Archive for category Economics
Health Care, Religion, Government, and The Left – Part II
Posted by Joshua Sharf in Economics, Health Care, PPC, Property Rights, Regulation on May 23rd, 2012
Last night, I posted some audio of lawyers at a loss for words at a panel discussion on religion and government. This morning, I’d like to post another clip from the Q&A, one that I think is particularly revealing about the left’s attitude towards religious liberty. The commenter is Ed Kahn, the lawyer for the Colorado Center on Law and Policy, and he’s discussing to what extent a hospital’s association with a religious body should matter. Shorter answer: none. But let him tell you himself.
(The audio quality here is markedly worse than the clip last night from Ms. Hart. I think it’s a combination of Mr. Kahn’s voice and the fact that he was sitting farther away from the mike, but there’s a persistent hiss. I ran it through the noise reduction algorithm, and while it got rid of most of the hiss, there’s a residue that makes it sound like he’s talking from the engine room of a starship, if the engine were powered by boilers, but I think it’s easier to hear than the raw sound.)
They can close shop on Saturday, but that doesn’t make them like a church or synagogue in my view. And if they’re going to hold out their product or their service to the public, then they should not be able to mandate that their religious beliefs to which they subscribe, that the results of that belief should be visited on the people who are entitled to sign up for that service.
If there’s a market where comprehensive health care is available without restriction, and people understand that, then maybe it’s ok for somebody to say that we’re a Catholic health insurer and our hospital is going to be open six days a week, but our emergency room will be open on the Sabbath. But in general, I think that if you’re providing a public service that is a necessity, especially, that it ought to be provided across the board, and the law ought to require it as a condition of licensing.
Some states do say to Catholic (unintelligible) hospitals, “You cannot restrict (unintelligible) abortion, you cannot restrict contraception services or tubal ligation,” and that, I think, is the better standard. So I start there. I think the concept that these organizations are health care, providing what’s a necessity, not simply a good like a candy store, overrides the ability to finesse what services they will or won’t provide, given an economic necessity or need, especially in monopoly situations.
There’s almost too much here to unpack, but let’s give it a try. It embodies almost all the current liberal assumptions about having a right to other people’s work product, and the inconsequentiality of others’ religious beliefs, to the extent that they differ from your own.
The phrase that really popped out at me was this: “…people who are entitled to sign up for that service.” Who talks this way, about people “signing up for a service?” The Left, apparently. Remember when Michael Moore rolled up to congressmen, asking them if they would be willing “sign their kids up to serve in Iraq,” as though it were a particularly violent venue for sleep-away camp. Seventh-graders are “entitled to sign up for” band. Adults purchase products and services with their own money. Seventh-graders buy things, too, generally with their parents’ money, which leads them to feel entitled.
The statement provides a case study of the inevitable intersection between social issues and economic ones. The Left feels entitled to sign other people up to do things for them, without realizing that at a minimum, there’s an opportunity cost. Grant the dubious proposition that All Hospitals Are Created Equal, that you can require anything calling itself a hospital to provide a menu of services at all times, in all places. They still can’t pay for the staff, facilities, and equipment to be perpetually on-call for every conceivable service or procedure. They will have to make choices. And since they are the ones providing the services, their own priorities and values will and ought to guide those choices.
That’s really the only fair way to decide.
If Charles Bronson were still around, he might reprise his scene from The Magnificent Seven where he throws the Mexican child over his knee and whacks him a couple of times for ingratitude, reminding him that his parents don’t do everything for him because they have to. (Hey, you want to be treated like a child?) Nobody makes the church or churches run these hospitals in the first place, except themselves from their own religious conviction. If that same religious conviction prevents them from providing other services, Planned Parenthood should just see that as a market opportunity.
Of course, the same law that enables the HHS Mandate also makes it virtually impossible to open new, specialized, physician-owned hospitals, thus providing further justification for commandeering existing facilities.
