Free markets

Wichita movie theater expands product line, now selling groceries

by Bob Weeks on January 23, 2013

Possibly seeking to take advantage of impulse purchases while patrons buy movie tickets, a Warren Theater in Wichita has started carrying a limited line of grocery items.

A reader submitted this photo, commenting: “I went to the taxpayer-subsidized Warren Theater this weekend, and who was staring back at me across the counter — none other than the smiling face of the mayor. Warren has a display set up to sell Brewer BBQ sauce and my sandwich included an (unrequested) cup of the stuff.”

The sauce in the photo is produced and marketed by Brewer’s Best, a company recently founded by Wichita Mayor Carl Brewer.

It is unknown whether Mayor Brewer plans to create other grocery products for Warren Theaters to sell.

Tagged as: Carl Brewer

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Wichita STAR bonds project not good for capitalism

by Bob Weeks on January 14, 2013

Tomorrow the Wichita City Council considers approval of the project plan for a STAR bonds project in Wichita.

The formation of the district has already been approved. This action by the council will consider the development plan and the actual authorization to spend money.

If approved, the city will proceed under the State of Kansas STAR bonds program. The city will sell bonds and turn over the proceeds to the developer. As bond payments become due, sales tax revenue will make the payments.

It’s only the increment in sales tax that is eligible to be diverted to bond payments. This increment is calculated by first determining a base level of sales for the district. Then, as new development comes online — or as sales rise at existing merchants — the increased sales tax over the base is diverted to pay the STAR bonds. Estimates are that annual revenue available for the bonds will be over $5,000,000.

For this district, the time period used to determine the base level of sales tax is February 2011 through January 2012. A new Cabela’s store opened in March 2012, and it’s located in the STAR bonds district. Since Cabela’s sales during the period used to calculate the base period was $0, the store’s entire sales tax collections will be used to benefit the STAR bonds developer.

(There are a few minor exceptions, such as the special CID tax Cabela’s collects for its own benefit.)

Which begs the question: Why is the Cabela’s store included in the boundaries of the STAR bonds district?

With sales estimated at $35 million per year, the state has been receiving around $2 million per year in sales tax from this store. But after the STAR bonds are sold, that money won’t be flowing to the state. Instead, it will be used to pay off bonds that benefit the project’s developer.

Some questions

Curiously, the city doesn’t provide a cost-benefit study for this project. This is the usual mechanism the city relies on as justification for investments in economic development projects.

Often developers ask government for incentives because they claim the project is not economically feasible without assistance. Is that the case with this development? If not, why the need for subsidies?

And if taxpayer subsidy is required for this development, we need to ask what it is about Kansas that discourages this type of business investment.

STAR bonds should be opposed as they turn over tax policy to the private sector. We should look at taxation as a way for government to raise funds to pay for services that all people benefit from. An example is police and fire protection. Even people who are opposed to taxation rationalize paying taxes that way.

But STAR bonds turn tax policy over to the private sector for personal benefit. The money is collected under the pretense of government authority, but it is collected for the exclusive benefit of the owners of property in the STAR bonds district.

Citizens should be asking this: Why do we need taxation, if we can simply excuse some from participating in the system?

Another question: In the words of the Kansas Department of Commerce, the STAR bonds program offers “municipalities the opportunity to issue bonds to finance the development of major commercial, entertainment and tourism areas and use the sales tax revenue generated by the development to pay off the bonds.” This description, while generally true, is not accurate. This STAR bonds district includes much area beyond the borders of the proposed development, including a Super Target store, a new Cabela’s store, and much vacant ground that will probably be developed as retail. The increment in sales taxes from these stores — present and future — goes to the STAR bond developer. As we’ve seen, since the Cabela’s store did not exist during the time the base level of sales was determined, all of its sales count towards the increment.

STAR bonds, or capitalism?

In economic impact and effect, the STAR bonds program is a government spending program. Except: Like many spending programs implemented through the tax system, legislative appropriations are not required. No one has to vote to spend on a specific project. Can you imagine the legislature voting to grant $5 million per year to a proposed development in northeast Wichita? That doesn’t seem likely. Few members would want to withstand the scrutiny of having voted in favor of such blatant cronyism.

