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5/5/08 – The Holy Grail: energy policy based on evidence vs. propaganda. Read a Reply

Last week’s entry ended with a jab at “policy wonks” who advocate a government-led restructuring of the energy sector in the name of combating global warming. This week we would like to recognize the efforts of scientists who are doing bona fide research on climate change, such as Dr. David Legates, the Delaware state climatologist.

Legates grew up in Delaware and completed his formal education at the University of Delaware (UD). Leaving the state in 1988, he spent nearly a decade at the University of Oklahoma and two years at Louisiana State University. His specialty is climatology, or the study of long-term climate trends, as opposed to meteorology (the science of weather prediction).

On returning to UD, Legates led the establishment of the Delaware Environmental Observing System, a statewide monitoring system for temperatures, rainfall, storms levels and tides. He was appointed as the state climatologist in September 2005.

In addition to being the keeper of climate records for Delaware, Dr. Legates has published many scientific papers, given talks, attended conferences, etc. He networks with, among others, the National Center of Policy Analysis, Heritage Foundation, and Heartland Institute.

Due to his failure to toe the “party line” on global warming, critics have attempted to discredit Legates, e.g., by labeling him a spokesman from an ExxonMobil-funded organization. “Del. scientist’s view on climate criticized,” [Wilmington] News Journal, 2/6/07.

The Delaware Department of Natural Resources and Environmental Control reportedly attempted to have Legates removed as climatologist (basically an academic appointment). Although the governor’s office declined to go along, Legates has been asked to make clear in public statements that he does not speak for the state government. The state climatologists of Oregon and Virginia are out of the mainstream too, and they have been subjected to similar treatment.

Environmentalists have alleged links between ExxonMobil and probably every scientist who has ever expressed heterodox views about global warming. Ironically, one of the quotes noted in the Greenpeace dossier on Legates captures the spirit of their own monitoring activity.

On April 23, 2008, four SAFE directors (Dorsch, Martin, Morris, Whipple) attended a talk by Dr. Legates sponsored by the Conservative Caucus of Delaware. The event took place in a second floor meeting room at the Brandywine Hundred Library with an audience of about 40 people. Given the leanings of the audience, it seemed that the state climatologist would be preaching to the proverbial “choir.”

Let it not be assumed, however, that Legates sticks to reliably receptive venues. Just the night before, in recognition of Earth Day 2008, he had spoken about global warming at Cecil College’s North East campus in Maryland.

The speaker arrived and set up his laptop for the slide show. Some chairs had to be moved in order to position the projector further from the screen, providing an opportunity to size up the speaker before the talk got started.

Boyish face, average height, a bit rotund, dressed rather casually, in his mid-40s perhaps, Dr. Legates seems energetic and friendly. He invites several late arrivals to come in and get seated. Hmm, nothing about the speaker stamps him as a corporate shill. Can this really be the man that critics have called “a favorite scientist of the global warming denial machine”?

Legates began with a disclaimer. He would not be speaking on behalf of any branch (executive, legislative or judicial) of the Delaware state government, but merely expressing his professional opinion on the convenient “truth” of global warming. Oh, darn, but no one walked out.

The ensuing talk confirmed much of our own thinking about global warming, which has been presented at length in previous entries. See, e.g., 1/21/08, “An update on global warming (cooling?).”

If the speaker intended to deny global warming, he had a funny way of going about. Thus, in the course of his talk, he acknowledged a warming trend, identified human activity as a contributing factor, and said carbon dioxide (C02) and methane in the atmosphere have a heat trapping effect.

Legates did take issue with the assumption, however, that rising levels of CO2, etc. can be expected to produce a straight-line (or accelerating) increase in global temperatures. How could such a relationship be expected when we know that global temperatures are influenced by many factors, including, probably most importantly, the level of sunspot activity?

Also, the earth was considerably warmer some 800 years ago than it is today, without catastrophic consequences for mankind. The medieval warm period is considered inconvenient in some quarters, and a few years ago a scientist at Penn State University proposed a restatement of the historical data that would have “gotten rid of” it. Errors were discovered in the methodology, however, and this effort was discredited.

The winter of 2008 brought record snowfall levels in many areas of North America (not Delaware), which apparently coincides with the currently low level of sunspot activity. More sunspots may flare up soon, given that alternating cycles of about 11 years of low and high sunspot activity have been observed in modern times. If so, the apparent pause in the global warming trend (average temperatures were higher in 1998 than they are expected to be this year) should end. But there are also precedents for extended periods of solar quiescence.

As we have previously noted, some Russian scientists (presumably not funded by ExxonMobil) believe the earth is on the cusp of an extended period of lower temperatures. Legates did not suggest this; he simply said it is not known what will happen.

The global warming faithful are aware that a cooling trend may be coming, and some of them are already crafting an explanation about “shifting ocean currents temporarily blunt[ing] the global warming effect caused by mankind.”