Colorado’s Diminished-Capacity Senator
Posted by Joshua Sharf in Colorado Politics, Economics, Energy, PPC on May 18th, 2012
Yesterday, the Senate Committee on Energy and Natural Resources took up the Clean Energy Standard Act of 2012, which would “require covered electricity retailers to supply a specified share of their electricity sales from qualifying clean energy resources.” The target would start at 24% in 2015, climbing to its final, and permanent level of 84% by 2035. Senator Mark Udall (D-CO) made the following comments:
“With that, let me just say that this bill would be a step in the right direction. I also want to emphasize that I still support, as I know do many of my colleagues, a renewable electricity standard nationally. We’ve had great success in the State of Colorado with the renewable electricity standard, and I would argue in fact, we felt less of the effect of this Great Recession because of our energy sector’s capacity to innovate, create jobs, and provide power that’s less and less expensive. We all know for example that wind, now, competes with coal and some would argue is actually cheaper than coal.”
There’s enough material to keep us occupied for a week – and it may – but we’ll start with the idea that Colorado’s Renewable Electricity Standard has been a “great success.”
It may have been a great success for Xcel and its shareholders, but for the ratepayers, it’s a slowly building vacuum, sucking more and more of their decidedly non-renewable dollars. In 2011, the RES was responsible for something like 4.5% of Coloradoans’ electricity bills, and number that is only going to grow over time, as the RES ramps up to its final 30% requirement in 2020:
According to the Public Service Company’s 2010 RES Compliance Plan, the ECA is projected to be $6.3 million this year, before it balloons to $141 million in 2012. It then increases exponentially to $738 million in 2020, or almost 23 percent of total retail electricity sales—none of which would count against the 2 percent retail rate impact.
Assuming 1.5 million ratepayers in Colorado (current figure is 1.3 million) in 2020, and the mandated 20 percent renewable standard, the ECA cost alone will average nearly $500 per year per ratepayer.
The ECA is the Electric Commodity Adjustment, and it’s the means by which Xcel gets around the 2% per year rate limit that is supposed to protect consumers from the fact that renewables are, contra, Sen. Udall, much more expensive than traditional sources of electricity. More about that in a succeeding post.
The Colorado plan, if extended to the country as a whole, will have the same deleterious effects on peoples businesses and homes. That link at the top of the page was to an Energy Information Agency study showing the effects of the proposed standard. Not only would the BCES cost dozens of gigawatts of capacity by 2035:
It would also raise the cost of electricity by about 18%:
If you look closely, you see that the EIA assumes that nuclear will take the place of coal’s baseline capacity, but in fact, the extremely large up-front capital expenditures may make that prohibitively expensive, in which case we’ll have no choice but to cover as much as we can with solar and wind. The result of that little dream scenario? We have more capacity, but the price is 20% higher, rather than 18%. The increase in supply still isn’t enough to make up for the extra cost of wind and solar as sources.
Coloradans have excellent reason to wonder why their senator thinks that paying more than neighboring states for their electricity constitutes a “great success,” and Americans should run like the wind from any effort to replicate the experiment nationally.
EPA “Doesn’t Live In The Energy World”
Posted by Joshua Sharf in Colorado Politics, Economics, Energy, PPC, Regulation on May 14th, 2012
In a recent hearing of the U.S. House of Representatives Energy and Commerce Committee, EPA administrator Gina McCarthy said under questioning by U.S. Rep. Cory Gardner, R-Colo., and Committee Chairman Ed Whitfield, R-Ky., that her agency – despite issuing regulations that will have a profound affect on electricity production in the United States – “doesn’t live in the energy world.”
“Tri-State is a wholesale electric power supplier in Colorado that is owned by the 44 cooperative, generating – transmitting electricity and has come to my office multiple times trying to talk about their compliance with EPA’s Utility Max standards and…their estimate is that it would likely cost them $1 million …I’m asking you to comment on the rural co-ops which are non-profits.
Ms. McCarthy confirmed that some ratepayers would see their rates increase by about 3%, which the EPA calculated to be about $3 a month for the average family, there was this exchange between the panel and her:
Rep. Gardner: “And so that – the only way they can do that is to pass those increased costs on to their ratepayers?”
