Socialism doesn't work (E-85)

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Government is the great fiction, through which everybody endeavors
to live at the expense of everybody else. - Frederic Bastiat

Details of the political conversation are constantly changing, with one breathless “breaking news” announcement on Fox News after another, but the truly fundamental ideas – such as the foregoing quote of a 19th Century French economist - keep coming up.

If you’re a bit fuzzy about what Bastiat had to say, this recap of a talk by Roger Crossan for the Conservative Caucus of Delaware may be helpful. Bastiat’s thinking still resonates, CC of DE blog,

And now, on to a series of contemporary examples of people seeking to use the government as a source of economic gain vis-à-vis their fellow citizens – in the name of economic equality, social justice, environmental stewardship, or whatever.

I. A plan to save Social Security - As its name suggests, the National Retiree Legislative Network is an advocacy group that seeks to represent the interests of senior Americans. NRLN recently came out with a series of posts proposing a “grand bargain” to close the projected fiscal gap for Social Security, Medicare and other healthcare programs.

In announcing this effort, NRLN described what sounded like a “pain-free” solution. Let’s try to make a difference,

Lower retirement income, higher healthcare costs and overall less purchasing power without Medicare will leave 100 million Americans at risk. This is senseless, there is a better way! *** We will be sending you a series of messages about relevant data that we will offer in NRLN’s proposal that could save Medicare and Social Security and reduce the U.S. budget and deficit without raising taxes.

Hmm, such an all gain, no pain solution sounded enticing – but could NRLN deliver? Typically, the essence of “grand bargain” solutions is that the opposing sides negotiate a compromise – e.g., cut benefits and raise taxes – in order to achieve what is purported to be an overall solution to a problem. See, e.g., Saving Social Security, Peter Diamond & Peter Orzag, Brookings Institution,

In the first installment of NRLN’s proposal, it was made clear that both Social Security and Medicare – already running in the red as no assets exist their respective trust funds – are financially unsustainable. And the maintenance of Social Security and Medicare benefits was characterized as being among the highest priorities of the government. #1: Introduction to NLRN’s “grand bargain” proposal,

. . . payments to those eligible for benefits are not entitlement or welfare payments (negative connotation – as in handouts). These benefits are deemed “Mandatory”, not Discretionary expenditures. Paying for federal and state highways and infrastructure, bridges to nowhere, government inefficiency and waste and fraud, all using our income tax revenue, are Discretionary spending programs . . .

According to the second installment, the members of Congress are at loggerheads over how to resolve the conflict between Mandatory (social welfare) and Discretionary (other functions of government) expenditures. No discussion of whether certain Discretionary programs (e.g., national defense) may merit higher priority than the Mandatory programs. #2: Kicking the can down the road,

•Conservatives want to shift more cost of benefits to retirees and would not raise federal income or payroll taxes; liberals would increase benefits and would raise federal income but not payroll taxes. The fight over who pays and how much never ends. Continued Mandatory versus Discretionary spending debates overrule common sense. There are very few if any true problems solvers in Washington, D.C.

•Cutting benefits or raising taxes are not in NRLN’s “Grand Bargain” proposal! It is time for seniors to rally behind a common sense plan that will work!

The next two installments discuss “the 75-year deficit liability” for Social Security ($25.9B) & Medicare ($2.1B), respectively. These amounts are not the 75-year deficits per se, based on the trust fund accounting involved, but apparently represent the actuarial increase in said deficits in the current year. And the indicated goal is to make changes so the trust fund accounting will balance out over the next 75 years. #3,
7/10/18. #4, 7/16/18.

The NRLN GRAND BARGAIN Will Challenge Congress and Federal Agencies to Fill [these Deficit Gaps].

NLRN’s grand bargain proposal is spelled out in the final two installments. The principal elements are payroll tax increases for higher paid workers and elimination of “wrong or improper payments”). #5,
8/7/18; #6, 8/7/18.

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So what’s wrong with this proposal? First, it ignores the question of how the US Treasury is going to come up with some $3 trillion plus interest to repay the amounts that have been borrowed from the trust funds (and spent for unrelated purposes). Second, it doesn’t address the feasibility of eliminating all those “wrong and improper payments,” which might well prove easier said than done. Third, it calls on retirees to make no sacrifices whatsoever, which may be OK for current retirees but seems unrealistic when it comes to defining the benefits to be provided for future retirees.

If Bastiat were alive today, he might have some choice comments about the folly of launching the Social Security, Medicare, etc. programs in the first place!

