Money Makes the World Go Round

And now it is clear what the economy of the US depends upon – it is advertising. Ad revenues drives the internet, it has caused newspapers to be bereft of sustenance, and it will inexorably be withdrawn from television once streaming becomes an unstoppable force. Those who have the highest profit margins appear to advertise the most. Hence the proliferation of pharmaceutical ads intended to draw consumers to the latest pill or injection allowed by the Federal regulatory bodies. You also see advertising for automobiles blanketing the airwaves. That is due in part to the business model requiring local dealerships. The local dealerships keep trying to wrest market share from other dealers (and car brands). Of course, the ads for the car brands are meaningful reflections of the American public. Who doesn’t want to be highlighted as the most masculine consumer out there, and the high energy products of the Dodge division will be sure to rub off on you if only you buy our cars.

Now, we see the next phase of advertising. All of the sports betting sites are showing off how much fun you can have by throwing your money down a black hole by selecting their site as your bookie of choice. I feel sorry for the underworld. One by one their markets are being usurped by legal ways to lose your own money.

Another area of the economy where money appears to be sloshing around is in the world of Medicare supplemental insurance. How many older celebrities can be resurrected on ads convincing gullible seniors to turn all of their health care needs over to a local HMO, who will be sure to have your best interests at heart as they try to glom onto yet another sucker. This is one where both the advertising dollars are at work, and the phone banks work actively too. We are some of the rare individuals who will answer calls on our landline for unfamiliar numbers. Since my wife is just about to become Medicare-eligible, we are receiving a large number of calls offering to assist her in her choices. My experience has shown the more effort made to separate you from your money, the more money is available to be made. With the plethora of people actively involved in trying to steer your decision, it is obvious Medicare is a gold mine for many companies.

For decades, the American economy has been dependent upon consumer spending. It was things that drove the economy, things manufactured in this nation. Now? As much money is spent on transient things as is spent on real items. Look at cell phones. The service that is sold can afford to underwrite the hardware (actual cell phone), and you end up paying the service a multiple of the price of the physical hardware. Of course, you are also paying for the signal being available, so energy and materials are used to build and maintain transmission towers. This is the hidden portion that backs up the handy signal you depend upon.

Just this year, we’ve seen the first crumbling of the “everything is available whenever you want it economy”. We’ve all been exposed to the barren shelfs in supermarkets, where product is totally unavailable at any price. From cream cheese, to canned cat foods, to infant formula, and toilet paper, we’ve seen what can happen when demand exceeds the ability of companies to deliver product in an efficient manner. In our spoiled society, we grow petulant when we are told we can’t have something the instant we want it. We look for scapegoats, and often it is the politicians in power who are blamed for any and all failures in supply chains. It is surprising how much we are in favor of free-enterprise solutions up until the time of a failure. Then we expect the government to have been anticipating problems, and are ready to throw the rascals out of office if they failed in their response.

In the coming years, many more things will either be unavailable, or only available at a price well above what we remember. We will see more things manufactured in the US, but will find out the cost is greater due to the higher costs in this country. The short-term memory of the US consumer and voter will once more blame the government for the higher prices, blissfully ignoring their previous desire to locally source the manufacture. We will have many chances to learn patience, and learn to be grateful for what we do have. I’m afraid, though, that we are so spoiled we will strike out in anger if we are told something is not available, or is much more expensive. Look at our experience with gas prices. People were not willing to take responsibility for their decisions to buy ever-larger vehicles. No, it became a huge crisis when the price of gas deviated from what people viewed as their right – to keep consuming energy without dealing with the true costs. We in the US are particularly spoiled – we view the rest of the world as our pantry, and expect all others to bow down before us since we are so exceptional. Except we are no longer that exceptional nation sharing our cornucopia with the rest of the world. No, we view it as our due to be able to consume on demand with no limitations. It will be difficult to adjust to a world with limits, but that is where we are.

Make West Virginia Great Again!

So this is what it’s like being dragged kicking and screaming into the 21st century. Here in West Virginia, we are being blackmailed into continuing the use of coal for electric power generation until the year 2040, regardless of the economics. And we are going to pay dearly for the privilege of using the dirtiest fossil fuel extracted from the earth in the most damaging way possible. How is this possible? Let us say when we selected a coal baron as Governor, we accepted his appointments to the Public Service Commission (PSC). And when a position came open in the 3-member commission, the Governor filled it with the recently-retired head of the WV Coal Association.

There are three large power plants run by Appalachian Power in the state of West Virginia. These plants sold power throughout West Virginia, and also to Kentucky and Virginia. All three plants face the need to upgrade their sludge handling facilities by 2028 in order to meet EPA regulations. The Kentucky and Virginia PSC’s refused to accept their portion of the costs for upgrading the water treatment facilities, so it fell to the WV PSC to make its decision. To no one’s surprise, they approved the half billion-dollar upgrade, along with the requisite costs for the utility to not only offset its investment cost, but enable Appalachian Power to earn a return on the incremental investment. The PSC stated their rationale for approval as: “Direct employment at the Plants, use of West Virginia coal, state, county and local taxes related to operating generation plants and related employment in businesses supporting the Plants and the coal industry cannot be discounted or overlooked.” I can’t wait for the first shipment of Wyoming coal to these plants, justified solely on cost. Lower cost will eventually out trump any other justification.

