Glibertarians.com 2017 Archive

Category: Regulation

  • Modeling U.S. Energy Policy

    Part One

    “The fact that the polynomial is an approximation does not necessarily detract from its usefulness because all models are approximations. Essentially, all models are wrong but some are useful. However, the approximate nature of the model must always be borne in mind.”

    – George Box*

    • Modeling U.S. Energy Policy
    Professor Tomain

    By observing the impact of the Carter and Regan administration’s reciprocal attempts to affect national energy policy with a historical understanding of the FFCA as the genesis of Federal energy policy, we develop a model of energy policy in terms of legislative goals. Then, with an appropriate model, we are able to undertake realignment toward new political ends. Fortunately, much of the heavy lifting has been done via Professor Tomain’s “Dominant Model of United States Energy Policy,” a handy tool to explain past and current trends in energy policy and regulation.[1]  Inherent in this model are the economic assumptions that: 1) the Gross National Product (GNP) is linked to energy production, and 2) economies of scale in energy production are achievable.[2]  These assumptions are well supported, in as much as energy is necessary input for Gross Domestic Product (GDP) growth, although the direction of causality between energy production and GDP growth has been difficult to ascertain and appears unidirectional for certain periods.[3]  Importantly, these two assumptions suggest a national energy policy which “favors large-scale, high technology, capital-intensive, integrated, and centralized producers of energy.”

    According to Tomain, the Dominant model has six goals, but, for our purposes, these are better distilled into two primary objectives for the lawmaker: 1) ensure an abundant supply of both primary and secondary energy 2) ensure reasonable and stable prices for energy.[4]  There are many legislative options to achieve these objectives, but only a few selections appear to be currently supported.  Consider, as evidence, the other goals Tomain identifies as complimentary mechanisms: i.e. limiting market power of large firms, promoting competition between fuels and between producers, generally subsidizing only mainstream energy sources, and allowing for both federal and state control of energy policy.[5]  Whether legislators identify these as the means to the end of stable energy prices and abundant energy supplies or as ends – in and of themselves – has determinative impact on what objectives are actually achievable.  If the real objective of Federal energy policy is to achieve carbon free energy independence in the United States, then a transition to non-carbon primary energy sources is a necessary condition. Policy ends which limit market power of firms, allow for decentralized control, increase competition, and subsidize current producers would, therefore, sit in conflict with that objective.

    • Contemporary Legislation Does Little to Support a Transition Toward Energy Independence

    For all the talk of an energy independent or carbon free future, the most recent series of energy policy acts, the Energy Policy Act of 2005, the Energy Independence and Security Act (EISA) of 2007, and the American Recovery and Reinvestment Act (ARRA) of 2009, all conform to the Dominant Model.  The Energy Policy Act of 2005 contains significant subsidies and incentives for traditional carbon primary energy producers.[6]  Coal producers receive $1.6 billion of assistance.[7] They receive a further $1.7 billion for upgrading generation equipment and emplace advanced combustion processes.[8]  Oil and gas producers are offered large production incentives and suspensions of royalty payments.[9]  Tax incentives are provided to an array of carbon primary energy including coal projects,[10] oil and natural gas,[11] and biofuels.[12]  All in all, some $85 billion of appropriations and relief is provided for in the acts with the bulk of funds directed at carbon based primary energy producers.[13]  This support is consistent with Dominant Model goals of subsidies for mainstream energy, promoting abundant energy supplies, favoring large producers, and large capital projects.

    Several steps omitted

    The EISA, by attempting to promote competition between fuels and between producers in order “to move the United States toward greater energy independence and security” and “increase the production of clean renewable fuels” with hopes to secure secondary energy supplies, is predicated on Dominant Model goals.[14]  To achieve these goals, the EISA adopts the dual mechanisms of emplacing production quotas for carbon dependent biofuels and subsidizing US biofuel producers to the point that blending biofuels with traditional fuels becomes affordable to consumers.[15]  Unfortunately, this does nothing to address the very real difference in the costs of production between biofuels and traditional fossil fuel producers.[16]  Setting aside the questionable economics of biofuel subsidies, foreign oil producers will remain profitable at price levels where expenditure for biofuel subsidies is politically unjustifiable.  It is also important to note, by focusing legislative effort on biofuel, the EISA targets sources of secondary energy without addressing the primary energy input inherent in the manufacture of biofuels, the origin of that primary energy, or the conversion rate of primary energy to secondary energy.  Without looking at primary energy sources, there is little hope of any affecting energy independence through legislative means.

