Taxing Capital

Sen. Elizabeth Warren (D-MA)

Senator Elizabeth Warren (D-Massachusetts) has suggested a wealth tax of 2 percent on assets above $50 million, and 3 percent on assets of more than $1 billion. She estimates that such a tax, which would by its nature be limited to the very rich, could generate $2.75 trillion in revenue over a decade. To paraphrase the late Everett Dirksen, a trillion here, a trillion there, and pretty soon you’re talking real money.

Starbucks billionaire Howard Schultz and former NYC mayor billionaire Michael Bloomberg have, of course, slammed Warren’s proposal as a gateway drug to Venezuela-Maduro style socialism. Continued critiques from Schultz, Bloomberg and the billionaire class will probably do more to garner support for Warren’s proposal than she herself could do with a thousand townhall meetings.

Schultz and Bloomberg apparently have forgotten that while they have ascended to levels of wealth that would make Croesus look like a homeless person, hundreds of millions of Americans (and Britons, and Europeans, etc.) have been undeniably left behind by the Great Prosperity of globalization and financialization of the economy. Wealth taxes have been proposed before, though not in the U.S.

Towards the end of the First World War, Great Britain considered imposing a wealth tax. Throughout the war, Great Britain not only had to equip and supply its own forces, it also had to advance funds to its allies France, Russia and Italy since none of them had enough cash to purchase necessary war matériel. By 1917, the cost of the war, including subsidies to allies, had put unprecedented strain on Britain’s national budget.

During the first three years of the war, taxation rates in Great Britain had increased significantly, and the levels of income to which the tax was applied were lowered. In consequence, many segments of the population that had never before paid income taxes were moved onto the tax rolls. This was accompanied by some erosion of civilian support for the war. In Parliament, Labor members argued that the working classes were bearing a disproportionate share of the war’s cost. Coal miners in South Wales even staged a tax strike in 1917. Labor proposed a tax on capital to ease the deficit, but the Tory constituencies opposed additional taxation generally, and a levy on capital in particular.

Ultimately, the British Treasury rejected any capital levy over concerns that it would cause a slump in asset prices because asset holders would try to raise capital by sales of those assets. That would depress capital markets and, most worrisome of all, possibly reduce the United States’ confidence in the soundness of Britain’s economy.

Of course today, despite nearly two decades of continuous foreign wars, the U.S. is not in the position Great Britain occupied in 1917.

 

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We’ve Come Full Circle on Payphones

Traditional technology, superhuman application.

I was on the road yesterday and realized how we’ve come full circle on payphones, that ancient technology (before the era of the cellphone) that enabled everybody to stay in touch, more or less. It even gave rise to new idioms that are still in use, even though the machinery that gave rise to them is long gone. In the 21st Century, you can’t “drop the dime” on somebody (i.e., call the authorities to report somebody for a crime) because there’s nowhere to drop the dime. Payphones used to cost a dime, but where is there a payphone around now? The county jail?

In the old-style payphone, like the ones Superman used to avail himself of, you’d go into a phone booth and close the folding glass door to shut out a bit of the street noise. In other words, you’d rent the phone for a dime, and the booth was free. (Why did Clark Kent think that changing in a phone booth, with clear glass panes, would help maintain his secret identity? It’s one of the Great Mysteries of the 20th Century.)

Some people really liked phone booths. 

Then the booths went away and were replaced with phone kiosks: a payphone surrounded by a big metal hood that might give you a little protection from the rain, but not much.

Then came the era of the cellphone, and payphones gradually went the way of the crossbow, the walled city and the eight-track tape.

Now, we’re in the era of the road warrior, but even a warrior needs a quiet space for an important call every now and then. Enter the rent-a-quiet-booth business. In coffee shops and malls and airports you may see these brightly colored booths with plush seating, outlets for your charger and USB ports. They put the old-style phone booth to shame. You rent them by the hour, and they claim to be soundproof (or close to it).