Assuming that predictions of global warming are well founded, what are the likely consequences?

Legates said a greatly increased level of hurricane activity is unlikely. The Katrina disaster was due in large part to the unique characteristics of the local geography including the fact that a large part of New Orleans sits below sea level. Also, while hurricanes have been on the upswing in the northern Atlantic, they have been declining in other ocean basins.

What about the fact that droughts are becoming more frequent in many areas, including Delaware? Don’t blame climate change; population growth and the clearing of land (which causes faster rainfall runoff) provide a ready explanation for dropping reservoir levels.

All of which is not to say global warming is of no concern, said Legates, nor that corrective action may not be indicated. Scientists need to develop a better understanding of what is happening, however, to provide the basis for a “well informed and prudent response.”

While not getting into policy options, Legates commended the views of the Cornwall Alliance, a religiously oriented but scientifically savvy task force that is concerned with stewardship of the environment. Here is an excerpt from their Website, which makes sense to us.

When addressing environmental problems, we should respond first to firmly established risks in ways that are cost-effective and have proven benefit. Prudent stewardship will avoid siren calls to action on speculative problems that are based on politicized science or media-driven hype, focusing instead on well-understood and well-argued evidence. In the world of policy priorities, arguments that millions may die in the next century (due, for example, to poorly-understood and wildly exaggerated claims about climate change) must yield primacy of place to well-understood problems (like unsafe drinking water, dirty fuels like wood and dung, and malarial mosquitoes) that cause some 4-5 million deaths annually and that could be solved for a fraction of the proposed cost.

Some environmentalists have responded to attacks on Dr. Legates et al. in the vein that academics have the right to be wrong. Besides, as one of them put it, “crucifying the man and these other guys probably does more harm than good, because it inflames people who are looking for victims and looking for the argument that global warming is a conspiracy of nuts and leftists and environmental extremists."

As we have said before, all concerned should forbear from personal attacks and let the science decide. With scientists like Dr. Legates on the job, the climate change debate will be sorted out appropriately in due course.

Meanwhile, the public should resist hugely expensive, long-term programs that would have no measurable effect on the earth’s climate.

The campaign to force Delmarva Power to enter into a 25-year contract to buy electricity generated by a $1.6 billion offshore wind farm exemplifies the sort of “feel good” measures that should be avoided. Fortunately, as of this writing, it appears that the campaign will fall short.

Let it not be thought, by the way, that this is about defending “the corporate interests.” Bluewater Wind, the firm that proposes to build the project, is owned by an international investment group (Barker & Brown, based in Australia) of considerable size and sophistication. It is a safe bet that Bluewater would earn a handsome profit on the project, while the power costs for Delaware consumers were correspondingly inflated.

For those concerned that too much fossil fuel is being consumed to produce electricity, there is always nuclear power – which is far more practical than wind power given the current state of technology.

Greenpeace founder Patrick Moore recently made the case for building more nuclear power plants. Amen! Note, however, that other environmentalists claim Moore is on the take from the nuclear power industry. Special interests are everywhere, it seems.

We now return to the subject of the 4/21/08 entry on “pain at the pump.” High gas prices have been front and center in this election year, and here are some recent developments.

American motorists are very concerned about the cost to refuel these days. Listen to what David Gares of Lebanon, Pennsylvania, has to say, for instance, about paying more than $4 a gallon for diesel fuel (his tractor-trailer rig gets a little over six miles per gallon).

You can't charge it back to the shipper, so it comes out of your own wallet. Now you have to start looking at how to cut back.

Gares was one of over 100 truckers who drove to Washington, D.C. to publicize their plight and demand action from Congress. Imagine the traffic tie-ups as their trucks lumbered around the National Mall.

Whatever one may think of politicians, they do listen when people get mad. Thus, some of our political leaders are starting to offer ideas about gas prices that go beyond the standard fare of cracking down on the oil companies, etc.

#One presidential candidate suggested a moratorium on the federal gas tax (18.4¢ per gallon, 24.4¢ per gallon for diesel) between the 4^th of July and Labor Day. Another picked up the refrain (albeit proposing a windfall profits tax on oil companies to go along with it), while the holdout (thus far) accuses his rivals of pandering.

Not that we favor short term, ad hoc actions like this, particularly on top of the income tax rebate that will swell this year’s deficit by some $160 billion. Still, the suggestion does show a willingness to go beyond government as usual thinking.

#Another idea is to suspend purchases of oil for the strategic reserve. Such action would not make much of a dent in gas prices, but in principle we see nothing wrong with it.

#Shelving his rhetoric about reducing America’s addiction to oil, etc., the president pointedly commented at a press conference on April 29 that Congress should stop blocking domestic oil production from the Artic National Wildlife Refuge, etc.