II. Biofuel mandate – Over the years, a variety of government subsidies and mandates have been used to boost the use of biofuels (primarily ethanol produced from corn) in motor fuel. The result is to augment supplies of oil, a nonrenewable resource, with various purported benefits: reduced use of oil, a wasting resource that will arguably run out at some point, lower motor fuel prices, and possible environmental benefits.

In December 2007, with a show of bipartisan cooperation, Congress passed and President Bush signed legislation that mandated a major increase in ethanol use over a period of years. SAFE was among the skeptics at the time. Fiscal visionaries at bay,

Why should the government mandate the use of ever more ethanol? Producing ethanol from corn is ruinously inefficient, not to mention its adverse effects on food prices and the environment. It may eventually be possible to produce ethanol from switch grass and such, but the technology has yet to be developed on a commercial scale.

A subsequent blog entry reviewed the arguments for and against government support policies for ethanol and concluded that these policies didn’t make much sense. If ethanol-content gasoline had solid economic advantages, it would be produced and sold without any need for government intervention. Ergo, the real goal was not to hold down motor fuel prices or combat global warming, it was to benefit various special interests, e.g., corn farmers and ethanol producers. Ethanol 101: the staying power of government programs,

No one paid any attention to such arguments, and the mandated increase in the use of ethanol in motor fuel (from 9 billion gallons of ethanol in 2008 to 36 billion gallons in 2022) is being phased in – without any clear-cut benefits. True, the US is importing a lower percentage of its oil requirements now and gasoline prices are relatively favorable. This isn’t attributable to the use of ethanol, however, but rather to an approximate doubling in the rate of US oil production (back to levels not seen since 1970) due to the fracking boom. US oil to break production record in 2018,,

There is no realistic explanation for the Renewable Fuel Standard (RFS) other than the political clout of the special interests that benefit from it. The renewable fuel standard is the Obamacare of the energy industry, Printus Le Blanc,,

Doesn’t reduce foreign dependence on oil – reduces vehicle fuel economy by about 3% when using E10 (gasoline including 10% ethanol) – aside from billions in subsidies in the farm bill, boost the price of motor fuel by between $0.13 and $0.26 per gallon of regular gasoline and $0.30 to $0.51 for diesel.

Compliance requirements added a new layer of complexity for petroleum refinery operations that some refiners found very costly – and which was reportedly the key factor in the decision of a Philadelphia area refinery to declare bankruptcy. The Renewable Fuel Standard is beyond repair, Printus LeBlanc,,

•Each refiner has a Renewable Volume Obligation (RVO) that is given to them by the EPA. A Renewable Identification Numbers (RIN) is a tracking number used for biofuels. To ensure every refiner is following the laws outlined in the 2005 and 2007 acts the EPA devised a way to track each batch of biofuel. Refiners must have a certain amount of RINs to meet its RVO. If a refiner does not have the capability to blend biofuel, it must purchase a RIN from another refiner that can produce RINs.

• The largest refinery on the East Coast was just bankrupted by the RFS. The refinery belonging to Philadelphia Energy Solutions (PES) was forced to declare bankruptcy in January. The 335,000 barrel per day refinery was over $600 million in debt, much of that due to the RFS. PES stated it spent $218 million in 2017 for RINs, more than it spent on personnel.

Why wasn’t the PES refinery equipped to blend biofuels? Like some other independent refineries, it had been designed and built to manufacture fuel, not to blend it for retail sale. Too bad for them said a representative of the ethanol lobby, characterizing PES as “slavishly pursuing a change in the law that fit its flawed business model.” A biofuels bankruptcy, Wall Street Journal,

At this point, some members of Congress proposed a legislative overhaul of the RFS – with the support of environmentalists who previously supported the program but have become disillusioned with its results. Environmental groups back Ted Cruz, Republicans on overhaul of Renewable Fuel Standard, Ben Wolfgang, Washington Times,

Mr. [Colin] O’Mara and other critics cite the fact that the RFS has mostly fueled wild growth in traditional corn-based ethanol, while the so-called “next generation” of biofuels — such as cellulosic ethanol — haven’t grown at nearly the same rate. Indeed, while the Environmental Protection Agency during the Trump administration has held steady the amount of corn-based ethanol that must be blended with gasoline each year, it’s r4educed the mandated amount of advanced biofuels blending.

Some confusing back and forth ensued as the ethanol interests and oil refiners squared off, including a protest by Republican members of Congress from the Corn Belt of EPA waivers that had been granted to several refineries. Republicans to Trump: Tell EPA to stop ethanol waivers, John Siciliano, Washington Examiner,

The pro-ethanol, Midwest lawmakers include Republican Sens. Chuck Grassley and Joni Ernst of Iowa, John Thune of South Dakota, Deb Fischer of Nebraska, and Roy Blunt of Missouri. The senators said they appreciate the meetings Trump has been holding to try to find a solution that suits both the refinery industry, which says meeting the ethanol requirements is too expensive, and the corn farmers. But they said the waivers are a problem.