But under tax expenditure programs like STAR bonds, that’s exactly what happens — except for the legislative voting part, and the accountability that sometimes follow.

Government spending programs like STAR bonds are sold to legislators as jobs programs. Development, it is said, will not happen unless project developers receive incentives through these spending programs. Since no legislator wants to be seen voting against jobs, many are susceptible to the seductive promise of jobs.

But often these same legislators are in favor of tax cuts to create jobs. This is the case in the Kansas House, where many Republican members are in favor of reducing the state’s income tax as a way of creating economic growth and jobs. On this issue, these members are correct.

But many of the same members voted in favor of tax expenditure programs like the STAR bonds program. These two positions cannot be reconciled. If government taxing and spending is bad, it is especially bad when part of tax expenditure programs like STAR bonds. And there’s plenty of evidence that government spending and taxation is a drag on the economy.

It’s not just legislators that are holding these incongruous views. Secretary of Commerce Pat George promoted the STAR bonds program to legislators. Governor Sam Brownback supported the program.

When Brownback and a new, purportedly more conservative Kansas House took office, I wondered whether Kansas would pursue a business-friendly or capitalism-friendly path: “Plans for the Kansas Republican Party to make Kansas government more friendly to business run the risk of creating false, or crony capitalism instead of an environment of genuine growth opportunity for all business.” I quoted John Stossel:

The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

The truth is that we don’t have a free market — government regulation and management are pervasive — so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

But it’s fair to say that crony capitalism created the economic mess.

But wait, you may say: Isn’t business and free-market capitalism the same thing? Not at all. Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

The danger of Kansas government having a friendly relationship with Kansas business is that the state will circumvent free markets and promote crony, or false, capitalism in Kansas. It’s something that we need to be on the watch for. The existence of the STAR bonds program lets us know that a majority of Kansas legislators — including many purported fiscal conservatives — prefer crony capitalism over free enterprise and genuine capitalism.

The problem

Government bureaucrats and politicians promote programs like STAR bonds as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Kansas economy.

Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

Despite this knowledge problem, Kansas legislators are willing to give power to bureaucrats in the Department of Commerce who feel they have the necessary knowledge to direct the investment of public funds. One thing is for sure: the state and its bureaucrats have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

What to do

The STAR bonds program is an “active investor” approach to economic development. Its government spending on business leads to taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Kansas and many of its cities employ: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Government spending on specific companies through programs like STAR bonds is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies at all levels of government that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Public Hearing Considering the Adoption of a STAR Bond Project Plan for the K-96 Greenwich Star Bond Projec… by

Tagged as: Capitalism, Cronyism, Economic development, Free markets, Government spending, Republican Party, Sam Brownback, STAR bonds, Subsidy, Taxation, Wichita city council, Wichita city government

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Wind tax credit promotes expensive electricity

by Bob Weeks on December 13, 2012

Conservative and free-market groups are asking Congress to oppose extending the Production Tax Credit for production of electricity from wind.

The letter, presented below, is designed for representatives from states that don’t have a Renewable Portfolio Standard, which is a policy or law that requires a certain amount of electricity to be produced from renewable sources, which is primarily wind in most places. Kansas has an RPS, and Governor Sam Brownback actively supports maintaining this standard, which will require that more Kansas electricity be produced from wind. Kansas Policy Institute has found that RPS will result in higher electricity costs, fewer jobs, and less investment in Kansas. Its summary is at The Economic Impact of the Kansas Renewable Portfolio Standard, and the full report is here.

The letter points out that the PTC has the effect of transferring subsidy from states without RPS to those states, like Kansas, that do.

December 12, 2012
Dear Members of Congress:

We write to urge your opposition to extending the wind Production Tax Credit (PTC). Created in 1992 by the Energy Policy Act, the PTC has far outlived its usefulness. Moreover, as a member of Congress serving a state that does not have a renewable energy mandate, you should be aware that the PTC essentially transfers taxpayer dollars from your constituents and subsidizes the states with such mandates. Renewable energy mandates force utilities to buy politically-favored forms of energy such as wind, while your state has wisely chosen to allow the most abundant and affordable forms of energy to be purchased by consumers and industries.

