RealCurrents

I was reading Jessica Mah’s post on how a lot of her high-school and college-age friends are really scared about global warming. Here in the U.S., it’s often reported that folks in other countries are more concerned than the average American, but little attention has been given to how the issue is impacting younger Americans.

It occurred to me that they need a little perspective on this. I grew up in the 1970s, and for those of us Americans who went through this period when the U.S. was in a severe technophobic angst, and there were constant pronouncements about all the terrible things that were going to happen, I suppose we’re just not so quick to be convinced the world is coming to an end every time scientists start preaching doom and gloom.

This was a very long list of crises that 1960s-70s experts insisted were soon to befall us, most of which I’ve probably (thankfully) forgotten, but which included such calamities as pollution, endangered species, population, overcrowded skies, the San Andreas and yes, even a looming ice age. I guess being terrified of nuclear armageddon just wasn’t enough anymore. The funny thing was, very few of these scientists were talking about an energy crisis.

Of course, even the “energy crisis” didn’t last long, once investors started pouring hundreds of billions into oil, which was $35 when I got out of high school but less than $10 when I got out of college. Jessica titled her post “Scared of Global Warming? Bring in the entrepreneurs!” and so yes, I think she’s right that entrepreneurs and the free market are a lot of the answer to global warming.

In general, though, I think we ought to stop and notice something. It sure seems to me that scientists can get into a negative funk about stuff, and end up focussing too much on the problems rather than the solutions. In fact, I can’t help wondering if it’s sort of the same dynamic as with investment newsletters - negativity and fear apparently sell a lot more newsletters, and a crisis may, sadly, be the only thing that will finally garner a research project any funding.

Now, this is certainly not all the scientists’ fault, nor is the business world off the hook. Just look at the American car industry, one of the most pitiful examples of research budgeting in modern history. Perhaps GM, Ford and Chrysler may be excused for being caught unprepared on fuel economy in the early 70s, since they were already struggling with new emissions restrictions. On the other hand, here we are again thirty years later and, sadly, it seems that only the recent combination of high oil prices, a dropping dollar, and concerns over carbon emissions was finally enough to get them serious again about improving fuel economy.

Amidst all the prognostications, it’s still not clear how global warming is going to play out. Besides the many questions of specific effects in specific places, there’s at least three basic questions involved. First is the question of how fast temperatures will go up. Second, how much will they rise long-term (or is it a runaway increase with no end in sight)? Third, if temperatures can be stabilized, will (can?) they then head back down?

We hear virtually nothing of potentially beneficial effects, but clearly there’s going to be some winners among the many losers from effects of global warming. Interestingly, so far the Russians seem to be the only ones thinking ahead about any positive outcomes from it. As Jessica suggests, entrepreneurs ought to be also. Again, though, we must keep a proper perspective - a long-term perspective.

While there’s a lot we don’t know, we can say that at least for practical purposes, whatever we can do will take place over decades. Realistically, it’s far too late to do anything about changes that may take place within the next decade or so. In other words, whatever research and changes - technological or political - that are to be made must be done consistently over a decades-long time frame.

This is, for example, why I strongly disagree with the basic Kyoto (Treaty) framework. Already China is producing as much carbon emissions as the U.S., and will likely continue to increase. Kyoto might be effective in reducing the emissions of Western industrialized nations, but given these reductions and the continued growth of China, India and other large industrializing countries, within a few years this extremely costly plan will prove ineffective in reducing the bulk of emissions.

We’ve heard from the scientists on global warming, but have yet to hear from the engineers, who are going to be the folks who have to make reductions in carbon emissions actually happen. We need to think about cost/benefit ratios. We also need to think about sustaining research investments over decades, which as the history of NASA indicates, is awfully difficult to do when you start out with crash-program type overbudgeting.

I think it’s a good bet that a lot of these new technologies are going to come from both big American businesses (such as Boeing with its new 787) and American entrepreneurs. This realization may not play well overseas, but any approach such as Kyoto that hobbles the American economy is going to be counterproductive.

Like it or not, the U.S. is still a (if not the) major innovation engine in the world. Companies in Silicon Valley (1, 2, 3) and elsewhere in the U.S. are working on hundreds of different technologies, everything from emission controls to cheap solar to electric cars to wind power and so on. Here in Texas, it’s become common to see the giant parts of wind turbines rolling down the highway on their way west, where hundreds are being put up.

We must remember that innovation, not political decrees, is the only way to solve the problems from global warming, and while we’re at it, let’s not forget to also think about taking advantage of the benefits.

First of all, in case anyone’s looking for it, here’s the official details on the IRS’ reasons for making April 17th the national deadline for filing your personal income taxes this year. It’s certainly also a good time to be thinking about how we could improve the system, something we all agree needs to be done, but can’t seem to agree how.

Of course, when you really get down to details, I’m not sure any of us quite knows quite what kind of tax system we’d prefer, but there are some basic qualities we could probably agree on. We need a system that no longer penalizes American business competitiveness, we need a simpler system (need I say more?), and we need a system that encourages - or at least doesn’t penalize - savings and various forms of investment and capital formation.

While a lot of conservatives might not agree on this last point, I think we also need a system that is modestly progressive, i.e. that gives a break to the poorest members of society. Even if you don’t agree with this philosophically, there is certainly a public interest in seeing these folks succeed financially, rather than linger on welfare rolls.

