Environment & Capitalism Marriage 1 – Government Dirigisme 0

An attendee at a cocktail party given by Export Development Canada during the International Economic Forum of the Americas remarked that inventors and entrepreneurs needed government R&D subsidies to help commercialize new processes. An entrepreneur in new Pipe Organ technology manufacturing, he insisted that his technological advances would never have been brought to market without bridge loans and taxe credits for R&D.

Today General Electric and Sargas of Norway have announced a breakthrough in carbon capture technologie. A new model of GE’s gas plants will be built with Sargas’s new process that would capture 90 per cent of their output of carbon dioxide, which can then be injected into oilfields to squeeze out more crude.

This could be doubly environmentally friendly as such a technology could potentially be used to reduce energy consumption in the energy extraction process to complement such technologies as Steam Assisted Gravitational Drainage which consumes much energy in the extraction of bitumen oil in Alberta or heavy crude in California.

Sargas’ technology which promises to capture up to 99% of Carbon emission in certain instances will now be commercialized by Big Business as embodied by one of the worlds largest, most profitable conglomerates: GE

Since GE’s CEOs are typically anti-tax, anti-big government and republican, one might wonder if Obama and the Democrats of this World will be shaken in their belief of Government economic and social ‘dirigisme’ now that the company promises to do what billions of dollars of American taxpayer money subsidized R&D research could not?

Obamacare Explained

Some readers might wonder why this blog has not commented on the US Primaries and the Republican leadership race. Very simply because it doesn’t matter yet. American political developments will become interesting with regard to a presidential election, when both candidates are known. A politically and economically interesting development in American constitutional and political life however, is upon us in the form of the Supreme court’s review of the Patient Protection and Affordable Care Act (PPACA). 26 States have joined in an effort to abolish the PPACA and the Health Care and Education Reconciliation Act of 2010 collectively known in Right of center circles as ObamaCare. Many a legal experts and US Supreme Court watchers have dubbed this a once in a lifetime redefining of State and Federal powers. So while ”who will be the next leader of the Free World?” is an interesting topic of discussion, the powers that Chief Executive will wield, seems like a relatively more important issue.

The legal and technical issues at hand are quite complex. The very first complaint against the bill, if I recall correctly, was that it was incomprehensibly long and complicated (even for lawyers apparently). So a quick recommendation: go wikipedia PPACA now, come back and read this post later… Now that you are back with a mild understanding of what ObamaCare attempts to do we can start raising some of the important  issues at stake here. Just in case Wikipedia wasn’t clear enough, the staples of the Acts are:

• The “individual mandate” where all individuals would be required by law to purchase health insurance coverage.
• Insurance providers will no longer be allowed to discriminate against pre-existing health conditions except smoking.
• Medicaid eligibility will be bumped up to 133% of the American poverty threshold.
• Sliding scale of subsidies for insurance purchase for Americans earning between 133% and 400% of the poverty threshold.
• Minimum standards of insurance policy will be imposed
• Penalties for 50+ person firms not offering insurance plans to employees

This healthcare plan proudly embodies the American penchant for convoluted government  market distortions. That the World hasn’t been struck by a wave of micro economists’ heart attacks following ObamaCare’s signing into law, is surprising in itself. The effects of minimum insurance policy standards would have been twofold. One to cover the new costs of the added ‘standards’, insurers would have raised prices. Subsequently health insurance consumers would have less coverage options and would face a higher price, leading to less purchase; less Americans covered. Faced with this prospect the democrats added mandatory purchase of insurance. ”You think insurance is too expensive? BUY some anyways” says Nancy Pelosi in this recurring nightmare libertarians get at night. At some point in 2009 someone must have asked the question: ”Now that we’ve figured out how to insure all Americans (by force), how do we do it without raping low income workers disposable income?”. The Answer was double. First they chose to bump up Medicaid coverage to a fixed percentage of people earning 133% or less of the statutory poverty, and then giving a subsidy to people earning more than that revised threshold. Now that subsidy would help people earning up to four times the poverty threshold. That means people (household of 1 in the 48 contiguous States + DC) earning up to 43,560$, just shy of the median household income, would be eligible for financial assistance. As an example: for a household of four in Alaska, the subsidy would be accessible up to a household pretax income of 111,760 US$.