When I moved to West Virginia in the late 1980’s, a point of pride in the state was the low cost of electricity as it was totally dependent on coal generation. Since those days, a revolution in energy generation has occurred. Natural gas availability has increased exponentially, and the cost of renewable energy has plummeted. At the same time, the deep thick veins of coal have mostly played out in the state, and the coal industry has resorted to the extremely destructive and disruptive practice of blowing off the tops of mountains in order to expose the relatively thin veins of carbon remaining. So now we suffer from periodic explosions causing rock to rain down from on high throughout our coal fields, and then suffer from the exposure of virgin rock to the atmosphere where every metal present is leached out into our streams. All for the pleasure of allowing our neighboring cloud factories to vent their excess heat into the atmosphere.

Much has been written about how coal has held this state captive for over a century. Coal mines, and coke ovens, have plagued us ever since industry began to exploit this resource. Of course, you wouldn’t want it extracted in your back yard, since the act of extraction just may make your yard and house uninhabitable. But we are still held in thrall to the large utilities and their subservient governmental regulators, all under the massive oversight offered by our oversized Governor. It makes sense that the state suffering from rampant obesity should select an exemplar of this trait to be its leader.

So while the rest of the nation learns how to adapt periodic energy sources into a system which can handle volatile energy demands, this state will muddle along with the power system of the last century. Once more, West Virginia is insistent upon remaining a vassal state to the rest of this country, and ensuring our subordination for multiple decades to come. A state looking ahead would try to market the flattened mountains as opportunities for solar farms, since the soil won’t grow useful plants due to the dearth of organic top soil. No, instead we will continue to permit the desecration of our lands in order to fulfill our need to pay obeisance to the gods of coal.

Do we deserve to be last in almost every economic category within these states? It would seem so, since we appear destined to race backwards rather than face forward and try to improve. The state has changed from a progressive labor enclave, into yet another southern US state where the Republican party staged a takeover. Law after law is enacted aimed at hamstringing the labor movement, many straight from the American Legislative Exchange Council (ALEC) playbook. It makes you believe the legislators have no individual capacity for thought, they have to outsource it to ALEC. But those are the facts on the ground, and we have to deal with the unfortunate circumstances we find ourselves stuck in.

It may be that all politics are local. What is unfortunate is that the local variant of politics in this state consists of denigration of education, followed by an insistence on wishing for an economic rescue from the economic gods of the past, instead of realizing the facts on the ground have changed, and no longer will we thrive if we refuse to look beyond coal. There is a reason why the coal extracting regions are among the poorest in the world. Only when you think coal is the only resource you have to share, will you accept the degradation it brings. Here in West Virginia, we think we only have coal to offer to the rest of the world.

It’s Now Or Never

What is “vengeful taxation”? That seems to be the sticking point now for my senator Joe Manchin from supporting some version of the Democratic social safety net spending program. Note how over the years, the emphasis in discussion has changed from describing the objective of the bills, to strictly focus on the overall cost of the programs. But back to “vengeful taxation”, according to Manchin it is not vengeful to seek the correction of the 2017 tax cut bill, as long as the tax rate for corporations keeps them globally competitive. Whatever that means.

Look, we in West Virginia have benefitted from the attention paid to this small, land-locked state lacking in so much of what is valued in the US these days. Having a Senator at the fulcrum of power is useful. And I am reminded of how small this state really is when I recall we encountered Senator Manchin at a local restaurant as he came in, bereft of staff and entourage, to join a party at another table. He gave us a couple of minutes as my wife pressed a couple of points home to him, and he was able to respond in the way many politicians have mastered – clasping hands, literally backslapping, and saying nothing that could not be interpreted in many different ways.

We seem to be stuck in a do loop (as Andrew Yang noted recently, betraying his computer programmer roots). We cannot break out of the prison of the dichotomy of the Democrats, where the progressive wing says our way or the highway, while a small minority of Senators holds firm to less fiscal stimulus. What I think is being missed by both sides is we’ve had 40 years of underinvestment in both human and physical infrastructure, and this time right now seems to be the only time where it is possible to get anything accomplished. The Republicans are insistent upon their nihilism, where they lay insensate upon the governmental table, while they await their normal due of mid-term elections to anoint them as the powers in Congress. This very time is the opportunity to get something done, in order to have accomplishments to tout for the next election cycle. Maybe, just maybe, if we can get something done, and people are working next year on infrastructure jobs, we can disrupt the Republican’s expectations of mid-term gains.

So much of the political discourse recently is predicated upon who can yell the loudest. Inside of the social media platforms, it is those on the right who seem to reach for the simplistic slogans which seem to captivate the nation’s attention. Couple that with the historical illiteracy of the American populace and it is no wonder the Republicans are able to characterize the Democratic proposals as socialism. It is painful to watch the true socialism for the rich over the past 40 years ignored, while the first attempt to use government to aid the workers at the bottom of the income scale is classified as handouts to the unworthy. But you have to admit it is effective, when polling shows ongoing gains for Republican positions while polling for Democrats shows decreased support since people have forgotten the messiness of the legislative process.

Has there ever been in the history of this nation such a handicap placed in the way of one political party? Where for over a decade, one party declares its implacable opposition to any action of the other party, with zero support for even critical actions like raising the debt ceiling? We should not even have a debt ceiling based upon how it is used as a cudgel rather than as a tool to restrain excessive spending. The consequences of not adjusting this artificial limit far exceed the political gains that one party may achieve in stifling raising the debt ceiling. But who among Americans have the attention span to realize it was the Republicans who were responsible for the dismemberment of our country’s credit rating, and the consequences yet to come if we do technically default on the debt?