McCarthy: “I have trouble answering that question because I don’t live in the energy world, but my understanding is that compliance can be achieved by lower demand, as well as increased generation, fuel switching, and a number of techniques.”
Whitfield: “I think that’s the point that we’re trying to drive home. You’re right, Ms. McCarthy, you do not live in the energy world. But then you make extrapolations on gigawatt issues that are a reliability concern based on the chart I saw. DOE rolls over in acceptance of your electricity generation, or lack thereof, analysis, and when you have the people in the field who are disputing that analysis on the gigawatt issue, we’re debating with an environmental agency, not our Department of Energy. And if the analysis was close to what industry, financial people, FERC (Federal Energy Regulatory Commission), EEI (Edison Electric Institute) say then, we would cut some leeway.
“But the administrations proposal – actually, the environmental rules – and the effect on the electric grid, of 10 gigawatts, is laughable. And so, you can do all the analysis on emittants you want, but we reject the premise that you are experts in electricity generation, the cost of building plants, and developing those.”
Rep. Whitfield’s point is that the opinions of actual experts – which seem to be in broad agreement that the EPA rules run the risk of reducing the US’s overall electricity output – are being subordinated to the judgments of the EPA, which, by its own administrator’s admission, doesn’t live “in the energy world.”
Is it true? Well, the EPA estimates a loss of 10 gigawatts (GW) of electrical generation nationwide as a result of its new rules. This estimate is indeed not only out of line, but well out of line, with a variety of other estimates from Credit Suisse (50 GW realistic, 60+ GW possible), Friedman Billings Ramsay (45 GW), the North American Electric Reliabiliy Corporation, or NERC (33-70 GW), the Midwest Independent Transmission System Operator, or MISO (13 GW immediate, up to 61 GW retrofitted), and the Institute for Energy Research (34 GW).
It’s one thing to be independent of the industries you’re supposed to be regulating. But even independent regulatory bodies shouldn’t be making rules based on assumptions and models whose results virtually nobody in the field takes seriously. Maybe the EPA should live a little more “in the energy world,” a world it so closely regulates.
Chronicles of Crony Capitalism
Posted by Joshua Sharf in Business, Finance, PPC, President 2012, Regulation on February 23rd, 2012
So far, the LightSquared story has mostly been written as one of the FCC favoring a politically-connected company at the expense of its competition, and that favoritism having resulted in nothing but waste. See, for example, today’s Coffee and Markets podcast on the subject. Their related links (Documents: LightSquared shaping up as the FCC’s Solyndra and Documents show Obama’s FCC used regulatory muscle to destroy LightSquared’s competition) pretty much give the outline. It’s a simple story, and one that fits in neatly with an overarching narrative, as they like to say, of political money buying regulatory help.
As usual, the story is more complicated than that. And as usual, the full story makes things look even worse.
The Wall Street Journal ran a story discussing just how badly the FCC had tied itself up in knots over this. First, they declared a looming bandwidth shortage, and then quickly auctioned off additional spectrum, spectrum that happened to lie near to that used for GPS. This was done years ago, and Falcone and his people no doubt assumed that the FCC wouldn’t be selling spectrum that couldn’t be developed. Having gotten the favor, they then were surprised when the FCC didn’t turn around and tell the GPS people that this was coming, and that they should shield their equipment – technically well within their capability. Having failed to do that, they now have to argue that there’s no spectrum shortage, after all.
Even assuming that the FCC wasn’t out to clear the field for LightSquared, they failed badly in their regulatory duty here. The FCC has complete control over this stuff. They can decide how, where, and when spectrum gets exploited, and by whom. Either there is or isn’t, was or wasn’t, a spectrum shortage that will imperil future growth. Either the spectrum neighboring the GPS wavelengths is or isn’t usable. Either the burden of preventing interference lies with LightSquared (or whoever buys this tainted real estate from them), or it lies with the GPS companies.