Now people earning 43,560 US$ represent the cream of the crop of wealth on a World scale. So why would the federal government give subsidies to so many people most of whom don’t even register as poor? The answer isn’t in the fine print it’s actually in between the lines. The high threshold for subsidy eligibility is actually an admission that the basic laws of supply and demand are right. How so? What happens when 30 million uninsured poor Americans suddenly show up simultaneously at their local insurance office with an Uncle Sam signed cheque asking for some premium quality insurance? Insurance companies having struck gold, all jack up their prices. Now, all those Americans on the cusp of middle class status have to compete for insurance products with a crowed of people wielding federal government credit cards, one word, though! So the price of insurance would rise for all, hence the necessity to help people who thought they were middle class.

Knowing the way the American tax code works, we could say that a cleavage has been created, cutting the american population roughly in two, where the top earning half suffers higher insurances prices and higher taxes to help pay for the bottom half’s increasingly expensive healthcare. Is this the only cleavage this legislation creates. No it isn’t. One major component of the legislative package is the clause prohibiting price discrimination. Price discrimination is allowed but only on a geographic basis. What might be the result of that policy. Unable to charge higher premiums for unhealthy individuals, insurance companies will have to charge higher average premiums on everybody including healthy people. So the Portland health nut who bikes to work, eats vegan, works out and lives a balanced lifestyle will have to pay higher premiums so that the overweight McDonald’s inhaling, binge drinking couch potato need not pay the fair value of his unhealthy ways. One might say this legislation is anti model citizen. If you are going to live a long healthy and successful life get ready to be whacked in the wallet.

The essential of this legislation is to create a one tiered healthcare system. Even if some Americans will buy their own healthcare from a private insurance corporation, they will do so on federally dictated terms. No free choice = no free will = no free market = one tiered system. However imposing purchases on consumers creates an inelastic demand (even if only partially), what do businesses do when facing an inelastic demand they raise prices and increase their profits. So what will be the ultimate result of these laws? The United States of America will consolidate its lead as the country with the most expensive healthcare in the World. This continues a long tradition of Left leaning policies to always collaterally benefit somebody already wealthy. Last weak we joked that Francois Hollande’s taxation policies would enrich Swiss bankers and now we follow this up with insurance providers in the US readying themselves for some unimaginatively gluttonous profits.

Understandably a majority of States are worried. They are reportedly on the hook for less than 5% of the estimated 500 billion yearly added healthcare spending. Now the Obama Administration has repeatedly said that States may opt out of the plan. However that option is conditional on states finding their own way to newly cover as many uncovered constituents as the federal plan would have. Here lies the States assertion that the legislation is coercive. In previous rulings it was found that over excessive inducing does represent undue coercion. Coercion in itself being an attempt against States’ constitutional sovereignty. Now this blog being about economics and not law, a different argument shall be posed. While assuming that opting out of the plan includes opting out of the plans funding a fundamental inequity subsists. The Congressional Budget Office has opined that the healthcare proposals are not fully funded. That is to say the federal government will incur more costs to the program than the proposals projected revenues. So this deficit will have to be covered by revenues from other sources such as income and corporate taxes levied nationally. This means than should States opt out of the plan as proposed they still run the risk of bearing the burden of cost without seeing any of the benefits. This surely represents an undue coercive reality all states are aware of.

Is it not strange that a constitutional law expert (Obama) would behave as though the Residual power were granted to the federal government instead of the states. What ever happened to respecting not just the letter of the law but also its spirit. More importantly where were the American micro economists when this legislation was being adopted? Canada with a one-tiered system has cheaper healthcare. France with its ultra comprehensive two-tiered system has cheaper healthcare. Instead of moving in the direction of making healthcare cheaper for all Americans Obama is moving in the opposite direction! with the caveat that the 15% of uninsured wont be anymore. Whether for personal rights, constitutional or economic reasons, ObamaCare leaves much to be desired.

Shout out to our Lithuanian readers!

Obama Block!

 Should have put money on it… In a perfectly political and foreseeable manner the current administration of Chief Executive Barack Obama has officially rejected the Keystone XL pipeline proposed by Canadian pipeline operator TransCanada Pipelines. Sad… yes for the World… sad for everybody in the World?… hum not so sure.

Let’s look at who are the winners here. The greenies are the obvious winners. What they’ve won or accomplished? I don’t really know, only a partial reading of the science on climate change and a total lack of understanding of the modern energy global supply chain, can help explain this spurious victory. Oil traders in the US…. say what? The price differential between West Texas Intermediate crude oil and Brent crude oil in Europe creates some serious arbitrage opportunities for the savvy speculator. The pipeline was suppose to help alleviate that price differential… oops I guess some opportunities are worth lobbying for, right! The Chinese may eventually be the big winners here. Should Keystone XL continually be pushed backed and Northern Gateway obtain the go-ahead, China’s consumers might actually get some breathing room at the gas pump… much to their American friends’ dismay and loss 😦

Pipeline a-bust?