The ruling class seems to think only those who can write a sizable campaign check are worthy Americans. They are near to their objective to institute a permanent oligarchy since they seem to view all opposing views as unworthy of consideration. In fact, only their votes would count in the world they wish to impose upon the majority of Americans who do recognize the problems 40 years of trickle-down economics hath wrought. We’ve gone from an America where the middle class was able to get ahead, to one where only raw wealth counts. It is an un-American country we now have. Unless you already have wealth, or unless you can count on a degree from an Ivy-league university to lubricate your rise up the social ladder, you just don’t matter as a human. The new oligarchy will deign to deal with your non-economic concerns, but really they are just laughing at those they patronize by letting them think they have political power.

But at least we won’t have socialism!

The Chickens Have Come Home To Roost

The true Laugher Curve

Pity the poor Republicans. For forty years, they have followed the mantras spouted by their soothsayers, Art Laffer and Grover Norquist. “Lower tax rates bring in more money. Prosperity will trickle down. I want a government so small I can drown it in the bathtub.” For forty years, we’ve been subjected to an experiment aimed at fulfillment of the Republican dream. Then, with the ascendance of a so-called “businessman” to the Presidency, they had their wish totally fulfilled. Tax rates for corporations were slashed, incremental personal tax rates were cut further, and the estate tax now only affects a truly small segment of the population. We should have seen wild growth in our economy! Everyone truly happy and sharing in the national prosperity.

Except. Except we were not sharing equally in the prosperity this nation generated. Many, many folks were caught in the grinding wheel of trying to survive inside of a high cost society. Some lived in fly-over land, where it took a little less to survive, but still, it was nearly impossible to survive on a single income earning anywhere near the minimum wage. If they fell behind, then there were the predatory lenders, the auto title lords, the pay-day lenders, who would take advantage of those who had the least and withdraw funds feeding those who already had made it.

Now the Republicans are facing an opponent that doesn’t buy into the Ayn Randian philosophy permeating the Republican party. And those same Republicans, forced to compete on the field of ideas and policy, are retreating to their well-worn phrases against socialism, and attempting to incite culture wars in order to keep their base energized and engaged. It seems as though the first cracks are appearing in the Republican monolith aimed at enshrining Trumpism into the political hall of fame. Erstwhile supporter of Donald Trump, Matt Gaetz, now finds himself at the focal point of the magnifying glass of the Federal investigating agencies, while the bright light of the press shining through that same magnifying glass has caused the first smoldering of combustion to appear.

There now is someone in charge who believes we’ve had a decades long dearth in the investment provided through the Federal government. The bill has come due in the amount of spending required to repair the neglected arteries of our commerce. Perhaps the global commerce cardiac infarction from the Suez Canal blockage will show folks what can happen if something we depend upon within the US is suddenly taken out of service. Were we to suddenly lose train routes from New Jersey to Manhattan, or lose I-95 due to a bridge failure, we would see how vulnerable we are to this type of incident.

But its more. We now have a society where access to the internet is taken for granted in most population centers. Unfortunately, it is not a given in much of the lower population density regions that extends across the nation. As someone who lives in one of these lower population states, non-existent or extremely poor internet service is the norm anywhere outside of what passes for a population center in the state. Private industry has not found it profitable to serve much of the area in the country, since there is so little population there to amortize their investment. One of the real reasons for population declines in my state is due to the inability to compete because of poor internet connectivity. This really was apparent during the pandemic, where there were attempts to conduct remote learning through the internet. Whole swaths of this state were unable to do this due to the lack of internet service. The internet has become a necessary utility, like electric, phone, and water. Now it appears we are addressing those regions where it is not available, and that is good.

So now we hear the wails from the Republicans about the extreme leftists who have taken over the opposition party. Nowhere do we hear about the extremism we’ve endured on behalf of the ideology of “I’ve got mine, now go screw yourself” party we’ve seen for over a generation. Like it or not, no one is a raging success on their own. If we’ve been successful, it’s because of education systems put in place a long time ago. When people began abandoning the public school system, mainly due to the integration of that public system, then their engagement with that system has atrophied. Many no longer believe they have a role to play in the success of the whole. Instead, they decry forced taxation as legalized theft. They don’t care if the poor can’t get ahead, they’ll just hole up in their gated community and enjoy the fruits of their supposed labor.

Well, better historians than me have traced the decline of societies to the times when a significant underclass no longer feels they are able to share in the wealth of the society. That’s when desperation leads to true socialistic movements that will overwhelm any gates the rich can put up to isolate themselves. We can begin to address the obscene inequities present in our current system, or we can pretend that we can escape the world’s ills by flying to Cancun while everyone at home freezes in the dark.

What Happens Next?

Despair creeps in when hope is exhausted. For so many during this long pandemic season, despair has been a constant companion after the shock of the first few weeks passed. But now, along with the seasonal change, hope is returning. For some, the financial boost coming from the COVID relief package will enable them to hang on until the economy fully recovers, and they can go back to a service economy job that pays just enough to squeak by. For many others, the opportunity to abandon the prison of their home with the onslaught of vaccination, will bring back essential socialization and family interactions. Still, it is hope that is omnipresent in this time of rebirth in nature.