The wind PTC provides a tax credit of 2.2 cents per kilowatt-hour, and lasts for ten years for anyone receiving it. With the wholesale price of electricity frequently ranging from 2.5 to 4.5 cents per kilowatt-hour, the PTC is worth a large percentage of the total price. This makes the wind industry one of the most heavily subsidized forms of energy. In 2010, federal subsidies paid $56 for every megawatt hour of wind energy compared to $0.64 for coal and natural gas electricity.

Despite having this generous subsidy for two decades, wind only produces 3 percent of America’s electricity. This corporate dependence on federal subsidies not only harms the taxpayers who finance the PTC, it also creates an improper incentive for wind companies to focus on obtaining lucrative subsidies rather than long-term sustainability and competitiveness. It is time the wind energy industry stood on its own and continued funding by the federal government will only hurt cost-effective energy sources as well as American taxpayers.

Lastly, for the twenty-one states that do not have a renewable energy mandate in place — states like your own — the stakes are much higher. Under the structure of the PTC, the bulk of the tax credits flow to those states that have the most wind generation capacity and those happen to be states with an RPS. This is because the PTC helps to disguise the true cost of the mandate. Extending the wind PTC ensures that your constituents will continue to subsidize wind power in other states that have made political decisions to force consumers to buy more expensive and less reliable forms of energy — like wind.

Reliable, affordable, and ‘always on’ electricity is critical to get our economy back on track. The wind PTC promotes unreliable and expensive energy to the detriment of dependable and cost-effective forms of electricity generation. By taking a principled stand against the PTC, you help taxpayers in your own state and ensure more cost-effective electricity generation overall. We urge you to allow this wasteful subsidy to expire, as planned, at the end of the year.

Freedom Action
Competitive Enterprise Institute
American Conservative Union
American Energy Alliance
Heritage Action
American Commitment

Tagged as: Free markets, Kansas Policy Institute, Sam Brownback, Subsidy, Wind power

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Nation can no longer afford wind tax credit

by Bob Weeks on November 15, 2012

From The Hill:

Sen. Lamar Alexander (R-Tenn.) on Wednesday said the nation’s fiscal situation has become so dire that the government can no longer afford to maintain a wind power production credit that has been in place since in 1992.

“I think there is certainly the largest realization that we’ve ever had that it’s time for it to end,” Alexander said at a Wednesday event hosted by The Hill and sponsored by the American Energy Alliance.

In a longer story, The Hill reports on the efforts of U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties) to end the wind production tax credit:

Rep. Mike Pompeo (R-Kan.) said he hopes that conversation leads to the elimination of all energy subsidies.

Pompeo has led the House charge against the credit. He got 46 other House GOP members to sign a September letter urging Boehner to nix the provision.

Pompeo said the wind credit’s history is instructive when debating the benefits of tax carve-outs for specific industries.

He pointed to a steep decline in wind turbine installations when the credit last lapsed in 2004 as proof that subsidies distort markets and investment. And planned projects and investments already are down for next year as a result of the credit’s cloudy future.

“I think that’s further evidence that it’s non-economic,” Pompeo said.

Pompeo has been at the forefront of efforts to end subsidies that distort energy markets. He and Alexander recently contributed an op-ed to the Wall Street Journal, which may be read at Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away. Pompeo also develops the argument in Governor Romney is right: End the wind production tax credit and Mike Pompeo: We need capitalism, not cronyism. The special interests that benefit from cronyism have struck back, but unsuccessfully: Kerr’s attacks on Pompeo’s energy policies fall short.

Tagged as: Capitalism, Cronyism, Kansas fourth district, Mike Pompeo, Subsidy, Taxation, Wind power

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I, Pencil: The Movie

by Bob Weeks on November 15, 2012

“The spontaneous configuration of creative human energies, of millions of people, with their various skills and talents, organizing voluntarily in response to human necessity and desire — as if led by an invisible hand to promote an end which was no part of the intention.”

