Thursday, November 20, 2014

Tuerck letter to Suffolk Environmental Club

The following letter from BHI Executive Director David G. Tuerck was sent to the Suffolk Environmental Club on November 20, 2014:

Dear Students:

Concerning your comments in the Suffolk Journal about Koch money “influencing … scientific results,”  I find it appalling that a group of students at Suffolk – or any student anywhere – would sign on the idea of banning money that goes to support research  without even the slightest attempt to confer in advance with the authors of the work being condemned.

You say you have “questions about what the [Koch] money is being used for exactly.”  Well, I have already told the Journal that almost all the money from Koch has gone to support faculty salaries, student scholarships and a speaking program.

As for the funds that go to the Beacon Hill Institute or its research, you, in my opinion, violated generally-accepted standards of academic integrity when you allied yourselves with the “Koch-free” people without first talking to me and my staff. I have to wonder how you would blindly attach yourself to what is a blatant, anti-free-speech, radical-left political campaign without first finding out what you are talking about. Where, I have to ask, was your faculty advisor when you did this?

What you do when you sign on to that the anti-Koch campaign is ally yourself with a political operative who is using her Suffolk connection to advance her career.  It seems to me that you might want to reconsider allowing yourselves to be used as pawns in her game.

I have a suggestion:  Contact Frank Conte, our Director of Communications, and ask for an appointment to meet with my staff to discuss our work.  Then you can reach your own conclusions about the quality of our research and whether you want it banned from Suffolk.

Sincerely,

David G. Tuerck
Executive Director, Beacon Hill Institute
Professor of Economics
Suffolk University

Related: Letter to the editor, Suffolk Journal, November 19, 2014





Friday, October 3, 2014

BHI work cited in Campaign 2014

BHI's work on labor market reform and interstate competitiveness has drawn the attention of office-seekers far and wide. Safe to say both parties like us. After all, the work speaks for itself. 

Tuesday, August 26, 2014

A peek at the Fed's model


From the Fed's authors: 
The U.S. labor market is large and multifaceted. Often-cited indicators, such as the unemployment rate or payroll employment, measure aparticular dimension of labor market activity, and it is not uncommon for different indicators to send conflicting signals about labor market conditions. Accordingly, analysts typically look at many indicators when attempting to gauge labor market improvement. However, it is often difficult to know how to weigh signals from various indicators.Statistical models can be useful to such efforts because they provide away to summarize information from several indicators. This Notedescribes a dynamic factor model of labor market indicators that we have developed recently, which we call the labor market conditions index (LMCI). Details of the data, model, and estimation will be presented in a forthcoming FEDS working paper. 
We look forward to reading the paper. 

Hat tip: Brian Wesbury of First Trust.

Friday, July 18, 2014

Composition of the Massachusetts workforce: By sector

Education and Health Services is the largest job sector in Massachusetts. More on the June Employment Situation in Massachusetts.

Beacon Hill Institute
Source: Executive Office of Labor and Workforce Development, Commonwealth of Massachusetts

Thursday, June 19, 2014

BHI's Conte in the Herald: Bay State benefits from foreign trade

This morning the Boston Herald published our op-ed on extending Trade Promotion Authority to extend free trade pacts. This benefits Massachusetts.

Thursday, June 5, 2014

State Tax Collections - U.S. Census Bureau

Quick takeaway: State sales taxes remain steady and dropped only slightly during the downturn of 2009.


Wednesday, June 4, 2014

A response to the Institute on Taxation and Economic Policy's misguided critique of the STAMP model

On May 21, 2014, The Institute on Taxation and Economic Policy (ITEP) released a report entitled, “STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes.” The report makes several criticisms of the Beacon Hill Institute (BHI) State Tax Analysis Modeling Program (STAMP®).  BHI responds here on what ITEP gets wrong about the STAMP model. (PDF file)

Thursday, May 22, 2014

In defense of STAMP as a tax modeling tool

A PDF version of this primer is available here

The following is an assessment of the appropriateness of modeling state tax policy using methods that came to the fore in The General Theory of Employment Interest, and Money, published in 1936 by the British economist, John Maynard Keynes. The two features of Keynes’s book that are most relevant to the topic at hand are (1) that it was written to address the economic conditions of the Great Depression, which was in its 7th full year at the time of the book’s publication, and (2) that it offered a tool, called the Keynesian multiplier, for measuring the effectiveness of the policy recommendations that came out of the book.