    Fortunately, both the Energy Policy Act of 2005 and later amendments added by the ARRA do make efforts at addressing primary energy.  For example, the 2005 Act eased certain requirements of the federal licensing process for hydroelectric dams.[17]  The 2005 Act extended and enhanced tax credits to ‘renewable’ primary energy sources such as hydropower, wind, solar, and geothermal.[18] Importantly, the 2005 Act sets an objective of “increasing the conversion efficiency of all forms of renewable energy through improved technologies.”[19]  In support of this objective, the 2005 Act provides $2.227 billion for “renewable energy research, development, demonstration, and commercial application activities.”[20]  These provisions are buttressed by the ARRA which amends Title XVII of the 2005 Act to provide an additional $6 billion of loan guarantees for renewable energy projects.[21]

    Furthermore, the 2005 Act provides support for the largest alterative producer of non-carbon primary energy, in the event of construction delays caused by regulators or by litigation, by extending funding to builders of nuclear generating stations to cover regulatory costs.[22]  Additionally, the 2005 Act sets aside $1.25 billion for a prototype hydrogen generating nuclear reactor and reauthorizes the limitation of liability on nuclear plant operators provided under the Price Anderson Act.[23]  Between the 2005 Act and the ARRA, some $41.7 billion are allocated across energy markets and technologies with the bulk of subsidies going to the largest producers.[24]  While stimulus helps shift the competitive landscape to make minor producers and alternatives to carbon primary energy more attractive to consumers, the allocations are simply too diffuse to tip the balance in favor of any producer or technology thus preserving the current competitive landscape.  This outcome suggests achieving energy independence entirely on non-carbon sources using policy and legislation keeping with the mechanisms of the Dominant Model will be ineffective and will require a reordering and rebalancing.  Owing to the favorable economics of oil prices under the Dominant Model it appears that US energy independence “is more a political slogan than an actual policy objective.”[25]  If however there were sincere efforts at achieving energy independence in the US what might they look like? We will explore this question in our next installment.

     

    * George Box and Norman Draper, Empirical Model-Building and Response Surfaces 424 (1987).

    [1] Joseph P. Tomain, The Dominant Model of United States Energy Policy, 61 U. Colo. L. Rev. 355, 355 n. 4 (1990).

    [2] Id. at 374-75.

    [3] The authors note, unsurprisingly, that the differing results are influenced significantly by the differing regulatory environments.  Jaruwan Chontanawat et al., Causality Between Energy Consumption and GDP: Evidence from 30 OECD and 78 Non-OECD Countries, SEEDS 113 (June 2006), http://www.seec.surrey.ac.uk/research/SEEDS/SEEDS113.pdf; see also Eden S. H. Yu and Been-Kwei Hwang, The Relationship Between Energy and GNP, 6 Energy Economics 186 (1984).

    [4] Tomain, supra note 1, at 375

    [5] Id. at 375-76.

    [6] Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005).

    [7] Id at  § 401.

    [8] Id at § 3103.

    [9] Id at § 341-57.

    [10] Id at § 1307.

    [11] Id at § 1321-29.

    [12] Id at § 1342-47.

    [13] Michael Grunwald and Juliet Eilperin, Energy Bill Raises Fears About Pollution, Fraud, The Washington Post (Jul. 30, 2005) http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901128.html.

    [14] Energy Independence and Security Act of 2007, Pub. L. No. 110-140, 121 Stat. 1492, 1492 (2007).

    [15] Id at § 201-48.

    [16] Jonathan Kingsman, Oil Price Fall Adds to Biofuel’s Woes, The Financial Times (Jan. 9, 2015), http://www.ft.com/cms/s/0/22bbd5ba-975f-11e4-be9d-00144feabdc0.html#axzz3csqAQnGr.

    [17] Energy Policy Act, supra note 6, at § 241.

    [18] Id. at § 202-03.

    [19] Id. at § 931.

    [20] Id.

    [21] American Recovery and Reinvestment Act, Pub. L. No. 111-5, 123 Stat. 115, 140, 145 (2009) (codified as amended 42 U.S.C. § 16516).

    [22] Energy Policy Act, supra note 6, at § 638

    [23] Id. at § 601-10, 645.

    [24] American Recovery and Reinvestment Act of 2009, Wikipedia (May 23, 2015), https://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009#Energy_infrastructure; Energy Policy Act of 2005, Wikipedia (Sept. 23, 2014), https://en.wikipedia.org/wiki/Energy_Policy_Act_of_2005.

    [25] The Oil Drum, China Energy Outlook: China’s Energy Strategy for the Future, Oilprice.com (Nov. 18,2012), http://oilprice.com/Energy/Energy-General/China-Energy-Outlook-Chinas-Energy-Strategy-for-the-Future.html.

  • A Taste of Honey

    Honey is not an item one thinks about very often unless you are fermenting a tasty mead or like to use the natural sweetener (gag) on your morning toast.  But there are lessons to be learned from honey: the effects of tariffs and as a parallel to the drug war.

    Americans apparently love their bee squeezings, consuming a yearly average of 1.3 pounds per person for nearly 400 million pounds in total.  Since demand is so high, U.S beekeepers can only supply forty-eight percent of this amount, with forty-one other countries making up the rest.  But honey, like so many other market products, is controlled (to some degree as we are about to find out), and foreign imports are, in theory, kept in check by tariffs.  Chinese honey, in particular, has been targeted since the year 2001 with a stiff tariff, tripling the import duty to $2.63 per net kilogram.  This was enacted because American producers complained that the Chinese were undercutting “fair market” prices (whatever those are!), making it difficult for domestic beekeepers to compete.

