Energy Fact of the Week: How Much Green for ‘Green Jobs’?

Pathetic simply pathetic. Yet another example of emotion and hope driving policy rather than fact and logic. In the face of facts that point out that "Green Jobs" are a total bust the Obama administration continues

to pursue a policy of wasting tax payer funds and driving long-term inflation by printing and spending money we do not have. These policies have to end if the U.S. and the western world is to experience a true economic recovery.

Energy Fact of the Week: How Much Green for ‘Green Jobs’?

By Steven F. Hayward

September 22, 2011, 9:49 am

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Even without the bankruptcy of Solyndra, the Washington Post noted that the Department of Energy’s entire $38 billion loan guarantee portfolio has generated a total of just 3,545 jobs—rather fewer than the 65,000 jobs the Obama administration projected the program would generate. That’s over $6 million per job. That’s a lot of ’70s-era Steve Austins running around powering the country. Even if the program worked as advertised, Dan Mitchell points out, it would come to about $600,000 per job generated, compared to an average capital cost of about $160,000 per job across the economy as a whole.

This might still not be unreasonable if these green energy jobs generated a lot of energy. In fact, overall electricity-sector investment generates fewer jobs than the average per dollar invested in the general economy. But it doesn’t appear that green energy programs produce jobs or energy in much quantity. A study by Hillard Huntington for Stanford University’s Energy Modeling Forum in 2009 looked at jobs created in different sectors of electricity production, and concluded that:

the advantages of increased jobs from renewable energy are vastly overstated at costs prevailing today … More importantly, strategies that subsidize these investments will be shifting the country’s scarce resources from sectors that would create more jobs (as well as economic value). This conclusion applies even for an economy in a deep recession and where policy wants to stimulate employment. Investments in roads, ground transportation and health care are likely to stimulate employment considerably more than green electric power generation. Policymakers and government agencies should look askance at the claimed additional job benefits from green energy.

Bottom line: “It will require a dramatic break-through in costs if renewable energy is to become a job generator.”

The Huntington study includes a very useful table that shows the final limitation of the green jobs mania. Although $1 million spent on “green” sources such as wind, solar, and biomass will generate slightly more jobs than $1 million spent on coal or natural-gas-fired electricity, the $1 million spent for coal or gas generates far more energy, making coal and gas a much more efficient investment. Figure 1 displays estimates of the number of jobs generated from $1 million in each electricity source, showing that by some estimates renewable sources produce more jobs per $1 million (the difference reflects the range of costs for renewables, which fluctuate wildly). Figure 2 shows the amount of electricity output from $1 million invested in each form. While wind and biomass stack up well with natural gas, coal is still the cheapest, and solar performs very poorly. (Caveat: these figures are based on 2006 prices. The fall in natural gas prices since that time will probably yield a different result today, placing it closer to coal.)

Energy Fact of the Week: How Much Green for ‘Green Jobs’?

Warren Buffett’s Tax Story Is Bogus

Great analysis by the Cato Institute on what are the actual tax rates payed by each income category. As is usually the case the facts do not hold any passing resemblance to the political talking points and assumed truths of the left. What I find most discouraging about this debate of taxes is that this country has lost the will to face facts and make informed decisions. We are rapidly becoming a nation where emotion plays a larger role in policy than fact. Sad and a true sign of cultural decline.

Warren Buffett’s Tax Story Is Bogus

Warren Buffett’s Tax Story Is Bogus

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For years, Warren Buffett has been claiming that his secretary pays a higher tax rate than he does. Recently, President Obama has taken that claim and run with it. I don’t know Mr. Buffett’s particular tax situation, but I do know that his claim as a general matter is bogus.

Let’s look at some numbers. The first chart shows IRS data for income tax rates by income group for 2009. These are average effective tax rates, calculated as income taxes paid divided by adjusted gross income (AGI). The chart shows that taxpayers with incomes above $500,000 had tax rates averaging about 25 percent. Middle-income taxpayers had tax rates of half of that or less. A few years ago, Buffett claimed that his secretary earned $60,000 and paid a 30 percent tax rate. But looking just at income taxes, that seems way off. (Note that this data doesn’t include the “refundable” portion of tax credits, which wipes out taxes for many people at the bottom end).

Perhaps Buffett was referring to the fact that his secretary pays a heavy load of payroll taxes in addition to income taxes. But when you look at data which includes all federal taxes, the system is still highly graduated with much higher rates at the top end.

Chart 2 shows CBO data for 2007 on average effective tax rates, including essentially all federal taxes—individual income, corporate income, payroll, and excise. Buffett’s secretary would fit into the fourth group in the chart, where the average tax rate was 17.4 percent. So if she is really paying 30 percent, then Buffett needs to show her some of his tax-reduction tricks. Note in the chart that Buffett’s peers in the top 1 percent paid an average rate of 29.5 percent, which is double the rate paid by middle-income taxpayers.