One of the main reasons for high gas prices is that global oil production is not keeping up with growing demand. Members of Congress have been vocal about foreign governments increasing their oil production; yet Congress has been just as vocal in opposition to efforts to expand our production here at home. They repeatedly blocked environmentally safe exploration in ANWR. The Department of Energy estimates that ANWR could allow America to produce about a million additional barrels of oil every day, which translates to about 27 millions of gallons of gasoline and diesel every day.

#Despite professing to be “deeply concerned about food prices,” however, the president continues to support the disastrous ethanol mandate/subsidy program. Too bad, we have a lot more education work to do on that issue.

To sum up this three-part series, the cost of restructuring the U.S. economy from top to bottom in an attempt to avert global warming would be stupendous. High gas and food prices are just the tip of the iceberg.

So for those who are not convinced that they want to pay for this idea, via either taxes or ever-higher prices, now would be the time to start asking questions about it.

Last week’s entry ended with a conundrum: If our political leaders are truly concerned about high gas prices, as they profess to be, why are so many “solutions” suggested that would simply make the problem worse?

It would be bad form to question the intelligence or impugn the motives of the tax & subsidy crowd, but we do see similarities between their approach and the exploits of a character in Greek mythology.

Icarus sought to escape from the isle of Crete with wings fashioned from feathers and wax. The wax melted when he flew too near the sun, and he fell into the sea and perished. Moral: beware of unwarranted confidence in your own abilities and unproven technology.

The crude oil shortage driving up gas prices is a function of supply and demand, and there is no reason it should continue indefinitely.

U.S. consumption of petroleum is expected to decline modestly in 2008 versus continuing to rise. A similar trend (or at least slowing growth in consumption) is probably at work elsewhere in the world.

Meanwhile, high prices for crude oil will encourage investment in new production – such as exploiting recent oil finds off the coast of Brazil – although such projects naturally take time to come on line.

With stabilizing consumption and the prospect of increasing production, prices for crude oil could decline – perhaps dramatically. Some analysts foresee oil prices falling to $80 per barrel within a matter of months; their premise is that the price overshot on the way up.

Other analysts expect oil prices to keep rising, e.g., a Canadian study predicts a doubling by 2012. This view focuses on declining production from established oil fields and rising demand for motor fuel in countries such as India, while implicitly assuming that the current price is in line with economic fundamentals.

We do not claim to know who is right. However, the history of oil prices demonstrates that dramatic price increases (e.g., in the 1970s) have often been followed by sharp decreases. See the following graph (per WTRG Economics) of crude oil prices from 1947 to 2007.

Instead of attacking high gas prices, in our opinion, the government should stand back and allow market forces to operate. Better yet, it could help things along by removing current barriers to U.S. petroleum production, scrapping ethanol mandates and subsidies, etc.

Such a strategy would work pretty well, we believe, but it is so simple that anyone could lead the charge. Promising to “stand up to big oil” or cure “America’s addiction to oil” has a more inspirational ring, never mind whether a tax & subsidy scheme would result in lower energy prices or push them up some more.

Given that higher energy prices are the all but certain result of tax & subsidy, politicians engage in a bit of fancy footwork. The idea is to point to a problem that “must be solved” and propose a solution without talking much about cost.

Enter the manmade global warming (aka climate change) theory. If people can be convinced that life as we know it is at risk, they may not worry about the cost of forcing a sudden shift from fossil fuels to alternative fuels. After all, one cannot expect to fight a war without casualties.

War? See Time Magazine’s recent story on “How to win the war against global warming.”

By the way, Time put a picture on its magazine cover that was patterned after the raising of the American flag on Iwo Jima. Veterans were outraged, we understand, and this image is not to be found on the Time Website.

Here is some of the backlash, courtesy of the National Center of Public Policy Research.

Iwo Jima veteran Donald Mates: "The Second World War we knew was there. Some say there is global warming, some say there isn't. And to stick a tree in place of a flag on the Iwo Jima picture is just sacrilegious."

John Keith Wells, the Marine lieutenant who led the platoon that scaled Mount Suribaci and raised the American flag: "That global warming [is] the biggest joke I've ever known."

Victory, in the minds of global warming activists, would entail raising the price of fossil fuels so high that consumers would switch to otherwise uneconomic alternative fuels. Thus, per the Time article:

The most important part of a blueprint to contain climate change is to put a charge on carbon emissions. As long as the sky is free, renewable energy will never beat fossil fuels. But put a price on carbon, and suddenly the alternatives look a lot better.

The most straightforward way to “put a price on carbon” would be to impose additional taxes on fossil fuels that would be passed along to consumers via higher prices. One observer gloats that high gas prices are starting to put a crimp in U.S. consumption, but says a carbon tax could achieve the same results without “fabulous ‘rents’ for oil owners and extractors.” (A carbon tax would provide zero incentive for increased oil production, however, and the revenues would probably be used to subsidize alternative energy projects rather than being rebated to the public.)