    Since the tariff on Chinese honey, to no one’s surprise, the imports from other countries suddenly spiked, as Chinese producers found other means to move their product.  Honey Laundering, as it is called, happens by shipping the product from China to a neutral port, changing the country of origin, and then sending the barrels onward to the United States.  Recent estimates say that a third of the honey consumed here comes from such illegal sources.  And because of filtration methods, the pollen – used to determine the country of origin – can be scrubbed clean, creating an untraceable product.  Some Chinese producers also create fake honey – make from artificial sweeteners and mixed with other liquids to look like the real thing.

    China, as to be expected, views the tariff as a protectionist measure.  The domestic producers counter that Asian honey has antibiotics and the presence of lead; also the tariff not only protects American beekeepers but is an important health issue.  For example, in India, honey tested for export in 2010 found lead and antibiotics in twenty-three percent of the samples. These samples were assumed to have come from Chinese sources, relabeled as Indian production.

    Over the past few years, there have been indictments and arrests for honey laundering, spanning several countries.  There are federal agencies at work here, too: the Department of Justice, ICE, and the FDA, busy busting illegal importers but only making a minor dent in the flow of illegal honey.  Honey laundering continues, and will continue as long as there are incentives to do so.

    Sources: various articles found online (take that!).

     

  • The ‘Oxford Comma’ Decision and Why it Was Wrong

    Oxford campus courtyard, comma not pictured

    By Square = Circle

    Grammar Nazis are like shamans – always hated and outcast until they are desperately needed.

    There have been several recent stories about the Oakhurst Dairy case, which was decided by a debate over the so-called ‘Oxford comma,’ which English professors are supposedly charmingly obsessed with, but which is too arcane for normal citizens to understand.

    As a former college English teacher who moved into a profession in which I frequently deal with the often-incomprehensible intricacies of labor law (i.e. construction management), I am here to disabuse you of the notion that it is the grammar rules, and not labor law itself, that suffer from being over-arcane.

    The case involves rules governing which labor classifications do and don’t get overtime pay, and hinges on whether, in the text of the law detailing overtime exemptions for various dairy workers, the phrase “for shipment or distribution” modifies the word “packing” or whether “packing for shipment” and “distribution” are two different items in a list of trades exempted from overtime rules. If the former, those who distribute the dairy’s products are not exempt from overtime rules, only those who pack are. If the latter then those who drive the trucks are exempt, too. The union, unsurprisingly, argued the latter and prevailed upon appeal (meaning overtime pay for distribution, but not for packing).

    Exemptions of this kind are common in fields where work comes in surges rather than being predictable day-by-day.

    The most-publicized rationale behind the decision was that since there is a comma before “packing,” “packing” could be the final item in the series, modified by the rest of the clause, since that’s how you would interpret the sentence if this comma were an ‘Oxford comma,’ i.e. a ‘serial comma’ preceding the final item in a list, so that the last item is “packing for shipment or distribution.”

    Presumably, there’s follow-up logic that says “and since there’s controversy over the ‘Oxford comma’ the rule is ambiguous and per state law ambiguities are to resolve in the employee’s favor.”

    But while the different varieties of comma (such as serial vs. parenthetical, the two that are relevant here) have superficial resemblance (i.e. they use the same mark on the page), their functions are entirely different, and they should not be confused, any more than the ‘th’ in “fathom” should be confused with the ‘th’ in “Chatham” (pronounced “Chat-ham”).

    This may seem a pedestrian observation, but it is just such a confusion that underlies the wrong decision in this case.

    The recent article by A. Barton Hinkle, for example, which I link above, eagerly utilizes amusing examples of misused parenthetical commas to show how ambiguity in commas can seriously affect meaning (if one doesn’t know the context and/or is a little dim), such as ““When @LouiseMensch reported on the FISA tap, she included details that implicated Putin’s own daughters, Carter Page and Paul Manafort.”

    If we pretend that the comma after ‘daughters’ is a parenthetical comma, rather than a serial comma, it sounds like the sentence is saying that Carter Page and Paul Manafort are Putin’s daughters.

    While these examples can be fun, they don’t have anything to do with serial commas, which don’t impact meaning. The “Putin’s daughters” example is one in which a serial comma could be read as a parenthetical comma – if one doesn’t know anything at all about the context of the sentence. It is the structure of the sentence, not the lack of the comma, that creates that ambiguity.

    The ‘Oxford comma,’ as it’s known to stuffy people who wear tweed, is specifically a superfluous serial comma added after the penultimate member of a series: “the flag is red, white, and blue.” The comma after ‘white’ is the ‘Oxford comma’ and is now considered by many to be over-fussy as it pointlessly doubles the function of the conjunction. “The flag is red, white and blue” is in no way less clear, and while style guides of the 1950s encouraged comma usage (“when in doubt, do”), style guides of the 1990s did the opposite (“when in doubt, don’t”).

    Regardless of how you feel about the ‘Oxford comma’ and whether it is acceptable to omit it, the reason the jury in the Oakhurst Dairy case decided wrongly is that the real grammatical requirement is that no matter how long or complex the series is the final member of the series grammatically requires a conjunction. “The flag is red, white, blue” is ungrammatical, as is the union’s interpretation of the clause that is at issue in the lawsuit.