Reports from Reuters and the Wall Street Journal claim that the White House is about to refuse permitting of the Keystone XL pipeline from Alberta to Texas. The reports also state the White House will permit TransCanada to reapply for the permit to a redrawn pipeline avoiding the Nebraska aquifers. Okay unsurprising decision by the Obama administration on this one. Realizing that some of Obama’s donors and staunchest supporters are tree-hugging, scorched-earth theorists hippies, the administration seems to be speeding up the regulatory process in preparation for the up-coming presidential election later this year. Mind you these are un-confirmed reports so far, yet reports we are sure at the very least represent Obama’s views regarding hydrocarbons in general.

Now the public reason for such a potential refusal would be to save the Nebraska aquifers which serve as the tap and drinking water of millions of inhabitants of the region. The political reason for such a refusal is the belief that Canadian Oil Sands, or Tar-Sands as the green mouvement calls them, are the dirtiest oil sources one can find and developing them imperils the global environment. Let’s adress these two issues shall we.

Regarding the fear of contaminated water and soils in Nebraska. I’ll admit that I understand it. I wouldn’t particularly like a big oil pipeline crossing my backyard either, especially given Enbridges pipeline leak in Michigan last year and the Gulf of Mexico Macondo well spill calamity of 2010. Now that would be my gut feeling reflexive reactionary thoughts right there. However my brain would eventually kick in and my train of thought would go somewhere along the lines of: Hey! no pipelines were involved in the GoM oil spill, serious case of apple and oranges comparisons going here. What of the Enbridge pipeline spill in a Michigan river? Well it was one of the first large scale spills in a long time to actually get reported on, why so? Apparently a little research reveals that pipelines have better safety records than airplanes do, who in turn have better safety records than cars. As I eye my own vehicle suspiciously after these thoughts, my mind turns back to the issue at hand. The over 3000 km Keystone XL project was only slated to increase the total US pipeline gride by ~1%. Much of the US pipeline grid is old and in need of replacing. Furthermore it is overstretched capacity is running at maximum on much of the grids routes. I am only speculating here but wouldn’t it be better if we  switched some of the oil flow from old decaying infrastructure to the most up to date technology in pipeline safety design? I’ll let the engineers answer that one but the answer seems quite self-evident.

Now assuming for a moment that the project never goes forward, what would be some of the easily identifiable consequences. One of the gravest consequences from an American perspective that I can think of would be increased dangers of oil spills. What was that? you say. Well, the most rapidly expanding production of oil in North America isn’t actually the Oil-Sands right now, it’s actually the Bakken oil fields in North Dakota. How does the oil from ND make its way to US refineries in the Mid-West or Texas you may ask yourself, the answer is by train. Oil from that region which could have been transported by Keystone XL or an attachment to the latter, is transported by freight-train hauling. If you’d ever looked up the safety record of freight-trains on Google you’d be a hell of a lot more worried than by pipeline trust me. Spilling petrochemicals from freight-train accidents are virtually a yearly norm in Canada where our two main freight-train companies have some of the best safety records in all of the Americas. But hey! suit yourself Obama. (In his defence it’s probably the EPA’s fault for being unable to study collateral benefits and consequences of their decisions)

Now let us look at the issue from a more global perspective, something the greenies claim to do. If Keystone XL doesn’t go through the most likely outcome will be the permitting of Enbridge’s Northern Gateway pipeline to the Pacific port of Kitimat. The result of that wold be simply increased CO2 emissions on a global level. How do we get to that conclusion? Firstly the oil will have to be transported to China or other regional industrial countries by super-tankers. No matter how efficient they’ve become over the years they don’t beat pipeline in terms of efficiency. Especially given that the distance travelled will be twice as long. Now we talk about the US being the biggest polluter in the world and China running a close second. A little detail forgotten quite often is that of efficiency per emissions. For virtually the same consumption of energy and pollutant emissions the US generates roughly three times more output (wealth), let’s not even broach the per capita quagmire. So Canada will have to send  the crude oil to be refined in some of the least environmentally efficient refineries in the world.

All this to say how can the best intentions in the world (save the planet from apparent environmental Armageddon) always lead to a worse outcome (more spills, more emissions and more deadweight loss: less global wealth). Mister Obama please think wisely before caving in to your green lobby please.

P.S. Since I now have to go to class I’ll leave aside talk of Canada’s Oil sands being all that dirty a point I’ll refute next time!

P.P.S. Leave comments, argue, get mad, it’s the internet there are thankfully no fist-fights to be had here 🙂