Archive for August, 2008

Unexpected Economic Growth

Kurt Brouwer August 28th, 2008

The Commerce Department revised its earlier report on economic growth in the second quarter, but the surprise — in this case — was on the upside.

U.S Economy: GDP Exceeds Initial Estimates on Exports (Bloomberg, August 28, 2020, Courtney Schlisserman and Timothy R. Homan)

…Gross domestic product increased at a 3.3 percent annual pace, compared with the initial estimate of 1.9 percent, the Commerce Department said today in Washington. Trade contributed the most to U.S. growth in almost three decades.

…The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

…Consumer spending, which accounts for more than two-thirds of the economy, grew at a revised 1.7 percent annual rate in the second quarter, compared with the 1.5 percent estimated last month and 0.9 percent for the first three months of the year.

The longest expansion in consumer spending on record will probably end this year, according to economists surveyed by Bloomberg earlier this month. Retail sales fell in July for the first time in five months, led by a slump in auto purchases, according to Commerce data.

…A smaller decline in stockpiles contributed to the larger- than-forecast gain in growth. Inventories fell at a $49.4 billion annual rate from April through June, down from a $62.2 billion first estimate. Still, the draw-down subtracted 1.44 percentage points from growth.

This is interesting.  Obviously, growth at an annualized rate of 3.3% poses a problem for those who say we are already in a recession.  Perhaps they believe this will get revised downward later in the year.  Or, maybe they believe the recession began and ended in the fourth quarter of 2007.  Or, whatever…

There are still plenty of economic problems ahead of us and we could see sluggish or even negative GDP growth later in the year.  Nonetheless, this is a devastating report for those who would have us believe we are in the worst economic crisis since the Great Depression.

For more on this, see these posts: How to Squelch an Economic Recovery and California Taxes Going Up and The Path to Prosperity in America.

Gridlock Looms for Wind Power

Kurt Brouwer August 28th, 2008

This photo from the New York Times shows kids splashing around in their backyard pool overlooking the Maple Ridge Wind farm near Lowville, N.Y.  It must be pretty cool to have such an obvious connection to the source of the power they use every day.

Source: New York Times / Mike Groll / AP

Wind Energy Bumps Into Power Grid’s Limits (New York Times, August 26, 2020, Mathew L. Wald)

When the builders of the Maple Ridge Wind farm spent $320 million to put nearly 200 wind turbines in upstate New York, the idea was to get paid for producing electricity. But at times, regional electric lines have been so congested that Maple Ridge has been forced to shut down even with a brisk wind blowing.

That is a symptom of a broad national problem. Expansive dreams about renewable energy, like Al Gore’s hope of replacing all fossil fuels in a decade, are bumping up against the reality of a power grid that cannot handle the new demands.

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

These are the hard, technical limitations on energy and on switching to alternatives.  Our energy infrastructure has been built up over decades and it will be expensive and time-consuming to make significant changes.  I think we need to do so, but we should avoid the assumption that this will be easy or that it can be done without other environmental tradeoffs.

The NY Times continues:

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

“We need an interstate transmission superhighway system,” said Suedeen G. Kelly, a member of the Federal Energy Regulatory Commission.

…The grid’s limitations are putting a damper on such projects already. Gabriel Alonso, chief development officer of Horizon Wind Energy, the company that operates Maple Ridge, said that in parts of Wyoming, a turbine could make 50 percent more electricity than the identical model built in New York or Texas.

…Transmission lines carrying power away from the Maple Ridge farm, near Lowville, N.Y., have sometimes become so congested that the company’s only choice is to shut down - or pay fees for the privilege of continuing to pump power into the lines.

Politicians in Washington have long known about the grid’s limitations but have made scant headway in solving them. They are reluctant to trample the prerogatives of state governments, which have traditionally exercised authority over the grid and have little incentive to push improvements that would benefit neighboring states.

I think we know what this last paragraph really implies, which is that our political leaders really don’t have the desire or the motivation or even the statemanship to move a project like this along.  Make no mistake, we’ve done much bigger and more difficult things — such as building the Interstate Highway System — so we can do this too.  Have you ever driven on our interstate highway system? You know, I-80, I-75 I-95, I-40, I-75 or H1 (Hawaii).  Here is a map that illustrates how extensive it is:


Source: Wikipedia

Well, this highway system was made possible by Federal spending beginning in 1956 under President Eisenhower and continuing on for decades. The actual cost was about $135 billion, give or take a few billion. But, the cost in current dollars would be several hundred billion dollars. Actually, it would be much more because building this today would involve buying out all the property owners along the way at today’s real estate prices.  Now, we may need a similar system for interstate electrical transmission.  Fortunately, the current estimate for the cost of this system is only about $60 billion or so, which is just pocket change compared to the cost of building our highway system today.

