, Hayek would not be shocked by how vivid the imaginations of American politicians have become as they “design” our future.

Entrepreneurs are essential to secure our future freedom. They help lower the costs and improve the quality for essential products. They help to decentralize power by overthrowing incumbents and channeling decision-making away from government. Congress does the exact opposite—they centralize decision-making and raise costs by subsidizing that which cannot exist in a free market.

The Blooms of the world need capital. Unfortunately, we are in a destructive spiral in many areas of the economy—more government involvement and more subsidization which leads to more problems and triggers more demands that government “solve” the problems.

George Gilder gives us the antidote: “The first great rule of enterprise is do not solve problems, pursue opportunities. Problems are infinite and they multiply continuously; when you solve them, you are back where you began. Governments specialize in creating problems that they then generously solve for the people, creating yet more serious and more systemic problems in the process.”

Every day, tens of thousands of people are working tirelessly to secure our energy future. Like Bloom Energy, they’re doing it in stealth mode—we won’t hear about them until they begin to be successful. Politicians will tell us it’s too risky to bet on Blooms. Should we trust the “wisdom” of the politicians or of the Blooms?


Hypocrite-in-Chief

June 7, 2010

“I am furious at this entire situation because this is an example where somebody didn’t think through the consequences of their actions. This is imperiling an entire way of life and an entire region for potentially years.”—President Obama 6/04/2010

“The Obama administration is proposing to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas, much of it for the first time, officials said …Mr. Obama said several times during his presidential campaign that he supported expanded offshore drilling. He noted in his State of the Union address in January that weaning the country from imported oil would require “tough decisions about opening new offshore areas for oil and gas development.”—John Broder in The New York Times—3/30/2010

Cleary, a fair assessment is that President Obama is in way over his head. But this is no knock on Obama.  How could it be otherwise for any politician wedded to central planning? Even competent, well-reasoned, and well-intended planners cannot outperform the collective wisdom of the market. Offshore oil drilling such as BP’s Deepwater Horizon site were enabled by politicians who substituted their policies and plans—in the form of liability limits—for the wisdom of the market. The catastrophic results will change the lives of millions.

Leadership begins with taking responsibility for your own mistakes, not by chanting a not-my-fault mantra.  The President and his enablers are trying to make believe he is apart from and not part of the problem. This colossal failure of leadership during a time of rising fear, falling stock prices, a simmering economic depression, and now, an environmental catastrophe will brew dangerous political extremism on both the right and the left.

Dmitry Orlov witnessed the collapse of the Soviet Union, and sees parallels between the disaster at Chernobyl and the Gulf of Mexico catastrophe. His view of the future is darker than mine but he warns:

It is natural for us to naïvely expect our leaders—be they corporate executives or their increasingly decorative and superfluous adjuncts in government—to be our betters, having been picked for leadership positions by their ability to lead us through difficult and unfamiliar terrain. We expect them to have the mental agility and flexibility to be able to revise their mental maps as the circumstances dictate. We don’t expect them to be stupid, and are surprised to find that indeed they are…These leaders are now attempting to lead us all on a dream-walk to oblivion.

See also:

The Failed Assumption

Accessories to the Crime

The Wisdom of the Market and the BP Disaster


The Failed Assumption

June 3, 2010

Many people have only a vague awareness of how expensive energy was until relatively recently in history. In 19th century America, most Americans consumed very little artificial light, and that included candles. In his brilliant new book The Rational Optimist, Matt Ridley reminds us of just how far energy prices have fallen. In the 1800s, the cost of one tallow candle burning for one hour was the average laborer’s income from six hours of work. If you went back as far as Babylonia where artificial light came from sesame oil lamps, one hour of light cost 50 hours of the average laborer’s work. Today one hour of lighting costs the average worker about one-half second of work. It is easy to see why until kerosene lamps became commonplace, most homes had no light in the evening other than what came from the hearth fire.

Question: Which United States presidents were most responsible for this reduction in the cost of energy? Of course, the answer is none of them. They played no part. Indeed most would not have dreamt of playing a part in directing entrepreneurs in their quest to discover ever cheaper forms of energy. Yet today, people believe this fantastic fairy tale: Without the intervention of government, our destiny is for energy to become ever more expensive and scarce. Why do people believe this when the opposite is the case?