As a nation, we begin to crawl out of our foxholes and survey the landscape around us. Some things should come into focus, even if they were visible prior to the pandemic. Though visible, they did not register as urgent problems in the before times. Will we have the collective will to address these problems now? We will see. The COVID relief bill has taken a first step towards solving some of these problems. But it is time-limited relief, and its provisions are for only one or two years. The problems, like child poverty, have existed for far longer. It was only during the nadir of the pandemic that we realized how interconnected we all are, and how we need to solve the problems of our brothers and sisters in need, or we will be swept under the tide of humanity crying out for aid.

We had a foretaste of what can happen when we ignore these problems for too long. Demonstrations aimed at protesting excessive use of force by law enforcement, were coopted at night by those who favored direct action and anarchy. It is important to recognize that the demonstrations were instigated by acts of violence, but the economy was also a significant factor. When people do not see hope in their lives, despair can overwhelm them and it is a small step to violence. Of course, those who saw only the violence in the streets were convinced that the source of that violence was organized, and financed by an evil cabal. Then we saw what could happen when those who decried violence, decided to perpetrate violence themselves on January 6. Certainly we all were living in a state of despair at that time.

Will we learn our lessons? Will we let the siren song of substance abuse wrap its embrace of slithering tentacles around us? Will we continue to insist upon punitive actions only as the sole treatment method available to those who succumb to its fatal attraction? Will we realize that the costs of maintaining our prison complex are vastly greater than the costs of providing real treatment? That’s just one of the problems that existed long before the pandemic, yet shows up now in greater relief.

Will we be willing to invest in improved facilities for schools? In some states, the disparity between school facilities and achievement is immoral. The zip code you live in should not be the primary determinant of your educational outcome. Yet it is in far too many states. But of course it is the greedy teachers’ unions that are seen as the source of poor student performance.

Will we continue to accept that in the service economy we now have, it is not moral to allow those who look after the most vulnerable in our population to work full time for wages that do not provide enough money to live in dignity? We’ve lost many of the jobs we had in small towns, where a manufacturer could take those who did not pursue advanced education and provide them jobs where they could support a family. We may decry the global shift of labor and capital, but it will not reverse and provide those jobs in the future. Any manufacturing that returns, will use smaller amounts of labor, and require advanced education in order to control and maintain the machines that actually perform the manufacturing. We can wail and moan about this change, or we can accept it and try to fashion our real world into one where we’d like to live.

We’ve just gone through a period where we tried to squeeze out testosterone as a grease for our economy. Witness the frantic push to grab the last bit of fossil fuels out of the public lands. Because, you see, drilling for oil is manly. And we need that image of the roughneck out there in his domestic pickup, living his life out in the frontier towns of the Dakota’s, or among the tumbleweeds of Texas, showing the best of what America has to offer. Yes, doesn’t require much education to be a roughneck. Just what we need to Make America Great Again. But the investment required to keep the oil and gas flowing through the fracking fields won’t just keep coming, since it is nigh unto impossible to make money when the output from the wells declines so precipitously. So will we turn from the allure of fossil fuel towards a cleaner future?

The Texas freeze has shown us just how vulnerable our energy infrastructure is. Will we have the will to require investment in upgrading facilities and making it possible to integrate periodic sources of energy generation (i.e., renewables) into our delivery systems? The next failure may not just be in Texas, but can be global in nature, especially if we get smacked by a coronal mass ejection from the sun. Are we willing to spend money now to protect against something that may not happen for 100 years?

All of these problems (and many more) have existed for decades if not longer. The virus has shown us that we are all living on borrowed time if we expect life to continue blissfully ignorant of the risks we run. Somehow we need to change our mindset from a heedless rush for maximum profits by corporations, to a model where some of the excess profits are recycled into system improvements that ensure continuity of service. Can such a change in mindset happen without government mandates? Texas may be our canary in that a completely deregulated environment did not ensure continuity of service to cover a once in a hundred-year weather event.

Since the 1980’s in the US, we have seen government put down as being the worst enemy of true Americans. It is past time to put that phrase into our history books, as we see what that philosophy does to a society after over 40 years of implementation. You end up with massive inequality in the economy, a bulging underclass that does not share in the overall prosperity of the nation, and facilities that all depend upon that have grown increasingly frail. It is time to change our perspective and look at what can be, and work to create that future for all of us.

Weather – We Like It Or Not

In January 1982, I worked at a chemical plant in Memphis when we suffered through a spell of bitterly cold weather like Texas went through last week. Chemical plants are like other similar facilities, such as oil refineries and power plants. Memphis is not in the deep South, but our plant was not designed for an extended period of extremely cold weather.

So I can understand why Texas has suffered as much as they have in their current cold snap. And the longer temperatures remain so much below freezing, the worse the damage will get. When we suffered our freeze in Memphis, our first priority was to shut down in a safe way and prevent leakage of hazardous materials. Once that was safely completed, all we could do was settle in for the inevitable thaw that would come.

But when the thaw came, that is when the true damage was revealed. All of the water and steam piping that froze, often burst. The sound of dripping water showed how much repair was needed before we could start up again. In our case, large diameter cooling water pipes had frozen solid and burst, which delayed our restart for weeks. This was certainly a contributing factor in the decision by Du Pont to close the process a year later.

