Subsidies

May 29, 2016

Housing

On Tuesday came the announcement that new one family homes sold in April had jumped to 619,000, just beating the low point set in 1995.  Yes, you read that right.  The high point of this recovery just passed a 20 year ago low.  The spring season certainly contributed to the jump, but the prospect of higher interest rates may have spurred many buyers to close the deal. Here’s a graph of new home sales for the past two decades:

The housing boom took a decade to build but the total damage of overinvestment is only now being felt in the slow growth that has characterized this recovery.  I’ll turn to the monetary economists at Alt-M.org:

“During the housing boom, investible resources that could have gone into augmenting human capital, building useful machines and sustainable enterprises, and conducting commercial research and development, were instead diverted to housing construction.  In the crisis it became evident that the housing built was not worth the opportunity cost of the resources allocated to it.” (Source )

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Energy Subsidies, or Not?

Many of us don’t like subsidies to giant oil companies like Exxon and Chevron. Why are taxpayers subsidizing these rapers of the environment?  The marketing of this idea is that bad, bad oil companies get good taxpayer money that could be put to better uses. But then we find out that when a poor family gets heating oil for a very reduced amount, the folks in Washington call that a “Consumer Subsidy” to the oil company  (Source).  Why is this not classified as a subsidy for poor families?  Welcome to the ugly politics of Washington where subsidies are  allocated across several departments, and House and Senate committees, so that our elected representatives can feel important and wield influence in order to collect more campaign money.  If the voters are confused, that’s the point.  Politicians use a technique ommon in used car sales: baffle the customer with B.S.

In 2010, Federal (not including states) subsidies totaled $11.6 billion for coal, natural gas and oil. Coal got $3.9 billion for R&D. (Source spreadsheet)  Much of that money was to develop technologies for carbon capture and sequestration, which is what we told politicians in Washington we wanted. (Source)  The energy companies didn’t want the money because they didn’t want to develop the technology. Now we blame the energy companies for spending the money?

Unfortunately, fracking has produced so much natural gas at such a low cost that many energy companies find it more cost efficient to simply shut down power stations that rely on coal.  The largest coal company in the U.S., Peabody Energy, recently declared bankruptcy after 130 years in business (WP article)

Let’s turn to the oil and natural gas portion of this sector since that accounts for 2/3rds of Federal subsidies.  $7.6 billion in subsidies includes:
$3.5 billion, almost half of the total subsidy, is for the LEAP program, which pays for heating fuel for low income families, not a subsidy for the oil companies;
$1 billion for fuel used by farmers, who lobby heavily for their subsidy, and it helps to keep food prices down for consumers across the country;
$1.1 billion for the Federal gov’t to buy oil for the Strategic Petroleum Reserve.  Why is this called a subsidy to the oil companies?
$1 billion for accelerated write-offs on development costs, land, equipment.

Providing consistent, reliable energy in any form is messy.  Every year, wind power kills thousands of eagles, a threatened species, yet there seems to be little outcry because wind power is a favorite of the environmental community and gets a pass.

Many years ago, I was selling tools to the mechanics at San Juan Coal Co. in a remote area of New Mexico and Arizona.  Giant earth movers with tires that were twice as high as a man dug up the coal deposits there.  Reaching up to the blue sky were giant erector set towers hung with huge cables that sizzled and spit with the sound of electricity surging through them.  Stretching toward the western horizon, I asked where the wires went. Southern California, I was told.  California wanted the electricity but not the pollution from creating the energy so they paid to have the electricity produced in this remote area and “shipped” hundreds of miles away.  The process was very wasteful and expensive.  The additional cost though was counted as a subsidy to the energy company because the accounting that is done in government has little to do with the day to day reality of most households and businesses.

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