Either the FCC didn’t know how it was planning to resolve this issues, or didn’t care. Or else, it knuckled under to a multi-million dollar lobbying campaign, in which case, what’s the point of claiming “independent” regulatory agencies are any good at all? If the FCC was throwing around its weight to help LightSquared, all these regulatory conflicts become even worse, leading other investors to throw their money after an investment the FCC must have known was headed for an iceberg.
The other example comes from the Department of Transportation:
Transportation Secretary Ray LaHood announced a $54.6 million loan to Kansas City Southern Railway Company (KCSR) for the purchase of 30 new General Electric ES44AC locomotives. These diesel-electric locomotives, built in Erie, Pennsylvania, will help KCSR meet increasing economic demand, and are more energy-efficient and produce significantly less carbon emissions than the locomotives they are replacing.
That’s nice. Railroads have had a very nice couple of years, and with the absence of KeystoneXL, are likely to have even more business, at least in the short term. Kansas Southern has a $7.8 billion market cap. It’s already carrying $1.6 billion in debt. Its quarterly depreciation expense is almost $50 million, or just about the size of the loan. Its operating cash flow was $170 million last quarter, and it showed a net income of $300 million. And it’s not as though GE is going to file for bankruptcy protection if it doesn’t get a $50 million order.
This from the same administration who reflexively defends a perfectly reasonable accounting change (see The Death of LIFO) by attacking oil companies, rather than by defending the change on its own merits.
The problem with both of these stories is that the finance is bound up inextricably with the politics. Analysts work by examining the underlying economic return, and to the extent that there are regulatory issues, they ought at least to be predictable or bounded. Companies getting regulatory benefits they can’t use, or subsidies they don’t need, don’t do anything to help create real wealth.
This Chart Still Needs a Campaign To Speak For It
Posted by Joshua Sharf in 2012 Presidential Race, Economics, National Politics, PPC on February 14th, 2012
A few weeks ago, AEI linked to this Wall Street Journal chart:
The post was titled, “Romney’s Economic Case In One Chart,” and it should be. But charts don’t speak for themselves; they need to be explained. In an age where pollsters routinely judge presidential prospects by the responses to the question, “Understands the problems of ordinary Americans,” it’s not enough to talk in abstract terms about getting the economy moving again, or screaming “Liberty!” at increasingly shrill pitches. It’s not even enough to say that the ever-growing gap between the dark red line and the light red line represents wealth. People need to be reminded why charts like this matter to them.
I see millions of families trying to live on incomes so meager that the pall of family disaster hangs over them day by day.
I see millions whose daily lives in city and on farm continue under conditions labeled indecent by a so-called polite society half a century ago.
I see millions denied education, recreation, and the opportunity to better their lot and the lot of their children.
I see millions lacking the means to buy the products of farm and factory and by their poverty denying work and productiveness to many other millions.
I see one-third of a nation ill-housed, ill-clad, ill-nourished.
But it is not in despair that I paint you that picture. I paint it for you in hope—because the nation, seeing and understanding the injustice in it, proposes to paint it out.
Eighty years of wealth accumulation later, we are not anywhere near so desperate. But a large portion of this still applies, and it wouldn’t be too hard to translate it into modern terms.
That gap represents houses unbought, vacations untaken, memories not made. It represents retirements not taken, or undertaken with too little money. It represents families living closer to the edge of disaster, and thus closer to the trap of government assistance, since they can save less. It represents education and training not gotten, success not earned.
Stasis is not starvation, but it is no less empty for all that, and it will, as Europe has shown, accelerate over time. In a country when men and women pride themselves on being masters of their own destiny, it should be possible to explain what being at the mercy of hostile forces means.
The good news is that we know it’s possible, and that the man who made it work was one of the rare 20th Century patrician Presidents.
The bad news is that those words were spoken at his Second Inaugural, as he prepared to deepen and strengthen all the wrong solutions.
