The Gap Again Widens

 The September trade numbers are out and America’s Trade deficit increased significantly since August. Not only did it increase, but it made the largest percentage increase since February of 1999. Of course, part of that dramatic note is due to the contraction that resulted as part of the economic down-turn.

An AP article (see: http://www.google.com/hostednews/ap/article/ALeqM5gNiyJ905Ho0Ur96V2TQhsBX19lGwD9BUNGF80) sites authorities who suggest that the increase in energy prices is outstripping the benefit gained in the export sector by a falling dollar.

As President Obama travels through Asia this will no doubt be a subject of discussion. A Chinese Yuan that is kept artificially low is credited with a not insignificant portion of the problem. The Chinese have indicated a willingness to let the Yuan adjust a little, but are, not unexpectedly, quite concerned about the state of the dollar (being holders of vast quantities of dollar assets.)

When I started studying the question of how nuclear power’s expansion was likely to transpire, I, like many, took it as  a given that there would be a substantial global expansion of nuclear power plant construction. I expected the “renaissance” would include both growth in countries that have long had a near de facto moratorium on plant construction (e.g. the United States) as well as some of the more promising aspirant countries that have not previously had commercial nuclear power such as Indonesia and Turkey. While I never believed that most of the states clamoring for nuclear energy would achieve it in my lifetime, I did expect a significant swing. After all, with a price on carbon and renewables not ready to take a chunk out of king coal at an affordable cost, nuclear power seemed to stand to be a big winner from climate change.

Today I am far less sanguine about an expansion that could be reasonably be termed a “global renaissance of nuclear power”. Perhaps it can be said that Asia is experiencing a nuclear boom. 57%  of the plants currently under construction are being built in just five Asian countries (China [over 25% of the total alone], India, Japan, South Korea, and Taiwan), and if you add Russia you have accounted for almost 3/4ths of the current construction. However, beyond rhetoric and political attempts to signal support for nuclear energy, there is little evidence of a full-fledged renaissance yet. The graph below shows the number of power plants being brought on-line each year, and the number of countries in which plants were brought on-line.

Just recently, the US government has signalled support for nuclear. The EPA predicted 180 new plants constructed by 2050 as a result of climate change legislation in its recent analysis (see: http://www.examiner.com/x-19285-Chicago-Economic-Policy-Examiner~y2009m10d26-EPA-sees-180-new-nuclear-power-plants-over-the-horizon ). Furthermore, there is evidence that the Obama Administration is backing nuclear expansion as part of a bid to get the required legislative support for passing carbon-constraining legislation. (see: http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102704081.html )

Should we expand nuclear power? I believe that, if we want to slow the pace of and eventually reduce carbon output, nuclear will have to be part of the solution. When you consider the scale on which we use electricity, wind, solar,  geothermal, and conservation in their current state of development don’t do the job . Hopefully, one day we will be able to cost-effectively tap the power of the sun for most of our electricity needs and will be vastly more efficient in our use of power, but that day isn’t today and by the time it arrives we may have suffered a dire price. 

It is essential to  understand the differences between nuclear power and renewables in terms of scale. Nuclear plants are typically both rated higher in terms of the amount of electricity they generate, and have much higher capacity factors than renewable plants. The capacity factor is a percentage of the rated power that a unit actually produces over the course of a year. For nuclear, capacity factors tend to be above 90% on average, and can be 100% in years in which fuel is not changed out and there are no other disruptions. For wind, a reasonable capacity factor is about 33%. This means that a typically sized nuclear plant (1000 MW(e)) produces more than 4000  wind turbines of 600 KW (e) or almost the same as 500 massive 5 MW(e) wind turbines. (These are at conservative capacity factors of 85% for nuclear and 35% for wind.)

So what is the tough nut to crack if the legislative environment is suitable for nuclear power’s growth? If one asks what policies need to be put into effect to spur US nuclear renaissance, one might quickly note that said policies are largely already in place, and still the evidence of a resurgence is primarily on paper.

First, you would need to provide loan guarantees. Why? Because private utilities don’t typically have enough assets to get people to loan them billions of dollars over a relatively short timeframe. It is not that these firms are small or not profitable, but rather that the magnitude of costs and risks for nuclear is so high. This is exacerbated by the many examples of planned plants that have not panned out. Famously, the Shoreham Nuclear Power Plant in Long Island, New York was completed but never made a return on investment. The operator eventually went out of business / was subsumed by a government entity. The Energy Policy Act of 2005 provides for a program that would reimburse lenders up to a cap in case of default. Current discussions are considering increasing the $18.5 billion pot for this program as that, sadly, is a scant amount on the scale of spurring a massive increase in nuclear power.

Second, while the nuclear power industry has had a quite respectable safety record, the scale of possible consequences and liabilities makes it impossible for utilities to afford the kind of insurance they would need to ensure they could stay in business in the aftermath of an accident. The government has the utilities covered on that front as well with the Price-Anderson Act that caps the liability of private firms so that they only have to insure up to a certain level.

Third, a major problem in nuclear power plant construction, much as in Defense Department acquisitions, is a proclivity towards cost-overruns and delays. One can imagine that stretching out the interest payments on an $8 billion dollar loan could be quite costly proposition.