It is one thing to accept the theory of manmade climate change, and quite another to bear the cost of the steps supposedly needed to stop it.

Per a recent poll, “only 18% of Americans are willing to pay 50 cents or more in additional taxes per gallon of gas to reduce greenhouse gas emissions.” And 48% of Americans would be unwilling to pay “even a penny more for this purpose.”

To circumvent such resistance, global warming activists visualize a “cap-and-trade” system. Here is how the Time Magazine article explains the idea.

The most feasible way to [put a price on carbon] is through a cap-and-trade system that sets ceilings for carbon output and lets companies that come in under the limit sell credits to those that don't, allowing them to keep polluting—a little. The effect is that overall carbon levels fall, and there is even money to be made by being greener than the next guy.

Most feasible? From a political standpoint, a cap-and-trade system would offer the advantage of being so complicated that energy consumers would not be able to determine how much the system was costing them. Economists are well nigh unanimous, however, that a carbon tax would work more efficiently. It would also not enrich players in a position to game the system [Enron on steroids], as would surely happen with cap-and-trade.

Another interesting feature of cap and trade is that such a system could potentially be implemented on a global (vs. national or regional) basis with the intent of shifting the “price of carbon” from developing countries to the United States et al. Thus, the cost of burning fossil fuel in relatively clean burning facilities here could be driven up by the cost of carbon credits, while less developed countries (where most of the growth in greenhouse gas emissions is going on) would be paid to find a use for natural gas that is currently being flared (burned), build cleaner power plants, preserve rain forests, etc. We doubt that a comparable transfer of wealth could be achieved with a straightforward tax & subsidy system, because U.S. consumers would not stand for it.

Now, if catastrophe truly loomed as a result of manmade global warming, the sacrifices being demanded might seem understandable. But as SAFE and others have pointed out repeatedly, the evidence linking the warming trend that has been observed to human activity is pretty thin.

Quite possibly alternative energy sources will emerge in time to supplant fossil fuels, we have nothing against this, but it would be prudent to develop and perfect the new technologies first rather than forcing changes at breakneck speed without regard for economic cost.

A good way to ensure that alternative energy projects are done right is for the private sector to set the pace. If Boone Pickens wants to invest in a huge wind farm in Texas, for instance, we think that is fine – just as long his money (and that of other private investors) is at risk and project feasibility does not rest on government subsidies.

Skeptics like us represent an inconvenient obstacle, and former Vice President Al Gore vented his frustration in a recent interview.

I think that those people are in such a tiny, tiny minority now with their point of view. They’re almost like the ones who still believe that the moon landing was staged in a movie lot in Arizona and those who believe the earth is flat. That demeans them a little bit, but it’s not that far off.

Well, what about the incontrovertible evidence that the world’s temperature has fluctuated for millions of years, and was considerably higher a few hundred years ago than it is now?

Also, isn’t it a fact that global temperatures are lower now than they were ten years ago?

Perhaps the deviation from a warming trend is temporary, as suggested in this piece from BBC News, and should be chalked up to climate variability. But we do not find much cause for panic in the report that the “best estimate for 2008 [is] about [0.4 degrees Celsius] above the 1961-1990 average.”

In the end, the rationale for tax & subsidy proposals (or the cap-and-trade equivalent) boils down to this. “We” know the score, and “you” need to fall in line. Energy will cost more in the short run, but in the long run everyone will be better off.

Is it not possible, however, that the Icarus factor would come into play? As an indication of what to expect from tax & subsidy schemes, consider what ethanol mandates and subsidies have already accomplished.

First, the government’s promotion of ethanol has contributed to higher gas prices, which is arguably OK because low gas prices were encouraging “wasteful” consumption.

“Subsidies to biofuels in the rich world” have also contributed to a worldwide run-up in food prices, which is hitting very hard in less prosperous countries. In the view of many, including some who are not all that concerned about high gas prices in the U.S., this development represents a crisis.

Even global warming activists are reportedly backing off their previously expressed support for corn-based ethanol. “Gore Ducks,” reported the New York Sun, after being told that the former vice-president was unavailable for an interview on the subject.

Should the public continue acquiescing in a government-led restructuring of the energy sector, confident that an elite group of policy wonks know what they are doing?

Soaring prices for motor fuel represent a burden for all of us, and it would be nice to do something about them. First, however, we need to understand their cause.

Let’s begin with some data to demonstrate the 89% increase in gasoline prices over the past 40 months. (Diesel fuel prices rose 104% over the same period; no wonder truckers are hurting.)

U.S. Avg. Price	12/27/04	12/26/05	12/25/06	12/31/07	4/14/08	Since 04
Regular gas	$1.79	$2.20	$2.34	$3.05	$3.39	+89%

Some politicians have seen fit to blame the oil industry and threaten windfall profits taxes and such, but their ideas, if implemented, could only make matters worse.