    As noted above, we are being asked to take the phrase ‘for shipment and distribution’ as a modifier of ‘packing.’ That means we can remove that element of the sentence and the sentence itself will remain grammatical. Here is the sentence if we remove that modifier:

    “The canning, processing, preserving, freezing, drying, marketing, storing, packing of agricultural produce. . .”

    vs. the not-ungrammatical

    “The canning, processing, preserving, freezing, drying, marketing, storing, packing or distribution of agricultural produce. . . .”

    While ambiguities are to be construed in favor of the employee, I see no ambiguity here. If there were an ‘and’ or ‘or’ between ‘storing’ and ‘packing’ then it would not be ambiguous whether you use the ‘Oxford comma’ or not: “The canning, processing, preserving, freezing, drying, marketing, storing, or packing for shipment or distribution of agricultural produce. . . .” This version also lacks the ‘Oxford comma,’ yet somehow manages to be perfectly unambiguous in the packing being “for shipment or distribution.”

    Because it’s about the conjunction, not the comma. The ‘Oxford comma,’ like Communism, is a red herring.

    But as with so many things, the whole stupid debate could be avoided by simply getting the government out of the equation. My understanding is that Maine has a style guide for laws explicitly stating that they don’t use the ‘Oxford comma,’ yet this standard isn’t applied consistently, so the courts couldn’t use it. Legislators are not motivated by pragmatism (or competence), their decisions don’t have to pass the workability test, and they will not be held accountable for their failures. In politics, it is about the gesture, not the result. A law was made mandating overtime pay universally, and then myriad exceptions had to be carved out of it because, as the Devil once said, “one law for the Lion and the Ox is Tyranny.”

    Even in a collective bargaining situation, had the Dairy simply been able to negotiate directly with the union without a body of poorly written but ‘well-intended’ legislation to try to interpret, hundreds of thousands if not millions in legal fees could have been saved, and perhaps even distributed to the workers by way of resolving the negotiations.

    In fact, absent the labor laws the points in dispute would likely have been directly and explicitly negotiated, rather than silently passed over because both parties thought they understood a pre-existing regulation and so never discussed it.

    But I wouldn’t hold my breath waiting for the lawyers and legislators to decide that repealing these regulations would be a ‘pragmatic’ development.

  • Being An Account of My Most Arduous Attempts to Establish a Relationship with International Jewry

    Gather round, young children, and I’ll tell you a tale. A tale full of treachery and intrigue, mighty heroes and dastardly villains, sung to the tune of the USA PATRIOT Act’s Section 326. A harrowing account of your intrepid author’s attempts to perform a simple act, made not-so-simple by the never-ending meddling of the federal government.

    Over the last several weeks, it has been my sworn and sacred duty to set up a small business banking account for our Glibertarian enterprise. Setting up a bank account should, in theory, be an easy enough exercise. One waltzes into a bank; puts hands on hips in the lobby and demands in a loud, commanding voice, “Ho, there! I require the services of a money lender! Make haste, for I have pressing affairs to attend to with the apothecary upon the satisfactory conclusion of our business!”; gives some information; and deposits some money. That is precisely how things worked the last time I had to open a bank account.

    Of course, preliminary research had to be conducted. Only one of us is actually made of money (I’ll let you try to guess who!), so the majority of my time was spent on the internet and over the phone with different institutions trying to find an actually free small business checking account. The majority advertise themselves as free, but once you get into the weeds a bit during the enrollment process, it turns out they are free only so long as you meet a variety of requirements, none of which are likely to occur with our current business model.

    Pictured here: a banker

    And yet, I persisted. Finally landing upon a local bank that, so far as I could tell, had actual, honest-to-Zardoz free small business checking, I gallantly sacrificed my entire lunch break to go speak with these generous merchants of monetary services. I walked into the lobby which, being the middle of a weekday, was largely empty. A thick-set manager in an off-the-rack suit quickly hurried over to me, vigorously shook my hand, and assured me that his underling would be able to attend to our needs. When asking what our business was, I explained that we run a website giving political and pop culture commentary. Why how wonderful! Did you know that the manager was a journalism major? It’s so important for there to be as many voices as possible giving great, down-the-line political commentary, to fight the nefarious tide of fake news!

    Bolstered by his enthusiasm and feeling mightily proud of myself for helping to selflessly bring the hard, unvarnished truth to a grateful readership (though given some of the comments made during his rambling glad-handing, I suspect he would not have been so generous with praise if he knew the direction in which our political commentary flows), I sat down comfortably with his associate to begin the process.

    Now, as you may or may not know, the leadership of our merry band is scattered across these United States. I explained that not only myself, but a handful of other individuals in various states would need to be signatories on this account. I thought this could be accomplished through digital signatures, faxes, etc. It is here that the first act closes, and the central conflict begins.

    The banker looked at me with a nervous smile. “Is there any chance of your associates being able to come in to one of our branches?”

    “None at all,” I replied, “and frankly I think it quite racist of you to ask*.”

    “I’ll need to speak to my manager. Please excuse me for a moment.”

    *thundering denunciation* “YES, YOU SPEAK WITH YOUR MASTER, VULGAR HIRELING, AND TELL HIM THAT I WOULD SPEAK WITH HIM FORTHWITH!”