This past Memorial Day weekend, President Obama said of the continuing flow of oil into the Gulf of Mexico that it is “as enraging as it is heartbreaking.” In truth, President Obama is describing his own monumental hubris. His hubris is a visible manifestation of our societal belief that capricious decision-making by our elected officials should take the place of the entrepreneurial discovery process.

Many pundits have predicted that the Gulf of Mexico disaster may be a fatal blow to President Obama’s popularity. They point to his detached attitude and his inaction. Indeed, I have heard strong supporters of Obama, such as Chris Matthews, express anger and frustration at Obama’s behavior.

But the outcome of this political process is unlikely to delight free-market advocates. First, contrary to the facts explained in these two blog posts (here and here), free-market capitalism will be blamed for the Gulf of Mexico catastrophe. Next, the public will embrace politically directed solutions; how could it be otherwise when they mistakenly assume that without central planning the entrepreneurial discovery process cannot sort out which new forms of energy should emerge. Finally, corporations that produce forms of energy that cannot survive without subsidy—such as nuclear—will be lining up at the congressional trough. The likely outcome is more central planning and the redistribution of precious energy funds away from entrepreneurs and into the hands of those touting energy sources that can only be successful politically.

In many countries in Africa including Uganda, the cheapest and most common form of fuel is still charcoal. Why? Gas and electricity cost more. Charcoal is widely available, and the production of charcoal is very low-tech. Charcoal has been used as a fuel for thousands of years. The result is deforestation in African countries such as Uganda and Kenya; the same phenomenon occurred in 17th century England. In contemporary Kenya the result of the deforestation has been called a heartbreaking ecological catastrophe; deforestation has created drought conditions and has dramatically reduced farming yields.

Imagine you are back in 1629 England. Stuart King Charles I has just dissolved Parliament and is determined to govern without it. His power to deal with the charcoal problem and the deforestation of England is seemingly absolute. Should he set up a Royal commission made up of England’s best scientific minds to look into the problem?  Suppose this commission was free of any political influence.

In 1629, the solution to England’s energy problems—high prices and diminishing supplies—was not known. And very importantly, it could not be known. Future solutions, fueled by a rising standard of living and entrepreneurial discovery, had to be discovered in the course of the market process.

My children are finishing their freshman year in high school. They are beginning to have ideas about future careers. Such ideas are in their infancy. They will only come to fruition in the course of a process that allows them to introduce their strengths and their dreams to the world. They will discover new and unexpected things about themselves, and if they are open to the feedback provided by the world and by their souls, they will be able to use their talents in ways that are fulfilling and rewarding. Would it be better for them to take a career test and be told what to study based upon the test results? Would it be better if they were directed into an occupation by their parents or a central authority?

If the entrepreneurial discovery process in energy is allowed to proceed, in less than a century we will no doubt have environmentally safer and cheaper sources of energy. No one, and I must repeat no one, knows for sure what those sources of energy will be. Trying to predict what those energy sources will be is like asking someone in Stuart England to predict the widespread use of kerosene in the 19th century. And even if a 17th century sage could have predicted kerosene, he could not have predicted the process by which it could be produced at a price making it available to the average household. There was no way then, and there is no way now, to bypass the entrepreneurial discovery process.

The alternative to the entrepreneurial discovery process is more central planning. The results of more central planning are likely to be rising energy prices, more use of environmentally destructive energy sources, and as a consequence, a falling standard of living.  The way out of this downward spiral is for the public to question its failed assumption.

Belief in the efficacy of central planning is a persistent belief. One reason for its persistence is clear—there is the appearance that something is being done by planners and politicians. The entrepreneurial discovery process, on the other hand, is largely invisible until the results are apparent. Until the results appear—for instance, a new form of energy is on the market—it may seem to the general public that nothing is happening to solve the problem. Faith in the entrepreneurial discovery process begins with an understanding of how discovery works and why it alone can solve our energy problems. Faith in the entrepreneurial discovery process is faith in something real; faith in the efficacy of central planning to solve our energy problem is literally faith in nothing.


Accessories to the Crime

June 2, 2010

Yesterday, Attorney General Eric Holder announced that federal authorities have opened criminal investigations into the BP Deepwater Horizon oil spill.

