Archive for the ‘Economics’ Category

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The “Dirty Little Secret Behind the Chevy Volt”…. The Rest of the Story

May 20, 2011

The “Dirty Little Secret Behind the Chevy Volt”…. The Rest of the Story

Patrick Michaels is a senior fellow in Environmental Studies at the Cato Institute and the editor of the forthcoming Climate Coup: Global Warming’s Invasion of our Government and our Lives, as well as the author of several other books on global warming.

His Forbes column on the Chevy Volt is a case study in the nexus between big government corruption and big business rent-seeking.

Michaels briefly recaps the well-known consumer fraud in which GM has touted the Volt as an all-electric mass production vehicle on the supposed basis of which its sales receive a $7, 500 taxpayer subsidy, which still renders it overpriced and unmarketable.

Michaels notes that “sales are anemic: 326 in December, 321 in January, and 281 in February.”

There seems to be a trend here.

Michaels adds that GM has announced a production run of 100,000 in the first two years and asks what appears to be a rhetorical question: “Who is going to buy all these cars?”

But wait! Keep hope alive! There is a positive answer to the question.

Jeffrey Immelt’s GE will buy a boatload of those uneconomic GM cars. Here the case study opens onto the inevitable political angle: Recently, President Obama selected General Electric CEO Jeffrey Immelt to chair his Economic Advisory Board.

GE is also awash in windmills waiting to be subsidized so they can provide unreliable, expensive power. Consequently, and soon after his appointment, Immelt announced that GE will buy 50,000 Volts in the next two years, or half the total produced.

Assuming the corporation qualifies for the same tax credit, we (you and me) just shelled out $375, 000, 000 to a company to buy cars that no one else wants, so that GM will not tank and produce even more cars that no one wants. And this guy is the chair of Obama’s Economic Advisory Board?

But of course. Michaels includes this hilarious detail in his case study:

In a telling attempt to preserve battery power, the heater is exceedingly weak. Consumer Reports their tests averaged a paltry 25 miles of electric-only running, in part because it was testing in cold Connecticut. (The [GM] engineer at the Auto Show said cold weather would have little effect.) It will be interesting to see what the range is on a hot, traffic-jammed summer day, when the air conditioner will really tax the batteries. When the gas engine came on, Consumer Reports got about 30 miles to the gallon of premium fuel; which, in terms of additional cost of high-test gas, drives the effective mileage closer to 27 mpg. A conventional Honda Accord, which seats 5 (instead of the Volt’s 4), gets 34 mpg on the highway, and costs less than half of what CR paid, even with the tax break.

The story of the GM Volt deserves a place in the Harvard Business School curriculum….but of course, it won’t. It’s a classic tale of the GOVERNMENT deciding what the public needs, not the marketplace.

Freedom is lost gradually by an uninterested, uninformed, and uninvolved people.

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More Oil Supply

April 29, 2011

By Michael J. Economides
Posted on Apr. 28, 2011

It is unfortunate that on the day when President Barack Obama said perhaps one of the most noteworthy things during his entire Administration, the ridiculous birther issue hijacked the news. On that day he was quoted: “”We are in a lot of conversations with the major oil producers like Saudi Arabia to let them know that it’s not going to be good for them if our economy is hobbled because of high oil prices.” He certainly would like more oil to get into the market.

After oil topped $110 per barrel, after gasoline prices have been flirting with $4 per gallon and after a relentless climb which lasted for weeks, the President felt compelled to do or, at least say, something. Obama can be the subject of criticism for a lot of things but as a campaigner he is almost impeccable. He is campaigning officially and he knows too well that virtually nothing removes votes from an American candidate better than higher gasoline prices.

Of course, it is hard to be the President of wind mills and solar panels and now try to implore foreign countries, raking it in from higher oil prices, to commit financial sacrifice. They are asked to increase the supply of the commodity, which has been labeled by Obama as the “energy source of the past”, and against which his Administration has gleefully declared war in both words and action from the time of the previous presidential campaign to today. One would think that higher oil prices would force people to use solar and wind to drive their cars. Yes, I know this is not possible and it is sarcastic but many of the President’s supporters, behind the public consumption headlines of feeling the consumers’ pain, think that what is happening is good for the energy future they would like to see.

The President, like many of his predecessors of both parties, is missing the opportunity to level with the American people: There are no alternatives to hydrocarbon (oil, gas and coal) energy sources in the foreseeable future. The entire twenty first century will still be dominated by them. Solar and wind are unrealistic today, they are thermodynamically deficient, and they will most likely never amount for much more than one percent of the world energy mix without massive government subsidies.

Ideological environmentalism has trumped economic development and has thwarted economic freedom, which was, ostensibly, the motive of the Cold War which America won but certainly does not act like it did. Al Gore, a precursor to Obama even before the Nobel Prize for the “Inconvenient Truth” wrote that the “internal combustion engine is the biggest threat to humankind.”