A bum rap: Exxon Mobil (XOM) is the biggest and most consistently profitable of the Western oil companies, so eyebrows rose when the company earned $40.6 billion for 2007. Other big oil companies have been tarred with the same brush.

On April 1, 2008, executives of ExxonMobil, Royal Dutch Shell, British Petroleum, Chevron and ConocoPhillips were haled before a House committee and grilled about their profits.

These companies earned an aggregate of $123 billion in 2007, as noted in media reports, giving rise to suspicions that they had been unfairly profiting from rising oil prices. Representative Edward Markey (D-MA) characterized the companies as laying a burden on American families. Representative Emanuel Cleaver (D-MO) quipped that their approval rating was lower than that of Congress, i.e., “you are down low.”

Cleaver’s comment may be an accurate representation of public opinion, but that does not mean that the oil companies are responsible for high gas prices.

The prime reason for the run-up in gas prices is the increase in crude oil prices, which are currently over $110 per barrel and climbing. Back in 2005, there was shock when the price for oil hit $60 per barrel.

As crude oil prices have risen in recent years, the percentage of gas prices attributable to crude oil increased from 49% in December 2004 to 72% currently. This is pretty clear evidence that crude oil prices (rather than some other factor) are driving gas prices.

XOM et al. are producers of crude oil, not just refiners and distributors, but they do not determine the market price. Global oil prices are primarily a function of demand for oil (which has been surging in non-U.S. areas of the world) and decisions of the low cost oil producers (Saudi Arabia, Iran, Russia, etc.) as to how much crude oil they will provide.

Congress would probably love to demand the appearance of representatives from these countries to justify their profits, but no one would come so they settle for calling Western oil companies on the carpet.

XOM earnings have been robust over the past several years, but they have hardly kept pace with the increase in crude oil prices. The economic gains of Saudi Arabia et al. have surely been far greater.

ExxonMobil	2007	2006	2005	2004	2003
Revenue	$405B	$378B	$371B	$298B	$247B
Cost of revenue	233	213	213	162	129
Other cost (net)	101	97	99	95	85
Income tax expense	30	28	23	16	11
Net profit	41	40	36	25	22
Profit margin	10.1%	10.6%	9.7%	8.4%	8.9%

Most people would concede that XOM is entitled to earn a profit for the complex and value-adding functions it performs. If the $41 billion that it earned in 2007 (an up year) is deemed “too high,” what should the number have been? A 10% profit margin does not seem outrageous to us, and other leading companies reported comparable or higher margins (e.g., AT&T 10%, Coca-Cola 21%, GE 13%, Microsoft 27%).

Nor should it be thought that XOM’s profits come solely from the pockets of U.S. motorists. Over 10% of the company’s 2007 profits were from chemical operations, and 62% of its petroleum product sales (including heating oil, jet fuel, etc.) were non-U.S. Ergo, rolled-up (upstream plus downstream) profit from U.S. petroleum products (including heating oil, jet fuel, etc.) sales in 2007 was probably on the order of $14 billion ($36B x 38%).

Similarly, the 5-company profit total of $123 billion reflects worldwide profits from all product lines. It is misleading to cite these profits, as media reports have done, as though they were being borne in their entirety by U.S. motorists.

*“Big Oil,” 2007*	*Revenues*	*Net Income*	*Profit Margin*
Exxon-Mobil (X0M)	$405B	$41B	10.1%
Royal Dutch Shell (RDS-B)	356	31	8.7
British Petroleum (BP)	284	21	7.4
Chevron (CVX)	221	19	8.6
ConocoPhillips (COP)	194	12	6.2
*5-Company Aggregate*	*1,460*	*123*	*8.5*

An alternative suspect: The hearing on April 1, 2008 was not the first time oil companies have been criticized for earning high profits, nor will it be the last.

Consider the following commentary by Peter Van Dorn and Jerry Taylor of Cato Institute on how “tar was gathered, feathers distributed, and the political mob undertook its predictable march” after XOM reported earnings of $10.3 billion for the 4^th quarter of 2005.

Generically, this type of activity is called “the blame game.” Note that the initiators of the game often have reason to feel guilty or uncomfortable about the very problem they seek to pin on someone else.

Federal and state governments earn no profits from petroleum operations, but they do impose taxes. On average, U.S. drivers pay federal + state excise taxes of about 50¢ a gallon (47.0¢ on gasoline, 53.6¢ on diesel) for motor fuel.

Income taxes are levied on oil company profits as well, and the total taxes imposed on the industry generally exceed company profits. Between 1981 and 2006, according to the Tax Foundation, “government collected $1.65 trillion in total taxes after adjusting for inflation. That is 65 percent more than the combined earnings of the 16 largest domestic oil companies during the same period.”

