Energy Reform Series: Part 3-The Case For Cap and Trade

In an effort to reduce carbon emissions, there are a few policies that the governemnt could enact that would greatly help to achieve this.  Some methods are better than others and each has its own merits, as well as drawbacks.

The first policy we will analyze is the Cap and Trade approach, championed by many Democrats, as well as flip-flopping Republicans.  Cap and Trade's main goal is to steadily reduce carbon emissions and other pollutants across the nation in a cost effective manner.

Each company or polluter will have a limit, or a cap, on the amount of pollution they can emit.  They are issued pollution permits up to that amount.  If need be, restrictions on pollution can get tighter for more greenhouse gas reduction.  They key part of cap and trade is that companies that efficiently and cheaply cut their pollution levels are free to sell their extra credits to the companies that cannot reduce as easily.  Companies have large flexibility in buying and selling permits, achieving the same total reduction, but at a lower overall cost to the economy.

How is this so?  Well, to start out with, we have to consider the alternative command and control policy.  In command and control, each factory is required to make the necessary reductions, regardless of what the overall cost might be.  The government sets clean air regulations, and companies must either upgrade their facilities, bearing whatever costs are involved, or break the law.

The figure above illustrates this point.  In the traditional command and control approach, the government, for example, mandates a 30% reduction in emissions, or 300 tons of CO2.  The cost to reduce for both plants together is $12,000.  In the case of Cap and Trade, on the other hand, the cost to reduce overall is cheaper.  This is because the revenue made from selling pollution permits to another plant adds additional profit.

Cap and Trade is known as a market-based policy, as opposed to a carbon tax, which would be called a corrective tax.  Market-based policies work within the free market system to provide price incentives for companies or even individuals to reduce consumption.

Cap and Trade could prove an effective tool at reducing pollution if adopted.  We encourage Congress to consider using these market-based policies to effect change in the environmental and energy policy reform.  We can use economics to work for us by providing incentives to do the right thing, while still reducing overall costs.

Energy Reform Series: Part 2

There are  numerous problems with how electricity is distributed.  As you can see in the graphic below, which shows a typical summer day's energy demand in California, energy use in households and businesses varies substantially during the day.  California, as the nation's largest state, can serve as a valid sample for how a large community uses energy.  As energy use continues to rise, the problem of how to apportion energy when use varies so much will only get compounded.

Scientists and economists have brought up this problem multiple times.  As stated in a Technology Review article, published by MIT, simply building more power plants will not solve the problem of so much more demand.  The need for energy is growing so much that too many power plants would have to be built to even provide enough energy for everyone, and setting up a power plant is not cheap.  This creates the problem of what to to to get more energy if building more power plants is not economically viable.

The solution to this problem might lie in smartgrids.  Smartgrids transform an otherwise "dumb" energy allocation system into an intelligent, self optimizing  network.  Tapping into internet based innovations could provide the system with a much needed boost in organizing power.  By bringing the smartgrid to the power industry, we can bring about change similar to that of the Internet on the total economy.

The need for a smartgrid is apparent when we consider a new technology, plug-in hybrids, that are now being used to help ease our oil-addiction woes. According to a study by Oak Ridge Laboratory, 160 new power plants would need to be built if everyone plugged in during the early evening, the peak electricity time.  This is an expensive proposition.  Instead, with a smartgrid, the local utilities could stagger charging times and change rates for off-time power.  With smart technology helping out, virtually none, if any, new power plants would have to be constructed.

Upgrading our nation's grid to become more technologically updated is an expensive public works project.  Though it would be a significant cost, it is likely to pale in comparison to the savings and benefits generated from the change.  The Electrical Power Research Institute estimates that poor reliability and outdated mechanics of the grid costs $100 billion.  With a similar investment, a smart grid, according to their findings, generate trillions in extra annual GDP for the U.S.  By working with legislators, on a local, state and federal level, as well as bringing in consumers and private companies, we can find a way to upgrade our grid and secure prosperity in our future.  The innovation and technology is there.  All we need now is the political willpower.