The Times article continues:

In Texas, T. Boone Pickens, the oilman building the world’s largest wind farm, plans to tackle the grid problem by using a right of way he is developing for water pipelines for a 250-mile transmission line from the Panhandle to the Dallas market. He has testified in Congress that Texas policy is especially favorable for such a project and that other wind developers cannot be expected to match his efforts.

“If you want to do it on a national scale, where the transmission line distances will be much longer, and utility regulations are different, Congress must act,” he said on Capitol Hill.

Anyone who lives in Northern California has seen windmills dotting the hills east of San Francisco. And, anyone who lives in or has traveled in the western U.S. knows that the wind in that region is steady and strong. So, producing energy from the wind is feasible.  And, Pickens is not just blowing hot air as this piece from Scandinavian Oil & Gas magazine indicates:

Mesa Power LLP, a company created by legendary energy executive T. Boone Pickens, has placed an order with General Electric to purchase 667 wind turbines capable of generating 1,000 megawatts of electricity, enough to power more than 300,000 average U.S. homes.

The agreement represents the first phase of the four-phase Pampa Wind Project that will become the world’s largest wind energy project, with more than 4,000 megawatts of electricity, enough for 1.3 million homes. When all phases of the project are completed as projected in 2014, the wind farm will be five times as big as the nation’s current largest wind power project, now producing 736 megawatts.

Pickens said he expects that first phase of the project will cost about $2 billion, and that electricity from the project will be on-line by early 2011. When complete, the Pampa Wind Project will cover some 400,000 acres in the Texas Panhandle.

For more on Pickens’ project see A New Strategy for Energy Independence — T. Boone Pickens. I also saw an ad featuring Pickens talking about energy.  It was good.

The New York Times article continues:

Enthusiasm for wind energy is running at fever pitch these days, with bold plans on the drawing boards, like Mayor Michael Bloomberg’s notion of dotting New York City with turbines. Companies are even reviving ideas of storing wind-generated energy using compressed air or spinning flywheels.

Yet experts say that without a solution to the grid problem, effective use of wind power on a wide scale is likely to remain a dream.

…Unlike answers to many of the nation’s energy problems, improvements to the grid would require no new technology. An Energy Department plan to source 20 percent of the nation’s electricity from wind calls for a high-voltage backbone spanning the country that would be similar to 2,100 miles of lines already operated by a company called American Electric Power.

…A handful of states like California that have set aggressive goals for renewable energy are being forced to deal with the issue, since the goals cannot be met without additional power lines…

Enthusiasm for windpower is running high now, but there is a huge gap between theory and practice.  Many politicans are announcing grandiose plans, but as the last line above points out, the grid is the ultimate bottleneck for getting serious wattage from the wind.  Fortunately, there are no major technical problems that would prevent us from building a better grid.  It’s simply a matter of finding a way to get it done.

As I wrote in the post about Picken’s project, if T. Boone was running things, I would not be be worried about leadership. But, even though he is pushing this initiative, we will also need action on the part of our political leadership in the states and in Washington D.C.  If we do not upgrade the electrical grid, then all this talk about alternative energy sources is just blowing in the wind.

Growth in Demand for American Goods

Kurt Brouwer August 27th, 2008

Though it’s sputtering a bit, our economy is still showing signs of life as this Bloomberg piece [emphasis added] indicates:

U.S. Economy: Durable Goods Orders Unexpectedly Rise (Bloomberg, August 27, 2020, Timothy R. Homan)

Orders for U.S. durable goods unexpectedly increased in July, indicating that growing demand from abroad is still helping companies weather a slump in domestic spending.

The 1.3 percent gain in bookings of goods meant to last several years matched the previous month’s rise, the Commerce Department said today in Washington. The gains may have been aided by foreign demand for automobiles, aircraft and telecommunications gear as exports climbed to a record.