This is part of the narration from a new short movie I, Pencil, produced by the Competitive Enterprise Institute.

Lawrence W. Reed, President of Foundation for Economic Education says about this movie: “For more than half a century, Leonard Read’s classic story has opened eyes and changed minds by the hundreds of thousands. It humbles even the high and mighty as it reveals the wondrous achievements of individuals whose contributions are coordinated by nothing more than incentives and market prices. This film guarantees that the insights of Read’s humble pencil will continue to work their magic for many years to come!”

A companion website I, Pencil, a film series from CEI has video of additional commentary, curriculum, educational resources, and many other items of interest in learning about how free markets work to bring us not only the things we need, but the things we want that make life better.

Tagged as: Capitalism, Free markets, Laissez faire

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Koch articles draw critics, but few factual

by Bob Weeks on October 15, 2012

Two large articles in the Wichita Eagle regarding Charles and David Koch of Wichita-based Koch Industries have attracted many comments, and many are not based on facts.

The two articles are The Kochs’ quest to save America and Charles Koch relentless in pursuing his goals.

A curious irony is the claim by many comment writers that Charles and David Koch want to buy America, while at the same time they are running it into the ground: “The koch bros. are funding the conversion of OUR COUNTRY into another third world country.”

Even if it was possible to buy America — whatever that means — why would someone destroy it first?

Another common thread in the comments is that Charles and David Koch didn’t complain about government spending, subsidy, regulation, etc. before President Barack Obama was elected. In fact, they have been working to promote free markets and economic freedom for many decades. Charles Koch and two others founded what became the Cato Institute in 1974, nearly four decades ago. Even earlier: A recent issue of Koch Industries Discovery newsletter contains a story titled “Don’t subsidize me.” Here’s an excerpt:

When Charles Koch was in his 20s, he attended a business function hosted by his father. At that event, Fred Koch introduced Charles to a local oilman.

When the independent oilman politely asked about the young man’s interests, Charles began talking about all he was doing to promote economic freedom.

“Wow!” said the oilman, who was so impressed he wanted to introduce the young bachelor to his eligible daughter.

But when Charles mentioned he was in favor of eliminating the government’s oil import quota, which subsidized domestic producers, the oilman exploded in rage.

“Your father ought to lock you in a cell!” he yelled, jabbing his finger into Charles’ chest. “You’re worse than a Communist!”

It seems the oilman was all for the concept of free markets — unless it meant he had to compete on equal terms.

Under oath

For more than 50 years, Charles Koch has consistently promoted economic freedom, even when it was not in the company’s immediate financial interest.

In the 1960s, Koch was willing to testify before a powerful Congressional committee that he was against the oil import quota — a very popular political measure at the time.

“I think it’s fair to say my audience was less than receptive,” recalls Koch.

Years later, Koch warned an independent energy association about the dangers of subsidies and mandates.

“We avoid the short-run temptation to impose regulatory burdens on competitors. We don’t lobby for subsidies that penalize taxpayers for our benefit.

“This is our philosophy because we believe this will produce the most favorable conditions in the long run,” Koch said.

Many comments take the company to task for accepting oil and ethanol subsidies. Koch Industries, as a refiner of oil, blends ethanol with the gasoline it produces in order to meet federal mandates that require ethanol usage. Even though Koch opposed subsidies for ethanol — as it opposes all subsidies — Koch accepted the subsidies. A company newsletter explained “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.” (The tax credit subsidy program for ethanol has ended, but there is still the mandate for its use in gasoline.)

Regarding oil subsidies, the programs that are most commonly cited (percentage depletion and expensing of intangible drilling costs) apply to producers of oil — the companies that drill holes and pump up oil. Koch Industries doesn’t do that. The company doesn’t benefit from these programs.

Other comments charge that Koch Industries wants to end regulation so that it can pollute as much as it wants. This is another ridiculous charge not based on facts.