Tell that to the Chinese who are buying at least 40,000 new cars per day.

Breaking even the lowest standards of credulity on the same day of the President’s Saudi plea, Lisa Jackson, the EPA administrator said rising gasoline prices were not her agency’s fault. Upward pressure on gas prices was “not coming from any environmental or health regulation.” Really? This from an agency that even its more ardent supporters think as the most intrusive and recalcitrant, ever, an agency that has attempted to regulate by government edict rather than legislative fiat.

Make no mistake: global climate change rhetoric — fully espoused by the Obama Administration — is a frontal attack on the US and the lifestyle that emanates from its economy and system. The Europeans who adopted it in the first place are not averse to admit that they are jealous of America. The Chinese, who are all too aware of the ramifications of mandatory carbon restrictions on both the world and, in particular, their economy, simply will not play along. They are, at best, bemused. Does anybody really believe there would be economically extractable hydrocarbons in this world that would not be produced because we pass legislation in the US? Isn’t the atmosphere the same for all?

To crown a day that surely even Don Quixote would question the credibility of Obama’s adversaries, a third jewel was added to the news menu. Senator Harry Reid said the “Senate will turn as early as next week to Obama’s proposal to repeal tax breaks for the oil and gas industry.” This is the answer. Let’s turn on Big Oil. That will solve the problem.

What are we really talking about? The “subsidies” amount to just $4 billion per year. It may sound a lot of money but here is a quick calculation. The United States is using about 400 million gallons of gasoline per day. At $4 per gallon this translates to $1.6 billion per day, which means that the yearly subsidies to the dreaded oil companies account for less than three days of just the US gasoline bill. The US total oil bill at today’s prices is about $2.3 billion per day. Using a modest multiplier in economic activity, that would make the US oil industry, not counting natural gas, a $10 billion per day economic activity. The “subsidies” trumpeted by the government headlines amount to a few hours of the industry’s size.

Last year the Chinese spanned the globe and spent $200 billion in buying oil properties. I am often in China and my colleagues there are actually bewildered. After a few drinks and when words become looser and in some ways, more lucid, they have two questions: “What is the energy policy of the United States? and “If you are not going to produce your own oil and gas why are you letting us have a free ride in accessing oil supplies everywhere in the world with no resistance and no competition?” I have no answer to either but I do know that the Chinese understand that energy means power and better economics. We no longer seem to get it.

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Obama’s Green-Jobs Fantasies

March 10, 2011

(For some reason WordPress kills the text formatting on some of my posts and the software refuses to register my edits; the result the following “smashed together” post.  My apologies)

By John Stossel

(http://townhall.com/columnists/johnstossel/2011/03/09/obamas_green-jobs_fantasies)
3/9/2011

Anyone who understands basic economics already knows that President Obama’s $2.3 billion green-jobs initiative was snake oil. Now, thanks to Kenneth P. Green, we have statistics as well as theory to prove it.
In a new article, “The Myth of Green Energy Jobs: The European Experience,” the environmental scientist and a resident scholar at the American Enterprise Institute writes, “Green programs in Spain destroyed 2.2 jobs for every green job created, while the capital needed for one green job in Italy could create almost five jobs in the general economy.”
Ironically, Obama boasts his initiative “will help close the clean-energy gap between America and other nations.” But Green says, “(C)ountries are cutting these programs because they realize they aren’t sustainable and they are obscenely expensive.”
Obama claims that if we “invest” more, “the transition to clean energy has the potential to grow our economy and create millions of jobs — but only if we accelerate that transition.”
What could make more sense? A little push from the smart politicians and — voila! — we can have an abundance of new good-paying jobs and a cleaner, sustainable environment. It’s the ultimate twofer.
Except it’s an illusion, as economic logic demonstrates.
“It is well understood, among economists, that governments do not ‘create’ jobs,” Green writes. “The willingness of entrepreneurs to invest their capital, paired with consumer demand for goods and services, does that. All the government can do is subsidize some industries while jacking up costs for others. In the green case, it is destroying jobs in the conventional energy sector — and most likely in other industrial sectors — through taxes and subsidies to new green companies that will use taxpayer dollars to undercut the competition. The subsidized jobs ‘created’ are, by definition, less efficient uses of capital than market-created jobs.”
Green is using good, solid economic thinking. Many years ago, Henry Hazlitt wrote in his bestseller, “Economics in One Lesson,” “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
In judging any government initiative, such as Obama’s green-jobs plan, you can’t look just at the credit side of ledger because the government is unable to give without first taking away.
Worse than that: Inevitably, more is taken away — destroyed — than is given because the government substitutes force and taxation for consent and free exchange. Instead of a process driven by consumer preferences, we get one imposed by politicians’ grand social designs. It’s what F.A. Hayek called “the fatal conceit.”
So we shouldn’t be surprised that green-jobs programs make energy more expensive. “(F)orcing green energy on the market (is) much, much more expensive,” Green said. “Using Spain as a model, when you do the math, you realize that creating 3 million new green jobs could cost $2.25 trillion.”
Of course, many people who push “green jobs” want the price of energy to rise so we’ll use less. If the environmental lobby wants Americans to be poorer, it ought to come clean about that.
The advocates of such programs don’t just misunderstand economics. They have lapsed into a pre-economic mentality. Rulers once believed they could do whatever they wanted, subject only to the physical laws of nature. If things didn’t work out as planned, it was because the people had failed to cooperate. But as economist Ludwig von Mises wrote, once economics emerged as an intellectual discipline, “it was learned that in the social realm too there is something operative which power and force are unable to alter and to which they must adjust themselves if they hope to achieve success … .”
That “something” is inescapable economic forces like the law of supply and demand.
Green is right when he says, “Central planners in the United States trying to promote green industry will fare no better (than Europe) at creating jobs or stimulating the economy.”
John Stossel
John Stossel is host of “Stossel” on the Fox Business Network. He’s the author of “Give Me a Break” and of “Myth, Lies, and Downright Stupidity.” To find out more about John Stossel, visit his site at johnstossel.com