How Not To Manage Rare Earths
Posted by Joshua Sharf in Business, Economics, PPC on January 30th, 2012
Rare earths were in the news a lot in 2011. Right now, it seems as though the news coverage paralleled the bubble in prices, but there’s no reason to be complacent. The government continues to make mistakes in dealing with these resources, missing opportunities to do it right, and eventually costing not only the taxpayer in cash, but also the country in national security.
First, a refresher on what rare earths are used in:
Late in 2010, Colorado-based Molycorp announced that it was ready to reopen one of the world’s richest rare earth mines in California, about an hour south of Las Vegas. The stock price soared, and soared even more on the news that it was working on vertical integration with a prime use of rare earths, magnets for wind turbines. Then, in mid-2011, China announced that it would begin cutting back on its rare earth quotas. Initially interpreted as China throwing it weight around, it now is clear that they were simply responding to demand information that they, as a near-monopoly, had before everyone else.
The metal prices themselves have followed suit, in a number of cases down well over 50% from their mid-2011 highs:
Some of this was simply a bubble bursting, but it’s also possible that the catalyst was more than just an amplified cyclical downturn. Vestas, along with a number of other wind companies, has found out that government subsidies aren’t forever, as the Spanish, Germans, and even the Americans are cutting direct subsidies to wind turbines. At the same time, other mines are increasing output, with Chile’s molybdenum output up 11% in 2011, and Toyota is threatening to release a rare-earths-free Prius. Rare earths prices are starting to stabilize, and it’s hard to see them going much lower.
While the world figures out a way around the problem, the US continues to throw environmental roadblocks in Molycorp’s way to actually re-opening the mine. Cong. Coffman’s well-intentioned proposal is to create a strategic reserve. By the time the bill actually passes, prices will quite possibly have risen again, and it’s not as though, in the long run, companies lack the incentive to retrieve these metals from the ground. To the extent that this is a national security issue, the solution is to let the companies mine the damn things, and to develop an ongoing industry capable of supplying the country’s needs, not only to guess as what we might need and stockpile them.
Hear That Whistle Blowin’?
Posted by Joshua Sharf in Colorado Politics, Economics, PPC, President 2012 on November 30th, 2011
It’s not very loud just yet. But if you bend down, ear to the rails, you can hear the ever-so-quiet singing of a train in the distance.
It’s the Hillary Special, and it’s scheduled to pull into 1600 Pennsylvania Ave., on January 21st, 2013.
The engine has always been there, in the railyard, getting refitted and cleaned and tuned up. Bill took it out for its paces a few weeks ago with the comments about Obama’s handling of the economy. Then, of course, came his book, with its false choice between drowning government and crony capitalism.
And now come the test runs, starting with the Wall Street Journal op-ed and the write-in campaign.
The train’s route was made clear by Pat Caddell, in last Friday’s appearance on the Ricochet Podcast. Caddell, along with liberal-but-not-insane pundit partner Douglas Schoen, explained in last week’s Wall Street Journal why Obama had to step aside for Hillary, for the good of the country, and the good of the Democratic Party, not necessarily in that order.
While some read this as desperation and wishful thinking, I’m more inclined to see it as the launching of Hillary’s 2012 exploratory committee. It tests the waters while not committing her to anything, indeed, while not tying her to any possible disloyalty at all.
Caddell’s & Schoen’s idea, in a nutshell, is that Obama can’t win re-election in such a way as to allow him to govern. That in order to win, he’ll have to poison the political environment so thoroughly that cooperation with the Republicans will be impossible, and that the country simply can’t afford that right now. If he loses, he’ll lose whatever gains he’s made for the Left with him. So for Caddell & Schoen, an Obama candidacy is a lose-lose situation.
Worse, Obama is simply giving up on large swatches of the Democrat coalition, in particular working class whites. He’s offered nothing substantial to labor, only the procedural, and is willing at every turn to sacrifice jobs and the economy to the elite green ideologues. (This is a Democrat talking, by the way, not me.)