In 2007, Buffett said that he paid a 17.7 percent tax rate. Alan Reynolds notes that Buffett earns large amounts of capital gains, which are taxed at a maximum federal rate of 15 percent. People in the top income groups do report a lot of capital gains, which reduces their overall effective tax rate. However, capital gains are included in chart 1, above, and you can see that the top income groups still pay much higher tax rates than others on average. One reason is that a large amount of income at the top is small business income, which is hit by ordinary income tax rates of up to 35 percent.

You have to go to the extreme top end of the income spectrum in order for capital gains realizations to really push down overall effective tax rates. The IRS publishes data for the 400 highest-income taxpayers. For these taxpayers, the average effective income tax rate in 2008 was 18.1 percent.

Since the beginning of the income tax, we have nearly always had special treatment of capital gains for some very good reasons, as I discuss here. I point out that virtually all high-income nations recognize that capital gains are different and that special rules are needed. A number of OECD nations have long-term capital gains tax rates of zero, including New Zealand and the Netherlands.

Another important aspect to this debate regards the link between capital gains and dynamism in the economy and dynamism in tax payments. The political left makes it seem as if there were a permanent aristocracy at the top end of the income spectrum in America. However, IRS data show the exact opposite—the top 400 are a highly dynamic group. Notice first in IRS Table 1 that 57 percent of AGI for these taxpayers is capital gains. That is a key reason why the people in this group are constantly changing—large capital gains realizations are occasional events that rocket people to the top of the AGI heap. One example is when an entrepreneur sells her successful and longstanding business and retires.

The last table in the IRS document reveals the dynamism. The IRS traced the identities of all taxpayers who showed up in the top 400 anytime between 1992 and 2008. The IRS found that there were a huge 3,672 different taxpayers who appeared during that timeframe. Of these 3,672, fully 73 percent only appeared once in the top 400! And 85 percent appeared only once or twice.

So at the top end of our capitalist system is a continual generation of new wealth and new wealthy people, and that dynamism reflects the still-energetic and free-wheeling nature of our economy.

China's economic miracle - Coming off the rails?

This article perfectly highlights the statement I have been making for some time now; that the laws of economics will be adhered to.  It is just a matter of time before the correction comes to China.  In my opinion a better measure of China's GDP would be based upon consumption totals.  

China's economic miracle may be about to come off the rails

Largely invisible to a radar screen dominated by concerns over the US and eurozone debt crises, the Chinese economic miracle, one of the few apparent bright spots that remains in a world beset by trouble, has in recent weeks also been showing unnerving signs of strain. Indeed, it may even be about to come off the rails entirely – quite literally.

Last weekend, one of China's new bullet trains rammed into the back of another, killing 39 passengers and injuring nearly 200 more.  Photo: AP

By Jeremy Warner

9:01PM BST 28 Jul 2011

214 Comments

Last weekend, one of China's new bullet trains, a showcase of the country's growing economic prowess, rammed into the back of another, killing 39 passengers and injuring nearly 200 more.

The accident has raised questions, not just about the safety of China's vaunting ambition in high-speed rail, but about the sustainability of the country's break-neck pace of economic development in the round.

As Shen Minggao, chief China economist at Citi, has observed: "High-speed rail in some sense represents China's fast growth. When you care so much about speed, you sometimes pay less attention to the quality of the growth."

China's political leadership has long dreamt of an entirely new rail network, from the prosperous eastern seaboard to remotest inland China, and over the past four years they've set about building it with a determination which no other country would seem remotely capable of.

But in so doing, they appear to have put speed before safety, and economic ambition before commercial viability. It is not just the quality of the bastardised foreign designs, copied and botched together to feed China's insatiable appetite for growth, which is now being questioned.

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The funding of this grand ambition is beginning to look increasingly shaky too. Financially, the project has already effectively broken the Ministry of Railways. At the last count, the ministry was nearly 2 trillion yuan (£200bn) in debt and clocking up losses at the rate of about £400m a quarter. On any Western definition, the ministry is completely bust. To meet the plan, another 2.8 trillion yuan has to be found in the next three and half years. Where's the money going to come from?

In recent debt issues, the railway has had to pay way above the going rate of interest, despite the fact that its bonds are implicitly and in some cases explicitly underwritten by the state. Of equal concern is that the newly opened links have failed to achieve anywhere near expected traffic levels. In the West, they would be dubbed a massive white elephant.

Concern over the new network's safety has created an even bigger hill to climb in terms of driving the necessary demand. Many of the trains are as empty as the ghost towns that sprout randomly upon China's vast open plains. For many Chinese, both are too expensive to contemplate.