Keynes saw it as his purpose to replace the hitherto recognized economic paradigm, then called the “classical” model, with a new paradigm that reflected the depth and persistence of the Depression. In the classical model, economic downturns, even severe economic downturns, were supposed to be self-correcting. The relevance here is that the classical model (whose assumptions mirror those of our CGE model) assumed that supply equaled demand except for brief periods of imbalance between supply and demand, which would be eventually corrected by price and wage adjustments.

Given that the ongoing economic downturn was clearly not self-correcting, argued Keynes, it was necessary to forge a new approach that both explained that downturn and provided a path back to more normal conditions. It was necessary to build a model in which the supply of goods and labor could exceed the demand for goods and labor over a protracted period of time.

Keynes’s approach turned the classical model on its head: Previously, saving was necessary for investment and therefore for production and employment. Now saving was a “leakage” from the spending stream that slowed the pace of economic expansion. Previously, government spending crowded out personal consumption. Now government spending provided a spur to consumption. Government could rescue the economy from a protracted downturn by using its tax and spending powers to boost aggregate demand.

In doing so, the government would take advantage of how the Keynesian multiplier could be relied upon to increase production and consumption. Government would spend, say, another$1,000 on some activity. It didn’t matter if the activity was something useful like building a bridge or something wasteful like paying men to dig holes and fill them in again. Spending was spending. And this spending would cause production to expand by some multiple of $1,000.

A key concept in computing the multiplier is the “marginal propensity to consume,” or ”MPC,” defined as the additional consumption that another dollar of disposable income would yield. Suppose this MPC equaled .5. An “injection” of $1,000 in government spending would immediately bring about $1,000 in new production. But then consumers would spend 50% of that, adding another $500 to production. Then consumers would spend 50% of that, or $250, leading to further new production and to further rounds of new consumption and production so that, at the end of the day, the initial ”injection” of $1,000 in government spending yielded altogether $2,000 in new production. Thus by spending only $1,000, the government would cause production to rise by twice that amount. Hence, the Keynesian multiplier.

A further wrinkle in this analysis is the Keynesian “balanced budget multiplier.” This concept, which comes up in Keynesian models of state tax policy, begins with the idea that, just as government spending is good for the economy, taxes are bad (though for reasons unlike those considered by STAMP). Taxes are bad in this analysis because they reduce disposable income. Suppose that the government decided to raise taxes by $1,000, rather than increase spending by $1,000. Now disposable income would fall by $1,000, and as a result, consumption would fall by $500, causing production to fall by the same amount. Then consumption and production would fall by another $250, and so forth, until both had fallen by $1,000.

Now suppose the government decided to raise spending and taxes by $1,000. We get the following effects on production:

  • Change in production from $1,000 in new government spending = $1,000 + $500 + $250 + $125 + ... + 0 = $2,000.
  • Change in production from $1,000 in new taxes = -$500 - $250 - $125 - ... - 0 = -$1,000.
  • Adding: $2,000 - $1,000 = $1,000.
Voila! The simultaneous $1,000 increase in spending and taxes has a net positive effect on the economy of $1,000. Conversely if the government had cut spending and taxes by $1,000, the economy would have shrunk by the same amount. And interestingly, the result doesn’t depend on the size of the MPC. Economic models that have built-in Keynesian elements show that a given increase in spending and taxes will expand the economy by that increase and that a given decrease in spending and taxes will contract the economy by that decrease.