Hillary, on the other hand, has shrewdly used her tenure at the State Department to build up her own stature as the actual adult in the party, as opposed to the aspirational adult – also known as an adolescent – currently occupying the White House. She’s been disciplined in sticking to foreign policy, keeping her mouth shut about everything else. Even Bill has, according to Caddell, mostly kept his mouth shut.
If in 2000, the country was suffering from Clinton fatigue, it’s now going through some nostalgia for the 90s. Unlike the Bush years, we were (mostly) at peace. Unlike the Obama years, we were prosperous, with a president who seemed to understand the importance of that fact.
Less odious to the center than Obama, Hillary could win with a positive campaign, or at least one without the overt slash-and-burn strategy that Obama is committed to. Once in office, she may be able to cut a grand spending-and-taxing bargain with the Republicans, where Obama has no hope of doing so. Merely by winning, she’ll be able to preserve the key elements of Obamacare, seen by the Left as this generation’s Progressive Great Wave.
Caddell & Schoen remember how, in 1968, when Johnson won only 58% of the vote in New Hampshire, he decided that he didn’t have the stomach for a long primary campaign, even though he stood an excellent shot at re-election against Nixon. He stepped aside in favor of Hubert Humphrey, who might well have won had Johnson stopped bombing Vietnam a couple of weeks sooner. The appeal to Obama’s sense of duty to persuade him to make the same choice.
More than that, they’ll appeal to the same sense of not wanting to fight for renomination. Caddell & Schoen are now trying to get one or several large Democrat donors to run a Hillary Write-In Campaign in New Hampshire. They believe that were she to win a significant percentage of the vote, it might really shake up the race on the Democrat side.
Since it wouldn’t be controlled by or connected to Hillary (wink, wink), Obama couldn’t really tell her to shut it down. Were he to be too forceful, it could allow her to resign and actually run against him, which is the last thing he wants.
I have to admit, I was a little disappointed at the lack of close questioning by the Ricochet gang. A number of Caddell’s assertions were dubious at best, and yet went relatively unchallenged. Obama has abandoned labor on the high-profile projects like Keystone XL. But he’s practically turned the NLRB into an arm of the AFL-CIO. The NLRB itself, as an end-run around the loss of a quorum to conduct business, threatens to invest its general counsel with an unheard amount of unreviewable authority and power.
Bill, as we’ve seen, has not been very quiet of late, complaining about Obama’s handling of the economy. Caddell also claims that Hillary is the only thing keeping Obama’s National Security Advisor in check with respect to Israel, but in fact, we don’t really know what Hillary’s person opinions about Israel are, and there’s plenty of reason to think they’re not particularly friendly. I believe Caddell makes that claim because it appeals to a clearly disaffected part of the Democrat base that remembers, as do most Israelis, Bill as a friend of that state.
Similarly, Caddell appeals to what the Democrat Party once was, but no longer is, when he tosses out with obvious disgust, but does not elaborate on, the notion that Obama will seek to circumvent a hostile Congress by ruling by executive fiat. True enough, but worthy of fuller examination, playing as it does to our fears of a truly imperial Presidency.
Thus, the outlines of the prospective Clinton 2012 campaign. The reality is, of course, is that Hillary would not govern as a centrist. She would likely be a more effective salesman for the old, unimaginative Blue Social Model policies that doom us to Europe’s fiscal fate, however.
That clickety clack that promises to take us back will, instead, leave us all – Obama included – singing the blues in the night.
President Golf Calls You Lazy – Again
Posted by Joshua Sharf in Business, Economics, PPC, Regulation on November 14th, 2011
In what was called a “scripted conversation” with Boeing’s CEO James McNerney, Jr., President Obama reprised his Malaise Moment of a few weeks ago, and said, “We’ve been a little bit lazy, I think, over the last couple of decades,” which resulted in the 2009 dropoff in Foreign Direct Investment in the United States.
I have to admit that my first reaction was that I was too busy to be bothered with replying. But, as the saying goes, sharks gotta swim and bats gotta fly.
Taken at face value, I don’t have any idea what the hell he was talking about. Worse, I don’t think he does, either. Certainly even a cursory examination of the facts would reinforce the conclusion that Obama’s grasp of recent economic history isn’t any better than his grasp of mid-century diplomatic history.