A statement on the KochFacts website states “recent critics have also claimed that Koch is one of the nation’s top 10 polluters. This study confuses pollution with permitted emissions, which are carefully regulated by the U.S. EPA and other agencies. The index labels as ‘polluters’ Ford Motor, General Motors, GE, Pfizer, Eastman Kodak, Sony, Honeywell, Berkshire Hathaway, Kimberly Clark, Anheuser Busch and Goodyear — corporations, like Koch companies, with significant manufacturing in the U.S. Emissions, a necessary by-product of manufacturing, are strictly monitored and legally permitted by federal, state and local governments.”

Say: Didn’t the U.S. government take over General Motors, and continues to hold a large stake in the company? And GE and Berkshire Hathaway: Aren’t those run by personal friends of Barack Obama?

The reality is that manufacturing has become much more efficient with regards to emissions, and Koch Industries companies have lead the way. One report from the company illustrates such progress: “Over the last three years, Koch Carbon has spent $10 million to enhance environmental performance, including $5 million for dust abatement at one of its petroleum coke handling facilities. These investments have paid off. In 2008, Koch Carbon’s reportable emissions were 6.5 percent less than in 2000, while throughput increased 10.4 percent.”

Even when Koch Industries does not agree with the need for specific regulations, the company, nonetheless, complies. Writing about an increase in regulation in the 2007 book The Science of Success: How Market-Based Management Built the World’s Largest Private Company, Charles Koch explained the importance of regulatory compliance: “This reality required is to make a cultural change. We needed to be uncompromising, to expect 100 percent of our employees to comply 100 percent of the time with complex and ever-changing government mandates. Striving to comply with every law does not mean agreeing with every law. But, even when faced with laws we think are counter-productive, we must first comply. Only then, from a credible position, can we enter into a dialogue with regulatory agencies to determine alternatives that are more beneficial. If these efforts fail, we can then join with others in using education and/or political efforts to change the law.”

Koch companies have taken leadership roles in environmental compliance, explains another KochFacts page: “In 2000, EPA recognized Koch Petroleum Group for being ‘the first petroleum company to step forward’ to reach a comprehensive Clean Air Act agreement involving EPA and state regulatory agencies in Minnesota and Texas. Despite fundamental policy disagreements, then-EPA Administrator Carol Browner acknowledged Koch’s cooperation. She characterized the agreement as ‘innovative and comprehensive’ and praised the ‘unprecedented cooperation’ of Koch in stepping forward ahead of its industry peers.” Browner was no friend of industry, and had a “record as a strict enforcer of environmental laws during the Clinton years,” according to the New York Times.

What may really gall liberals and Koch critics is this: They believe that a powerful and expansive government is good for the country. But what we have is a complicated machine that a company like General Electric can exploit for huge profits, all without creating things that consumers value. Charles Koch calls for an end to this, as he wrote last year in the Wall Street Journal: “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

The political Left just can’t believe that anyone would write that and really mean it.

Tagged as: Capitalism, Cronyism, Economic freedom, Free markets, Government spending, Koch Industries, Political Left, Regulation, Subsidy

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Pompeo: Wind production tax credit should expire

by Guest Author on September 20, 2012

U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, and U.S. Senator Lamar Alexander contribute the following article on the harm of the wind power production tax credit (PTC). The NorthBridge Group report referenced in the article is available at Negative electricity prices and the production tax credit.

Puff, the Magic Drag on the Economy
Time to let the pernicious production tax credit for wind power blow away

By Lamar Alexander And Mike Pompeo

As Congress works to reduce spending and avert a debt crisis, lawmakers will have to decide which government projects are truly national priorities, and which are wasteful. A prime example of the latter is the production tax credit for wind power. It is set to expire on Dec. 31 — but may be extended yet again, for the seventh time.

This special provision in the tax code was first enacted in 1992 as a temporary subsidy to enable a struggling industry to become competitive. Today the provision provides a credit against taxes of $22 per megawatt hour of wind energy generated.