And thus we’ve come full circle. In the old days the booth was free and you rent the phone. Now you rent the booth and bring your own phone. And it costs a lot more than a dime.

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PG&E to File BK

 

Electric utilities have to worry about a lot of stuff that sounds mundane, including that part of system maintenance that goes under the heading of “vegetation management.” In plain English, that means trimming trees so that they don’t interfere with transmission and distribution lines. The problem is very large and very complex because many miles of utility lines run through remote areas in which trees and brush, left to grow over decades (plural), can cause problems for both inspection and access for maintenance. In the eastern U.S., vegetation management is primarily a matter of system reliability: A branch or fallen tree can press one wire against another, causing a short or other disruption in service.

But in the western U.S., vegetation management is also very much a safety concern. A tree branch doesn’t need to touch a line to cause a fire. If it gets too close, electricity can arc from the line to the branch. If the branch is dry, which is often the case in rural California, it can burst into flame. Sparks, embers or burning fragments of the branch may drop to the ground. The ground is usually full of dry leaves and underbrush. Combine that with strong winds and within a few minutes a vast area of dry forest will be turned into a blazing inferno. The proximity of suburbs and exurbs to these forested areas only increases the risk to lives and property.

California generally, and PG&E in particular, has had a very tough history in this regard. going back decades. The Camp Fire, which raged through much of last November in PG&E’s service territory, shows that vegetation management is literally a matter of life and death: 86 persons died in the Camp Fire, which also destroyed 14,000 homes, more than 500 businesses, and 4,300 other structures. Estimates of damages are in the range of $7 billion.

CNN reports that California utility PG&E will file Chapter 11 at the end of this month. It’s believed that a PG&E power line came in contact with nearby trees and sparked the fire. The Camp Fire comes on the heels of a series of wildfires, also blamed on PG&E, in 2017. Those fires caused $10 billion in damages and 44 deaths. In 11 of those fires, state investigators found the company violated codes regarding brush clearance near its power lines or had made related violations.

 

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The Problem With the War on Coal: There’s Only “Friendly Fire”

Coal mine, early 20th century

“Friendly fire” is one of those euphemisms that’s hard to square with reality. It occurs when some of your troops are out ahead, most likely going toe-to-toe with enemy forces. Reinforcements arrive. But the reinforcements mistake their own troops for the enemy and start firing at them. Whoops.

It’s nothing new. In Britain’s First Afghan War (1839-42), a contingent of Indian troops were arriving by sea at Karachi, Pakistan, the closest port of call to the front lines. They were to join up with other local troops from the Sindh who were also allied to the British. These Sindhi soldiers were stationed at a combination lighthouse-fortress that guarded the mouth of the harbor at Karachi.

When the warship carrying the Indian troops arrived in the harbor, the commander of the fort made the unfortunate decision to greet it with an artillery salute. The ship mistook this for an attack and opened fire. Within a very short time many of their Sindhi allies lay dead underneath the smoking rubble of what used to be a lighthouse and a fort.

And that’s the problem with the war on coal. There is no war on coal, but politicians can use it to get votes. Get people angry. Make them feel like victims. Then they’ll vote for you. Remember “Trump Digs Coal”?

CNN (yes, I know, it’s CNN) put out an interesting clip yesterday on whether Trump has fulfilled his promises on restoring coal mining jobs. Electricity generation is the leading use of coal in the United States, but the fact is that more and more  coal-fired generation is shutting down not  because of any Obama-era war on coal, but because coal-fired generation just cannot compete on price with natural gas-fired generation and, increasingly, with renewables.

But it’s easier to win votes if you can say there’s a war on. Then you have an enemy. In fact, it’s pure economics.

The reason that natural gas is cheaper is because of fracking and the development of reserves in what were previously hard-to-reach (if not impossible-to-reach) shale formations. Fracking and natural gas spurred economic development in Texas and Louisiana, along the Gulf Coast, in an area running through Pennsylvania, Ohio and New York known as the Marcellus shale, and in North Dakota in the Bakken.