For facilities in Texas, often it’s the smallest components that cause the biggest issues. Pressure sensors have very small diameter piping that leads to a gauge and signal transmitter. That little bit of piping is often what freezes, leading to a loss of the sensor. Faced with the option of running their process blind, operators shut down their facility. Then the loss of heat from combustion or chemical reaction leads to more freezing. It’s a vicious cycle.

There are other factors that exacerbated the situation in Texas. By isolating themselves from the national power grid, they were able to claim that their utilities were not engaged in interstate commerce. That freed them from Federal regulation, and enabled them to rely solely upon intrastate regulation. For Texas, that is a prime motivating factor, and one reason why the situation has been so dire during this time. The few corners of the state that are tied into the national grids (El Paso and Beaumont) appear to have come through this crisis with minimal damage, since they were able to import electricity from outside of the borders of Texas. But everywhere else has been held hostage to the native stubbornness of the state.

To many on the outside looking in, it is inconceivable that Texans would willingly put themselves through a disaster just to continue to be free of external regulation. But that would not be a true assessment of the state of Texas. I first visited Texas nearly 50 years ago, and was struck by the attitude I encountered there. If any place in the US could be an independent country, Texas was that place. In the intervening decades, it seems this feeling has only strengthened. What Texas will find out is that there are real benefits to be had in integrating with the rest of the country. What I fear is this most recent incident will only serve to ossify the attitudes of true Texans, and perhaps send the secessionist movement into overdrive. It seems as though the tendency in Texas, and through much of the country, is that it is much better to go it alone. As if someone could wall themselves off from the rest of the world and still maintain a standard of living better than anyone else.

This was the motivating factor leading to the building of “the wall”. If we could just put up a barrier and prevent the others from diluting our genes, we would solve many of the problems of the nation. Funny thing, though. In Texas the concept of private property rights proved ascendant to the need to build a barrier. In many of the border lands adjacent to the Rio Grande, families that had owned the land for generations objected to their property being broken in two by a barrier wall. Civil litigation has held up construction for years, and there’s no end in sight.

So the tragedy unfolding in Texas is both of natural and human making. The cold they’ve been subjected to is certainly something that would cause much suffering by itself. But it was due to the nature of the power business in Texas, where no one enforced requirements to maintain back-up capacity, or winterize their facilities, that made a natural disaster an order of magnitude worse. Keep the situation in Texas in mind as Republicans keep insisting on a steady drumbeat of deregulation. Maybe regulations are more expensive. Maybe we pay a little more each month to ensure continuity of service. I know that it is a bitter struggle each time a utility in our state tries to recover funds spent on upgrading infrastructure. But as Texas has shown, you can pay me now, or pay me later. For Texas, later has arrived.

Let’s Subsidize Work Instead of Shareholders

Substation transformer

Looking back, there is no surprise that the result of the tax reductions passed by Republican votes in 2017 failed to rejuvenate the economy. The stated belief was that businesses would use the windfall from reduced taxation to invest in their employees, through higher wages, or invest in productive assets and expand their production base. Surprise! They didn’t. Businesses found that their analysis of the best use of the windfall was to increase stock buybacks and increase stock dividends. The main reason? There is just not justification for investing in new productivity within a mature market like the US.

Production facilities were not relocated from low wage countries, since the cost of labor greatly exceeds the benefits from lower taxation. Therefore it does not make economic sense to relocate low-value manufacturing back to the US for strictly economic criteria. It is only due to events like the supply chain interruptions from the pandemic (and to a lesser extent trade and tariff wars) that created a new incentive for bringing low value manufacturing back to the US.

What is needed is to create new incentive to build businesses that address needs within the US that are additive to the existing consumer base, rather than attempting to relocate existing production to meet stagnant demand. The best place where new demand could be created is in the energy markets and the infrastructure of the electrical grid. Somehow we must make it worthwhile to cause a market shift to use of renewable energy on a smaller scale than through citing of huge power plants, which result in inefficiencies through thermodynamic factors and through distribution from the grid. We already know that large power plants and the necessary facilities to distribute the energy are vulnerable to external shocks. A single large coronal mass ejection event from the sun could result in system wide outages for months at a time until new transformers are built and installed. Similarly, with the destabilization of international relations, use of electromagnetic pulse weaponry could cause equivalent destruction. Either way, our civilization is vulnerable to external forces that would bring us immediately back to the pre-industrial age, leading to immense loss of life.

So it makes it very clear that we need to create enough incentive to enable the decentralization of our electrical system. By doing that, we would improve our own future by reducing the potential for severe disruption. We would also create literally millions of jobs by creating a market for home energy system improvements that would use local labor to install and maintain. And our large scale manufacturing would also benefit by creating the solar panels and battery storage devices that the new grid would use.

Several years ago, we in West Virginia suffered through the aftereffects of a derecho that stopped electrical service across our region for multiple days. Living through that encouraged us to purchase a whole-house electrical generation system, powered through natural gas. Those systems have a weekly 5-minute system test where the generator runs. In my immediate neighborhood in West Virginia, I can hear three generators (including ours) conducting their tests over the course of the week. Good for us. We are assured that we cannot lose electrical power for an extended time. Or are we? Since we would all tap into the natural gas system, would it have enough capacity to handle all of us (and the others up and down the line) who have generators to handle peak demand? There is no way for us to know that except to run the full-scale test and suffer through an extended power outage. Surely this back-up generator expansion is not a scalable solution for metropolitan areas, since I am aware of no studies indicating how much gas would be available if it was being used extensively to replace standard electrical service.