Below is a quarterly graph of foreign direct investment in the United States, starting in 1980. The series starts in 1960, but it roughly zero from then until 1980, owing to the fact that the US, generating the lion’s share of the world’s wealth, was relying on exports more than FDI for growth:
You can see a couple of patterns here. First, FDI accelerates through the business cycle, as expected. As the economy picks up steam, it generates interest abroad and confidence in investors looking for growth. Second, over the last “couple of decades,” FDI has grown through each business cycle, if you discount the dot-com bubble evident in the very late 90s. Third, when the US economy goes into recession, foreigners stop investing here, until they see some evidence of a bounce-back. All of these patterns clearly apply to the most recent recession, and the current economy.
Of course, we all knew this was bunk, anyway. National accounts must balance, and the only way we can finance our trade deficit is through FDI in our economy. If we find ourselves unable to generate enough wealth, or attract enough investment, to import the things we want, that’s indeed an indictment of our ability to compete, but it likely has much more to do with government policy and regulation than with the work ethic of most Americans.
Obama’s statement that this pattern existed over “the last couple of decades,” is, I think, an attempt to include Bill Clinton’s presidency in his criticism, a back-handed return volley to Clinton’s oblique criticisms of Obama’s economic policies. It’s more than just his routine scolding of his fellow citizens, it also contains a domestic partisan political component, as well. One wants to resist the temptation to overstate the electoral consequences of such tension. But it may be that the President’s famously thin skin is once again getting the better of his judgment.
At this rate, maybe his staff should just use that XtraNorml animation engine for any future “scripted conversations.”
Efficiency Without Regulation
Posted by Joshua Sharf in Business, Economics, Energy, PPC, Regulation on October 27th, 2011
As many of you know, I’m completing a year’s sojourn here in Omaha, the midwestern town with a decidedly western sensibility. (Don’t believe me? Check out the River City Rodeo sometime.)
I’ve been doing web development for Werner Enterprises, one of the country’s larger trucking firms, but having dabbled in finance, I also always take a peek at the quarterly earnings reports. They almost always include a line like the following:
We continued to effectively manage the impact of higher fuel costs by improving our fuel miles per gallon… We are controlling truck idling; optimizing the speed, weight and specifications of our equipment; and implementing fuel enhancing equipment changes to our fleet.
How good are they at it? Turns out, they’re pretty good. Below is a graph of the national average diesel price vs. the company’s reported (or calculated) fuel cost per mile:
At first, you’ll see that the fuel cost grows faster than the fuel price. Some of this is a result of EPA emission regulations, which made the newer engines less fuel-efficient. As they newer engines were gradually introduced to the fleet, they affected overall operating costs. (In fact, at least one of the 10Qs from that era notes that Werner was able to command a premium when re-selling its older, hand-me-down tractors to other carriers.)
Over time, the company has managed to implement certain fuel-saving practices and patent aerodynamic designs that have cut fuel costs. The diesel price curve (courtesy of the US Energy Information Administration) look a lot like the curve leading up to 2008, but the cost per mile has dropped below it. For comparison, in Q3 2006 and Q3 2010, diesel was a little over $2.90/gallon, but Werner’s fuel cost per mile was 17% lower. That represents just under 4% of operating revenues, which is slightly enormous in this business.
They’ve done this even as the rise of intermodal has limited trip length:
Shorter trip lengths are associated with lower fuel efficiency; they involve more stops and starts, more idle time, and a higher percentage of time spent off of the interstates. So the cost containment has happened in spite of this.
It’s also happened despite the fact that class 8 trucks have no CAFE standards at all (although class 8 truckers probably have cafe standards of their own, mostly involving coffee & pie).
If anything, as we’ve seen, the government has made fuel efficiency more difficult by choosing emissions control over it. This choice may or may not be justified; that isn’t the point. The point is that, left to fend for themselves, with the government having made policy decisions that placed other priorities above fuel efficiency, trucking companies have been able to improve their own processes, and to demand better mileage from their suppliers.