Such an investigation is apparently warranted. BP’s own internal documents show that they were aware of potential trouble. According to the New York Times, as far back as 11 months ago, BP “was concerned about the well casing and the blowout preventer.” But the investigation should not stop there. Let’s examine the role of the federal government in this ongoing catastrophe.

As we have covered in a previous post in 1986, Congress passed and President Reagan signed the Oil Spill Liability Trust Fund. Under the law, operators of an offshore rig face no more than $75 million in liability for damages caused by an accident.

Without that law there would almost certainly have been no accident. Why? Simply, the Deepwater Horizon well would not have been built. Would you buy stock in, or bonds from, a company that faced potential damages running into billions of dollars if the company was unable to obtain insurance? Of course not.  Thus, without a limit on its liability, BP could not have raised the capital to drill this well.

Steve Chapman writing at Reason.com observes:

BP was drilling for oil at depths that only recently were impossible. The company had solved the puzzle of how to carry out extraction a mile underwater. Unfortunately, it neglected to devise a reliable way to cap an unplanned blowout at that depth. It’s as though the Apollo engineers landed men on the moon without being entirely sure how it would get them back.

The questions is, why would a company behave so recklessly? Critics of capitalism would answer, “Greed.” But the free market places many checks and balances that prevent greedy attitudes from resulting in greedy behavior. Among those checks and balances is competition. That is why corporations turn to government to remove free market checks and balances. Government is the source of monopoly, government is the source of subsidies, and only government can grant special privileges such as liability limits on risky behavior. Liability is one way of ensuring that greedy people do not take excessive risks. Limits on liability allowed BP, with the government’s blessing, to use force against the public and the ecosystem in the Gulf of Mexico.

Use of force? BP has destroyed physical property—beaches, marshes, wetlands—and they have already destroyed the livelihood of tens of thousands of people, with more certain to come. The catastrophic effect on the Gulf of Mexico ecosystem is almost certain to be incalculable.  This is aggression aided and sanctioned by the federal government.

But there is still more. With the blessing of the Environmental Protection Agency, BP has poured almost a million gallons of chemical dispersants into the Gulf of Mexico. According to the New York Times, “BP continues to stockpile and deploy oil-dispersing chemicals manufactured by a company with which it shares close ties, even though other US EPA-approved alternatives have been shown to be far less toxic and, in some cases, nearly twice as effective.”

While the dispersants have probably reduced the amount of oil that has washed up on beaches, they may have increased the long-term environmental damage. Reports are that the dispersants have helped to sink the oil to the ocean floor damaging plankton. The sunk oil may be helping to create underwater plumes of oil that are resulting in still yet to revealed damages to the marine population in the Gulf of Mexico.

Why would the federal government sanction this? They share a similar interest to BP: to reduce as much as possible the visible damage in order to prevent the public outcry from growing still louder. A destroyed beach is visible and will have a vocal constituency. While, for example, if the breeding grounds of the Bluefin tuna are destroyed, the crime will be a largely invisible and unreported. Bluefin tuna migrate thousands of miles each year to the Gulf of Mexico to breed. Will Canadian Bluefin fishermen ever be compensated or even be recognized as have being a victim of BP’s crimes?

“Every fish and invertebrate contacting the oil is probably dying. I have no doubt about that,” said Prosanta Chakrabarty, a Louisiana State University fish biologist. Oil dispersants are maximizing that damage by increasing the number and kind of marine life that comes in contact with the oil.

The ripples to the food chain have scarcely begun. The damages to our beaches are just beginning. Unimaginable consequences will play out for many years. BP is an aggressor aided and abetted by the federal government.


The Wisdom of the Market and the BP Disaster

May 20, 2010

The BP oil spill in the Gulf of Mexico has the potential to become one of the worst environmental catastrophes in history—a disaster that may rival the destruction of the Aral Sea under Soviet Communism.

Does this mean that at protecting the environment, capitalism is no better than socialism? For some, this catastrophe reinforces their narrative about capitalism. We will be told that BP and its contractors endangered an important ecosystem in the world as they recklessly pursued profits. We will be told that there is an inherent conflict between the pursuit of profits and the interests of humanity and that government is an essential mediator.