From 2009 to 2013, federal revenues lost to wind-power developers are estimated to be $14 billion — $6 billion from the production tax credit, plus $8 billion courtesy of an alternative-energy subsidy in the stimulus package — according to the Joint Committee on Taxation and the Treasury Department. If Congress were to extend the production tax credit, it would mean an additional $12 billion cost to taxpayers over the next 10 years.

There are many reasons to let this giveaway expire, including wind energy’s inherent unreliability and its inability to stand on its own two feet after 20 years. But one of the most compelling reasons is provided in a study released Sept. 14 by the NorthBridge Group, an energy consultancy. The study discusses a government-created economic distortion called “negative pricing.”

This is how it works. Coal- and nuclear-fired plants provide a reliable supply of electricity when the demand is high, as on a hot summer day. They generate at lower levels when the demand is low, such as at night.

But wind producers collect a tax credit for every kilowatt hour they generate, whether utilities need the electricity or not. If the wind is blowing, they keep cranking the windmills.

Why? The NorthBridge Group’s report (“Negative Electricity Prices and the Production Tax Credit”) finds that government largess is so great that wind producers can actually pay the electrical grid to take their power when demand is low and still turn a profit by collecting the credit — and they are increasingly doing so. The wind pretax subsidy is actually higher than the average price for electricity in many of the wholesale markets tracked by the Energy Information Administration.

This practice drives the price of electricity down in the short run. Wind-energy supporters say that’s a good thing. But it is hazardous to the economy’s health in the long run.

Temporarily lower energy prices driven by wind-power’s negative pricing will cripple clean-coal and nuclear-power companies. But running coal and nuclear out of business is not good for the U.S. economy. There is no way a country like this one — which uses 20% to 25% of all the electricity in the world — can operate with generators that turn only when the wind blows.

The Obama administration and other advocates of wind power argue that the subsidy provided by the tax credit allows the wind industry to sustain American jobs. But they are jobs that exist only because of the subsidy. Keeping a weak technology alive that can’t make it on its own won’t create nearly as many jobs as the private sector could create if it had the kind of low-cost, reliable, clean electricity that wind power simply can’t generate.

While the cost of renewable energy has declined over the years, it is still far more expensive than conventional sources. And even the administration’s secretary of energy, Steven Chu, calls wind “a mature technology,” which should mean it is sufficiently advanced to compete in a free market without government subsidies. If wind power cannot compete on its own after 20 years without costly special privileges, it never will.

Tagged as: Interventionism, Kansas fourth district, Mike Pompeo, Subsidy, Wind power

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Pickens changes his mind, again

by Bob Weeks on September 4, 2012

Energy investor T. Boone Pickens has changed his mind about government subsidy of energy markets — again.

Until recently Pickens has been promoting federal legislation titled H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011, or NAT GAS act. The bill provides a variety of subsidies, implemented through tax credits, to producers and users of natural gas. The goal is to promote the use of natural gas for a transportation fuel, particularly for long-haul trucks.

Now, according to reporting in Politico, Pickens said about the transition to natural gas “It’s going to happen, and you don’t have to have Washington do it, thank God.”

Later in the article Pickens is quoted as saying “You don’t have to have a tax credit; it’s going to happen.”

Before promoting subsidies for natural gas as a transportation fuel, Pickens actively promoted wind power, another form of energy production that receives government subsidy. In 2008 Pickens ordered 667 wind turbines worth $2 billion from General Electric. Now, in the Politico article, he concedes he lost a lot of money on this venture.

His plan, at that time, was to use wind power to generate electricity, and the natural gas saved would be used to power transportation. But there’s another relationship between wind power and gas, and it stems from the unreliability and variability of wind power. It’s difficult to quickly adjust the output of most power plants. But natural gas turbine plants are an exception. Kansas recently saw one of its major electric utilities complete a new natural gas power plant. The need for the plant was at least partly created by its investment in wind: A document produced by Westar titled The Greenhouse Gas Challenge noted the “Construction of the 665 MW natural gas-fired Emporia Energy Center, providing the ability to efficiently follow the variability of wind generation.” In another document announcing a request for a rate increase it stated “Our Emporia Energy Center is excellent for following the variability of wind production.”