Electrical service is the best example of an area where new means of producing and distributing a commodity (electrons) could be reworked to create new opportunities for investment and entrepreneurship. Unfortunately, other areas of our infrastructure are not as amenable to creating new incentives for reworking and repair. Other utilities such as water and gas are already regulated, and new fees for upgrading service are scrutinized and rarely approved by regulatory agencies. Face it, to replace water or gas lines involves huge investments, and the incentive to do that is not worthwhile for the private market to seek this as an area for investment. But it is crucially needed. Therefore if we are looking for places for government to stimulate the economy, it makes much more sense to provide subsidies for additional productive work rather than to provide tax reductions that only benefit shareholders. And I’m speaking as one who is fortunate enough to receive dividend income through my owned equities, so I am a beneficiary of the current system.

If anything has become evident during this year of pandemicmonium, it is that maintaining the ability of the consumer to keep stimulating the economy through spending is vital. If we suddenly turn off the spigots, then the result is longer term shrinkage of the economy, and a further increase in income inequality. So the types of changes I am proposing are not appropriate for this stage in the pandemic. But coming out of this mess, it is vital that we begin to plan to actually improve the state of our nation and its infrastructure, rather than accept what we had as being adequate. We now have a wealth of data to show that we’ve lived with inadequate systems, merely because it would have gored someone’s ox to fix the problems.

Only a Cold

2020 daffodils 1

I caught a cold last week. It showed its ugly presence on Saturday, with spasms of sneezing, a sore throat, and a developing cough. In the four days since that time, I’ve persuaded myself that it is not the dreaded new disease (no fever or chills), and that the disease is receding as I would expect it to. But its appearance even in the time of increased precautions against viral invaders shows that the new virus can be just as sneaky and opportunistic.

It is amazing how quickly the world has changed. Last week at this time, we were still looking forward to taking a trip to Key West for some hedonism. That was before I saw a cumulative display of disease cases day by day since January. When you see for yourself that the rate of reported cases was increasing by 12% per day, the numbers came alive for me and told me that if we ran the risk of taking a trip, we were not going to have a good time. Even if we safely ran the gauntlet and did not catch the disease, our time of relaxation would be ruined by worrying about making it back in one piece.

Having a background in math and statistics made it clear to me that we are in a global exercise we’ve not gone through since 1919. When a new virus emerges and passes into the human population, one that no one has immunity to, and one that appears to have a significant mortality factor, you have to watch it closely in order to gauge its infectivity and its effects. What is ironic is that China and the US shared an initial response to belittle the potential harm that this virus posed. In China, this resulted in the doctor who raised the initial alarm being censured by the Chinese state, prior to the time that the doctor succumbed to the disease. In the US, the potential for an epidemic was ridiculed by the President and his favorite press sources. We heard about the Democratic hoax that was aimed at bringing down the President. Even today, as of March 17, you can see a post by Dr. Ron Paul decrying the response to this epidemic as being overblown. In both cases, China and the US, precious time was lost in responding to the emergence of this disease. They will only take this disease seriously when family members are stricken by the pneumonia this disease can cause, and those family members are turned away from all hospitals because they’ve had to ration respirators and only those under age 80 will be treated. That’s the decision they are making in Italy, having to ration their available slots to the younger population.

It is a bit jarring to hear myself described as elderly, but since I’ve now crossed the age 65 divide, I now fall into the target demographic for this virus. So far the effect for us has been canceled concerts and canceled trips, and a lack of church services. The chorus we’ve been working on for months, a performance of Carmina Burana scheduled for April, has not been canceled formally but since no one can rehearse for it, it is on borrowed time. Our children are out of the house, and though one son is working in retail and will likely take a hit, we are able to help him out if needed. If we are not hit ourselves by the virus, we will weather the storm relatively easily.

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But for the economy of the world, we are now seeing the issues caused by the streamlining of supply chains by linking to non-domestic sourcing of parts. For decades now, the maxim of running public corporations solely for the maximizing of return to the shareholders has caused businesses to rely fully on foreign partners, either for finished goods, or for creating semi-finished goods that get completed elsewhere in the world. Quality improvement processes preached the benefits of lean assembly lines, since excess inventory hid systemic inefficiencies. So more and more businesses performed global integration of their supply chains. That process worked well until there was a supply disruption at the original point of manufacture. If the ultimate goal is to have product available to sell, then some inefficiency may be needed to allow for supply chain interruptions.

The disruptions in supply chains will continue to ripple through the world’s economy for months to come. Add to that the immediate disruption in the lives of service providers who will be laid off from their retail and food service jobs in the coming weeks, and we have the potential for a huge decrease in economic activity during the year. Already the governments of the world are generating proposals for helicopter money to be shoveled out and spread across the land. All of it with money borrowed from our distant descendents. This crisis has the potential to turn into a debt implosion, with the destruction of much of the seemingly secure capital in the world through waves of bankruptcy and discharge of debt. Will this black swan event be the one that causes the world to fundamentally reset its economic system? Growing economic inequality and growing dependence upon government debt to sustain the illusion of economic growth are at the point of totally collapsing. When no one can keep the appearances up, what happens to the world?