It is useful to understand that nuclear plants are cost-intensive in front-loaded construction costs, but are relatively cheap in terms of fuel and operations and maintainance. This means that, once plants are built, they are relatively profitable when the utilities no longer have to funnel a big chunk of the money back into paying off the capital costs. I’ve heard an employee from Georgia Power say that nuclear was by far their least expensive power source, but this was, of course, based on the fact that the plant costs had depreciated off their books. The Federal government has provided delay insurance to cover delays that are due to the regulatory requirements (i.e. if the NRC puts a hold on you, the government picks up the tab) for a limited number of early plants. Furthermore, some jurisdictions (i.e. Georgia and Florida) have approved the extremely controversial practice of allowing their utilities to charge customers for plants before they are even running (for that matter, before construction has even begun.)

Despite all these policies, I remain skeptical that we will see a major nuclear power plant construction boom given the magnitude of costs and risks involved. This puts me at a loss. While I believe in the benefits of nuclear power, I am also quite concerned about our massive deficit, so I’m not too sure about the one policy prescription that remains available to jump start a renaissance. That is, if the government buys or substantially increases subsidization of nuclear power that may make a difference. Any such policy would have to ensure that taxpayers got their investment back in terms of a cut of the earlier mentioned profitability.

The magnitude of the United States’ Department of Defense (DoD) is, on many levels, awe-inspiring. This led me to create this little trivia game called “DoD or Country” that considers which is larger in various aspects - our defense complex or given countries. I hope you enjoy it. The anwers appear below. Don’t peak.

 Questions:  

1.) Weighing in at $583 billion US dollars, which is more expensive: the US DoD budget or the budget of the entire government of Australia?

2.) At 9,500 square kilometers, which is more extensive: America’s largest military installation -White Sands Missile Range – or the country of Cyprus?

3.) Consisting of about 3,600,000 people, which is larger: the combined active, reserve, and civilian components of the DoD or the population of Mongolia?

4.) At 440,000 barrels per day, who consumed more oil in 2006: the Department of Defense or the country of Argentina?

5.) Consisting of 45 ships, which is larger: the US Naval Fleet Auxillary Force (i.e. the ships that supply the Navy’s combat fleet) or the merchant marine fleet of Lithuania? 

6.) Consisting of 185 aircraft, which contains more aircraft:  the current C-17 cargo plane fleet of the US Air Force or the current Singapore Airline’s fleet (all models of aircraft combined)?

7.) At 764 dead, which involved a greater number of lost lives: the US military’s Killed in Action figure for 2007 or the number of fatalities due to terrorism (as defined by the US NCTC) in Somalia in the same year.

8.)At 2,150 Megawatts (electrical) [MW(e)], which has a higher combined output rating from all nuclear reactors: all of the active  aircraft carriers of the US Navy or all the commercial nuclear power plants in Brazil?

Answers:

1.) DoD; Australia’s annual budget in the same year (2008) was a mere $340 billion.

2.) Cyprus; White Sands is 8,300 square kilometers (1,2oo km. sq. less.)

3.) DoD; Mongolia’s population is only about 3.041 million.

4.) Argentina; The South American nation’s oil consumption was 120,000 barrels per day more.

5.) Lithuania; The Baltic state’s fleet consists of about five more merchant ships than the US Navy’s Auxillary force. (Perhaps a few more than that depending upon how you define “ship.”)

6.) DoD; The Air Force has almost 80 more C-17s (of all varients) than the Singapore Airline has in total aircraft (of all models.)

7.) DoD; The DoD reported 25 more killed in action in 2007 than was the number of Somali terrorism fatalities (739) that year.

8.) DoD; Brazil’s two reactors are rated at 2,007 MW(e), while the 10 Nimitz and one Enterprise class carriers have ratings of 194 MW(e) (both reactors on a Nimitz combined [times 10]) and 210 MW(e) (all eight Enterprise reactors combined).

Is Iran on the verge of a revolution? Can Kim Jong Un maintain power if his father transfers it to him in the near future? Are we seeing the leading indicators of America’s decline in conditions like debt that is completely out of control, failing business giants, the crippling costs of persistent asymmetric warfare, and looming unaddressed crises such as the mathematically infeasible pay-go social security system? What will the rise of massive high-growth emerging economies mean for world affairs? What will the world look like politically, economically, and diplomatically 3 months from now?; 6 months?; 1 year?; 2 years?  

We are living in interesting times. We could be on the precipice of some very major changes to the international system. Sometimes change is slow and evolutionary; sometimes it is faster and more revolutionary; and, rarely but occasionally, the conditions evolve to converge to the point where it is catastrophically instantaneous. There is a vigorous tug of war in progress between inertia and the winds of change.

I would love to be able to make some definitive predictions about what the world will look like next year. Like the vast majority of people, I am motivated by discomfort with uncertainty to want to think that I can have a grasp on how events will unfold. However, the lesson (an unintended lesson to be sure) that has most stuck with me in completing graduate degrees in International Relations and Economics  is that anyone who thinks they can predict the future unfolding of large-scale political and economic events is full of crap. This will no doubt be considered heresy to many who have made lucrative livings because we (as a species) would rather pay millions to someone who makes an incorrect prediction than to accept that we have no idea what will transpire. One can read papers that misapply probabilistic and statistical models in some of the most elite scholarly journals because even the most educated of our society are addicted to thinking that the future can be known in a system whose level of complexity remains beyond our capacity to unravel.