The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners. Last weekend's rail crash can be seen as a harbinger of wider economic catastrophe to come.

As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall.

Nowhere is the unsustainability of Chinese growth more apparent than in its spectacular real estate bubble. Prices have been growing like topsy, despite a growing overhang of vacant new development. Conscious of the dangers, the Chinese authorities have taken a number of steps to cool the overheated housing market. Early evidence is that it seems to be working. Prices have risen by "only" 7pc over the last year and transaction volumes are lower.

Unfortunately, it is not as simple as that. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.

According to the most recent International Monetary Fund staff report on China, the property market directly makes up some 12pc of the country's GDP. Indirectly, it is a lot more, as the property market is highly connected to the output of basic industries such as steel and cement, as well as downstream industries such domestic appliances and other consumer durables.

The banking sector is also highly exposed, having financed much of the recent development. Direct lending to real estate (developers and residential mortgages), accounts for nearly 20pc of all bank lending in China.

For a long time now, the Chinese leadership has been conscious of the economy's dangerously high reliance on investment and net trade to fuel growth. Economic and financial calamities in the West have convinced policy-makers of the need to move more swiftly than they would have liked to address these imbalances.

Yet despite the rhetoric, the country has failed appreciably to wean itself off the dependence. Domestic consumption still accounts for a woefully small proportion of the economy. In the round, public policy still overwhelmingly prioritises investment and exports over higher disposable incomes.

The longer China takes to make the switch, the more likely it is that China's present phase of investment-led growth will end badly. In high-speed rail along with much else, China is trying to run before she has properly learned to walk. Rampant corruption, cronyism and poor governance only add to concern over the sustainability of the present economic and social model.

So when China lectures the US on its absence of economic leadership and the suicidal tendencies the world's richest nation is displaying in putting political infighting before the interests of financial stability, it perhaps ought to look to the mote in its own eye. The imbalances China has deliberately created in its pursuit of economic advancement are a large part of the overall mischief that has taken place in the world economy this past decade.

By supporting its trade surplus through massive purchases of US Treasuries, China, one of the poorest countries in the world, has in effect been lending the US, the richest, the money with which to buy its goods. How stupid is that? Debasement of the vast dollar assets China has accumulated in the process is the least it can expect by way of payback for a flawed economic model.

Demographics and destiny, US housing edition

Great article.  The basic conclusion is that rental properties are and will continue to be great investment opportunities into the foreseeable future.  

Demographics and destiny, US housing edition

Posted by Cardiff Garcia on Jul 26 22:07.

This morning’s miserable new home sales report gives us an excuse to write about a theme we’ve been distantly following for some time: the possibility that the housing downturn has overshot the pre-crisis boom and will eventually provide an economic boost when it corrects.

Whether this turns out to be the case depends on whether demographics can trump the recent adjustments in household behaviour, as a recent paper from RBC explains:

Some investors have expected that population growth would drive new home sales back to prior levels. We believe that this view intuitively makes sense and agree that demographic trends will ultimately drive demand in the long-term.

In our opinion, however, other factors including vacancy levels, declining homeownership rates and an increase in household size are temporarily exerting a disproportionate influence on housing demand. …

Historical Trends in New Home Sales

Median new home sales have dropped precipitously since the recession began in 2007. The United States experienced a median of ~675,000 new home sales from 1980 to 2006. Since 2006, however, median new home sales have been 430,000 annually.

And here’s a graph from Calculated Risk updated to include this morning’s figures (click to expand):

The bullish case — the argument that eventually we’ll see a burst of construction activity after a reversion to previous levels of housing demand — is partly based on straightforward population growth. Eventually more households will have to form and we’ll start to see prospective buyers of new homes emerge.

Here’s more detail from RBC…

The United States population has increased by ~3 million people on average since 1990. It is currently projected by the US Census to increase from ~310 million people today to ~340 million by 2020. This assumes a growth rate of ~1% or ~3 million people annually.

… and in graphical form:

Of course, what also matters here is whether or not there’s a lot of excess capacity already in the market. This is difficult to say, but if you look at the pace of homes built in the last few years relative to the population growth, we can at least start to get a sense of whether or not there’s currently a housing shortage in the making.

Helpfully, Dan Indiviglio did exactly this last month:

As you can see, the rate of population change per homes created declined over the last ten years from the previous decade. It’s higher than the decade before that, but not by much — suggesting that, as Indiviglio writes, “if there’s still some excess capacity in the market, there doesn’t appear to be much.”

Now back to RBC and the factors likely acting as countervailing forces to demographic trends: an increase in household size, declining homeownership rates, and vacancy levels.