In fact, it may well be true that BP recklessly pursued profits; but rather than blaming free-market capitalism, the fault lies in central planning and what Ron Paul calls corporatism. Corporatism Paul tells us is: “A system where businesses are nominally in private hands, but are in fact controlled by the government. In a corporatist state, government officials often act in collusion with their favored business interests to design polices that give those interests a monopoly position, to the detriment of both competitors and consumers.”

This morning the New York Times reports that “prominent oceanographers [are] accusing the government of failing to conduct an adequate scientific analysis of the damage and of allowing BP to obscure the spill’s true scope.”  Most independent experts dispute the government’s estimate that the BP leak is producing 5000 barrels of oil a day; some experts estimate up to 50,000 barrels a day are being spewed.

Now, the government’s poor response to the disaster doesn’t remove the culpability of BP and it doesn’t address the critique that the pursuit of profits by BP is to blame.  But, there is much more to government’s role in this disaster. Let’s focus on the government’s Oil Spill Liability Trust Fund passed by Congress in 1986. Under the law, operators of an offshore rig face no more than $75 million in liability for damages caused by an accident. Damages from the BP accident are certain to run into the billions.

On a free-market there would be no laws limiting liability. Laws that limit liability encourage the taking of risks that would not otherwise be taken. Experts can argue all they want about whether offshore oil drilling is inherently safe or not. Experts can argue all they want about what safety precautions BP should have had at the rig but didn’t. Their views are interesting and often informative, but they keep us rooted where the problem is not.

I live in a rural area and we cook on a gas stove. There is no natural gas pipeline, and so every few months a truck brings us propane gas that is stored in a tank outside of our house. The tank meets certain safety standards, and it passes muster with our insurance company. Suppose we began to store propane on our property in an unapproved container? We would quickly find out that our insurance would be canceled. Further, the fire department and the town would pay us a visit. If we had an accident, the effects would likely impact not only us but our neighbors.  In other words, in a free market, insurance companies play a vital role in determining acceptable risk.

Suppose you began to routinely speed on the interstate, driving over 90 miles an hour. Suppose you received many speeding tickets but managed to keep your license to drive. You would quickly find that your automobile insurance company would either cancel your policy or drastically raise your insurance rates. Would it make sense for the government to pass a law capping your liability in case of an accident? Of course not, that would encourage risky behavior.

In January I wrote at this blog:

Under current law, it is literally impossible to build a safe, clean nuclear power plant. My 1984 paper explains why. The text is available here. In short, there would be no nuclear power plants operating in the United States without government subsidies. The Price-Anderson Act places a cap on damages that a nuclear power plant operator will incur should the plant have an accident. In other words, for over 50 years the government has introduced the same type of systemic risk that we have seen in financial industry. The industry gets the rewards, the government says, and taxpayers absorb the risks.

In their book World Politics: International Politics on the World Stage John Rourke and Mark Boyer write of the Aral Sea:

There are few stories better than that of the sad fate of the Aral Sea  to illustrate humankind’s abuse of the environment and its devastating consequences. The inland sea is located between Kazakhstan to the north and Uzbekistan to the south. In 1960, when those countries were still part of the Soviet Union, the sea was the fourth largest inland body of water, covering 26,300 square miles, an area about the size of Belgium and the Netherlands combined.

Then, beginning in the 1960s, Soviet agriculture demands and horrendous planning began to drain water from the sea and from the two great rivers that feed it (the Amu Darya from the north and the Syr Darya from the south) faster than the water could be replenished.

The sea started to shrink rapidly. As it did, the level of its salinity rose, and by 1977 the catch from the once-important fishery had declined by over 75 percent. Still the water level continued to fall, as the sea provided irrigation for cotton fields and for other agricultural production. The same Soviet planning that brought the world the Chernobyl nuclear plant disaster in Ukraine, stood by paralyzed as the Aral Sea began to disappear before the world’s eyes.

Now, in reality, geographical name Aral Sea is a fiction, because it has shrunk in size and depth so much that a land bridge separates the so-called Greater Sea to the north from the Lesser Sea to the South. What was a single sea has lost 75 percent of its water and 50 percent of its surface area in the past 40 years. That is roughly equivalent to draining Lake Erie and Lake Ontario. The Uzbek town of Munak was once the Aral Sea’s leading port, with its fishermen harvesting the sea’s abundant catch. Now there are few fish, but even if there were many, it would not help the people of Munak. The town is now in the middle of a desert; the shoreline of the Lesser Sea is 50 miles away.