Energy Reform Series: Part 1

The United States has a huge energy problem.  Gas price fluctuations throughout the year show us the fragility of our oil supply and our unhealthy dependence on petroleum for energy.  Coal mining accidents, very tragic occurrences, also force us to question our attachment to a resource that pollutes the environment so much.

The United States uses far too much resources like coal and oil and far to little of resources like solar and wind.  Yes, part of the reason is the price of the energy, but these polluting resources also have an unquantifiable environmental price.  Additionally, with government and private sector help, we can make these forms of energy cheap and efficient.

world oil production has increased in recent decades

Conservatives who wail that the government should not get involved should take a history lesson.  A lot of change has come out of government action, and for the better.  NASA, for a while, was the sole consumer of major computers, sustaining an infant industry that has now led to a huge tech sector in the United States.  A form of the Internet was started by the Department of Defense.  Government investment has lead to University funding and the Space Race.  Therefore, we can safely say that there is a place and time for government investment.

We need to make sure that we, as a country, jump ahead and capitalize on energy reform.  If America does not take the lead, some other country will do so, and we will have to buy it from them.  Coming up with and manufacturing the new clean energy technology does not require vast oil reserves or coal mines.  All it requires is an innovative spirit, ingenuity, a bit of private capital, and political will.  We have all of these, to varying extents, right here in America.  The only thing lacking in any regard would be political will.  We need leadership in Washington and around the country to kick-start a clean energy revolution.

By bringing in government investment and private capital, we can diversify our energy sources and make sure  it is affordable and the industry is sustainable.  The US can then become a leader on the world stage, exporting this technology to the rest of the globe.  By being a leader in clean energy, the US could mitigate the influence OPEC countries like Iran wield simply because they have oil.  By acting now, the US can secure its place in the energy hierarchy of the globe.

Patent Reform

Patents are powerful.  When granted, they give the holder of the patent a government issues monopoly over their product or idea for 20 years.  That's a long head start for people to start producing the product and raking in the dough.

Patents are instrumental to promote innovation, when done correctly.  Patents protect novel ideas and encourage people to come up with new ones.  Because there is the assurance that once someone comes up with something new that that something will be protected from copying, there is an incentive to come up with more ideas.  It rewards those who work hard to develop a product, preventing freeloaders from selling copycat products without investing the time and effort into developing the product.  The more ideas there are, the more innovation and economic growth a country will have.  It's one of the reasons that the United States has been home to innovation hubs like Silicon Valley.

However, despite its strengths, our patent system is in desperate need of an overload.  Take a look at the graphic below.  In recent years, the amount spent on trying to sue for or defend patents has been far greater than the profits associated from those same patents.  Efficient and innovative?  We think not.

Part of the problem is that some patents are too broad.  As the Planet Money Team explains on NPR, the patent office has granted too many patents for simply the general idea, rather than the specific application.  In other words, people are being granted a monopoly for on demand streaming of anything, rather than a particular way to stream music on a portable device.  These patents seem to indicate that the person who owns the patent, owns the area itself.  

This is not what patents are for.  We need to have patents protect actual technological applications, rather then a broad, unclear field.  You can't just say that you want to patent the whole field.  Patents should require specific documentation on how exactly you are going to it.  For example, Samuel Morse, when asking for a patent on the telegraph, asked also for a patent on electromagnetic communication.  Nowadays, this would have wide reaching applications.  The internet, television, fax machine, etc, would all be under control of this patent.

Another problem is that patents are applied for, and sometimes granted for ideas that are obvious to those in the field.  People trying to capitalize off a potential government monopoly on the product want to patent seemingly everything, whether it is a novel idea or not.  This, as you can see in the below graphic, creates a large backlog, flooding the system with illegitimate applications which drown out perfectly genuine and innovative proposals. Getting rid of these obvious patents will clear up some of this backlog, and allow the real innovations to be protected.

Not only is there a backlog of obvious patents, but the whole system seems seriously understaffed.  The patent office is a critical part of the economy.   As stated before, it has the power to grant monopolies for 20 years.  It seems as though this part of government, with such power, ought to have enough resources to make sure it does its job well.  We need to make sure such a backlog never exists and patents are processed in an efficient and timely manner.