The boost from exports, which kept the U.S. expanding last quarter, may wane because the European and Japanese economies are now contracting, while the dollar is rallying. Federal Reserve officials anticipate trade gains will fade, minutes of their Aug. 5 meeting showed yesterday.

…Economists projected orders would be unchanged after a previously reported 0.8 percent increase in June, according to the median of 76 forecasts in a Bloomberg News survey.

Excluding transportation equipment, orders rose 0.7 percent after a 2.4 percent increase. Those bookings were projected to fall 0.7 percent, after an originally reported 2 percent gain in June.

Today’s report indicates stronger growth in the third quarter than economists previously anticipated. Morgan Stanley analysts now project a 0.8 percent annualized gain in gross domestic product in the period, up from 0.4 percent previously.

Tomorrow, the Commerce Department is also forecast to raise its estimate of second-quarter GDP growth to 2.7 percent, from 1.9 percent before, due to stronger exports…

I can’t wait to see the Commerce Department report on Q2 economic growth.

Update: More good news came through today as the Associated Press reported that consumer confidence had the biggest monthly increase in a couple of years [emphasis added]:

Americans felt better about the economy in August, as a barometer of sentiment posted the biggest boost in two years amid falling gas prices. Two reports suggested that a bottom could be nearing for the housing market, but economists caution it’s too early to proclaim that the worst is over.

The Conference Board, a private research group, said Tuesday that its consumer confidence index rose to 56.9, up from a revised 51.9 in July. That’s the largest gain since August 2006 and is ahead of the 53 expected by economists surveyed by Thomson/IFR…

How to Squelch an Economic Recovery

Kurt Brouwer August 27th, 2008

If history is any guide, screwing up the economy has been a bipartisan effort — Republicans and Democrats have done things that do not make economic sense.  Have our political leaders learned anything from the mistakes of the past?  This Washington Post piece points out some mistakes to avoid [emphasis added]:

Five Ways to Wreck a Recovery (Washington Post, August 18, 2020, Amity Schlaes)

Perverse monetary policy was the greatest cause of the Great Depression. But five non-monetary missteps were important in making the Depression great, and the same missteps damaged the global economy as well. While many are thinking about the Depression, few seem concerned about replicating these Foolish Five today:

  • Giving in to protectionism. In Herbert Hoover’s time, Sen. Reed Smoot and Rep. W.C. Hawley proposed a tariff that was to raise effective duties by as much as half. More than a thousand economists signed an open letter warning that the duties would “raise the cost of living and injure the great majority of our citizens.”

But Hoover’s Republican Party didn’t much care. In its 1928 platform, the GOP had pledged to “reaffirm our belief in the protective tariff.” Ambivalent, Hoover signed the bill. An irate Canada and many other nations retaliated. At a time when the United States was begging for foreign markets, it lost them. The selfish signal discouraged an already unstable Europe.

Today, international trade claims a sizable share of our economy. Bilateral free-trade agreements with Colombia or Panama are good insurance — cheap steps that might prevent an expensive loss, that of the Western Hemisphere to Venezuela’s Hugo Chávez.

Yet again, one party — the Democrats, this time — is cavalier. House Speaker Nancy Pelosi is blocking passage of these bilateral agreements. And another ambivalent politician — Sen. Barack Obama — has sent mixed messages to Canada about just how much he wants to roll back the North American Free Trade Agreement…

Free trade has been one of the chief engines of global prosperity.  It would be a huge mistake to adopt protectionism as the Smoot-Hawley legislation did prior to the Great Depression.   There is plenty of disguised protectionism going around today in the form of misleading claims about America’s manufacturing output.  In fact, though employment in manufacturing is dropping due to improvements in productivity, manufacturing output has never been higher.

There is also plenty of obstructionism about trade agreements as well.  The Colombia free trade pact is a perfect example.  Colombia’s goods can now come here largely without restriction.  But, there is a bill that would give U.S. exporters improved access to Colombian markets.  That seems unambiguously good for us, yet Congress is holding it up due to opposition primarily from U.S. labor unions.  Big mistake.

The Washington Post continues with a second point on how we could squelch the recovery:

  • Increasing taxes in a downturn. Hoover more than doubled income tax rates, taking the top marginal rate to 63 percent from 25 percent. FDR hiked the top rate to 90 percent. Perhaps worse, Roosevelt’s Treasury crafted taxes to punish business, including an undistributed profits tax and an excess profits tax, that ultimately sucked cash from a capital-starved economy.