To take each of these in order…

First, after decades of a declining population per household (one impetus for new home starts and sales during that time), we’ve seen an uptick in the last few years:

The trend driving this is the number of jobless college graduates and young adults moving in with their folks. RBC: “The Harvard Center for Joint Studies on Housing estimates that the number of young adults (age 20-29) living at home rose by 1.6 million from 2005 to 2010.” Newly jobless adults of all ages moving in with relatives and friends are also likely contributors.

Second, the national homeownership rate has dropped from a peak of about 69 per cent in 2004 to 66.4 per cent now. Even more worrying is that the biggest decline has come in the under-35 category, which “contains the largest proportion of potential first-time homebuyers”, according to RBC:

Third, high vacancy rates matter because prospective homebuyers could opt to buy cheaper existing homes, including those foreclosed on, rather than new homes. So higher vacancy rates now would imply a longer time before demand for newly built homes returns.

The estimates on vacancy rates tend to vary considerably by economist, making this the haziest of the three factors listed above.

Karl Smith, the most comprehensive and articulate blogger making the case that a housing shortage exists, is sanguine (see also here):

The census bureau tracks that number. However, its month-by-month estimate was well out of whack with the preliminary data coming in from the formal 10-year Census.  Still a credible guess is that there might be in the range of 1.5 million “excess” vacant homes. That number includes empty rentals as well as homes for sale. Even in the best of times some homes are vacant, but there are roughly 1.5 million more than there were in 1990, adjusted for population changes.

That 1.5 million number is less than our estimate of the number of missing households. Somewhere around 500,000 new homes are scheduled to be completed in 2011. However, typically around 200,000 to 300,000 homes are demolished each year as they become unlivable.

This suggests our total inventory of available homes is less than our total number of “shadow households” and is not about to catch up anytime soon.

RBC, for its part, pegs the number a little higher…

… and is less optimistic:

Based on anecdotal evidence from the National Association of Realtors (NAR), we believe that remarketed foreclosures are being priced on average at a 20% discount to new homes. The large size of this discount suggests to us that many consumers will elect to purchase foreclosed properties as opposed to investing in a new home even if homeownership rates remain constant. We expect that the level of vacancies will remain stable at ~2 million homes which is meaningfully above the long-term average.

There’s a chance that vacancy rates could be high very high now and remain high if homebuyers were to simply express their choice for new rather than existing homes. But this is certainly not what’s happened lately, as the percentage of total sales that new home sales has accounted for continues to decline:

On these points, it would seem that RBC economists are right to be pessimistic — to think that too many current trends will continue to overwhelm natural demographic pressures for more housing construction. And if you really want to pile on, check outScott Sumner’s recent post on why previous household formation trends won’t return anytime soon.

Sumner notes that along with young people moving in with their parents, another problem is something that we previously worried about in this space: less immigration, caused both by recent crackdowns and by less incentive to move here because of the stalled economic recovery.

But as ever, the whole story is actually a bit more complicated.

As both Smith and Indiviglio have noted, the pre-2006 boom in housing took place almost entirely in single-family homes, while new construction of multi-family residential buildings stayed flat (chart from Indiviglio):

Multi-family structures, of course, are those that typically rent out their units. We’ve seen a significant climb in rents inflation in the past year or so, which makes perfect sense: increased demand for rental units coincides with the lower homeownership rate. Indiviglio adds that once young people finally do decide to move out, it will likely be to rentals, given their limited credit histories and tighter standards for buying homes. The same would apply to the jobless who have stayed with friends and, especially, to those previously foreclosed on — given their damaged credit histories. So there’s a good chance this pattern will remain.

All this has obvious implications for the possibility of new construction activity. Given that there never was a boom in multi-family buildings, this is precisely where the shortage would be (Smith’s case all along) — and if demand for rentals continues, at some point you can expect to see a supply-side reaction, ie more construction. In addition, existing single-family homes might be turned into rentals, which would (helpfully) reduce the amount of shadow inventory. All of this would also be entirely consistent with a more fundamental shift among Americans in the perception of the value of owning homes versus renting, if there’s been one.

At any rate, we find the case persuasive, so we’re not ready rule out the possibility of a meaningful increase in housing activity just yet. It’s too early to know what will happen, and as Ryan Avent explains, construction cycle operates with a big lag on increased demand, so we wouldn’t see much progress for a while, maybe a year or two.

What everyone writing on the matter seems to agree on is that a higher level of economic growth would be needed to launch the construction takeoff. Growth — and jobs in particular — is needed to rejuvenate household formation, get young people to strike out on their own, reduce vacancy rates, and attract immigrants. Once this happens, the demographic trends will do the rest of the work.

But that’s an awfully big “once”, as the prospects for higher growth in the next few quarters remain uncertain. So although we tend to agree with the idea that there’s a burgeoning housing shortage, we remain agnostic on when the eventual correction will begin.