    Some five minutes pass in hushed consultation. There are no other customers in the bank. I nonchalantly begin to inspect the windows and doors at the edge of my vision, to plan my escape, if it turns out that my growing suspicions are true, and I have wondered into a clan of vampires or ghouls using a regional bank as a front to draw in potential victims.

    Meaty Manager avalanches back across the room, with an exasperated look upon his reddened ground chuck face.

    “I’m sorry, but I’m afraid we’ll not be able to meet your needs.”

    “Excuse me?” I replied, momentarily dumbstruck.

    “It’s the PATRIOT Act, you see…” and he then begins to tell me of a curse that the Great Tribe has laid upon he and all his kind.

    In 2001 of the Western reckoning of years, as many of you may recall, our great nation was paid a friendly visit by some rather motivated Mohammedans who, through a series of peculiar mishaps, wound up killing thousands of innocent people. The immediate and predictable response to this, was for our Federal Government, Beloved by All, to pass an enormous omnibus bill full of things like indefinite detention and a host of new regulations on a wide variety of industries. If they hated us for our freedom, we had found a most ingenious method by which to defuse their wrath – simply get rid of the offending freedoms.

    Image result for patriot act
    Fox News graphic of PATRIOT ACT, heroically standing in front of the sigil of the glorious Department of Homeland Security

    In this behemoth of a law lies section 326, dealing with the establishment of what is known as a Customer Identification Program. Now before establishing accounts, banks are required to, and held liable for, making strong efforts to establish the identify of their customers. The exact methods by which they do this are left up to the individual institutions. According to the text of the act itself, it sounds easy enough to perform using only legal documents. However, Meaty Manager explained to me that practically all banks, particularly those who are only regional players and who cannot afford to buy off entire branches of government, generally are held to much tighter restrictions by their compliance departments, lest they find themselves on the wrong end of a federal inquiry. And so, without having the opportunity to actually see each of the individuals face to face and have a chat with them, they simply could not pass muster using their bank’s particular CIP rules. There was no way, you see, for them to have faith that we were not drug dealers or terrorists (he mentioned those two professions explicitly, showing an interesting creep from Fighting Terrorism to Eh, the Tool is Already There, Might As Well Use It to Fight Drugs).

    Gathering what dignity remained to me, I indignantly declared to him that such was foolishness in the age of internet business, and that surely a great catastrophe (in the form of lack of growth) would befall his institution if it continued in this folly. Meaty Manager could only smile and give me a Gallic shrug, as if to suggest that, if such were the vicissitudes of fate, then he would suffer what he must.

    On my way out the door, Meaty Manager did offer one piece of parting advice. He suggested to consult with a bank whose reach extends across all the lands, so that there would be outposts near any person that we decided needed official access. Perhaps then, could their identities be properly ascertained to the King’s satisfaction.

    Thoroughly demoralized at this point, your dogged author decided to follow the suited mound’s advice and talk to a big bank. And so, this past Saturday morn, I found myself in the lobby of a Major National Bank. After waiting for some time, I was finally introduced to Paul**, the small business banking representative. I explained to him right away the issue I had had previously, and he agreed it was an obstacle.

    There followed two hours, and I am not kidding or engaging in hyperbole there, in which I was interrogated by Paul and his Manager (I was by now convinced that every man who works in a bank has the exact same physical build). I explained more than once what our business did. I showed them the site. I explained about the concept of the Internet, and how it came to be that many different people, only a few of whom have ever met in person, can reside in different states and still all have interest in a shared venture. I was asked more than once some questions that sounded suspiciously like they were going to lead to “gotcha!” moments had I answered differently, some about drugs and some about terrorism. It was, frankly, ludicrous.

    I asked why I was being treated this way. Same story, different day: PATRIOT Act, section 326. We don’t Know you. How can we Know your compatriots when they aren’t even here? Was I aware how deeply suspicious this entire thing was? Why, did I know that some young dissidents have used otherwise seemingly innocuous websites to sell the Devil’s own concoctions? What nerve had I, to come in here proclaiming my own innocence, when all of my actions so clearly speak to the contrary!

    I shall not bore you with further details; suffice to say that due to some stern negotiations and my resolve to not leave without a deal in hand, one hour after the bank closed, I left with a newly established account, and a series of addendums that I could mail to my compatriots that which, upon completion in front of a notary, would then suffice to establish identity for banking purposes. You see, the Financial Crimes Enforcement Network’s FAQ on the CIP allows for a bank to rely on the good offices of a third party for purposes of establishing identity. However, the bank is held responsible if the third party’s methods are found to be insufficient or unsound. As such, few banks are willing to take such a risk. However, when it comes to dislodging an agitated libertarian from your place of business after the automatically timed overhead lights have already extinguished, it appears they were willing to make an exception.

    TL;DR version: apparently starting a small business with partners in different states is now considered to essentially be drug-running or terrorism related unless and until proven otherwise. This helps to preserve our freedom after 9/11. Be grateful the King is there to see all, and to protect us from the evils that lurk in the dark.

    Image result for patriot act
    Production poster for The Patriot Two: After the Apocalypse.