Today, Democrats are planning tax increases that make Bill Clinton’s hike look mild. The proposals start with lifting the cap on Social Security payroll taxes — an effective increase in the top marginal tax rate of 6.2 percent, or for some 12.4 percent, all by itself. Add in the promised repeal of the Bush tax cuts and you have an additional 4.6 percent increase. Effective top rates approach 50 percent. There are also proposed increases for dividends and capital gains. Taken together, these will make the U.S. economy sluggish and more like that of Europe…

As we pointed out in a recent post (California Taxes Going Up), there is a strong movement to raise taxes in California.  Tax revenues have been going up for years, but politicians have simply spent far more than we raised.  Now, rather than slowing the growth of spending, they want to raise taxes.  Higher taxes often backfire though because taxpayers change their behavior and the expected revenues gains fall short.  For more on what the proposed tax increases would mean, see Largest Tax Increase Since World War II.

We do not need to repeat the mistakes of the Great Depression by raising taxes or adopting protectionist trade policies.  That will only slow down the recovery.  And, as we pointed out in a recent post, there are clearcut, proven ways to encourage prosperity as pointed out in this article from The American Magazine:

The Path to Prosperity (The American Magazine, August 7, 2020, Amela Karabegovic and Alan W. Dowd)

A new report confirms that low taxes, limited government, and flexible labor markets help to spur economic growth.

There are times when common sense is not so common. We may be in one of those times, which is why a new report on the power of economic freedom is so important.

Common sense tells us that low taxes, limited government, and flexible labor markets will help to spur economic growth. The Fraser Institute’s 2008 Economic Freedom of North America (EFNA) report offers a striking, yet unsurprising, picture of the benefits that flow from such policies.

In 2005, the most recent year for which data are available, Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas-states with consistently strong records of promoting economic freedom-had an average per capita GDP that was more than $4,300 above the U.S. average. Their total growth from 1981 to 2005 was nearly 20 percentage points higher than the U.S. average.

In the latest EFNA index, Delaware is the top-ranked state or province in all of North America while Texas is tied for second with the Canadian province of Alberta. And for good reason: Delaware has the smallest size of government at the subnational level and ranks first among U.S. states on key taxation measures; Texas ranks first in labor-market freedom at the all-government level and has a state top marginal income tax rate of zero. Delaware and Texas also rank high in the categories of government transfers and subsidies as a percentage of GDP at the all-government level.

By comparison, West Virginia, Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island-states with low levels of economic freedom-had an average per capita GDP that was more than $4,300 below the U.S. average. Their total growth from 1981 to 2005 was 10 percentage points below the U.S. average.

Again, this is predictable: all of these states rank in the bottom half of the nation on taxation at the all-government level, labor-market freedom at the state/local level, and size of government at the all-government level.

The benefits of policies that promote economic freedom extend far beyond good scores and bragging rights. For instance, a one-point increase in economic freedom results in an increase of $32.13 in venture capital investment per capita; an increase in the number of patents by 8.2 per 100,000 population; and an increase of 4.2 percent in the growth of sole proprietorships.

The encouraging news is that most states have maintained a high degree of economic freedom and embraced polices that nurture economic freedom. In fact, the 2008 EFNA report found that 20 states have improved their level of economic freedom since the last report, with Louisiana experiencing the greatest increase…

This is a case where putting in a blogging acronym, RTWT [that is, read the whole thing] is not a cliche.  This article is important and well worth reading.  The principles outlined in the article work at the national level, the state level and the local level.

If you improve and enhance economic freedom, more prosperity ensues.  If you restrict economic freedom by increasing taxes or laying on more bureaucratic red tape, you inevitably reduce prosperity.  Our economy is resilient, yet it should also be clear that people gain prosperity faster in areas with more economic freedom.

No matter what happens with this presidential election, it should be clear that we want to encourage — rather than squelch — economic growth.  There is certainly room for disagreement on how to achieve growth, but let’s not lose sight of the goal — a strong, prosperous economy.

The Falling Price of Eggs? — Chart of the Day

Kurt Brouwer August 26th, 2008

Source: Carpe Diem

We all know that food costs have gone up lately, but this chart should put the recent upturn in perspective.  Food prices have fallen steadily — with occasional brief upturns — for well over 100 years.

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