Cheap natural gas is good for the manufacturing sector. You need steel to drill for natural gas. With cheaper natural gas, steel manufacturing costs go down. Which makes steel equipment for fracking less expensive. Which makes for more natural gas…and so on.

Cheap natural gas is a feedstock for other products, such as ethylene for plastics. You may not like plastics, but, face it, you use them every day without noticing it.

One of the concerns sparked by the recent death of FERC Chairman Kevin McIntyre is whether natural gas projects, such as pipelines, might be delayed. FERC has tried to allay those fears, but the magnitude of the concern shows one of the economic differences between coal and natural gas: transportation. Natural gas moves by pipeline. Coal moves by railroad. Large portions of the railroad infrastructure in the United States is in a dangerous state of decay, and needs to be rebuilt. In terms of economic returns, railroad repair would be a much better use of $5 billion than a wall along the Rio Grande.

Sure, environmental regulations hamper coal-fired generation, but the real deciding factor is the price of the coal-fired kilowatt-hour.

Coal-fired generation will continue to be used in the U.S., but it will decrease. If the government decides to keep coal alive, that’s a subsidy no matter what it’s called. To the extent you subsidize one player (coal) in a market (electricity), you hurt others (natural gas, renewables), and the other industries that depend on those other fuels — whether in North Dakota, along the Gulf Coast, or in the Marcellus.

And that’s why the war on coal is a war of 100% friendly fire.

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Chairman’s Death Leaves FERC Divided

FERC Chairman Kevin McIntyre passed away this past Wednesday after a battle with cancer. Our condolences to his family and colleagues.

His passing leaves FERC with four remaining commissioners, two Republicans and two Democrats. According to the Washington Post, as of January 3, 2019, of 707 federal executive branch appointments requiring Senate confirmation (like the FERC chairmanship), 127 have no nominee. Given the other storms that are likely to hit the White House in 2019, the FERC chairmanship may not be high on the list of the administration’s priorities.

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Why High Voltage?

The transmission lines you see along the highway may strike you as ugly eyesores or as proud monuments to modern civilization. But whatever your point of view, one thing is certain: every one of those lines is the result of a complex physical and economic calculation, including a number of forward projections on load and capacity. Plus, while some stand-up comedians are called high voltage, the real high voltage is in those lines. Why is the voltage high?

Under the second law of thermodynamics, whenever power is transferred, some of it is lost. In the case of transmission lines, losses take the form of heat emanating from the conductors, leakage of current across insulators, ionization of pathways in the air surrounding the conductors, or just current running to ground. Also, magnetic and electric fields are created around the conductors, which create inductance and capacitance in the lines. The short answer is that the higher the voltage, the smaller the losses.

Under Ohm’s Law, the voltage (V) is equal to the product of the current (I) and the resistance (R) in the circuit, or V = I*R. The power (P) is the amount of the energy absorbed in the circuit (i.e., delivered to a load such as a customer’s machinery), which is equal to the voltage (V) times the current (I), or P = V*I. The power lost (P_L) when current flows through a conductor is the product of the resistance (R) of the conductor through which the current flows and the square of that current. P_L = I²*R. Thus, if you lower the current (I), you reduce the amount of power lost.

But if you lower the current, under P = V*I you would have to raise the voltage in order to keep the same amount of power going to the load; that is, the power must be constant, so under P = V * I, V has to increase if I is lowered.

The reverse is also true. If you raise the voltage, you can decrease the current and keep the power constant. So if we were to raise the voltage by a factor of 100, the current would be reduced to 1/100th of its former value.

Going back to our loss equation, since power lost is proportional to the square of the current (I²*R), reducing current by a factor of 100 reduces losses by a factor of 10,000 (.01 * .01 = .0001).

And that’s why high voltage makes sense.

 

 

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