    All information used to write this article that was not gleaned from my personal experience was obtained here and here, if you want to ruin your Sunday afternoon reading through it. Having already done so, I wouldn’t recommend it.

    *conversations may not have occurred precisely as recounted
    **names have been changed to protect the barely competent

  • Understanding Insurance

    “Harrumph, harrumph,” grumbled the crowd, “This place used to be better when you could beat the waiters.”

    The purpose of insurance is to provide protection from low-risk, high-cost events like car accidents and medical emergencies. The first major insurance company was Lloyd’s of London in 1688. It began in a coffee shop popular with sailors and merchants, so it was a good place to get news on sea trade. The sea was a dangerous place at that time (hint: AARGH! SHIVER ME TIMBERS!) and merchants wanted protection from losses. Speculators began offering to pay for potential losses according to the perceived risk in exchange for fees from the merchants. Basically, they were gambling on which ships would sink. If the ship sank, the merchant won, and if it didn’t, the speculator won. This practice later spread to other activities. Then the government got involved – with predictable results. Crop insurance came to the US in 1938 and flood insurance in 1968. Like everything else the government does, its insurance programs are costly and heavily in debt. More on this later.

    Insurance companies work only as long as the value of the claims paid is less than the revenue (premiums) they get from their customers. In short, there are only so many things they can pay for and stay in business. If the government required car insurance companies to pay for oil changes, car insurance would become much more expensive and every car insurance companies would go bankrupt. And it would be impossible to find a mechanic on Saturday.

    This situation is similar to what has been happening with health insurance. Most people do not spend much on healthcare between the ages of 1 and 60. For an average person in the US, about $9,000 is spent on healthcare in the first year of life, and about $3,000 per year until the age of 60. Costs rise steeply after that. For a typical American, about 30% of all the money spent on healthcare in their life is spent in their last year of life and about 80% in their last 15 years of life. For this reason, in countries with government-run healthcare, old and seriously ill people often face very long wait times for medical treatment. The bureaucrats hope that they will die before the government must pay for their treatment. This isn’t a conspiracy theory. Britain’s National Healthcare Service freely admits to rationing care such as cancer drugs and hip replacements to fix the hole in its budget.

    Dr Mark Porter, leader of the British Medical Association, said: “The NHS is being forced to choose between which patients to treat, with some facing delays in treatment and others being denied some treatments entirely. This survey lays bare the extreme pressure across the system and the distress caused to patients as a result.”

    Those of us in the US hear constantly about how greedy heartless health insurance companies are because they won’t pay for this or that (often a highly questionable this or that, Sandra Fluke). But it’s important to realize that NO insurance system, whether private or public, can pay for everything. The whole point of insurance is that many people pay in some often and a few take out a lot rarely. This isn’t politics. It’s arithmetic. And for those who claim that Britain or Canada’s system is better because it is cheaper, the reason it is cheaper is not because it is more efficient. It’s because they decide in advance how much to spend each year. It’s easy to keep costs down when you decide you will only spend so much and keep people waiting for as long as possible.

    Again, insurance can only work when it is used for low-risk, high-cost events. For health insurance, this means that the only things that ought to be covered are things like surgeries and expensive medicines. Some people might choose to buy extra health insurance, just as some people with pricey cars buy extra car insurance. But if you drive a regular car, there is no point to fancy car insurance, and if you are healthy, you do not need fancy health insurance. In short, if you want to fix America’s healthcare system, the best thing to do would be to let consumers buy whatever level of coverage they want. For most people, this would mean a cheap plan with a high deductible–the so-called substandard and junk policies.

    President Obama has repeatedly referred to the 4.7 million discontinued policies as “substandard.”[3] When the President announced his administrative “fix” that attempted to allow those with canceled plans to keep their existing plans for another year, Senator Tom Harkin (D–IA) said he was still “concerned about people having policies which don’t do anything. They’re just junk policies.”[4]

    The only kind of junk insurance is the kind you can’t afford and are forced to buy.

    Now let’s go back to the US government’s insurance programs. The US govt flood insurance program is currently $25 billion in debt. If it was a private company, it would have gone bankrupt decades ago. The Federal Crop Insurance program has done better since it was partially privatized in 1980. The government is still paying about 60% of its $12 billion cost.

    The lesson: whatever the good or service, it is always cheaper and better through the market than through the government.

  • A Brief History of Energy Regulation, Part One

    “What can you do with thorium?  It’s sort of like garbage in a way… but it might save the world.”

    – Jon Kutsch[1]

    Introduction

    Inexpensive access to energy is a requisite for a functional modern economy.[2]  The stability of the global economy is tied to the stability of oil exports.[3]  The bulk of global oil reserves are held by politically volatile nations.[4]  This combination is a serious threat to national security which has gradually fostered a desire for the United States to gain independence from the global energy market.  However, the contemporary and historic legislative efforts toward independence do not fully address the threat and entail politically undesirable externalities.  While the United States has become the World’s third largest producer of fossil energy,  our costs in production are significantly higher than our competitors.[5]  The underlying economics of this position call into question the ability of the United States energy sector to supply domestic demand without imposing tariffs sure to have wider economic consequences.