My advice to those trying to get a handle on the future, save your soothsayer money, hedge your bets, and enjoy the ride.

With respect to government culpability for the financial crisis, the primary lesson that people have taken away seems to be that the executive and legislative branches were just negligent and did not regulate businesses enough. That is, while business was actively at fault, the government was merely too passive.

It is true that there were certainly specific areas in which the existing incentives created an economically unstable condition, and regulation (and 20/20 hindsight) might have negated the problem. For example, the recently proposed legislation to require loan originators to keep five percent of the loans they make on their books is probably a good idea for new regulation. After all, a major part of the problem was that those who madeloans had no incentive to ensure they were good loans because they were selling them off in securitized form as the ink was still drying on the paperwork. This meant that their only incentive as to make more loans, not good loans.

However, I don’t think we should be quite so quick to conclude that the government’s only role was in failures of omission. The government has long supported the notion that virtually everyone should be homeowners. They supported and implemented policies that facilitated a move toward a greater proportion of home-ownership, and, in doing so, they too are culpable for a condition in which there were way too many people without the incomes to be homeowners who were buying homes.  Until a year ago or so, many people would have thought this a laudable policy, but seeing the effects of having so many people owning homes they cannot afford, we must recognize that the government should not have been supporting housing ownership in the manner it did.

Why is this distinction between active and passive culpability important? My worry is that we seem to be in a period in which people just want government to get off their duffs and be active, and we may not be conscientious enough about whether they are actively doing the right things. No one can say the Obama Administration hasn’t been bold in its policies, but whether it turns out to have been smart in them remains to be seen.

To be frank, I am a little terrified about the idea of a $1.8 trillion deficit for the year. A budget deficit of well over 10% of the entire Gross Domestic Product (GDP) is nothing to take lightly. I certainly hope President Obama will be true to his words to engage in deficit reduction at some point, but I am afraid that like the Republicans, without facing legislative opposition, he will go just as hog-wild as they did. The President certainly has lofty goals, but they all come with price-tags attached.

On a recent trip to Budapest, I snapped this picture on Margit Circle not far up the road from the the Margit Island Bridge. This is a popular thoroughfare on the Buda side of the Danube that leads to a massive multi-level shopping mall and to the  Moscow Square transit hub that is of modern design, yet, at once, appearing out-dated. At the time, I thought the picture conveyed an interesting theme or moral, but I was not certain what it was. Two buildings with structurally identical facades – ornate moldings,  faux columns, and window arches – but conveying completely different images. One is the color of cow dung from grass-fed cattle, is marred by chipped and peeling paint, and has a coating of grime and soot clinging to the paint that dares remain. The other is a clean white and light blue pattern with gray trim that has not yet been darkened and discolored by car exhaust and industrial plant emissions. It takes a sustained glance to realize that they are the same building.

For Ferenc Gyurcsany, Hungary’s soon to be erstwhile Prime Minister, the moral should be that one can only dress up an economy if the fundamentals underneath are sound. Hungary’s economic problems far precede the recent global recession, which is part of the reason why the Hungarians have been one of the worst hit nations in the region, and the first European nation to require outside assistance in the form of International Monetary Fund (IMF) loans last fall.

Gyurcsany resigned yesterday in the face of an economic melt-down. The outright resignation was foreshadowed over the weekend by an offer to step aside if a vote-of-no-confidence that would be held in April rejected the Hungarian Premier. Subsequently, the voice of the Hungarian people was clear in indicating that they had lost confidence in the presiding government.

Amongst the first things that one notices in examining the Hungarian economic fundamentals is that the Central Bank just decided to keep their interest rate steady at a rather high 9.5%. Hungary is so hard hit because it faces a catch-22 as a result of its recent history of excessive spending. For a country in recession, and estimates project a 3.5%  to 5% drop in GDP this year, the monetary prescription is to increase the money supply, and this is done by reducing the cost of money (i.e.  lowering interest rates.) However, Hungary has run such high deficits that it needs to maintain high interest rates in order to attract capital, and because lowering rates will lead to capital outflow and further depreciation of the Forint (Hungary’s national currency). Currency depreciation, while it may benefit exporters (but, of course, people are almost universally buying less these days), means that prices on imported goods are higher. As a globally integrated and relatively small country like Hungary relies heavily upon imports in some sectors, overall consumption is decreased, and consumption is the engine of an economy.

So if monetary policy cannot help, what is left? Unfortunately, fiscal policy prescriptions are out of the question as well. The fiscal policy prescription for a recession is to increase government spending and decrease taxation (i.e. further deficit spend.) However, because Hungary was deficit spending its heart out in the good times, it now faces conditions in which it cannot afford to continue on this path. It can’t exacerbate its deficit spending spree without serious consequences that are already being seen with Fitch’s early March downward revision of Hungary’s creditworthiness, and recent statements that the rating agency may down-rate Hungary further in the near future. Of course, the IMF would frown upon increasing government spending.