At the time of these investments by Pickens and Westar, the price of natural gas was high. Now it is low — so low, and the prospects for future low prices certain enough — that Pickens has abandoned his wind farm projects. Even with all the subsidy granted to wind power, it’s cheaper to generate electricity with gas.

Let’s hope this is the last time Pickens develops a plan to tap the federal taxpayer to pay for his plans.

Tagged as: Free markets, Subsidy, Wind power

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Minimum wage increase not a solution

by Bob Weeks on September 4, 2012

Those who advocate for a higher minimum wage law appear to have the best interests of workers as their concern. But as is almost always the case when government intervenes into markets, the unintended consequences create more harm than good.

In the case of the federal minimum wage, we need to remember that this law — as well-intentioned as it may be — is not the solution to unemployment or raising the standard of living of workers.

The great appeal of a higher minimum wage mandated by an act of Congress is that it seems like a simple and harmless way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects. Milton Friedman explained in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity — as measured by the give and take of supply and demand — lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain minimum amount. The law can’t compel you to hire someone, nor can it force employers to keep workers on the payroll.

The people who lose their jobs are dispersed. A few workers here; a few there. They may not know who is to blame for their situation. Newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher minimum wage level.

Some things employers do to compensate for higher labor costs include these:

Reduce non-wage benefits such as health insurance.
Eliminate overtime hours that many employees rely on.
Substitute machines for labor. We might see more self-service checkout lanes at supermarkets and more use of automated telephone response systems, for example.
Use illegal labor. Examples include paying employees under the table, or requiring work off-the-clock.
Some employers may be more willing to bear the risks of using undocumented workers who can’t complain that they aren’t being paid the minimum wage.
Some employers may decide that the risks and hassles of being in business aren’t worth it anymore, and will close shop.

Solution to low wages

If we are truly concerned about the plight of low-wage and low-skilled workers we can face some realities and deal with them openly. The primary reality is that some people are not able to produce output that our economy values highly. These workers are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is not producing graduates with the skills needed for well-paying jobs. But this is a problem that can be fixed.

Another way to increase wages is to encourage more capital investment. But capital is a dirty word to liberals, as it conjures up images of rich people earning income from the labors of others. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man using the backhoe is more productive, although the worker using the shovel is undoubtedly working harder. But it is productivity, not work effort, that is valued. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a way that increased the output of workers and our economy.

These savers and investors are not necessarily wealthy people. Anyone who defers current consumption in order to save and invest — no matter how small the amount — provides capital to industry.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These people and organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

Minimum wage as competitive weapon

We also need to examine the motivations of those calling for a higher minimum wage. Sometimes they see a way gain a competitive advantage.

In 2005 Walmart came out in favor of raising the national minimum wage. Providing an example of how regulation is pitched as needed for the common good, Walmart’s CEO said that he was concerned for the plight of working families, and that he thought the current minimum wage of $5.15 per hour was too low. If Walmart — a company the political left loves to hate as much as any other — can be in favor of increased regulation of the workplace, can regulation be a good thing? Had Walmart discovered the joys of big government?

The answer is yes. Walmart discovered a way of using government regulation as a competitive weapon. This is often the motivation for business support of regulation. In the case of Walmart, it was already paying its employees well over the current minimum wage. At the time, some sources thought that the minimum wage could be raised as much as 50 percent and not cause Walmart any additional cost — its employees already made that much.

But its competitors didn’t pay wages that high. If the minimum wage rose very much, these competitors to Walmart would be forced to increase their wages. Their costs would rise. Their ability to compete with Walmart would be harmed.

In short, Walmart supported government regulation in the form of a higher minimum wage as a way to impose higher costs on its competitors. It found a way to compete outside the marketplace. And it did it while appearing noble.

Tagged as: Capitalism, Free markets, Minimum wage, Regulation

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Crony Chronicles: I Want To Be A Crony

August 30, 2012

Cronyism? “It’s like having a best friend who gives you other peoples’ stuff.”

Tagged as: Capitalism, Free markets, Interventionism, Politics, Subsidy

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