Regulatory policies have contributed to higher gas prices as well. If the federal government wants to achieve lower gas prices and support the creation of U.S. jobs, it should (1) stop blocking the development of unexploited petroleum reserves (notably in Alaska and offshore), (2) moderate environmental requirements that have inhibited the construction of new refineries in this country during the past 30 years, and (3) scrap the economically disastrous mandates and subsidies for ethanol. See prior entries for discussion, e.g., 9/3/07, “Alternative energy: let the market decide,” and 12/24/07, “Fiscal visionaries at bay.”

The states have done further damage by overlaying the federal rules with a patchwork of their own requirements that inhibits the creation and operation of a national market for petroleum products.

Perhaps Congress should take a break from badgering the oil companies and look into the impact of government policies on gas prices for a change.

Some bad ideas: In years gone by, to borrow a line from Ben Lieberman of the Heritage Foundation, Congress reacted to surging energy prices by “taxing successful energy sources and subsidizing unsuccessful ones.”

Such policies produced bad results before, and there is no reason to believe they will work better now. The results of doing nothing and letting supply and demand do their job would be far better.

For those who do not remember, let’s briefly recap what happened in the 1970s and early 1980s when our country set out to achieve “energy independence.” (Of course, oil imports have continued to climb.)

A nationwide speed limit of 55 miles per hour was more honored in the breach than the observance.

Fleet mileage standards for passenger autos fueled the growing popularity of SUVs and light trucks.

A windfall profits tax (enacted in 1980) discouraged domestic oil production by capping expected returns from new investments. Also, the tax brought in far less revenue than expected due to lower than projected oil prices.

Why would anyone want to go through all this again, reinforcing the long term trend to import more and more of our oil needs from politically unstable areas of the world at the expense of U.S. consumers and this country’s balance of payments?

Yet there have been recent calls for a new windfall profits tax, or failing that the repeal of “tax breaks” for the oil sector. The revenues from ending tax breaks (some $18 billion over 10 years) would be earmarked to support ethanol, wind power, etc.

At the April 1, 2008 hearing, Congressman Edward Markey alluded to the $18 billion tax increase proposal. He also challenged the oil company executives “to invest 10 percent of their profits to develop renewable energy.”

The oil company executives explained that it will take decades to develop economically practical substitutes for oil as an energy source for motor vehicles, i.e., this country will be relying on oil for much of its energy needs for the foreseeable future. Even by 2030, according to Stephen Simon of Exxon Mobil, “oil and gas still will handle about 54% of the world’s energy demand” (paraphrase).

In summary, the idea of curbing high gas prices by imposing additional taxes that the oil companies would pass on to consumers has little plausibility. Alternative energy sources will probably be developed in time, but forcing this to happen on a crash basis would not contribute to lower gas prices either.

So why is it that the same bad ideas keep coming up? Let us know what you think about this, and tune in next week for a suggested answer.

Having reviewed the problems of the Social Security system last week, we will now suggest a strategy to sell the needed reforms.

The key is a persuasive message, as Aristotle taught over 2,000 years ago, offering logos (reason), pathos (emotion), and ethos (credibility). Let’s see how this might work in the case of Social Security reform.

Reason: The case for Social Security reform was made in the 4/7/08 entry, so an “in a nutshell” summary should suffice now.

Social Security (over 20% of the total budget and on the rise) will not be affordable much longer. Younger workers can expect sharp tax increases and/or benefit cuts to keep the system going. Also, retirement benefits from Social Security bear no necessary connection to taxes paid, e.g., some workers pay taxes all their lives and receive no benefits at all.

To address the future funding deficit and other problems, it has been proposed that the Social Security system be converted from a hit or miss welfare scheme to a retirement savings plan in which younger participants could, at their option, use the payroll taxes they pay to fund personal accounts.

The conversion would require a number of years and substantial up front funding, but said funding would be recouped later and the problems with Social Security would be cured permanently. Cato Institute has offered a detailed proposal (the 6.2 Percent Solution) that SAFE enthusiastically endorses.

What is the alternative? Proposals to “save” Social Security versus reforming it entail a combination of tax increases and benefit cuts. However artfully contrived, the cure would be about as much fun as a root canal. Also, no such plan would ensure a permanent solution because demographic trends (notably lengthening life spans) could throw the system out of fiscal balance again.

The foregoing represents a good start, we believe, but more will be needed to carry the day. Read on.

Emotion – Life is a complicated experience, rife with uncertainty, and human beings face decisions at every turn.

To avoid agonizing over their decisions, which would consume excessive energy and have negative survival value, people follow rules of thumb. When the alarm goes off, get up. When the light turns green, go. Eat three meals a day rather than eating all the time. And so forth.

One of the key points, to borrow a line from the movie Ghostbusters, is “who are you going to call?” when help is needed.