This puts Hungary in the unenviable position of having no economic policy to right its course, and it must ride it out and hope that it doesn’t go over the falls.

One of the most damaging mistakes made in policy-making is ignoring feedback loops. There is a tendency to see and act upon simple solutions without investigating whether unanticipated effects are likely to result. This is particularly true of economic decision making. Perhaps this is reflective of a general lack of economic literacy that develops between the time people (politicians included) take that obligatory sophomore microeconomics class and when they enter get into their unrelated careers.

The low income are having trouble living off the wages they earn? Just mandate a higher minimum wage. Of course, in most cases this will increase unemployment (particularly among those the law is attempting to help), and while a given person may end up benefiting from higher wages they may also be one of the unfortunate that end up with no wages. There is a shortage of affordable housing? Just put a cap on rental rates. Of course, this leads property owners to shift to alternate uses of land where possible, and possibly even to abandoning property if they can neither earn a profit on it nor, due to zoning laws, convert the property to another use. The simple solution, therefore, eventually leads to fewer housing units being available and possibly urban blight as well.

What does this have to do with the recent decision by Bank of America to pull job offers that it had made to foreign graduate students? Bank of America’s decision was the result of legislation that prohibited hiring foreign workers if a firm is accepting Federal funds and is laying off American workers. Because the bank had to lay off lesser skilled employees as a part of a reorganization, it could not hire the foreigners. I put both this legislation and many of  executive compensation cap plans in the category of ignoring the unintended consequences.

Readers of the Economist will recognize the dearth of executive talent as a reoccurring theme with regard to the  problems facing the business world today. Lately there has been an assumption that we could not have a more incompetent group of executives running American businesses. However, by limiting the pool of executive talent to which we have access to US citizens, we have a smaller base available and greater chances of having a less competent set of executives in the future.

Any plan that limits total compensation to executives runs the same risk. If compensation is not competitive with alternative employment, the most talented will go elsewhere, leaving those who cannot find alternative employment (either abroad or in other fields) to run American firms. This is not to say that capping salaries and then tying other earnings to performance wouldn’t be reasonable. This has a positive feedback effect in that it gives the executive incentive to increase a firm’s performance. There must be a value-added to executives to justify such high incomes. If they don’t enhance productivity by anywhere near their earnings, they obviously should not be earning such high wages.

I fear that there is a lot of simplified solutions going into the restoring the economy, and that we won’t know all of the adverse impacts for some time to come.

On February 26th a conference took place at Georgia Tech in Atlanta entitled “The Six Party Talks and Korean Energy Security”. Conference speakers included Mr. Kurt Tong- Director of the Office of Korean Affairs at the State Department, Minister Kim Myong Gil of the North Korean Mission to the United Nations, former Ambassador to South Korea James Laney, and a number of prominent experts from academia and think-tanks. The conference covered a range of issues involving energy needs on the Korean Peninsula, and lent particular focus to questions of energy as both a vital resource for economic development and as a bargaining chip in negotiations with North Korea.

The central bargain of the 1994 Agreed Framework agreement between the US and the Democratic People’s Republic of Korea (DPRK) was the provision of energy to North Korea in exchange for movement away from nuclear arms development. The energy in question included fuel oil shipments as well a commitment to provide about 2000 MWe in electrical capacity in the form of light water nuclear reactors. The 1994 agreement, like all other agreements with North Korea to date, eventually unraveled in a raft of mutual accusations about failure to comply with the provisions of the bargain.

The use of energy as a bargaining chip makes a good deal of sense because the DPRK is desperately under-provided with electricity and heat, and the amount of electricity generated in recent years is even substantially below 1994 levels. Many readers have probably seen nighttime time-lapse satellite photographs in which South Korea looks like an island in the sea of Japan, with only a single dot recognizable between the Republic of Korea and the coast of China. One speaker at the Georgia Tech conference, Leon Sigal, had recently traveled to the DPRK, and spoke about how meetings were conducted in winter coats because the little space heaters in the Ministry conference rooms could not adequately heat the big rooms in a timely manner. As I once heard from a medical student who had traveled to North Korea, it is telling how deficient even the showplace facilities are in the DPRK (the student was talking about the atypical, yet still out of date and unhygienic, hospitals to which his delegation was taken.)

Dark Nights

 The North Koreans are apparently still angling for light water reactor technology to be part of a negotiated agreement. Selig Harrison, Director of the Asia Program at the Center for International Policy and occasional visitor to the DPRK, wrote in a February 17th Washington Post Column that he was told that completing the two reactors negotiated under the Agreed Framework would be part of the requirement for continuing dismantlement of the existing Yonbyong reactor. The US now apparently takes the stand that it is not the time to discuss light water reactors as part of an agreement.

What is interesting is that the North Korean grid,  as it exists, is incapable of handling the two 1000MW(e) plants. This point was made several times during the conference at Georgia Tech, and may be clear even to neophytes to capacity planning such as myself. North Korea’s electrical grid is not international in nature. In fact, North Korea’s electricity is supplied by a number of small grids that are not all interconnected even within the country. It has been said that any more than 10-15 % of electricity on a grid coming from a single plant is problematic. If North Korea’s grid were a single interconnected grid, one 1000MW(e) plant would produce about 20% of the electricity being generated on the grid in 1994. However, since it is not a single grid, this would be much larger proportion. Furthermore, the electrical grid, like much of the DPRK’s infrastructure, has been steadily deteriorating. The idea of installing such a massive source is a recipe for failure.