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The Chevy Volt and Nissan Leaf are selling like . . . electric cars.

March 4, 2011

Car Talk

11:19 AM, MAR 4, 2011 • BY JONATHAN V. LAST (http://www.weeklystandard.com/blogs/car-talk_552899.html)

Hey everybody–it’s the Age of the Electric Car! Sales numbers for the Chevy Volt are out and you’ll never guess how many of these future machines consumers gobbled up in the month of February. Go ahead and try. I’ll wait.Is that your final answer? Okay. Well the real number is:

281.

Yup. 281 Volts were sold in February. That might sound terrible to you, but it’s actually really strong. Because Nissan only sold 67 Leafs (Leaves?), and the Leaf is both cheaper and, as far as over-priced econo-boxes go, way better than the Volt. So really, the Volt is doing pretty great. In fact, if you had told GM execs last year that the Volt was going to out-sell the Leaf by more than 4-to-1, they would have been thrilled.

Now if you wanted to be a Grumpy Gus and fixate on the bad news, it’s true that the trend isn’t great. In January, GM moved 321 Volts, so February represents a 12 percent decline. But again, there’s a bright side: Leaf sales dropped by 23 percent! So actually, the Volt has better legs than its prime competitor, too.

What, you want more good news? Okay, how about this: Because the Volt and Leaf sales are so . . . emerging, taxpayers saved money! The government gives everyone who buys one of the overpriced Volts or Leafs $7,500. So every electric car that doesn’t sell is money back in our pocket!

The only problem real problem is what these numbers mean for President Obama’s goal of having 1 million electric cars on the road by 2015. At this rate, it’ll take 232 years to hit that mark. But never fear. As Fred Barnes reminds us, Washington won’t ever give up trying to influence how Americans drive. They’ll think of something.

Bonus Fun Fact: The Volt’s 2011 production run was originally supposed to be 60,000 units. GM cut that number to 10,000 units. At this rate, the Volt is on track to sell 3,612 Volts this year. (Assuming sales don’t decline any further).

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Why the Dollar’s Reign Is Near an End

March 2, 2011

For decades the dollar has served as the world’s main reserve currency, but, argues Barry
Eichengreen, it will soon have to share that role. Here’s why—and what it will mean for international markets and companies.

By BARRY EICHENGREEN

The single most astonishing fact about foreign exchange is not the high volume of transactions, as incredible as that growth has been. Nor is it the volatility of currency rates, as wild as the markets are these days.

Instead, it’s the extent to which the market remains dollar-centric.

Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.

Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What’s more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.

The greenback, in other words, is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

The Three Pillars
How could this be? How could the dollar’s longtime most-favored-currency status be in jeopardy?

See the share of global foreign-exchange transactions involving the dollar, and the dollar’s share of official global foreign-exchange reserves.

To understand the dollar’s future, it’s important to understand the dollar’s past—why the dollar became so dominant in the first place. Let me offer three reasons.

First, its allure reflects the singular depth of markets in dollar-denominated debt securities. The sheer scale of those markets allows dealers to offer low bid-ask spreads. The availability of derivative instruments with which to hedge dollar exchange-rate risk is unsurpassed. This makes the dollar the most convenient currency in which to do business for corporations, central banks and governments alike.