    The scale of the problem is immense and, presuming legislators are driven toward action rather than inaction, several strategic questions arise.  Is energy independence in the United States really possible?  If so, can it be done without increasing tariffs, levying a carbon tax, or increasing carbon emissions in the process?  Are regulators and industry adequately equipped with the policies to implement such a change?  In the following sections, the author will attempt to answer each in turn.

    Our journey begins with a history of United States energy policy from which we develop a model of our present policy.  Understanding this model provides appropriate framing for the subsequent discussion.  The issues are then analyzed within the framework of the Obama era sociopolitical environment.  Particular focus is placed on how the United States sources primary energy and the impact that selection has on consumer use of energy carriers.  Ultimately, emplacing a uniform and efficient structure for energy independence is a collective action problem.  Presuming energy total energy independence is the desired outcome, a series of recommendations are presented for legislators and policymakers to consider.

    Policy Background

    The United States has a rather patchwork history when it comes to energy law and legislation.  At the turn of the 20th century, legislative control over energy production rested primarily in the hands of State and local governments.[6]  As the country transitioned from wood fuels to coal and oil, the market for energy expanded from local to national and eventually international markets.[7]  Driven by the developments in the energy market, energy law and regulation underwent a similar transition from local to federal control.[8]  Increasing concentration of market power amongst the largest energy and energy transport firms prompted the Hepburn Act and the Elkins Act designed to reign in their power.[9]  The market disruptions of World War I led to the passage of the Food and Fuel Control Act (FFCA).[10]  The FFCA created the first federal energy agency with broad power to regulate prices across energy markets, the Federal Fuel Administration (FFA).[11]

    The origin of the phrase "pulling a train."Though it was given broad regulatory powers, the FFA did not exercise its authority to any great extent and relied instead on soft power.  Instead of fulfilling its appointed goal of coordinating and establishing a national energy plan, the FFA’s existence was characterized by “a muted form of corporatism.”[12]  Specifically, those individuals charged with regulatory control often had direct financial interest in industry being regulated.[13]  Thus, federal regulation tended to respond only to particular market disturbances within a particular industry.[14]  This tendency to focus on a narrow market segment (e.g. coal or oil) rather than treating the United States demand for energy as an integrated whole has persisted to the present day.[15]  Regulating parallel to a given industrial segment has demonstrated advantages in lowering transaction costs, but it has a critical limitation in that it imports intra-industry conflict to the regulatory process.[16]  The process effectively only takes into account the segment cost to the public, which is concerned with the price of energy carriers or secondary energy and cannot effectively optimize for a given requirement of primary energy because to do so requires trading against particular segments.[17]  Conversion losses are the ultimate driver of public cost between primary energy and energy carriers.  Legislators and policy makers tend to confuse the relationship between primary and secondary energy when developing their objectives and policies.  Simply put, United States energy policy is currently unconcerned with developing an optimized system level energy infrastructure.

    New Deal Ice Palace for FDR. Subtle, understated, and not at all Hitleresque.

    The policies introduced through Roosevelt’s New Deal did little to alter this situation.  Further federal regulations were imposed on particular segments of the energy market through various new agencies and powers but there was no effort directed at engineering the market as a whole.[18]  In fact, due to labor’s political ties, much effort was directed at propping up the residential coal market where the conversion losses had become uncompetitive with energy carriers like electricity and heating oil.[19]  New Deal regulation aimed at stabilizing the coal industry was developed by the industry itself and largely ineffective.  The coal market was finally stabilized through technical means by its use as primary energy for commercial production of electricity.[20]  The siloed and industry-driven response of New Deal regulation left “little room for either energy planning or redistribution of wealth from producers to consumers.”[21]

    The first major attempt at overhauling this patchwork system was undertaken by the Carter Administration but was ultimately unsuccessful. Responding to the lingering effects of the 1970’s Oil Crisis, President Carter sought to centralize federal control over the energy markets, break the United States of dependence on Oil imports, and jumpstart an energy transition from oil to alternative sources.[22]  The Department of Energy (DOE) was established as a cabinet-level position in an effort to provide the right level of central authority.[23]  The National Energy Act of 1978 attempted to alter the balance of domestic fuel away from exports use by promoting use of indigenous energy reserves, conservation, and alternative energy through various tax credits, rate structure shifts, and subsidies.[24]  Coal, in particular, was regarded as a critical source of primary energy to break the hold of foreign oil.[25]  The final piece of legislation to emerge from the Carter administration was the Energy Security Act of 1980 which promoted the use of coal as a feedstock for synthetic fuels (energy carriers) while attempting to drive the overall market toward geothermal and solar primary energy with alcohol as a dominant energy carrier.[26]

    Unfortunately, these legislative efforts were destined to be half measures and failures. Authority had not been fully centralized in the DOE because “energy decisionmaking and policymaking responsibilities were scattered over several branches of the federal government, and even within the DOE itself authority was fragmented.”[27]  The analysis behind the National Energy Act and Energy Security Act together failed to take a systems view of conversion efficiency and sunk costs ultimately relying on the market to shift itself to other sources of primary energy.[28]