Let’s put all of this together. The same failed idea—central planning—gives us the destruction of the Aral Sea, gives us nuclear power, and gives us offshore oil drilling. Human greed exists, but it needs an agent of coercion to do widespread damage. That tool of coercion is government.

BP may be reckless, but only the government grants them the privilege of capping their liability. Without that cap on liability, their ability to raise money in the financial markets would be severely hampered. In other words, without a capped liability, offshore oil drilling in its current form would not exist. I write in its current form, because it is possible that the removal of the limit on liability would encourage new technology that could lead to safe offshore oil drilling.

All this is speculative, but we know that the BP accident is not an inevitable result of free-market capitalism. Like the destruction of the Aral Sea, the accident is an inevitable result of central planning. Mankind seems determined to not learn the lesson: At our peril, we substitute our own judgment for the wisdom of the market.


Nuclear Power is Neither Safe or Necessary

January 28, 2010

Among the biggest whoppers President Obama told us last night during his State of the Union address was this: “To create more of these clean energy jobs, we need more production, more efficiency, more incentives. That means building a new generation of safe, clean nuclear power plants in this country.”

Under current law, it is literally impossible to build a safe, clean nuclear power plant. My 1984 paper explains why. The text is available here. In short, there would be no nuclear power plants operating in the United States without government subsidies. The Price-Anderson Act places a cap on damages that a nuclear power plant operator will incur should the plant have an accident. In other words, for over 50 years the government has introduced the same type of systemic risk that we have seen in financial industry. The industry gets the rewards, the government says, and taxpayers absorb the risks.

The insurance industry is a necessary mechanism in a free-market to help prevent excessive risky behavior. We ask a 16-year-old to drive safely, but we require him to hold insurance. Asking the financial services industry to not make risky bets or asking the nuclear power industry to build a safe plant is useless if we continue to prevent both industries from suffering the consequences of their actions.

Now, I suppose that President Obama would tell me that we need nuclear power and that the government can be trusted to place appropriate safeguards on the industry. That’s like saying the 16-year-old doesn’t need to hold insurance, but the government will monitor his driving habits.

Did the government direct Steve Jobs to produce his new iPad? Has the government directed the extraordinary innovation that has been centered in Silicon Valley and is transforming the world? There is nothing inherently different about energy. Free-market entrepreneurs innovate; governments waste resources by directing them into industries and firms that could not survive without subsidization. Think about ethanol.

Nuclear power is neither a liberal or conservative issue; it is a human rights issue. It is a human rights issue because under current law, it is coercive technology. It places in harms way Americans who have not voluntarily chosen to absorb the risks. Just as in the financial service industry, where Federal Reserve policy made a financial meltdown inevitable, increased subsidization of nuclear power may make a disastrous accident inevitable.


A Prosperous Future for Al Gore, A Poorer Future for America

November 20, 2009

Suppose there was a man who lectured and wrote about the catastrophic consequences of climatic change to adoring audiences worldwide. Yet, suppose this man was so ignorant about basic facts of science that recently, when on the Conan O’Brien national television show, he promoted geothermal energy stating the inner core temperature of the earth was several million degrees and that there are drill bits that could withstand that heat. (If the earth was that hot at its center it would be a star. The actual core temperature is very speculative, but is estimated to be around 3000°C  to 7000°C. )

Further, suppose this man, who wants to control the lives of others, is an avid meat eater; even though if he switched to vegetarianism, he could shrink his carbon footprint by up to 1.5 tons of carbon dioxide a year. Further, suppose he has become so wealthy from his alarmist message that he owns a large home, and his home uses more energy in one month than the average household uses in a single year. Further, suppose he has convinced the government to subsidize a company in which he has invested, because the company makes an electric car that will sell for $89,000. Yes, according to the Wall Street Journal “A tiny car company backed by [this man] has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.” This man according to the London Telegraph could become the “world’s first carbon billionaire” after investing heavily in green companies receiving government subsidies.