Another problem exists in how injunctions are granted for apparent patent violations.  Although the court system has improved in handling this, there is still a long way to go.  In any major electronic product, there are hundreds if not thousands of patents.  If one of these was violated, previously the whole phone could be shut down, even if it was just a infinitesimally small part of the whole electronics and software puzzle that made up the final product.  Now, full injunctions are rarer, but there still needs to be more policy and culture changes in this area.  Fairer and more clearly defined rules could speed up the hearing process, and keep lawsuits out of court.  Overall, proportional damages should be rewarded instead.  The courts should award damages proportionate only to the idea or ideas in question, not the whole product itself.

Below is a report, put together by FastCompany that evaluates recent changes to patent reform, the first such changes since 1952.

FastCompany brings up the critical point on patent trolls-firms that seek and collect patents solely for the ability to sue companies.  Such actions increase the number of lawsuits associated with patents and the costs associated with maintaining them.  If it no longer pays to innovate, then people will simply stop doing it.  The actions of these firms must be stopped.  These firms birdying up their claims in courts that are more likely to decide in their favor.  Therefore, claims need to be brought up in a court that has some reasonable connection to the original claim, not a court of preference to the plaintiff.  Making sure that patents are for specific ideas, rather than broad principles, should also help combat these firms.


In Summary:

We have identified major improvement areas we would like to see the new congress tackle.  With these changes, we will have taken a step towards major patent reform.

Improvement areas:

Improving the quality of patents: Patents need to be written clearly and precisely, and be about a specific idea, rather than a general principle.  The idea must be novel, rather than an obvious principle.

Contributing more resources to the patent office: workers in the US Patent office need to be highly trained to handle the content of the idea submitted. Procedures must be improved to handle the intense volume of patent applications.  More highly trained employees need to be staffed to the patent office to handle the backlog of applications

Halting injunctions and awarding proportionate damages: Patent infringement damages should be awarded proportionately, based on the value of the idea in question rather than the whole product.  Injunctions should not halt the release, sale, or production of a product based on a very small violation.

Ending private hoarding of patents: Measures must be taken to ensure that firms do not collect patents simply to sure other companies.  Plaintiffs should bring their cases to courts with a connection to the issue at hand, rather than to a friendly one.

The Obscure and Interesting Politics of Food

Since today is Thanksgiving, and it is a time to be thankful and eat considerable amounts of food, we felt it was appropriate to address food as an issue in today's politics.  Food is actually a huge political debate and has significant implications associated with it, most of the time without us realizing it.

The first issue is the way we view and produce food in the first place. For the better part of the last half century, governmental policy has dramatically encouraged the production of a finite breadth of food types, doling out subsidies to corn, meat and dairy farmers, as seen by the graphic below.

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The subsidies encourage farmers to have limited diversity in the breakdown of the crops they grow and produce.  Instead of producing more broccoli, farmers can make a larger profit by producing the meat and corn that is so dominant in our economy.

The imbalance in production mirrors an imbalance in price.  A Big Mac is a far more economical option than broccoli in the short term for a family whose income is only minimum wage.  You may think that this is not a big concern, but it has huge lasting repercussions in many areas, from health to national security.

First of all, because of the high amounts and low prices of high calorie foods, this contributes to a food environment that favors the consumption of these high calorie options.  Consequently,  over one third of adults are currently classified as obese and kids are quickly catching up.

This epidemic of obesity has serious problems for our health system.  With an increased number of people being obese, this also means an increased number of people with weight related health problems, such as heart disease.  This means higher health care costs for everyone, as health care providers scramble to balance the books with such a large segment of the population representing such a high risk. Now, with the Obama health care plan representing a large role for government in the management of health care, this means government may have a new role in managing the food supply to promote health.

But health problems are only one part of the food picture.  One is food's relationship to energy.  The production and transportation of food takes over 19% of the fossil fuels used in American industries.  In addition, more carbon is introduced into the atmosphere due to all sorts of farm factors: through chemical fertilizers, machinery,  processing, etc.  This guzzling of a scarce resource, oil, only adds to the dependence on foreign oil, another politicized issue that politicians love to have their talking points about.  Regardless, the energy politics are a lot more complicated than just a question of energy for cities and cars, it also includes how we gain the calories we need.