There have been a number of suggestions that might make nuclear power plants feasible in the DPRK such as bringing the North’s grid up to date and / or hooking part of it into Russia’s elecrical grid, but it is intriguing that such an essential component for nuclear power plants to be feasible was not a central part of the discussion. It would seem that North Korea is eager to gain access to the technology and, perhaps, to have the feather in its cap of having such advanced technology.  Meanwhile, the US, at least in 1994, has seen provision of reactos as a means to buy North Korea’s compliance at a low proliferation risk, and was not overly concerned with the reasonableness of the “solution”.

Inspired by David Letterman’s “Will it Float?”game, and, with the fiscal stimulus at the forefront of the national consciousness, I thought I would put forth my predictions for what parts of the  “American Recovery and Reinvestment Act of 2009″ will be likely to stimulate the economy. Though, in reality, it will be more of a look at which are “good” stimulus given the criteria discussed below.

The criteria for good stimulus is fairly simple, and these days the alliterative prescription is well known to just about everyone. It must be ”timely, targeted, and temporary.” I don’t know which economist first suggested these criteria, though at least part of it follows from the prescriptions of Keynes. I do know that it was not Nancy Pelosi, Harry Reid, or any of the other politicians that economically-illiterate journalists have given attribution for the concept.  Likely, the economist who suggested was not the same one who put it in it’s easily remembered alliterative form.  

The criteria of timeliness is probably the most difficult to make predictions about. Contrary to popular misconception, one will not necessarily get positive results from raining  money from the skies like manna from heaven. Even if the objective is more to spur consumption than to achieve the project goals (ala paying some crews to dig holes and others to fill them in), if there is no mechanism set up to allocate and distribute funds than it may become like trying to pass a moose through a garden-hose.  Getting legislation passed happened fast by Washington standards, but there is still the issue of getting the money into consumer’s hands.

The “target” in ”targeted” is job creation and the installation of dollars into the pockets of those who are most likely to spend them. The prevailing belief among economists is that this means those at relatively lower incomes rather than higher incomes. Higher income individuals tend to save more of the dollars that they earn. Preferably the disbursement will not take the form of a one-shot disbursement that many are likely to use to pay down debt or put into savings (laudable but not stimulatory.) Now one may be lured into the false reasoning that any government service that keeps people from having to spend their hard earned money on a given “necessity” would mean more money to spend. While there may be a marginal truth to this, because such service provision would be something that a given person may or may not provide for themselves if given their own choice in the matter, it would be, at best, a particularly inefficient form of stimulus and would get an “F” on the criteria of being targeted. Furthermore, most such programs would likely show a negative result on the “temporary” criteria.

The “temporary” criteria results from the fact that the goal is not to build permanently higher levels of government spending that will ultimately crowd out private sector growth. Politicians seem to understand the economic prescription to deficit spend (i.e. reduce taxes and increase government spending) during dire times like these. What they fail to grasp is that the rest of the time one should not be deficit spending. Instead, in good times, they should be cutting government spending. Of course, one may not put much stock in these Keynesian notions (they had fallen into disfavor until recently), but you can’t pick and choose the parts of the theory that are valid based upon the political benefits of doing so.

It should be noted that a “yes” vote assumes that it is done correctly, but in practice it may not work out that way. A “No” doesn’t necessarily mean that the government shouldn’t spend money on said item, but, rather, that it is not a good stimulus measure by the aforementioned criteria, and should probably not be in the recovery package. It should be noted that there is a great deal of room for debate as there is little by way of description of many of the programs, and, furthermore, timely, targeted, and temporary all involve a subjective element. However, some programs are clearly better than others in meeting these criteria. Those wanting to read through the Act itself to make their own judgements will find the link at the bottom.

And so, without further ado:

Department of Agriculture (DoA): Agriculture Department building repair and construction: Yes

DoA Office of the Inspector General: No, but you will have some necessary oversight and administration costs and so these expenditures are probably advisable, and will be referred to as the OIG Proviso in subsequent sections.

Agriculture Research Service (ARS) building maintenance: Yes

Farm Service Agency (FSA) Information Technology: Yes, if timely and temporary

Natural Resources Conservation Service (NRCS) Watershed and Flood Prevention Operations: Yes in part at least

Rural Housing Service (RHS) Rural Housing Insurance Fund Program Account: No

RHS Rural Communities Facilities Program Account: No.

Rural Business (RB) Program Account: No

Rural Utilities (RU) Rural Water and Waste Disposal Program: Yes

RU Distance Learning, Tele-medicine, and Broadband: No (Loan guarantees may not build a market where non exists presently)

Food and Nutrition Service Child Nutrition Programs: No (Temporary? try yanking this away)

Economic Development Assistance: Yes

Periodic Censuses and Programs: Not likely

Broadband Technology Opportunities Program: No

Digital-to-Analog Converter Box Program: No

Scientific and Technical Research Services: No (not much detail provided)

Construction of research facilities: Yes

National Oceanic and Atmospheric Administration (NOAA) Operations, Research, and Facilities: Not unless used in more well-defined manner.