Despite the fact that Keynes himself recognized that this line of analysis was legitimate only when production and employment were significantly below their ”full-employment” norms, the Keynesian model dominated economic thinking well beyond the end of the Depression and until the early 1970s, when “stagflation” cast doubt on its applicability to current conditions. Thereafter, economists started to rehabilitate the previously discarded classical model, causing mentions of Keynes to disappear almost entirely from the academic literature and to receive less and less consideration in college textbooks.

The recent economic downturn did, in fact, breathe new life into the Keynesian corpse. But the failure of the economy to respond measurably to the 2009 “stimulus” policies suggests that this renewed life will quickly fade. The current economic weakness appears to be due, not to an insufficiency of demand, but to uncertainties surrounding Obamacare and Dodd Frank and to safety net measures that deter people from taking jobs, all of which operate on the supply-side of the economy. When ITEP criticizes us for assuming full employment, it is implying that we should be more “Keynesian” in our approach. We should treat government spending as good for the economy and taxes as bad only insofar as they reduce disposable income. The balanced budget multiplier is a handy tool for government expansionists who want to claim, in effect, that the state government can make the state economy as big as it wants by merely spending more.

We prefer the alternative approach is to revert to classical arguments that government spending crowds out consumption and that taxes matter, not for how they affect disposable income, but for how they affect incentives to work, save and invest. In that framework, a reduction in government spending translates into an increase in personal consumption. Reductions in tax rates, as they apply to sales or income taxes, increase the reward to work, saving and investment and, through that mechanism, cause production to expand. This “supply-side” approach makes sense insofar as the demand-side palliatives called for by the Keynesian model seem to have lost their usefulness some 70 years ago. No one outside of some other modeling organizations takes the idea of the balanced budget multiplier seriously anymore.

It is the position of the Beacon Hill Institute that, in modeling tax policy, Keynes’s ideas work well, insofar as they do at all, for considerations of federal tax policy changes in an economy that is clearly depressed owing to a lack of aggregate demand. The federal government can influence national economic conditions through Keynesian policies since it can run budget deficits and print money, whereas state governments can do neither. Furthermore, the federal government doesn’t have to concern itself with the outmigration of capital, jobs and consumer activity in the way that the states do when it comes to raising taxes.

Economic models that use Keynesian multipliers to rationalize individual projects, such as building a sports arena in a depressed area, are also fine as far as they go. But state policy makers should be wary of models that presume to generalize that approach to making to state tax policy.

The BHI approach to modeling a reduction in, say, the state sales tax is focus on how that tax change will expand consumption by making consumption cheaper in the state and thus bring in more retail business and, by doing so, increase production and salaries. Sales tax revenues will go down, but the reduction in those revenues will be partly offset by an increase in income tax revenues and other tax revenues. Government spending will fall but the taxes previously paid to government will show up as increased consumption. The alternative view, that the path to economic expansion lies in combined spending and tax increases does not fit the facts of the current economy at the national level and certainly does not fit those facts at the state level.

Wednesday, March 26, 2014

Blasts from the past for critiques of BHI that don't last.

 
Another day, another reason for a handy compendium of response to "critiques" of BHI's work (and an note on argumentation.)


WSJ's Notable & Quotable for today nails the data problem with prevailing wages

From today's Wall Street Journal (gated)

Philip K. Howard, from his new book "The Rule of Nobody: Saving America From Dead Laws and Broken Government" (Norton, 2014):
 The 2009 economic stimulus package promoted by President Obama included $5 billion to weatherize some 607,000 homes-with the goals of both spurring the economy and increasing energy efficiency. But the project was required to comply with a statute called the Davis-Bacon Act (signed into law by President Hoover in 1931), which provides that construction projects with federal funding must pay workers the "prevailing wage"-basically a union perk that costs taxpayers about 20 percent more than actual labor rates. This requirement comes with a mass of red tape; bureaucrats in the Labor Department must set wages, as a matter of law, for each category of construction worker in each of three thousand counties in America. There was no schedule for "weatherproofers." So the Labor Department began a slow trudge of determining how much weatherproofers should be paid in Merced County, California; Monmouth County, New Jersey; and several thousand other counties. The stimulus plan had projected that California would weatherproof twenty-five hundred homes per month. At the end of 2009, the actual total was twelve.
 http://online.wsj.com/news/articles/SB10001424052702303725404579461330128654314?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303725404579461330128654314.html

For more on the prevailing wage, see BHI's 2008 study.