Second, there is the fact that the dollar is the world’s safe haven. In crises, investors instinctively flock to it, as they did following the 2008 failure of Lehman Brothers. This tendency reflects the exceptional liquidity of markets in dollar instruments, liquidity being the most precious of all commodities in a crisis. It is a product of the fact that U.S. Treasury securities, the single most important asset bought and sold by international investors, have long had a reputation for stability.

Finally, the dollar benefits from a dearth of alternatives. Other countries that have long enjoyed a reputation for stability, such as Switzerland, or that have recently acquired one, like Australia, are too small for their currencies to account for more than a tiny fraction of international financial transactions.

What’s Changing
But just because this has been true in the past doesn’t guarantee that it will be true in the future. In fact, all three pillars supporting the dollar’s international dominance are eroding.

First, changes in technology are undermining the dollar’s monopoly. Not so long ago, there may have been room in the world for only one true international currency. Given the difficulty of comparing prices in different currencies, it made sense for exporters, importers and bond issuers all to quote their prices and invoice their transactions in dollars, if only to avoid confusing their customers.

Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time. Just as we have learned that in a world of open networks there is room for more than one operating system for personal computers, there is room in the global economic and financial system for more than one international currency.

Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China’s yuan.

Americans especially tend to discount the staying power of the euro, but it isn’t going anywhere. Contrary to some predictions, European governments have not abandoned it. Nor will they. They will proceed with long-term deficit reduction, something about which they have shown more resolve than the U.S. And they will issue “e-bonds”—bonds backed by the full faith and credit of euro-area governments as a group—as a step in solving their crisis. This will lay the groundwork for the kind of integrated European bond market needed to create an alternative to U.S. Treasurys as a form in which to hold central-bank reserves.

China, meanwhile, is moving rapidly to internationalize the yuan, also known as the renminbi. The last year has seen a quadrupling of the share of bank deposits in Hong Kong denominated in yuan. Seventy thousand Chinese companies are now doing their cross-border settlements in yuan. Dozens of foreign companies have issued yuan-denominated “dim sum” bonds in Hong Kong. In January the Bank of China began offering yuan-deposit accounts in New York insured by the Federal Deposit Insurance Corp.

Allowing Chinese companies to do cross-border settlements in yuan will free them from having to undertake costly foreign-exchange transactions. They will no longer have to bear the exchange-rate risk created by the fact that their revenues are in dollars but many of their costs are in yuan. Allowing Chinese banks, for their part, to do international transactions in yuan will allow them to grab a bigger slice of the global financial pie.

Admittedly, China has a long way to go in building liquid markets and making its financial instruments attractive to international investors. But doing so is central to Beijing’s economic strategy. Chinese officials have set 2020 as the deadline for transforming Shanghai into a first-class international financial center. We Westerners have underestimated China before. We should not make the same mistake again.

Finally, there is the danger that the dollar’s safe-haven status will be lost. Foreign investors—private and official alike—hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

A World More Complicated
How much difference will all this make—to markets, to companies, to households, to governments?

One obvious change will be to the foreign-exchange markets. There will no longer be an automatic jump up in the value of the dollar, and corresponding decline in the value of other major currencies, when financial volatility surges. With the dollar, euro and yuan all trading in liquid markets and all seen as safe havens, there will be movement into all three of them in periods of financial distress. No one currency will rise as strongly as did the dollar following the failure of Lehman Bros. There will be no reason for the rates between them to move sharply, something that would potentially upend investors.

But the impact will extend well beyond the markets. Clearly, the change will make life more complicated for U.S. companies. Until now they have had the convenience of using the same currency—dollars—whether they are paying their workers, importing parts and components, or selling their products to foreign customers. They don’t have to incur the cost of changing foreign-currency earnings into dollars. They don’t have to purchase forward contracts and options to protect against financial losses due to changes in the exchange rate. This will all change in the brave new world that is coming. American companies will have to cope with some of the same exchange-rate risks and exposures as their foreign competitors.

Conversely, life will become easier for European and Chinese banks and companies, which will be able to do more of their international business in their own currencies. The same will be true of companies in other countries that do most of their business with China or Europe. It will be a considerable convenience—and competitive advantage—for them to be able to do that business in yuan or euros rather than having to go through the dollar.

U.S. Impact
In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.

Nor will the U.S. be able to run such large trade and current-account deficits, since financing them will become more expensive. Narrowing the current-account deficit will require exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar will have to fall on foreign-exchange markets—helping U.S. exporters and hurting those companies that export to the U.S.

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP—$225 billion in today’s dollars. That is the equivalent to a half-year of normal economic growth. While this is not an economic disaster, Americans will definitely feel it in the wallet.

On the other hand, the next time the U.S. has a real-estate bubble, we won’t have the Chinese helping us blow it.

Dr. Eichengreenis the George C. Pardee and Helen N. Pardee professor of economics and political science at the University of California, Berkeley. His new book is “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.” He can be reached at reports@wsj.com