The final point we must consider is food security. Michael Pollen addresses the importance of the issue in his article An Open Letter to the President by saying that "when a nation loses the ability to substantially feed itself, it is not only at the mercy of global commodity markets but of other governments as well." Now, what is the US's position in terms of food security?

First of all, relating back to energy, much of our food has been re-purposed for fuel. Up to 37% of our total corn crop has been directed away from the food market and into ethanol production. This decreases the food supply, but as of yet it has yet to impact us in a significantly negative way. We discuss the negative consequences of using food for fuel here.

But that may change in the coming decades, as a combination of factors could pose serious threats to our food supply. For one, the energy that the food supply so dearly depends on could become much less dependable and much more expensive, especially as the politics of the Middle East become more and more unpredictable. Moreover, the US just this last summer was hit with a historic drought, and Russia has had severe decreases in wheat production as they deal with similar environmental factors. If these severe weather instances develop into recurring trends, then it will be even more difficult to maintain a steady food supply. Finally, as examples such as the 2008 Chinese milk scandal helped reinforce, the US cannot rely on international sources of food without serious misgivings about the detriments to health.

All isn't lost though. There are actions we can take to ensure our own health, energy efficiency, and national security with how we decide to manage the politics of food in the coming years. So given that, after you eat and give thanks today, write to your representative to send the message that food is a very important political issue right now and needs to be addressed in a pragmatic manner.


Happy Thanksgiving!

An Analysis of GDP

Gross Domestic Product, or GDP, is used by many economists as a measure of the overall strength of the economy.  It its simplest form, GDP is calculated by taking household consumption and adding to it business investment, government spending and net exports.  Below is a specific breakdown of each part of GDP for the United States in the second quarter of 2012.

                                   

One thing that is clear looking at this graph is how much household consumption contributes to our GDP.  Housing and Utilities purchases alone ($2.0 trillion) exceed all Federal spending, which amounts to a little over $1.2 trillion.  Business investment contributes significantly to our GDP as well. The takeaway from this is that if we really want to boost our economy, finding ways to promote consumers to spend more money is the way to go.  Here is a breakdown, by sector of the economy, of our GDP. This one references the GDP of 2009.

The percentages change from year to year, but generally we can see what parts of the economy are most important.  Here's how the US fits into the larger world picture:

As we can see, the United States is a large portion of the world economy.  It is the largest portion, in fact.  This means that the United States occupies a very important role as a producer and consumer of world goods.  What affects the United States affects the whole world.  We have seen this with the current financial situation.  When the United States was drawn into a deep recession, so to was most of the world.  In this country, we need to be mindful that our fiscal policies have a very wide ranging impact.  The same can be said for other countries in emerging markets.  When a single country occupies such a large slice of the world economy, their actions have huge consequences.

Here's a breakdown by state of our country's GDP:

The same lessons can be learned from this graph.  California, as a large slice of the pie in America, affects many citizens all around the country because of their decisions.  Indeed, they also occupy a large portion of the world economy.  Silicon Valley, the entertainment industry, and agriculture are all huge parts of the world economy. Small decisions in Los Angeles or San Jose or even Salinas can have impacts on a large stage.

Our Ideas:

With all this in mind, we can figure out efficient ways to boost our domestic production.  Increasing consumer spending and business investment is of paramount importance.    By keeping interest rates down in a bad economy, more money can be freed up for consumers and businesses, so that they can spend it in the economy.

More needs to be done however.  We advocate applying principles of microlending to local communities in order to elevate people into economic success and sustainability.  We have outlined such a proposal in a previous post.  While this is not a sole solution, it could go a long way to providing funds for consumers and small businesses.

In hard times, we also need to empower these same small businesses by lowering their tax rates.  Small and medium sized businesses drive both business investment and household spending, so increases there will make a significant difference.

Additionally, much has been made of the United States' trade deficit.  In the topmost graphic, you will see a negative number for net exports.  In the graphic below, you will see the net exports as an overall percentage of our GDP.