I don’t know all the specifics of the FairTax Plan, but this morning Houston City Councilman Michael Berry had Americans for Fair Taxation’s David C. Polyansky on, discussing this proposal. Here’s a summary taken from their website:

“The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. …”

In other words, the FairTax plan would be based on consumption, not income or savings, so if you made a lot of money but lived frugally, saving and investing what you made - and so creating jobs and wealth - then you wouldn’t get taxed that badly. On the other hand, if you wanted to live like the robber barons, then you’d pay considerable tax - 23% (plus state sales tax, I presume) - but you wouldn’t have to hire an army of accountants and lawyers, nor would you need to worry about estate taxes. That last part alone would probably save wealthy folks enough to where many would gladly pay the 23% on consumption in order to have more financial flexibility.

Of course, I don’t know how they come up with these numbers, but that 23% would apparently include all Social Security and Medicare taxes, and since it’s a straight number, it would be easy to predict the tax impact of any transaction and, like sales taxes, the amount would apparently only be levied on the final purchase, so there wouldn’t be a bunch of “built-in” taxes that add to the cost of goods. While the combined federal and state tax would be about 30%, twice the European VAT, if it had a downward impact on inflation - and interest rates - it might prove a bargain for these reasons as well, without having the regressive characteristics for which value-added taxes have been criticized.

The FairTax Plan, which currently has about 60 mostly Republican co-sponsors in Congress, including Texas Sen. John Cornyn, is reportedly most strongly opposed by Washington lobbyists and some Congressmen in powerful committees, who would lose a lot of influence were it to pass. Perhaps this is the best reason of all for supporting it.

The FairTax would basically be a 23% federal sales tax on everything, that would be balanced by a “prebate” that would rebate the tax burden that would be paid by a family living at the poverty level. So as I understand it, you’d only be paying this consumption tax on purchases above the poverty level.

Moving to a consumption tax is key, because this would put our industries on a much more competitive basis with those of other countries. Right now, in Texas at least (I know some states are different), if you buy a $100,000 home, you have to pay property tax, on the order of 2.5%, every year on that home, which is made in America, of course. On the other hand, if you buy a $100,000 car imported from Germany, England, or wherever, you generally don’t have to pay this tax every year. But if you you buy a $100,000 aircraft made in Wichita, Kansas, you do!

Of course, this is property, not income tax, but it’s just one glaring example of how our system in some many subtle ways (double taxation of overseas earnings is another) rewards importers over domestic industries. A consumption tax would lower the effective cost of our goods overseas and make our manufacturing, agricultural, and other industries more competitive, while at the same time likely doing more to improve conservation of resources and protection of the environment than a lot of other measures would.

I recently read that the U.S. is spending more now on tort litigation than it is on research and development. Unfortunately, there’s not much of an export market in torts, so I hope we will find a way to get our priorities right before China and India (and near everyone else) eats our lunch.

On my site AeroGo today I used one example, the recent discovery that weightlessness affects the immune system in a way somewhat similar to HIV, as a springboard for discussing why it’s often hard to justify exploration and research beforehand, even though we have hundreds of years of human experience that clearly show a big long-term payoff.

The problem is that we usually get it wrong when we try to predict what we’ll find and the timetable for reaping benefits. We find something unexpected and seemingly disappointing, that in the long run ends up being way bigger than what we were looking for. Columbus was looking for spices and gold. There actually was gold, just not in the West Indies. Columbus apparently had failed, because the Spanish didn’t realize at first that they’d discovered two whole continents.

The U.S. needs to aim higher and stop quibbling so much about R&D. While funding needs to increase in the private sector (in case you haven’t noticed the federal government is already in hock up to its eyeballs), even more important than an increase is the need to get a lot better at the poorly-understood techniques of targeting and scaling of R&D investment.

We need to spend less per project early on, spread funds around more broadly, and most of all invest much more consistently and for the long term, something difficult to do in the U.S., at least in government agencies and publicly-traded companies.

Capitalism works great until it doesn’t, and I’m wondering if in the energy sector we’re somehow reaching one of those economic eddies where things don’t just work themselves out. I’m not convinced yet that this is the case, but I’m really beginning to wonder how high oil has to go before we see some serious investment by the energy industry.

Okay, the term “serious investment” really isn’t fair, because that’s something they do as a matter of course. But here in Houston, Texas, the energy capital of the world, you’d think companies would be hiring like crazy. Oil is up about seven times (unadjusted for inflation) since the lows of the late 1980s.

Apparently I’m not the only one wondering about that. Reuters is reporting that European Union finance ministers meeting in England “issued a statement saying they … wanted oil companies to increase investment in oil exploration, production and refining capacity as well as alternative energy services.”

Back in the late 80s, when oil was really down, there was a bumper sticker in Houston that went “Dear God, Please give us $28/barrel oil again. We promise not to waste it this time.” For a long time, I assumed this more prudent mindset explained the oil industry’s rather non-aggressive stance (the economic devastation in the oil business was a lot worse than most people realize). Now I suspect oil exploration may well be restrained by the realities (?) of the global Hubbert curve, if indeed worldwide production is presently peaking.

In any event, it seems clear that worldwide energy demand is by no means peaking, mainly because of China and India, so oil companies may have to once again get aggressive about alternative energy sources (maybe it’s a good time to buy real estate in Parachute, Colorado - I wonder what happened to all those empty houses).

It may not be wise to press the oil companies too much to increase oil production through conventional drilling, but in a capitalist economy, when the price goes up steadily, consumers are sending a clear signal to producers to increase supply, and increased investment by producers is part of what justifies the premium profits they get in such situations.

I really don’t see how the energy companies can seriously be thinking we are presently in danger of seeing excessive investment in their sector. Oil would have to drop by nearly two-thirds just to get down to $28. I hope the oil companies will re-invent themselves as diversified energy companies or at least pay out the profits in dividends quickly so someone else can invest them in our energy future.