Monday, March 3, 2014

David G. Tuerck interviewed by Massachusetts Matters on the recent UAW vote in Tennessee.


Wednesday, January 23, 2013

On the reading list: Indur M. Goklany's "Humanity Unbound."

It's on our reading list. Goklany provides what appears to be a welcome antidote to the nostrums of the green economy --  a thorough historical look at the contributions of conventional energy to well-being. For green energy to work it would have to supplant the tremendous progress humankind has made thanks to fossil fuels.

Thursday, January 3, 2013

David G. Tuerck on Fox25 discussing the "Fiscal Cliff" deal

Boston News, Weather, Sports | FOX 25 | MyFoxBoston Video Link.

Response to the Union of Concerned Scientists' "Critique" of BHI's RPS studies

Elliott Negin,
Director of News & Commentary
Union of Concerned Scientists
Huffington Post

Dear Mr. Negin:

I write this letter to you to correct your statements and misrepresentation of our studies that you presented to your readers in an article titled Koch Brothers Fund Bogus Studies to Kill Renewable Energy on December 7th 2012.

You state that I ‘essentially conceded’ that we ‘fudged’ our findings due to the funding of groups that utilized our findings or assumptions you make about our funding. This could not be further from the truth, and as I will detail here, your deceptive selections of our papers and incorrect statements are misleading your readers.

As with all of our Renewable Portfolio Standard (RPS) reports the donors and funders of the project wish to remain anonymous, but as I will demonstrate, none of our numbers are ‘fudged.’ We use rigorous analysis and a dynamic economic model with an 11-year track record to produce accurate ranges for the estimated costs that states are likely to experience due to RPS polices. The fact is that by mandating that utilities produce electricity by using more costly and less efficient methods, electricity costs will rise. These price increases are not immaterial and will have direct effect on decisions faced by both residents and businesses in the state.

I do not question the findings or independence of the Union of Concerned Scientists, or yourself, due to the eight Anonymous donations of more than $100,000, or donations from ClimateWorks Foundation, EarthShare or The Energy Foundation of the same size. (1) To do so would be to commit the motive fallacy which always seems to be used by those with no legs to stand on. Questioning funding sources is the ‘red herring’ to avoid any serious discussion on methodical issues in a study. But I do question your findings based on incorrect information and misleading statements.

First, you quote our paper:

“assumed that the Energy Information Administration’s projected renewable energy price estimates are too low,”

Which is true, but you leave out the part of the story that does not fit your caricature of findings that disagree with your belief. In our research we found that EIA estimates were in the lower range of levelized energy costs and higher in capacity factor for renewable energies for the nation as a whole. For this reason we included them in our paper, as the ‘low case’ to fully represent the huge range of possibilities that this policy could have. We also included other creditable estimates in our modeling to represent a ‘high case’, as well as a combination of the two sets to calculate our ‘medium case’. Additionally, in our calculations we use state specific information when it is available. For example actual wind power farms in Kansas have capacity factors close to 40 percent, higher than EIA estimates, which we utilized to improve our results.

Secondly, to continue the quote above:

“…and that cost containment measures embedded in state polices will fail.”

But again you fail to include any of our discussion of why they are likely to fail, and regardless should not be included in an examination of the policies. In researching the cost caps, we were unable to find any examples of effective, enforceable cost caps for RPS or Renewable Energy Standards (RES) being enforced. This is not particularly surprising, as most policies have step-up mechanisms and the larger costs are likely to be incurred as the policies are fully implemented. But it does begin to show a trend. Furthermore, most cost containment measures are worded such that the decision to implement them is more likely to be a political decision then an economic one.