NOAA Procurement, Acquisition, and Construction: Yes

NOAA Office of the Inspector General: OIG Proviso Applies

Department of Justice (DoJ) OIG: OIG Proviso Applies.

DoJ Violence Against Women Program: No

State and Local Law Enforcement Assistance:  No

Community Oriented Policing: No

NASA: As there is no explanation of these funds, I will have to go with No.

National Science Foundation (NSF) Research Activities: Yes, potentially. NSF is set up to distribute funds (timely), and can distribute these until they run out (temporary), but whether this puts money in the right wallets will be seen.

NSF Educational and Human Resources: No

NSF Research Equipment and Facilities: Yes

NSF OIG: OIG Proviso Applies

Department of Defense (DoD) Operations and Maintenance:  Yes ( they installed a timeline to incentivize timeliness)

DoD Research, Development, Test and Evaluation: Yes

DoD Defense Health Program: Yes (specifically for repair and modernization)

DoD OIG: OIG Proviso Applies

Corps of Engineers (CoE) Investigations: No

CoE Construction: Yes

CoE Mississippi River and Tributaries: Yes

CoE Operation and Maintenance: No

CoE Regulatory System: No

CoE Formerly Utilized Sites Remedial Action: Yes

Department of Interior Water and Related Resources: Part Yes and part No

Department of Energy (DoE) Efficiency and Renewable Energy: Yes, but timeliness criteria is a concern. It depends upon block grants operating effectively, and also  funds develop technologies that may not be mature enough.

DoE Electricity Delivery and Reliability: Yes. Again, timeliness is a concern. However, improving the grid is both overdue and may yield substantial benefits in addition to temporary employment gains.

DoE Fossil Energy R&D: No

DoE Non-Defense Environmental Cleanup: Yes

DoE Uranium Enrichment Decontamination  and Decommissioning Fund: No

DoE Science: Probably No (Not defined in the Act)

DoE Innovative Technology Loan Guarantee: No. Not a good stimulus, though, perhaps, laudable.

DoE OIG: OIG Proviso Applies

Defense Environmental Cleanup: Yes

Construction, Rehabilitation, Operation and Maintenance Western Area Power Administration: Yes in part

Department of the Treasury (DoT) Salaries & Expenses: No, but like OIG expenses, may be necessary

DoT Community Development Financial Institutions Fund: No

Internal Revenue Service (IRS) Health Insurance Tax Credit Administration: No, but like OIG necessary for conduct of the program

General Services Administration (GSA) Federal Buildings Fund: Yes

GSA Energy-Efficient Federal Motor Vehicle Fleet Procurement: Yes

GSA OIG: OIG Proviso Applies

Recovery Act Accountability and Transparency Board: No, but necessary administration

Small Business Administration (SBA) Salaries and Expenses: No mostly

SBA OIG:  OIG Proviso Applies

SBA Surety Bond Guarantees Fund: No

Business Loans Program: Perhaps, depending on loan use

Department of Homeland Security (DHS) Office of Secretary for Management: Yes

DHS OIG : OIG Proviso Applies

Customs & Border Patrol (CBP) Inspection and Communication Systems Installation: Yes

CBP Fencing, Infrastructure & Technology: Yes (although whether it is a good idea is a different question entirely)

CBP Construction: Yes

Immigrations Automation Modernization: Yes

Transportation Security Administration (TSA) Aviation Security: Yes (equipment purchase and installation)

Coast Guard (CG) Acquisition, Construction, and Improvements: Yes

CG Alteration of Bridges: Yes

Federal Emergency Management Agency (FEMA) State and Local Programs: Yes if grants are used in ways that are timely and create temporary employment

FEMA Firefighter Assistance Grants: Yes, They are for modifications and upgrades.

FEMA Disaster Assistance Direct Loan Program: No

FEMA Emergency Food and Shelter: No

DoI Management of Lands and Resources: Yes, if used for rehab and restoration

DoI Construction: Yes

DoI Wildland Fire Management: No, not likely

Fish and Wildlife (US F&W) Construction and Improvements: Yes

National Park Service (NPS) Deferred Maintenance: Yes

NPS Historic Preservation: Yes

NPS Construction: Yes

US Geological Survey (USGS): Yes

Bureau of Indian Affairs (BIA): Part No and Part Yes

BIA Construction: Yes

BIA – Indian Guaranteed Loan Program: No

BIA – OIG : OIG Proviso Applies

Environmental Protection Agency (EPA) – OIG: OIG Proviso Applies

EPA Superfund: Mostly Yes

EPA Leaking Underground Storage Tank Cleanup: Yes

EPA State and Tribal Assistance Grants: Perhaps, depends upon use

EPA Administration: No

Department of Agriculture (DoA) Forest Service Capital Improvements: Yes

DoA Wildland Fire Management (DoA): Yes

Department of Health and Human Services (DHHS) Indian Health Services: No (ambiguous description)

DHHS Indian Health Facilities: Yes

Smithsonian Facilities Capital: Yes

National Endowments for the Arts Grants and Administration: No

Department of Labor (DoL) Employment and Training: No, fails on timeliness (hopefully anyway, one would hate to think we will still be in a recession in the time that it takes not only for these funds to be disbursed productively, but for the workers to complete training programs and then find work.)