You already know from the title of my post that I’m talking about Al Gore. You might wonder why anybody listens to him? A charitable interpretation would be that, even though he is a flawed human being like us all, people listen to him because they value his message about controlling the effects of man-made global warming. No doubt that is true of at least some of his followers. In my view, many are not cheering his message of “climate control;” they are cheering his message of “control.”

It is a dirty secret of academia; professors who cannot teach well but who do mediocre research that very few will ever read, can earn a very nice salary. On an unsubsidized free market, the value of their services would be much less than it is today. There would be no government grants and contracts for their research. Consumers (students and their parents) would be less tolerant of shoddy college courses; and if these professors couldn’t teach, they might find themselves without a job at all. Some people value and cheer any message of control—because it is in their economic self-interest.

Of course, professors receiving government grants and contracts are not the only ones who value any message of control. Mediocre artists who depend upon government grants for their livelihood value control. Government workers of all types, as well as union workers, who depend upon government privilege cheer for more controls. And now we have a growing class of business executives who instead of selling products valued by the market turn to the government for subsidies and bailouts. They too are in the corner cheering for Al Gore, because it means more handouts for them.

None of these people read my blog; and even if they did, they are unlikely to be convinced by the arguments I make. They have weaved a tangled nest of lies in their minds which allows them to justify seeking for wealth that other human beings have produced and that they have not earned. Barring some epiphany in which they clearly see the unrevealed values they live by, they will never be convinced to change their behavior.

But there’s another group of people who support controls—not because they’re trying to live off their fellow human beings—but because they are fearful of the world without controls. They believe for instance that we are running out of fossil fuels and that they will be cold at night if government does not subsidize new green fuels. Al Gore feeds off this energy of fear.

In his book The Origin of Wealth, Eric Beinhocker estimated that the complexity of the economy in New York City alone generates tens of billions of available products to New Yorkers. To many this is evidence of waste that should be controlled by government. After all someone might say, “Why do we need 500 kinds of breakfast cereals? Why do we need to be able to choose from hundreds of automobile models?” For many caring and economically illiterate individuals, it is natural to believe it would be better if smart people, like Al Gore, directed us to develop the “optimal” car model that was both safe and fuel efficient.

Beinhocker estimates, “Over 97 percent of humanity’s wealth was created just the last 0.01 percent of our history.” Complexity goes hand-in-hand with wealth creation—it is no spurious correlation. What seems to be a mess of competing products is what leads to the discovery of new, innovative solutions. Currently, there are literally tens of thousands of entrepreneurs working in the green energy field. Like Al Gore, some of those are not real entrepreneurs; they are simply political operatives getting wealthy off their political connections. They prevent real discoveries from taking place. Every dollar directed to them, is a dollar that the market cannot allocate towards viable solutions. In contrast, real entrepreneurs only make money when they serve the most urgent needs of the consuming public.

Al Gore may well be right in that geothermal energy may be an important part of our energy future. But, there are many different ways to harness geothermal energy, many yet to be discovered; just as there are many different ways to harness solar energy, many yet to be discovered. More importantly, just as no one ever heard of the internet company Amazon in 1990, there are forms of energy that we have not yet heard of that will change our lives in lasting and meaningful ways.

The more the likes of Al Gore gets to control, the poorer we and children and our grandchildren will become. Instead of being directed to the most promising new sources of energy—as it would be on a market system of profit and loss—energy resources will be directed to wasteful products, like Al Gore’s hybrid sports car.

Al Gore, like all of us, has a narrow mind filled with ignorance. The discipline of the marketplace reduces our ignorance and helps to direct our energy and our capital in the service of others. Those who do not understand this and those who feel a sense of entitlement that others should serve them want more controls. They want others to serve them more than they want to serve others. Of course, this is the age-old human story—human beings trying to live off the labor of others. To the extent that we collectively forget that this path leads to economic ruin, is the extent to which Al Gore’s future brightens while ours dims.


Consumers Vote No Confidence in U.S. Energy Policies

May 28, 2008

The Conference Board said yesterday that its Consumer Confidence Index fell to its lowest level in 16 years. No doubt, sharply rising energy prices have contributed to this fall.