For example, in Missouri the Missouri Public Service Commission (MPSC), which is the department responsible for measuring the cost cap, as well as ensuring the RPS is fully implemented, should determine the rate increase “by estimating and comparing the electric utility’s cost of compliance with least-cost renewable generation and the cost of continuing to generate or purchase from entirely nonrenewable sources.” Additionally, “future environmental regulatory risk including that of greenhouse gas regulations should be taken into account.”(2) If a MPSC analyst can determine the least cost energy of a theoretical power plant, the cost of a theoretical purchase contract, AND determine the cost of all possible future environmental regulations, then the analyst would be wasting his skills.

Aside from the points mentioned above about the cost-cap provisions, they are irrelevant to the goal of our study, which is to estimate the cost of compliance to a RPS in the time frame legislated. There are three possible outcomes of the RPS. It is (1) met in the timeframe required, (2) the cost cap provision is enacted and the RPS is not met in the timeframe required or (3) the RPS is not met due to technical impossibilities. Our studies measure (1) as (2) is more based on political science, requiring large assumptions, than economics while (3) is not relevant to policy discussion.

Thirdly, you reference your colleague’s ‘fact check’ of our Michigan RPS analysis. This ‘fact check’ plays fast and loose with the facts, making false claims and entirely misrepresenting our study. I will supply the summary corrections again for you here.

You said we “ignored the fact that the state already has a standard in place, enabling them to inflate the costs of implementing the stronger standard.” This would be a valid critique, if it were true. In fact, in Graphic 2 of the paper we compare the two polices side by side, including the results of the difference between the two policies.

Next you stated that we “made questionable assumptions about renewable energy technologies--often citing out-of-date, controversial or unsubstantiated material to support their assertions--instead of using real-world cost and performance data from local projects.” As stated above, we use a range of estimate to provide a better interval that we are confident the results will be in. In Mr. Deyette’s ‘fact-check’, he suggests we use capacity factors for wind power based on the Great Lakes region. The number he suggests is within our range of estimates, which is one of the most defensible reasons for using ranges. No one knows what the capacity factor of wind will be in 2025, we make assumptions about the range to provide a range of net costs as guidance.

Finally, you allege we “failed to factor in the new standard's benefits, including economic development, job growth, cleaner air and reduced carbon pollution.” We go to lengths in both the papers and the STAMP® documentation to show this is not true, and your statement is uninformed. As we state in the paper:

“The jobs that are lost due to higher energy costs are not as easy to identify as the jobs created by new energy construction projects, but they are just as important. While Public Act 295 might generate visible new jobs and construction projects, our projections clearly indicate that Michigan electricity ratepayers will pay higher rates, face fewer employment opportunities, and see investment redirected to other states.”

The STAMP® model does account for the benefits of the policy. More jobs and investment will be seen in some sectors of the Michigan economy, mainly in those related to the installation and building of green energy. But the higher electric prices would have larger negative effects on the state, leading to the net negative costs we report.

Your haphazard analysis which makes-up facts and consistently misconstrues statements is an insult to your readers and a sad inquiry into our paper. I would be happy to discuss any methodical questions or concerns you have with our papers in an effort to improve them, but accusing me of ‘fudging’ studies for money based on ignorant facts is disappointing.


Sincerely,


Michael Head
Research Economist
The Beacon Hill Institute at Suffolk University


cc: Joanna Zelman, Editor, Green Department, Huffington Post.
1 Union of Concerned Scientists, Annual Report (2011);14, http://www.ucsusa.org/assets/documents/ucs/annual-report-2011.pdf.
2 Missouri Register 35 (16):1190 August 16, 2010.
https://www.efis.psc.mo.gov/mpsc/commoncomponents/viewdocument.asp?DocId=935517878.