    With centralized control an ostensible failure, the reciprocal policy of the Reagan administration seems a natural response.   Reagan had campaigned on a promise to deregulate the energy markets and abolish the DOE.[29]  Price controls on crude oil which had existed in one form or another since the Nixon administration had grown increasingly complex and economically untenable under Carter.[30]  To some extent, the new administration was successful in dismantling the regulation supported under Carter.  January 28, 1981, signaled the beginning of this reversal with President Reagan’s signature of the executive order for Decontrol of Crude Oil and Refined Petroleum Products.[31]  Predictably the Carter era synthetic fuels programs failed as, without price controls, they were no longer cost competitive with foreign oil producers.[32]

    Arguably Reagan’s efforts were equally as unsuccessful.  For example, the contemporary theory of State and Federal energy regulation treats transmission elements as monopolies but generation elements and producers as a competitive market.[33]  The DOE is still a critical component of the President’s cabinet, and its authority is still fragmented demonstrating that “government regulation of energy is well embedded in the country’s political economy.”[34]  Little wonder that to date policymakers have been unable to coordinate an integrated national energy plan….

     

    To be continued.

    [1] Alex Pasternack, The Thorium Dream, Motherboard (Nov. 9, 2011), http://motherboard.vice.com/read/motherboard-tv-the-thorium-dream

    [2] Eden S. H. Yu and Been-Kwei Hwang, infra note 37.

    [3] Anthony H. Cordesman, American Strategy and US “Energy Independence,” Center for Strategic & International Studies (Oct. 21, 2013) http://csis.org/files/publication/131021_AmericanStrat_EnergyIndependence.pdf.

    [4] John Browne, The Energy Crisis and Climate Change, Global Economic Symposium, http://www.global-economic-symposium.org/knowledgebase/the-global-environment/the-energy-crisis-and-climate-change/proposals/the-energy-crisis-and-climate-change (last accessed Feb. 23, 2015).

    [5] Steven Mufson, How Low Can Oil Prices Go? Welcome to the Oil Market’s Old Normal, The Washington Post (Jan. 12, 2015), http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/12/how-low-can-oil-prices-go-welcome-to-the-oil-markets-old-normal/; Steve LeVine, The Real Reason Saudi Arabia Can Afford a Price War Against US Shale, Quartz (Dec. 12, 2014), http://qz.com/311179/the-real-reason-why-saudi-arabia-can-afford-a-price-war-against-us-shale/.

    [6] Joseph P. Tomain, The Dominant Model of United States Energy Policy, 61 U. Colo. L. Rev. 355, 357 (1990).

    [7] Id.

    [8] Id. at 358.

    [9] Id. at 359.

    [10] Food and Fuel Control Act, Wikipedia (May 9, 2014), http://en.wikipedia.org/wiki/Food_and_Fuel_Control_Act.

    [11] Tomain, supra note 6, at 360.

    [12] Id.

    [13] Id.

    [14] Id. at 361.

    [15] Id.

    [16] Id. at 361-62.  Tomain offers the conflict between “major and independent firms, producers and refiners, and producing and consuming states” as an example.

    [17] Primary Energy, Wikipedia (May 5, 2015), http://en.wikipedia.org/wiki/Primary_energy.

    [18] Tomain, supra note 6, at 363.

    [19] Id. at 364. Great quantities of coal had been used for both commercial and residential heating and cooking in boilers, stoves, and furnaces.  Residential conversion of primary energy to heat simply could not match the efficiency and economies of scale offered by a switch to commercial production of inexpensive energy carriers.

    [20] Id. at 364-65.

    [21] Id. at 365.

    [22] Id. at 370.  Global economies

    [23] The Department of Energy Organization Act of 1977, 42 U.S.C. § 7101 et seq (2015).

    [24] Id.

    [25] Not only does coal feature prominently in the statement of purpose for the Powerplant and Industrial Fuel Use Act of 1978, a legislative component of the National Energy Act, the Fuel Use Act actually went so far as to generally prohibit construction or operation of “a base load powerplant without the capability to use coal or [capability to be modified to use coal].”  Powerplant and Industrial Fuel Use Act, 42 U.S.C. § 8311(a)-(b) (2015).

    [26] Tomain, supra note 6, at 371.

    [27] Id. at 370.

    [28] Id. at 371.

    [29] Sheldon L. Richman, The Sad Legacy of Ronald Reagan, Mises Institute (Oct. 1, 1988), https://mises.org/library/sad-legacy-ronald-reagan-0.

    [30] The inefficient Federal central planning of both prices and allocation of petroleum resources effectively magnified the objectively small supply shortage caused by OPEC and the Iranian revolution into the Gas Crisis of the 1970’s. Ben Lieberman, A Bad Response to Post-Katrina Gas Prices, The Heritage Foundation (Sept. 1, 2005), http://www.heritage.org/research/reports/2005/09/a-bad-response-to-post-katrina-gas-prices.

    [31] Exec. Order No. 12,287, 46 Fed. Reg. 9909 (Jan. 28, 1981).

    [32] Tomain, supra note 6, at 372.

    [33] The Regulatory Assistance Project, Electricity Regulation in the US: A Guide (2011)

    [34] Tomain, supra note 6, at 372.