This is not necessarily a bad thing.  Even though our trade deficit is large, it is only a small percentage of the total economy.  Even if the gap got bigger, it would not necessarily mean that our economy would be worse off.  If we go by the economic principle that trade increases wealth, a country with a trade deficit, if efficient, will make up that loss in some other area of the GDP.

We do this by specializing.  Importing items allows us to specialize in producing goods that we are especially good at making.  We don't have to be a large exporter to be a powerful economy.  If we have strong consumer spending and business investment numbers, as well as a certain amount of government spending, our economy will still be very strong for the future.  This country needs to work on exporting goods, but we need not worry to much about this trade deficit, as long as it stays within a small percentage of our GDP, because we can always specialize and produce something different, capitalizing off trade.

Social Media In Campaigns

This election, President Barack Obama and Republican Presidential candidate Mitt Romney had vastly different strategies when it came to utilizing social media.  Though the president's campaign had a head start in this part of the campaign, on election day,  Team Obama had amassed a ten to one advantage on spending in this area.  A NewsHour piece illustrates the big difference between the two campaigns:

Here is a chart breaking down the social media statistics for both major candidates.  Obama had a much greater presence on social media than Mitt Romney.

In June Spending, the Obama campaign spent a modest 8%, good enough for around 4.5 million dollars:

In Mr. Romney's spending pie chart, online ads purchases do not appear:

While it's presumptuous to say that Mitt Romney lost the election because of his failures in social media campaigning, it could very well have played a significant role in the defeat.  President Obama's team was able to clearly and efficiently reach its audience, as well as provide mobile tools for volunteers.  The emphasis on social media by Team Obama shows that they were, perhaps, a bit more innovative in their strategy and willing to take the risk in investing heavily in digital.  

That risk, if it was even regarded as a risk, certainly paid off.  Obama was able to score a victory, helped by the fact that his campaign had solid organizing aided by digital tools. By pushing the envelope and developing new campaign strategies, the Obama campaign stayed ahead of the curve and ahead in the polls.   Mr. Romney took the more conservative approach, not using extraordinary resources on new technologies.  Conventional tactics, used long before this social media revolution, no longer seem as effective.

2008 was known to many as a "social media election."  This election also was affected by social media influences.  In the future, the influence of social media is likely to grow.  In order to keep up with the times, candidates for elected office need to do more on social media.

We have seen the exceptional political influence social media sites can wield through these past two presidential elections, as well as movements such as the Arab Spring.  It seems that for now, this technology is here to stay in American and world politics.  

Debt vs. Deficit

Debt and deficit.  People often confuse the two.  Republican pundits attack Democratic policies on both.

A deficit occurs when all government incomes, called receipts, are less than the amount of government expenditures, called outlays.  Revenues come from income and other forms of taxes.  Expenditures result from a variety of purchases and entitlements. Since a deficit involves only a year's receipts and outlays, it applies to just one year. If the government took in $14 trillion and spent $15 trillion, the deficit would be $1 trillion.

When the government runs a deficit for a certain year, they need to borrow money in order to pay their bills.  To do so, the Federal Reserve can print some or all of the shortfall, but this typically leads to inflation.  How much inflation occurs depends on the amount printed.  If everyone has more money, and there are the same number of products, then those products will become more expensive.

Usually, instead of printing money, the government operates in credit markets, issuing bonds, like private companies can.  A bond is a form of a loan.  when the US Treasury issues its bonds, it means it is promising to pay that money, which it needs now, in the future.  When governments issue bonds, investors buy them up, selling them on secondary markets.

Debt, on the other hand, is basically accumulated deficits.  If the government has to keep issuing bonds, borrowing money each year to pay its outlays, then the debt will continue to grow.

Debt typically grows each year.  With each successive deficit, the debt, or at least the gross debt, will continue to grow.  A misconception is that if the government takes in more than it spends, that its receipts are greater than its outlays, that there is no debt.  This just means that the government has managed to run a surplus, but all debt that was accumulated previous years is still there.