I have often told my classes that rising energy prices are not something I fear, and then I proceed to give a big exception: “If government becomes heavily involved in the market for energy, I will add rising energy prices to my list of fears.” Allow me to explain.

Before the Industrial Revolution, life for most was lived at a bare subsistence level. Most grew their own food and made their own clothing. Few lived in cities, most were malnourished, and energy was very expensive.

Before 1700, charcoal was the dominant fuel used in England. By the 18th Century, England had used up most of its forests to make charcoal. So how could the Industrial Revolution have begun in England without a viable fuel source? Did an English king or parliament promise to solve the problem? Did they punish speculators? Did they subsidize some alternative forms of energy? None of this occurred, but alternative fuels began to arise as ironmakers began to use cheaper coke (a form of coal) instead of charcoal.

Until 1850, in some homes, whale oil was the preferred form of fuel for indoor illumination because it burned with less smoke and odor. By contemporary standards, whale oil was enormously expensive; the average home could not afford it. For many Americans at that time, indoor activities basically ended at sunset.

In 1857, a clean burning kerosene lamp was introduced, and the use of relatively scarce whale oil ended very rapidly. By the end of the 1800s, refined petroleum was selling for literally pennies a gallon—there had been an astonishing reduction of almost 97% in the price of refined petroleum.

Since falling energy prices in real terms has been the norm for centuries, it is instructive to ask: What has gone wrong in the past few years? Many explanations are offered: The “peak oil” theorists say we are running out of fossil fuels. Others blame growing demand from the emerging economies of China and India. Others blame large oil companies. Still others blame speculators. All of these explanations do not reveal the truth.

First, consider that we were running out of charcoal; then we were running out of whale oil; but yet, alternatives—developed by entrepreneurs on the free-market—pushed energy prices down at dramatic rates. This dramatic fall in the cost of energy has played a large role in the growth of the middle class.

Next, consider the dramatic rise in energy usage caused by the Industrial Revolution and by the growth of the United States. During this same period, energy prices fell dramatically. Rising demand coaxed out more supply and more efficient ways to find and use energy. When we review history, we see that neo-Malthusians, such as Paul Ehrlich and the Club of Rome, have been claiming for decades that we are running out of resources. The truth is that the emergence of the Chinese and Indian economies is a happy occurrence for the billions who have been impoverished for so long.

Then, consider large oil companies. I will not defend their honor, but I will point out that the assertion that they have formed a nefarious cartel, impervious to market forces, is about as believable as saying that Ford, Chrysler, and GM could band together and increase prices in order to solve their woes.

Finally, consider speculators. A speculator is a friend of the consumer. Speculators can only make money if they buy low and sell high. In other words, they will make money only if they transfer supply from times of relative plenty to times of relative scarcity. If they are wrong, they must sell when prices are lower; thus speculators have every incentive to avoid such blunders.

If mainstream explanations for rising energy prices hold little water, what instead can we look towards? First, the Fed by destroying the value of the dollar must take a large share of the responsibility. As importantly, we can look towards ethanol subsidies that have drained away billions of dollars from the market—dollars that could have been invested in the discovery of truly viable alternative fuels.

Obama and Clinton are promising more of the same. Obama ‘s official web site promises this:

Obama will invest $150 billion over 10 years to advance the next generation of biofuels and fuel infrastructure, accelerate the commercialization of plug-in hybrids, promote development of commercial-scale renewable energy, invest in low-emissions coal plants, and begin the transition to a new digital electricity grid. A principal focus of this fund will be devoted to ensuring that technologies that are developed in the U.S. are rapidly commercialized in the U.S. and deployed around the globe.

Did you feel angry or did you laugh when you read “Obama will invest…”? No, Obama will not contribute any of his own money; he will drain away $150 billion from consumers and entrepreneurs who can fund viable alternative energy and, in the process, throw away on follies such as ethanol not his own but other people’s money.

As for Clinton, her official campaign site promises:

Hillary would transform our economy from carbon-based to clean and energy efficient, jumpstarting research and development through a $50 billion Strategic Energy Fund and doubling investment in basic energy research.

If you believe that Hillary and her band of experts are smarter than thousands of entrepreneurs who are committing their own resources toward discovering alternative energy sources, then you should vote for her.