Wednesday, August 29, 2012

Christian Science Monitor "New GDP numbers do Obama no favors"


Economists expect only modest improvement in the second half of the year. Most believe the economy will keep growing, but at a subpar rate of around 2 percent.
"The economy was sluggish in the second quarter and the slight upward revision ... does nothing to change that picture," said John Ryding, an economist at RDQ Economics, in a note to clients.
The report was the government's second look at gross domestic product for the second quarter. GDP measures the country's total output of goods and services, from the purchase of restaurant meals to construction of highways and bridges. A third and final estimate of second-quarter growth will be released next month.
Growth at or below 2 percent is not enough to lower the unemployment rate, which was 8.3 percent in July. Most expect the unemployment rate to stay above 8 percent for the rest of this year.

John Steele Gordon: A Short Primer on the National Debt - WSJ.com


But while these numbers are fun to play with, they don't mean much. It's the debt's size relative to gross domestic product that matters, just as personal debts must be measured against a person's income before they can be properly evaluated. The GDP of the United States was $15.003 trillion at the end of the first quarter in 2011. That makes the public debt equal to 66.1% of GDP and the intra-governmental debt 31.1%. Total debt is now 97.2% of GDP and climbing rapidly.

And it's the climbing rapidly part that is worrisome, not the debt's current size relative to GDP. Indeed, the debt has been substantially higher by that measure in earlier times. In 1946, in the immediate aftermath of World War II, it was 129.98% of GDP. But while the debt had increased enormously during the war (it had been 50% of a much smaller GDP in 1940), it did not increase substantially over the next 15 years. It was $269 billion in 1946 and $286 billion in 1960. The American economy grew so much in those years that the debt, while slightly up in absolute terms, was down to only 58% of GDP by 1960.

Wednesday, June 20, 2012

David Henderson takes on a Keynesian myth

From Defining Ideas at the Hoover Institution's blog

"Keynesians and others have their own explanations for why the Keynesian predictions of postwar economic disaster did not come to pass. The three most popular are: Rosie the Riveter left the labor force; the G. I. Bill put many returning soldiers in college rather than into the workforce; and the American people stopped saving and started spending the money they had accumulated during the war. The data, however, do not support these explanations."

Monday, October 17, 2011

Why are Civilian Flaggers not saving the state money?

A Cape Cod Times story runs under the headline "Civilian flaggers not a money saver" with some important points

1. "The $1.8 million contract ... calls for the company to provide flaggers at a rate of $49 per hour."
2. "The state pays a Sandwich police officer working the same detail $41 per hour"

This would lead a typical person, and hopefully a reporter even more so, to question why are less trained flaggers paid more then a police officer? The article mentions state prevailing wage laws in passing, but never actually considers the question.

As we stated in a 2008 report, prevailing wage calculations are methodologically incorrect and exceed BLS surveys of actual wage rates. Massachusetts calculations suffer similar bias in their methodology. If the state actually wants saving from flaggers they would not legally require them to be paid a minimum wage of $49.

Friday, August 19, 2011

BHI’s response to TP’s Climate Progress blogger Michael Conathan’s critique of NJ wind farm study

-- This post was written by Paul Bachman, Director of Research, Beacon Hill Institute, August 19, 2011.


On TP's Climate Progress blog, Michael Conathan, claims that Beacon Hill Institute's recent cost-benefit analyses of offshore wind energy in New Jersey are slanted. Conathan alleges that the BHI study "misses the mark on both sides of the ledger by dramatically overstating the costs and underestimating the economic benefits of offshore wind."

It is actually Mr. Conathan that "misses the mark" in his critique of the BHI study. Mr. Conathan makes baseless claims, reports only partial data and relies on irrelevant studies with no economic value or relevance to offshore wind power in New Jersey. We address his individual critiques below.

Mr. Conathan: "The study dramatically underestimates the economic savings realized from the environmental benefits by assuming a static price for the valuation of reduction of greenhouse gasses - which will inevitably rise over time. "

BHI response: Mr. Conathan bases his claim on speculative assumptions about the future regulations of greenhouse gas emissions and other variables. He assumes that the U.S. government will impose a cap-and-trade system, a carbon tax, or a restrictive E.P.A. regulatory regime. This action by the federal government would raise the cost of greenhouse emissions and in turn the price of coal and other fossil fuels, while at the same time raising the benefits of wind power. However, these greenhouse gas regulations are not even a remote possibility in the current political and economic environment.