The barren shelves in the stores and the anecdotes about pitched battles for the last shreds of toilet paper have shown us how close we are to unraveling as a civilization. As long as we had sports, and access to material goods when desired, and good restaurants to pig out at, then we were happy. But let us have one week where demand outstripped supply, and we see how thin the veneer of civilization is.

I figured that the tone of this post is so much bleaker than most of my posts, that I needed to leaven it with a reminder that there is still beauty in the world. The pictures are of my daffodils that have burst into glorious flower within this past week. Every year I have a couple of weeks of peak daffodils. This is their time, and a reminder that spring is coming, and better times are ahead. I leave you with a delight of daffodils. Stay well in the days ahead.

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The Amateur Hour

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Amateur – 3. A person inexperienced or unskilled in a particular activity

The United States is conducting an experiment. An experiment that affects each and every person inside of the country, and many others around the world. This experiment involves turning over the operation of the executive branch of government to a group of amateurs, and observing what happens when amateurs are turned loose upon the gears of diplomacy, economics, and the military.

So far, the results have not been catastrophic. Taking the issue of the economy for example, the trends established since the economy bottomed in 2009 are continuing to result in gains in employment, and in measured economic growth. Despite claims of exceptional performance under the current administration, GDP growth averaged 2.2% from 2010 through 2016, while GDP growth during the current administration has been 2.6%. Using the statistical t-test, the two sets of data (past administration vs. current administration) are equivalent. There is not a statistically significant difference between 2.2% and 2.6% growth. But the one knob that this administration has turned, the tax cut, has yet to factor into the performance of the economy. The tax cut does have the potential to increase the rate of GDP growth significantly. However, the tax cut comes with a cost that has yet to be reckoned. The estimated deficits will increase greatly due to reduced tax revenues, and if there is an economic downturn in the next few years, the normal response of loosening fiscal policy to boost the economy will likely not be available. So we are at the mercy of the amateurs in the administration who believe it to be prudent fiscal policy to significantly cut taxes at a late stage in an economic recovery that has entered its ninth year. But what do experts know, anyway?

If you consider diplomacy, there is certainly a mixed bag to date. It does appear that twitter tirades and brazen bluster did result in at least enabling an initial meeting between North Korea and the US, with a generic agreement being signed. If this is indeed a first step towards a ratcheting down of tensions on the Korean peninsula, then this administration will have accomplished a worthwhile and noteworthy goal. But if the North Koreans continue playing Lucy with the football to the US’s Charley Brown, then relations may end up worse off than if there was no meeting.

That is the good news on the diplomacy front. Elsewhere, it is evident that this administration has zero respect for, and zero admitted need for diplomatic experience and expertise. Witness the exodus of State Department veterans over the first year of this administration. As of last November, 60% of the top management of the State Department had left government service, according to the American Foreign Service Association. A hiring freeze instituted under Rex Tillerson has been lifted by his successor, but nothing will replace the institutional memory and experience of those who were driven out by the bias of the current administration against subject matter expertise. The supporters of this President would say that this reduction in long-time employees is “draining the swamp”. What they do not realize is that this world is complex, and the diplomats at the front line in embassies around the world are essential in preventing US interests from being damaged. There will be costs, some of them severe, in the years to come due to the sabotaging of the diplomatic corps.

Meanwhile, the diplomatic style of this President was fully on display at the recent meeting of the G-7. The petty nature of the response to Prime Minister Trudeau’s press conference, replete with the denunciation of Trudeau as having “stabbed the US in the back” by declaring that Canada would not be bullied by the US, shows how much of this President’s actions are guided by his personal perception of slights. The threats unfurled against the strongest allies and trading partners of the US show that he has a vanishingly small knowledge of international trade and the risks to the economy of the world, by insisting on retreating to an era when America may have been great, but by imposing tariffs, we helped to drag the world into depression shortly thereafter.

Militarily, we are repeating the follies that have bedeviled military planners ever since military technology began changing year by year. That is, we are fighting the last war, not the next war. Thus the huge increase in the military budget over the coming years is earmarked for more ships, more fighters, more bombers, more in-air refueling capabilities, and keeping older hardware systems running. Meanwhile, the funding for cyber security ends up with a scant 4% increase when all of the ups and downs of spending by department are added up. Undoubtedly, there is a need for building ships to replace those that are near the end of their useful life. Likewise, replacement aircraft are needed. But the budget funds multiple generations of new weapons systems with no apparent overall strategy on what the military force of the future should look like.

The wars of the future will increasingly be economic or cyber in nature, and seeing funds spent on hardening the electric grid, purchasing large numbers of replacement transformers that could quickly be put in service should a grid disruption occur, these funds would be well invested for our economic and physical security. In fact, just as we used to have strategic metals reserves in case our supply got cut off, we should have a strategic transformer reserve, where these substation-level transformers that will be fried in an EMP (Electro-Magnetic Pulse) event can be quickly replaced. The best way to provide such a reserve was investigated by the Department of Energy and the report was issued to Congress in March of 2017. It does not call for a Federally owned reserve, but calls instead for increased coordination across utility companies. It does call for an increased reserve but one that is maintained and controlled by utility companies. Will such a program work when it is called upon? No one knows. But we do know that the huge increase in military spending is not going for what can happen in the present or future. No, it is going to the weaponry of the past.