Some people blame government for their problems, while others see government action as their salvation. Neither answer is right all the time, but it is easier to go with a generalized assumption than to puzzle over where the truth lies in specific cases.

Thus, skeptics of government question whether setting a minimum wage truly benefits lower income workers – probably just drives up the unemployment rate they may say. Others insist government should require employers to pay their workers “a living wage.”

The two mindsets are irreconcilable, and it is hard to demonstrate that one or the other is “correct.” The resulting debate as to what the government should and should not do is more about values than facts.

Social Security reform via personal accounts would move decisions from government to participants in the program. That seems like a good thing to SAFE members and those who think like we do, but how does one win over people who view the 6.2 Percent Solution as a misguided effort to tinker with one of the proudest achievements of the New Deal?

Ultimately, to be persuasive, our message must have emotional resonance. Images and stories to which people can relate may be more helpful than volumes of fact-based arguments and statistics.

SAFE does attempt to reach people at an emotional level. Thus, the cartoon of a man offering to help a child struggling to carry the “U.S. debt” appears in every issue of our newsletter. “Thank you, Grandpa!”

We have also sponsored advertisements featuring flesh and blood youngsters. Thus, Jason Allen Dempsey, a grandson of SAFE director Jerry Martin, carried a sandwich board on Newark Community Day in 2002 saying today’s pork/ tomorrow’s debt are UNFAIR TO KIDS.

There is a multigenerational family picture on the front page of Cato’s guide to Social Security reform; a copy is posted on our Website.

Good stuff, but there is much more we could do. In hopes of picking up ideas as well as showing support for a vitally important project, SAFE directors Steve McClain, Bill Whipple, and Daniel Kerrick recently attended a screening of I.O.U.S.A. in Philadelphia.

Taking a leaf out of Al Gore’s playbook, I.O.U.S.A. is designed to dramatize the coming fiscal crisis for the general public. Click this link for additional information.

As to how I.O.U.S.A. was put together and whether it works, here is what we observed.

The film offers a compelling mix of gee whiz graphics (eye candy to make the financial data go down), statements of numerous speakers in settings both formal and otherwise, and action scenes from America (losing its way) and China (on the rise). Did you know the second biggest U.S. export to China is demolished vehicles to be melted down and made into steel?

There are sound bites from U.S. presidents going way back. Some are more appropriate than others, but the point is fairly made that the fiscal mess has been developing for decades under leaders from both parties.

David Walker (identified as the U.S. Comptroller General) and Robert Bixby of Concord Coalition are shown speaking out on the Fiscal Wake-Up Tour and also behind the scenes. Walker’s framework of the four American deficits (budgetary, savings, balance of payments, and leadership) serves as the structure of the film.

There are appearances by William Bonner (“Empire of Debt”), Warren Buffet, former Treasury Secretaries Robert Rubin and Paul O’Neill, several members of Congress (notably Ron Paul from Texas), actor Steve Martin et al. in a skit about the strange notion that things should not be bought unless one can afford them, and “ordinary people” who stumble when asked basic economic questions.

The film will be revised before being released around the end of August, and we are hopeful that various flaws will be addressed.

One point is to update the material, e.g., by explaining that David Walker has left his government job to head the newly formed Peterson Foundation and covering the Bear Stearns buyout.

We question the degree to which the leadership deficit is associated with the current president. Without attempting to defend the president’s fiscal record, which has been mixed at best, he at least offered a proposal for Social Security reform while his predecessor made no effort to restructure the entitlement programs that threaten to swamp the government’s fiscal boat. Current deficits were reduced (albeit not eliminated) in the 1990s, however, for which the previous president does deserve credit. For a balanced assessment, see the 1/28/08 entry, “State of the budget: a 40-year slump.”

Also, the role of legislators is shortchanged. The many members of Congress who have not only approved excessive budget requests but also demanded more deserve recognition, and not just mavericks like Ron Paul who have gone against the flow.

While I.O.U.S.A. seeks to foster awareness of the fiscal mess, it does not offer solutions. That is something the country will have to address, but we can all agree that awareness is the first step.

Did this film reach the audience? There was clapping when it ended, and in the Q&A session that followed hands shot up all over the theatre and the questions asked demonstrated passion. The reaction at other events we have attended, such as the Fiscal Wake-Up Tour stop in Baltimore, was decidedly more restrained.

So, are we thinking SAFE should make a movie to promote its ideas? Hardly, we lack the artistic (not to mention financial) resources required. We will urge family members, friends and associates to see I.O.U.S.A. when it comes out, however, and remind them that SAFE has suggested solutions to the fiscal mess that merit serious consideration.

We will also strive to infuse the kind of communications that SAFE is equipped to handle with emotional appeal. One approach is to present easy to grasp images, such as the card stamped “insufficient funds” posted by the Social Security Reform Center.