Let us take a look at the recent history of CO2 prices over time. The IntercontinentalExchange INC. which runs the Chicago Climate Exchange and Chicago Climate Futures Exchange has decided to shut both down due to a lack of legislative interest. "The U.S. has not enacted carbon cap-and-trade legislation and changes to the EPA acid rain program have reduced trading activity," ICE said in its notice. "Accordingly, volumes are down substantially and the exchange is operating at a loss." It appears that IntercontinentalExchange INC. does not share Mr. Conathan's view that the price of greenhouse gas emissions will inevitably rise over time.

The exchange also lists prices for New Jersey RGGI futures contracts. On June 30, 2011 the price was $2.02 per metric ton for November 2016 delivery and on May 30, 2011 the price was $1.93 per metric ton. In our study we used a real price of $2.04 in 2011 dollars. Therefore, our price is well within the range of futures prices listed at that time. Moreover, if we inflate our current price using a 3.5% annual rate, our $2.04 2001 real price translates into a nominal price of $2.78 in 2020 and $3.92 in 2030. We, in fact, do account for his inevitable price increase over time.

Mr. Conathan: By BHI applies an absurdly high discount rate of 10 percent to the benefits when most economic studies use rates of 3-5 percent. The discount rate mistake alone could lead to underestimating the benefits of offshore wind by as much as 50 percent.

BHI Response: First, Mr. Conathan makes the mistake of comparing our 10 percent nominal discount rate with 3-5 percent real, or inflation-adjusted, discount rates. Using the same 3.5 percent inflation rate assumption as in the previous example would translate our nominal rate into a real discount rate 6.5 percent, not far off from his 3-5 percent range. If we use the recent annual CPI increase of 4.2%, our real discount rate becomes would be 5.8%. Moreover, the White house Office of Management and Budget recommend using this discount rate.

While Mr. Conathan rails against us for applying such as high discount rate to the benefits, he is silent about the fact that we apply the same discount rate to the costs of the project. Thus, if we are underestimating the benefits of the project by 50 percent, which we do not, then we would be underestimating the costs also.

Mr. Conathan: BHI also artificially inflates the costs of the project compared to fossil fuel generation by failing to account for the reality that as costs go up, people will reduce their consumption thereby partially offsetting the price increase.

BHI Response: Mr. Conathan is describing what is commonly known as a "rebound effect." It is often used to describe the consumers' behavior after the installation of energy efficiency equipment. For example, as consumers witness their winter heating bill drop after making energy efficiency changes, they respond by turning up the thermostat to a more comfortable temperature, and thus negate some of gains of the efficiency gains. However, Mr. Conathan thinks that there is a free lunch to reducing electricity consumption and fails to recognize the two factors in the wind power case. First, consumers incur a cost to reduce the amount of electricity they would have consumed in the absence of the higher price. Either consumers lose the benefit they derive from that electricity consumed, for example less time on one's IPad, or consumers make an energy efficiency investments to reduce their electricity consumption, which also has a cost of lost opportunity to spend the money elsewhere. Thus, our estimates of the price effects include these costs of the rebound effect and do not need to be adjusted.

Mr. Conathan: "Furthermore, the study estimates the cost of natural gas and coal based on historical prices rather than based on forecasts of future market conditions. While natural gas prices are difficult to predict, experts believe coal prices will rise in the future."

BHI Response: Here again Mr. Conathan believes that his and other "expert" assumption of future prices and regulatory regimes are more valid than ours. Only time will tell who is more accurate. However, what we do know is that forecasting future regulations, supply, demand, costs, prices and other variables is extremely difficult and uncertain, and that includes coal prices. This is why we conduct a sensitivity analysis to test the robustness of our assumptions and provide a range of estimates.

Mr. Conathan: "The BHI study entirely fails to account for the jobs that would be created by the wind farm. Meanwhile, according to a 2009 report by the European Wind Energy Association, the wind energy sector in Europe created more than 60,000 jobs from 2004-2008."