Another issue in play is a proposal that the EPA authorize higher ethanol blending (E15 vs. E10) on a year-round basis versus lowering the blending ceiling to 10% in summer months. At last report, it appeared that this proposal would probably be approved. Trump “very close” to allowing year-round ethanol boost, John Siciliano, Washington Examiner,

Because higher volumes of ethanol can contribute to fouling engines and causing repair problems, that would be bad news for some motor fuel consumers. Trump’s ethanol plans alarm the boating industry, John Siciliano, Washington Examiner,

“Sixty-five percent of people assume that any gas sold at retail gas stations is safe for all their products, when in fact federal regulation prohibits E15 use in small engines,” said [Thom Dammrich, president of the National Marine Manufacturers Association]. “These engines — like those in boats, lawn mowers, and motorcycles — suffer immediate damage when fueled with blends exceeding 10 percent ethanol, thus voiding their warranty and saddling consumers with high repair and replacement costs.”

What a mess! Not only was the RFS created to gratify a special interest group, but now other special interests are fighting back. Wouldn’t it be better for the government to butt out and let the usage (if any) of ethanol in motor fuel be decided by the free market?

III. The bloomdoggle – In June 2011, a proposed package of incentives was announced to encourage Bloom Energy, Inc., a fuel cell company headquartered in California, to locate a manufacturing plant in Delaware. The proposal was endorsed by Delaware’s top political leaders (governor, three members of Congress), and executives of Bloom Energy (BE), Delmarva Power and Light Company (DPL), and the University of Delaware. Delaware attracting Bloom Energy for high-tech manufacturing hub, Sen. Tom Carper, press release, 6/10/11.

An integral element of the incentives package was a long-term arrangement between DPL and BE for the construction and operation of facilities to generate 30,000 KW of electric power with BE fuel cells. The fuel cells were to be powered by the chemical oxidation, as distinguished from combustion, of natural gas.

Delmarva Power is proposing to partner with Bloom Energy to facilitate a 30 MW fuel cell installation as part of the utility’s renewable energy portfolio, pending legislative and regulatory approval. The Governor will be asking the General Assembly to consider legislation that would establish a regulatory framework for fuel cells, a reliable technology that is increasingly cost-competitive for commercial use. The proposed legislation would also enable locally produced, clean energy from Bloom Energy Servers to be counted towards Delmarva Power’s renewable portfolio requirements.

If the legislation passes, Delmarva Power would then file a new manufactured-in-Delaware fuel-cell rate tariff with the Delaware Public Service Commission for its review and approval.

Implementing legislation was subsequently introduced in the General Assembly, passed overwhelmingly, and signed into law by the governor on July 7. Among other things, this legislation provided that BE fuel cells made in Delaware would qualify as a “renewable energy” source under Delaware’s Renewable Energy Portfolio Standards Act.

DPL and BE negotiated a contractual arrangement for the fuel cell power facilities, which was to remain in force for 21 years after the facilities came on line. DPL was to provide natural gas at market cost, act as the billing and collection agent for the Qualified Fuel Cell Provider (QFCP) tariff, and realize no profit or loss from the arrangement. BE or its designee would operate the fuel cell facilities, and the electric power produced would be sold to the electric grid at market price. The aggregate QFCP tariff was be determined based on amortization of capital costs + operating costs + natural gas cost – sales of electricity to the grid. The aggregate amount of the tariff was to be allocated to DPL ratepayers located in Delaware, and the amounts collected would go to BE or its designee. The DPL/BE arrangement was reviewed and approved by the Department of Natural Resources and Environmental Control (DNREC).

DPL filed a tariff application based on the foregoing arrangement with the Delaware Public Service Commission (PSC), and it was expeditiously approved after the required public notices and an evidentiary hearing on October 18. Order 8062, 10/18/11.

On December 1, the PSC issued a comprehensive order confirming its approval of the QFCP tariff and spelling out the rationale: The PSC was faced with what it called a binary choice, in that it could either approve or disapprove this tariff but had no authority to alter its terms in any respect. The PSC concluded that there was evidence to support each of the statutory criteria for approval of the tariff: The fuel cell power facilities would utilize innovative baseload technologies – offer environmental benefits relative to conventional baseload technology – promote economic development in the state - promote price stability over the project term. For all the uncertainties and risks associated with the BE venture, the PSC had no basis to override the judgment of the experts who had studied the BE business model, devised the incentives proposal, and recommended going ahead with it. Order 8079, 12/1/11.