DoL Community Service Employment for Older Americans: Yes

DoL State Unemployment Insurance: Yes

DoL Departmental Management: No, but administrative

DoL Office of Jobs Corps: Yes

DoL OIG:  OIG Proviso Applies

DHHS Health Resources and Services: Yes, if spent properly

National Institutes of Health (NIH) National Center for Research Resources: Yes

NIH Office of Director: Probably not

NIH Buildings and Facilities: Yes

Agency for Health-care Research and Quality (AHRQ): Part Yes and Part No

Administration for Children and Families (ACF) Block Grants to States: No

ACF Children and Families Service Programs: No

Administration on Aging (AA) Aging Service Programs: No

AA Office of the National Coordinator for Health Information Technology: No

AA OIG: OIG Proviso Applies

AA Public Health and Social Services Emergency Fund: Yes

AA Prevention and Wellness Fund: No

Department of Education (DoEd) Education for the Disadvantaged: Mostly No, partially Yes

DoEd Impact Aid: No

DoEd School Improvement Programs: No

DoEd Innovation and Improvement: No

DoEd Special Education: No

DoEd Rehabilitation Services and Disability Research: No

DoEd Student Financial Assistance: No

DoEd Student Aid Administration: No

DoEd Higher Education: No

DoEd Institute of Education Sciences: No

DoEd OIG : OIG Proviso Applies

Corporation for National and Community Service (CNCS) Operating Expenses: No

CNCS OIG: OIG Proviso Applies

National Service Trust: Presumably No

Social Security Administration (SSA): Yes, in large part (funds replacement of IT)

SSA – OIG: OIG Proviso Applies

Government Accountability Office (GAO) Salaries and Expenses: Yes. While I normally would put ”Salaries and Expenses” a “No”, this provision has a time limit that would seem to make it a temporary rather than permanent expansion of the Federal government.

Military Construction (all branches): Yes (One can only hope that they won’t build up the bases that will subsequently be BRACed out of existence.)

Family Housing Construction and Maintenance: Yes

Homeowners’ Assistance Fund: Perhaps

Veterans Affairs (VA) Medical Facilities: Yes

VA National Cemetery Administration: Yes

VA General Operating Expenses: No

VA Information Technology Systems: Yes

VA OIG: OIG Proviso Applies

VA Grants for Construction of State Extended Care Facilities: Yes

VA Administrative Provision: No

Department of State (DoS) Diplomatic and Consular Programs: No

DoS Capital Investment Fund: Yes, if used in a timely manner.

DoS OIG: OIG Proviso Applies

International Boundary and Water Commission (IBWC)  Construction: Yes

Department of Transportation (DoTrns) Grants for National Surface Transportation System: Yes

Federal Aviation Administration (FAA) Facilities and Equipment: Yes

FAA Grants-in-Aid for Airports: Yes

Federal Highway Administration (FHwyA) Highway Infrastructure Investment: Yes

Federal Railroad Administration (FRA) Capital Assistance: Yes

FRA Capital Grants to Amtrak: Yes (time limits imposed)

Federal Transit Administration (FTA) Transit Capital Assistance: Yes

FTA Fixed Guideway Infrastructure Investment: Yes

FTA Capital Investment Grants: Yes

Maritime Administration (MA) Grants to Small Shipyards: No (ostensibly there is a lack of business for such yards, and nothing in this Act changes that.)

 MA OIG: OIG Proviso Applies

Housing and Urban Development (HUD) Public Housing Capital Fund: Yes

HUD Native American Housing Block Grants: Yes

HUD Community Planning and Development: Yes (gives preference to those who can award contract within four months)

HUD Home Investment Partnerships Program: No

HUD Homelessness Prevention Fund: No

HUD Housing Stability and Energy Investments: Yes

HUD Lead Abatement: Yes

HUD OIG: OIG Proviso Applies

Health Information Technology: In part Yes

State Fiscal Stabilization Fund: No

A note on the ”Buy American” Clause: Many are rightfully distraught over provisions requiring that all iron, steel, and manufactured goods come from the US if they are to be used in carrying out the earlier provisions of the act. While the bulk of the outrage comes from abroad, there are also those from US firms who are likely to be injured by the ensuing trade disputes that find the provision objectionable. There is also an issue of what effect this will have on cost and timeliness. It should be noted that there are exception provisions for cases in which the needed material is not made in the US in sufficient quantities. It is recognized that costs will, in many cases, be higher because of this clause, and there is an exception provided the total cost is greater than 25% of what it would be if free trade ruled. Despite these exceptions, it is a near inevitability that inefficiencies will result because of these provisions. It will take time to determine what the effect will be on cost and there will be differences of opinion about whether US manufacturers can meet the needs, and, all the while, timeliness will take a hit or there will be a default position that leads to always using US suppliers even when there are radical delays or cost increases.

While the reasoning behind this provision may seem solid because it seems to produce a force-multiplier effect for employment, it is hard to determine the true effects because this analysis must take into account that some foreign companies will stop buying Boeings in favor of Airbus or Caterpillars in favor of  Komatsu in retaliation.