As for McCain, he has been all over the place on ethanol. His web site promises: “John McCain Will End Policies That Contribute To Higher Transportation And Food Costs. Ethanol subsidies, tariff barriers and sugar quotas drive up food prices and hurt Americans.”

Clearly, of the three, McCain currently has the most promising position on energy; but he may flip-flop yet again. When in the debates he will have to talk in 30 second bites, McCain is likely to be hammered by Obama alleging that he is not doing enough to help the American people.

And what of the American people? It is a truism that we will get the government we deserve. If we collectively have little understanding of history and economics, we will fall for the seductive call for yet more government intervention. If we are seduced, the current level of consumer confidence will seem in hindsight to have been high.


The Sorrows of Ethanol

April 23, 2008

In 2000, I began to realize what a monster ethanol was becoming. Bill Bradley was seeking the Democratic nomination for president. Although I disagreed with Bradley on many things, I had always admired his principled stands on issues. As a senator, he had always opposed subsidies for ethanol. Shortly into the primary season, he “revaluated” his ethanol stand and decided he was in favor of ethanol subsidies—so much for Bradley being a man of principle.

One of the major beneficiaries of ethanol subsidies has been Archer Daniels Midland (ADM). They receive billions of dollars of government subsidies a year. The Cato Institute has called ADM one the biggest recipient of corporate welfare. To insure that their welfare keeps flowing, ADM gives generously to political candidates of both political parties. All three remaining candidates—John McCain, Barack Obama, and Hillary Clinton—support the continuation of these subsidies. For that alone, all three are unqualified to be president.

All three value their political future more than the environment, the food supply, and the health and welfare of billions of individuals. If you think that is hyperbole read on.

In previous posts, I have covered some of the more harmful environmental effects of ethanol, such as its effects on aquifers. In another post, I observed that ethanol is a creation of a complex set of subsidies, and—like nuclear power—it would not thrive on a free-market. This subsidization drains away capital from entrepreneurs who are seeking to discover new, viable forms of alternative energy.

Astonishingly, ethanol is being produced by ADM in coal fired plants that produce significant amounts of pollution. According to many, including UC Berkeley geo-engineering professor Tad Patzek, making ethanol uses up to six times more energy than the finished fuel itself generates—for a net loss of energy. This is precisely why ethanol would not exist on a free-market.

OK, so what do we have so far: we have a fuel that wastes energy, helps to destroy the environment, draws investment funds away from the discovery of real alternative fuels, costs the taxpayer billions, and corrupts many politicians. Is there anything else? Unfortunately, yes. Ethanol, along with the current housing crisis, is threatening to push food prices beyond the reach of billions.

Before we go any further, you may be scratching your head over how our current housing crisis is inflating food prices. Every time the Fed bailouts a Bears Stearns, it monetizes private securities and increases the money supply. The money has to go somewhere, and one of the places it is going is to hedge funds that are helping to create a commodities bubble.

Of course, perhaps the major culprit in the commodities bubble is ethanol. According to The Economist in 2007:

Biofuels (took) a third of America’s (record) maize harvest. That affects food markets directly: fill up an SUV’s fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30m tons of extra maize going to ethanol this year amounts to half the fall in the world’s overall grain stocks.

Rice and wheat prices have at least doubled in the past year. The Economist‘s food-price index has jumped in real terms by 75% since 2005. Rising food prices have led to riots in recent weeks in Haiti, Indonesia, and Africa. In Haiti, many have been reduced to eating cookies made from mud.

My wife came home today and told me she paid $5.29 a pound for kale. Green vegetables are a staple in my family’s diet, and we will cut back on other spending before we reduce our consumption of vegetables. Others are not as fortunate, they will fill their bellies with cheaper, processed food. In that way, subsidies toward ethanol will also contribute to rising health care costs.

McCain, Obama, and Clinton argue over who is the real elitist. They can all proudly wear that title. While they enjoy a standard of living that few who have ever walked this earth have enjoyed, they support policies that make many go hungry and sicken others.

What is a voter to do? Hug your children, walk in the woods, read a good book, help a neighbor or a colleague. These three candidates don’t deserve your time, attention, or energy. All you need to know about the three of them is that they all support continued subsidies for ethanol. How sad that our great country faces a choice like this.


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