In 2012, the first of the BE fuel cell power facilities came on line and the PSC began reviewing compliance with the terms of the QFCP tariff on a monthly basis. Order 8136, 4/17/12.

This arrangement is to remain in effect for 21 years, i.e., until 2033. No changes can be made except by mutual agreement of BE and DPL. There is no obligation on BE’s part to upgrade the fuel cells in use as the technology improves (considerable improvements are claimed in the prospectus for BE’s recent initial public offering), and no specific cap on the amount of the tariff that may be charged. Any legislative changes to void the agreement would trigger a requirement that DPL ratepayers make immediate payment of all future tariffs due under the agreement.

To date, Delmarva ratepayers have been billed nearly $200 million for the QFCP tariff, net of proceeds from selling all electric power produced to the grid (conventional natural gas power is considerably cheaper than fuel cell power), which works out to some four or five dollars per month for a typical ratepayer. The cumulative tariff is increasing by about $3 million per month, and if this pattern continues the payments will total nearly $700 million through 2033.

Ratepayers receive a partial offset in that a portion of the Bloom tariff may be applied to offset charges that would otherwise be due under the Renewable Energy Portfolio Standards Act. Fuel cells powered with natural gas are somewhat less efficient than a combined cycle natural gas (CCNG) power plant, however, and therefore produce higher carbon dioxide emissions per unit of electric power.. As a result, ratepayers concerned about the global warming threat cannot derive the same moral satisfaction as from making payments that go to support wind and solar power.

Back in 2011, the politicians and media backed the BE venture, and the proposal was swiftly implemented with very little debate. However, ordinary Delawareans were dubious from the start. Order 8079, 12/1/11.

We received scores of written comments from members of the public, not all of whom were Delaware residents or even Delmarva ratepayers. The overwhelming majority of the written comments exhorted us to reject the Project, and echoed certain general themes. Many compared the Project to Solyndra, the recently failed solar company in California. Many called it a “boondoggle” or “crony capitalism.” Others complained that if the fuel cell technology were truly so promising, Bloom could have found private investment to back it. Still others expressed displeasure that Delmarva was not taking any risk since under the proposed tariff it will be made whole for all expenses it incurs. Many questioned the calculation of the $1.00 per month cost to Delmarva ratepayers. Many also criticized the semantics of calling a generator fueled by natural gas a “renewable” resource. Very few written comments supported the Project.

At this point, given the magnitude of the QFCP tariff payments and the failure of BE to meet its projected job targets, public perceptions of the arrangement are even more negative and the media coverage has turned skeptical as well. State-subsidized Bloom Energy reports more losses, Karl Baker, News Journal,

Talk show host Rick Jensen of WDEL has hosted several segments about the “bloomdoggle” on his radio show, most recently
last week when he interviewed civic activist John Nichols and thermodynamics expert Lindsay Leveen. In the course of this conversation, Mr. Jensen spoke of organizing an on-line petition slamming the QFCP tariff and urging the governor and General Assembly to do something about it.

Boom, Lindsay Leveen composed a petition the same day that as of August 12 had garnered 68 signatures. Here’s the link:

Folks, signing the petition (and forwarding the link to family and friends) is quick and easy, and this is a chance to make an important point. It’s time to stop thinking the government can solve every problem and knows better what should be done than we do. It's time for smaller, more focused, less costly government!


# Agreed on all. – SAFE director

# THE GENERAL WELFARE CLAUSE in both the Declaration of Independence and the Constitution created a government that cares about ALL its people, including the orphans, widows, sick, disabled, poor and more. *** Let's not succumb to calls for austerity and death. Stop fretting about taxes. That has already been handled by the current administration. Let's keep our eyes on the future. – New SAFE member

Comment: The prime issue is spending. And unless the government addresses the fiscal problem in a decisive way, including a restructuring of entitlement programs, the future looks bleak. See, e.g., The Great Equalizer, David Smick, 2017.

It is difficult to deny that debt is a major threat to our children’s future. *** Less than a decade from now, payments for Social Security, Medicare, Medicaid, Obamacare, and other federal health program entitlements, combined with interest payments on America’s national debt, could exceed the size of the entire federal budget. *** The call by some politicians during the 2016 election for a massive expansion of Medicare was a reckless act of fiscal insanity and a heartless false promise that can never be kept without risking a massive burden on the backs of the millennial generation.”

It's also not clear that the founders intended the “general welfare” clause be applied to create intergenerational welfare programs, witness the following quote:

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816.

#Good post. – SAFE member (DE)

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