I will not go through the tax provisions in any detail. In general the tax provisions for individuals are likely to have some type of positive effect on consumer spending. Though with debt being what it is there will probably be a lot of cases in which the extra income is used to pay down debt. I’ve heard the idea of issuing as pre-loaded debit cards to make consumption easier and debt repayment more difficult. I don’t know what the administration costs and timeline are on such a plan (the government is geared up for sending out lots of checks now, but, to my knowledge, not for issuing debit cards) or whether it would succeed. Presumably, credit card companies would begin to take these debit card payments unless strictly prohibited. Of course, rebates (whether in check or debit card form) are not as useful as reduction in monthly deductions because “permanent” income increases are more likely to be spent.

There are many admirable tax credits for energy conservation and reduced pollution emissions in the Act. They may be worthwhile, but they are not necessarily good stimulus. In many cases, they distort consumer behavior without having much impact in causing increased consumption.  

 For those who would like to view the Act in order to develop their own opinions, it can be viewed at:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf

Source: Library of Congress

A friend was telling me the other day that his salary was cut due to the economic downturn. He explained that his boss had put the “decision” in his hands, he could take the cut or he would have to be laid off. I found this interesting because it seems so anomalous, but the fact that it is an oddity is probably part of the reason we may be on the brink of a depression.

The story goes like this. Some prices rise and fall freely as demand and supply fluctuate (think of wheat, oil, pork bellies, and the like), but other prices are impeded from change. One kind of price that does not adjust easily, at least in one direction, is the price of labor (i.e. wages.) With respect to wages, we see what is commonly called a “ratchet effect”. This means that they can move up with minimal difficulty, but, in most cases, they cannot move down readily. There is often an expectation that a person’s wages will rise regardless of whether that individual’s  productivity or responsibilities have increased, just by virtue of their loyalty to the company. Firms readily accept this reality when sales and profits are increasing. (After all, replacing workers is costly.) In a few cases there are contractual obligations that prevent wages from dropping, but, even when there are not, wages often don’t move downward even when prices in general are in free fall.

This, I believe, is where psychology enters the picture. Cutting wages tends to be taken as a personal affront. There is an emotional reaction to it because people take it as a sign that others believe their personal value is diminished. Because of this, employers are reluctant to even suggest wage reductions, and, when costs must be cut, they engage in reducing their workforce. In other words, instead of cutting $50 from every employee’s paycheck, they fire ten workers and leave everyone else’s wages unchanged.  Granted there are some firms for which - due to their size and idiosyncratic situation – it wouldn’t make sense to keep every employee, but, rather, it is more feasible to reduce there labor pool by a few. However, this is not true in every case, and if some firms would benefit from retaining an experienced workforce (say for a day when the economy rebounds) they could reduce the problem at hand if they were able to change their decision-making. One will note that some employers with lots of hourly employees are able to cut hours and keep all of their employees working, because it is not an insult to ask someone to work less like it seems to be when one asks them to take less per hour of work. Some might point to this as a benefit of a universal health care system versus the current employer-based system. That is, if people could retain the benefit of health care under reduced hours, they might be more readily willing to accept such adjustments. However, if the move from 45 hours per week to 39 per week means forfeiting health care, the decision making is changed. (I don’t know if this is a true benefit on net because a universal system might also translate to reduced worker loyalty to a firm and an increase in labor costs associated with a migrating labor force.)

I suspect that the consumer confidence calculus (i.e. whether people feel it is safe to spend their money versus saving it) is effected differently in a world of wage inflexibility with higher unemployment than it would be in a world with higher wage flexibility and lower unemployment. An employee that expects that there is a high probability of a marginal cut to his or her wages will probably reduce spending, but to a different degree than does someone who has a more dire fear that, albeit with a smaller probability, his or her job will go away altogether. Facing the paralyzing fear of being unemployed in an economy in which jobs are hard to come by, people may feel more compelled to restrain spending than if they think a loss is coming that is within a range that they can later absorb (e.g. packing a lunch as opposed to eating out and reducing discretionary leisure spending.) The reduction in consumer confidence is of course what keeps the economy on a downward trajectory.

I was thinking about how, should this line of thought be correct, one might go about increasing wage flexibility and, therefore, reducing unemployment and the corresponding contraction in consumer confidence. My astute wife pointed out that individuals given a choice between a wage cut and a workforce cut seem to choose the former. Also, as mentioned, the aforementioned friend explained how he was given a choice (that may not have really seemed like a choice) that he accepted. It seems that one way to circumvent the mode of thought that imposes a ratchet effect on wages is to move the decision making down the line. If an individual is given a choice, they cannot take the outcome as an insult, and, even if a majority of workforce peers decides to a wage cut when one disagrees, it is still not likely to be taken as a personal offense because the peers are making decisions based on themselves rather than the dissenter. So I think one mechanism to increase wage flexibility is by way of increased democracy.

Another means to increase labor flexibility would be to find a way to reduce the correlation between benefits and a forty hour work week. This may be economically challenging, but if hours could be cut without a major hit being taken on the benefit front, this could be useful to increasing labor flexibility in the non-salaried sector of the economy.