Another approach is to tap into the stories of flesh and blood people (not just abstractions like the country or “all of us”) who are concerned about the government’s fiscal irresponsibility. Consider Students for Saving Social Security (S4), for instance, who have inspiring enthusiasm, tremendous energy, and some incredible ideas (like an ostrich walk across New Hampshire).

Credibility: However well crafted our message, it will have little impact unless SAFE is seen as a source of valid information and relevant opinions.

There are some common sense rules to build credibility. Do not overstate points to attract attention. Do not make factual claims that cannot be substantiated. Refrain from personal attacks on opponents. If you have a financial stake in a proposal (this does not apply for SAFE), disclose it up front. Do not turn every communication into a fund raising appeal.

These rules seem rather obvious (although there have been some bobbles on the campaign trail this year), and we try to observe them. Hopefully the public has noticed. Enough said.

Another dimension is more elusive, namely developing a constructive agenda. It would be easy to survey the fiscal mess that our leaders have created and cry “woe is us” or “this must be stopped,” but what would that accomplish?

Thus, Senator Jim DeMint’s (R-SC) campaign to “stop the raid” on Social Security makes the point that tax revenues earmarked for Social Security are being spent for other purposes. Without overall Social Security reform (a personal account option for younger workers), however, one wonders what would happen to the money.

The SAFE approach is to review where things stand and offer practical ideas for improvement. Forget about turning back the clock, fiscal conservatives must reinvent themselves as fiscal visionaries and work for a better tomorrow. See 10/29/07 entry, “How to win: be proactive, not reactive.”

Observers who focus first and forecast on the budget imbalance are often called “deficit hawks.” While their intentions are admirable, they lack direction, and the basic problem is – you guessed it – disagreement as to how big a government the country should have.

Without more, an agreement to balance the budget begs the question. As columnist David Wessel put it:

To achieve consensus, the Brookings-Heritage group ducked the size-of-government question. The liberal wonks can read their statement and say, "Well, Congress could raise taxes if spending exceeds the legislated limits." The conservatives can say, "Well, we signed onto 'explicit long-term budgets,' not tax increases."

Let there be no doubt where SAFE stands. We believe the United States needs a smaller, better-focused, fiscally responsible government – not because that is how things used to be, but because the country will not prosper in the future with a government that undermines personal responsibility at every turn.

Also, hiking taxes to pay for ever-expanding government could easily tank the U.S. economy. Have you ever noticed that many of our political leaders have not a good word to say about private enterprise, yet are addicted to taxing the riches it produces? The fable about the goose that laid golden eggs comes to mind.

Not that there is anything wrong with consensus, it needs to be achieved eventually, but considering it as the primary goal can lead to the camel (“horse designed by committee”) syndrome that we have mentioned before.

It has been suggested, for instance, that there is a way to please everyone on Social Security reform. Fiscal conservatives want personal accounts as a vehicle for personal savings, while liberals fear “carve out” accounts would undermine the Social Security system by diverting tax revenues otherwise available to cover current retirement benefits.

Why not make everyone happy by offering personal accounts as an additional benefit of the Social Security system?

Well, let’s see, the upshot would be (1) a new government program that is not truly needed, and (2) no progress towards fixing the existing Social Security system. As the Cato Institute noted several years ago, “additions to the existing system [would really be] just a tax increase.”

As of this writing, the only presidential candidate who has shown interest in personal accounts is also said to have backed away from “diverting payroll taxes from Social Security to fund [them].” Bad ideas, it seems, do not go quietly into the night.

SAFE has a logical case for Social Security reform, we will strive to make it emotionally appealing, and we expect to enjoy credibility.

Reforming Social Security may be easier than figuring out what to do about Medicare and other healthcare programs, but still represents a major challenge. To progress, we must overcome some common misconceptions.

1. Medicare is a far bigger financial problem than Social Security. [Both programs are in big trouble.]

Medicare expenditures already exceed the tax revenues dedicated to support the program and the shortfall is projected to grow rapidly. Meanwhile, Social Security is spending less than its dedicated tax revenues, although this relationship will reverse around 2017.

Therefore, from a fund accounting viewpoint, Medicare is in worse shape. As the Social Security and Medicare Trustees put in a recent report to Congress, “Medicare’s financial difficulties come sooner – and are much more severe – than those confronting Social Security.”

Bear in mind, however, that earmarking of the tax revenues in question is somewhat arbitrary. If Congress designated a portion of Social Security payroll taxes for Medicare, Social Security would replace Medicare on the critical list. Yet, many taxpayers would not even notice, so long as their take home pay did not change.

Here is another example. Although the rapid growth of Medicaid is causing plenty of fiscal stress, both for the federal government and the 50 states, alarms are not showing up on the fund accounting radar screen because Medicaid is funded from general revenues.

Shifting to a budgetary viewpoint, Social Security is the government’s biggest single program. It costs more than Medicare and Medicaid combined, and will continue to do so for some time.