Once again, the amateurs determining the strategy for national defense are insistent upon spending large to procure the weapons of the past, while ignoring the needs for the defense of our nation and our lifestyle from the real threats that we face.

The concept of amateurism is good. In athletics, we maintained the façade of amateurism for many decades, but eventually it was broken down. In tennis, in the Olympics, in all sports, it is recognized that if you wish to have excellence in performance, it is necessary to have people who can dedicate their lives to the sport by being paid for their efforts. We followed the same principles in our government. Those who were willing to sacrifice much larger private sector paychecks for the limited compensation of government positions were recognized and honored for their expertise and their service. But in this misguided administration, we have sacrificed those who developed their expertise over decades, in order to promote the agendas of the amateurs who struggle against the current of events in their fields. The problem is that there are real consequences that come from having amateurs deal with issues that can cost real money, and real damage to international relations, and cost lives when dealing with the military.

 

Social Security – the Personal Option

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One of the greatest problems that we face as a country in the US, is that too many people end their working life without assets they can use for their years after work. Another issue is that many people do not benefit from overall improvements in the economy. They have no stake in the game. And a third problem is that Social Security will exhaust its trust fund within a small number of years. For the third problem, there are solutions that will push the day of reckoning for Social Security out decades longer into the future (raise the taxable base, limit further the benefits paid to workers who earn well above the median wage, small increase in the Social Security tax rate). But I’ve not seen any proposal to solve the first two problems. This post provides a potential solution for these critical issues.

First, some background. The Standard & Poor’s 500 stock index, known as the S&P 500, is an index of the largest companies by stock valuation that trade in the US. Since 1926, it has included at least 90 companies, so that its performance is nearly a century old. Since 1957, it has contained 500 stocks. If you invested money in the index in 1928, just before the Great Depression, it would have earned an average of 9.6% per year if you continued to reinvest the dividends. So over time, the investment earned at a higher rate than investing in bonds, and that covers all of the stock market declines since then. Other stock indexes exist that track US corporations, and they show similar rates of growth over time.

The proposal is this. Out of the current 12.4% of employee contribution (split evenly between employee and employer) that currently goes into the Social Security fund, allocate 2% of new employee contributions into a personal account that invests in a stock index fund of companies based in the US. All dividends from the stocks will be reinvested into the personal account. At the time when a person takes Social Security payments, this person will have the option of converting the account to an IRA rollover, or converting it to an annuity.

A simple spreadsheet model shows the potential value of this approach. For someone at the lower end of the income spectrum, a person with salary income of $30,000 per year whose salary increased by 3% per year for a 40 year working career, the personal account would be worth $220,000 assuming that the accounts earn an average 8% per year. The 8% is less than the 9.6% average of the S&P for the past 90 years. This would enable someone who retires to have a significant account that reflects the growth of the economy during their working years. If they choose to select the security of an annuity, it would be administered by the Social Security system in order to avoid additional expenses of going through an insurance provider. Using an annuity calculator, the income for a 67 year old investing $220,000 would be about $1200 per month. This would be a significant increase in the benefit available as compared to the Social Security benefit for an individual.

The Social Security benefit would need to be reduced to reflect the smaller amount of tax revenue that is allocated to the standard benefit pool. But that reduction would take into account the length of time that a person has paid into the personal account fund. Social Security uses a 35 year working career as its basis for calculating benefits. Therefore, someone who has paid into the personal account for 35 years would have a benefit reduction of 16%, since they paid 16% less into the program(2% going to personal account / 12.4 % going to Social Security originally). For those who paid into the personal account for fewer years, the benefit reduction would be approximately 0.5% per year that they paid into the personal account.

What would the effect be of this money being funneled into the stock market? It would be relatively small. In 2016, the amount of money going into the Social Security system accounts from wages was about $700 billion. The proposed personal account would be about $110 billion per year. That amount of increased demand for stocks would raise valuations somewhat, but the investment markets should be able to absorb the incremental demand for investment. This would need to be modeled by real economists, instead of armchair analysts armed with Excel spreadsheets.

Those who are wary of stock investment will point to the inherent risk of stocks. And yes, there will be times when the value of personal accounts will go down on a year over year basis. But the nature of the equity markets has tended to go up when viewed on a longer timescale, such as a person’s working career. Perhaps there could be a personal option for those who are philosophically opposed to investing in stocks, but it would be one that people would have to select, instead of being the default option.

Those of us who have had the fortune to be able to invest over a lifetime, know the benefits of our economic system. We’ve been able to build up our pile of equity. But many folks will work their entire lives and have little to nothing to show for it, except for a Social Security payment. This suggestion would allow for everyone to have a stake in the economy, and would allow for individuals to either opt for the security of annuity payments for their lifetime, or to assume control of a personal account for their own benefit, and for the benefit of their heirs. I believe it is time to think outside of the box in order to attack some of the intransigent problems that this country faces.

Back during the administration of G. W. Bush, Social Security privatization was proposed, and quickly abandoned due to the outcry from many supporters of the system. Those proposals included more diversion of accounts than this proposal, and added more complexity in terms of investment choices. This approach keeps it simple, stupid. And since it rolls out so gradually, everyone would see how well their accounts are doing over time, and should be pleased with the long-term performance of their fund. It’s been nearly 15 years since the last attempt was made to enable private accounts. It is past time to reconsider the approach, and recognize that this is a populist proposal instead of a free ride for Wall Street.