More than that, it’s a little “I, Pencil” microcosm. These decisions are the result of a long chain of cost-benefit calculations stretching from engine manufacturer to trucker through customer to consumer. Each of these relationships has its own set of elasticities of supply and demand, which affect how much of the fuel cost can be pushed downstream. The amount that can’t be passed on to each customer provides the incentive for fuel economy.
It also provides the ceiling for how much each is willing to pay for it. Including the engine manufacturer. The government could probably demand higher fuel efficiency out of tractor engines, and the result would be greater inefficiency overall, because the cost of producing that engine would be greater than the system is currently willing to pay.
You could justify those expenses as externalities, say, the national security cost of keeping the Saudi pipeline safe and operating. But then you’re stuck arguing that the political & regulatory systems are as efficient in balancing interests as the economy is in balancing costs, which I think is, at best, an unproven assumption.
Note: Naturally, the opinions expressed here are entirely my own, and do not in any way represent Werner.
There Is No National Bridge Crisis
Posted by Joshua Sharf in Economics, PPC, President 2012, Transportation on October 17th, 2011
Bridges make great campaign backdrops, as President Obama tried to exploit the other week while introducing his jobs bill. Trumpeting the desperate shape of America’s bridges, Obama spoke in front of a bridge between John Boehner’s Ohio and Mitch McConnell’s Kentucky, (a bridge that, as was noted at the time, wouldn’t have been eligible for funding under his new spending spree). Listening to him – and to just about every other public-works-booster in the last 20 years – you’d think that it was only a matter of time, months perhaps, before we found ourselves trapped behind rivers and gorges, as our bridges collapsed into dust.
Not so.
In fact, both as a percentage and in absolute terms, American bridges that are classified either Structurally Deficient or Functionally Obsolete has been falling for at least two decades. The percentage is aided by natural growth and new bridge-building. But that doesn’t account for the decline in absolute terms:
Over the last 19 years, we’ve added about 6% to our national bridge inventory, while the number of Obsolete bridges has declined by about 4% in absolute terms, and the number of Structurally Deficient bridges is down by over 40% in absolute terms:
Structurally Deficient means that the bridge’s actual structure has deteriorated, or the bridge is on a working road and has had to be taken out of service. Functionally Obsolete means that the bridge is now too narrow or too low for the highway system that it’s a part of. And under the FHWA’s 10-Year Rule, no bridge that’s been built or upgraded or repaired to spec in the last 10 years is either Deficient or Obsolete. If a bridge is both Deficient and Obsolete, it’s only classified as Deficient. On a percentage basis, the achievement is even more striking:
The percentage of Structurally Deficient bridges has declined from over 20% to just over 11%, and the number and percentage of Obsolete bridges has declined, even as the national highway system has been continuously upgraded and extended.
In Colorado, the percentages are better than the national average, and have been since 1998 (the first year I could find state-level records). Currently, they stand at 7% Deficient and 10% Obsolete, even as the number of bridges has grown by 8% since 1998.
It might also help to look at the highway spending numbers over the last 20 years. I suspect that some of the increase in the late 90s’ Obsolete totals is a result of upgrading the surrounding road system, and that the decline in Obsolescence in the last 10 years represents a shifting of priorities, even as the number of bridges continues to climb.
Notably, what you don’t see is any massive improvement in the numbers from 2009 to 2010, the Year Of the Shovel-Ready Project. There’s a slight improvement, but nothing out of line with historical trends, which suggests that all that ARRA money wasn’t really going where it was advertised.
It’s possible, I suppose, that we’re coming up on the end of the useful life of some large number of bridges sometime in the new few years, but I doubt it. We’ve been growing the system and doing maintenance since the 1950s, and this Bridge and Highway crisis is one I’ve been hearing about as long as I can remember. Once one of these memes makes it into the public discourse, it seems it’s almost impossible to get rid of, no matter how much progress has been made.
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