It is accepted by most economists that some debt, sometimes, is a good thing for the nation and the economy.  When in a recession, tax revenue falls because of the lack of business and personal growth.  If tax rates are slashed, the revenues will fall even more.  The government also spends more on its social  programs such as unemployment insurance/benefits, so the government should run a deficit in order to pay for all that.  Conservatives argue that deficits in bad times need to be offset by surpluses in good times.  However, this does not need to be the case, when we consider debt in relation to our nations economic productivity, the GDP.

If the debt remains at a steady percentage of our GDP, the government can sustain that level of debt, even if they run deficits forever.  Consider the following: if the government has debt of 30% of its GDP at the start of a year, and it ran a balanced budget, even though the gross debt stayed the same, the percent with respect to GDP will go down.  The GDP almost always goes up.

The more our GDP grows, the more debt we can afford to take on.  GDP is basically an equivalent of the nation's tax base.  The more growth in the country, the more profits and salaries will rise, and the more tax revenue for the government.

There are negatives to government debt.  When the government has to continually issue bonds, these bonds compete with private ones on the investor's market, pushing up interest rates.  The more money the government takes from this market, the less money there is for the private sector.

Debt does have many positives though.  Families, for example, go into debt and borrow money in order to buy a house or pay for college.  The accumulated deficit of paying for one of these lasts for many years, but people still manage to pay it off.  Debt makes the benefits of owning a house and higher education reachable for more people.  Companies operate the same way, obtaining loans in order to expand, hoping for more profit later on.  In the same way, government can go into manageable debt in order to pay for items that its citizens deem important.

Badly Needed Senate Procedure Reforms: Part 2

In the second part of our Senate reform series, we'll discuss secret holds.  In the last post, we discussed the filibuster, used as a means to delay or kill legislation   While the filibuster has been commonly used, especially recently, it is not the only way a senator can stall or stop a bill.

The Senate, it turns out, typically conducts business in the form of unanimous consent, which means that a single member can cause considerable consternation when other senators are trying to pass a measure.  This hold can be done without releasing one's name, hence the term "secret hold".  After some recent changes to the procedure, a senator can hold under anonymity for up to two days.  The problem: senators can still team up.  One will hold fro two days, then another.  The result is a killed bill.

Our proposal:

We need to adapt the rules to hold senators accountable.  Holds can still exist, but all holds should be public.  Senators should then explain to the American people why they have place a hold.  There is then a public record of why the senator is opposed.  Changing these rules should streamline the legislative process and make the system more open and transparent.

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Badly Needed Senate Procedure Reforms: Part 1

As the election is now complete, and a new legislature will convene in January, we felt it was time to discuss what we feel are much needed reforms to Congress.  We are focusing our attention this time on Congress's upper house, the Senate.

First, we'll focus on the filibuster.  What was once a procedure to extend debate has now become an obstructive tactic, aimed at delaying  or oftentimes preventing, a measure from being brought to a vote on the Senate floor.  Per the Supreme Court ruling United States v. Ballin, Senate rule changes can be achieved by a simple majority, though, of course, these rule changes could also be filibustered before any vote would take place.

Below, we can see how many times filibusters have been used by tracking instances of cloture.  Cloture is invoked to bring debate to a quick end and to force a quick vote.  Recently, cloture has been invoked, with limited success, showing that numerous filibusters have been successfully used to block bills, especially by the  Republican Party.

In order to begin debate on a bill, the senators must adopt a "motion to proceed."  Once this occurs, debate is unlimited unless 60 senators vote to end it.  Therefore, because of the rules governing filibusters and senate debate, a minority of 41 can stop a bill cold.

This tactic has been used to prevent presidential appointments, tax bills from passing, and the end of tax subsidies from taking effect.  The filibuster has even been used to block Mark Udall's proposal to end the current filibuster.  These procedures are now a hindrance to the governmental process, making the Senate slower moving and gridlocked.  The rules are actually an undue regulation on the democratic process, endorsed predominantly by Republicans.

Now that's big government.

We need to change the rules so that it does not take 60 votes to get any bill passed.  A simple majority to end debate is all that should be required.  Perhaps this will eliminate the chance of the minority to have a say, but in today's partisan gridlock, we desperately need a way to streamline the legislative process.  Eliminating outdated and obstructive filibuster rules is the first step towards making that happen.

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