BHI Response: Mr. Conathan is wrong again. We report net jobs, which includes 2,400 jobs created in the construction, manufacturing and related industries. These jobs created are simply swamped by the jobs lost in the other sectors that suffer from the higher electricity costs.

Mr. Conathan cites a report from the European Wind Energy Association, hardy an unbiased source. The purpose of the report is to boast the positive employment effects of the industry. However, as an economic study, it makes nonsensical assertions and fails to look at the economy-wide effects of wind energy that is more expensive and less reliable than conventional energy. Manufacturing and other energy intensive industries facing higher costs can move production to lower cost locations or simply shut down.

For example, the study states that the "additional employment effect of including the higher cost (and higher employment per MW installed) of offshore capacity is estimated at 2,800 jobs…" The report associates higher costs and higher employment requirements with offshore wind with economic benefits. The report associates higher costs and less efficient energy sources with more employment in the wind energy industry. Using this logic, the wind power should not be placed just off the New Jersey coast, but rather in the middle of the ocean because it would create many more jobs to construct and maintain the turbines and transmission lines that are much further away from the energy consumer. This is the same logic that would insist that a canal should be dug with picks and shovels instead of machines.

The report, and Mr. Conathan, fail to note that Denmark has the highest concentration of wind power in Europe and the highest electricity rates in Europe. Moreover, Denmark sells its wind power to Germany during the overnight hours at a very low rate, when the wind is blowing most consistently, and buys conventional electricity back from Germany during the daytime at a much higher rate, when their electricity demand is highest.

Mr. Conathan: Furthermore, the study assigns zero value to increased energy independence and vastly underestimates the reductions in greenhouse gas emissions that New Jersey's targeted 1,100 MW of offshore wind energy would produce.

BHI Response: Mr. Conathan displays his ignorance of the composition of the New Jersey electricity market. As we explain in the report New Jersey gets the vast majority of its electricity supply from domestic sources of coal, natural gas and nuclear power. Oil only provides between 0.5 percent and 1.5 percent of state electricity, and fluctuates depending on oil prices. Moreover, because it is unpredictable and unreliable, wind power cannot provide any of the marginal electricity supply. In other words, wind power operators are at the mercy of the current wind conditions and they cannot control their output to meet changes in electricity demand at any given moment in the day. Therefore, wind power must supply the base load on the grid, which means it would displace domestically supplied coal and natural gas and would have no effect on electricity supplied by oil. Therefore, no foreign oil would be displaced by the wind power.

Contrary to Mr. Conathan's statement that we underestimate the reductions in greenhouse gas emissions the wind power project would produce; the emissions effect is likely negligible for two reasons. First, coal represents 68% of the New Jersey's marginal supply of electricity, so that when the wind suddenly stops blowing at any given moment, coal plants must be cycled up to supply the power lost from the wind plant. The opposite happens when the wind begins to blow again.

Nevertheless, the coal plants cannot be shut down completely when the wind power is operating. That is to say coal power plants are similar to an automobile idling. They are still burning coal and sending some electricity to the grid, but not at an efficient level. When the wind stops blowing the cola plant operator hits the gas petal, if you will, to keep the current electricity supply balanced with the current demand and prevent brownouts and blackouts. While the coal plants are idling, so to speak, they are running at less-than-peak efficiency and produce more greenhouse gas emissions than if they were running at peak efficiency while online. This shifting back and forth between idling coal plant and intermittent wind turbine reduces the emission benefit from wind power.

In addition, the construction of a 1,000 MW wind plant takes much more raw materials, such as steel concrete, aluminum, plastics, transmission wires and land, or in this case water, than a conventional power plant. The production of all these materials also produces greenhouse gas emissions and when we accounted for these greenhouse gas emissions, the wind advantage erodes even further.

Mr. Conathan: This report isn't BHI's first foray into the admittedly complex world of offshore wind. A 2003 report from BHI on Cape Wind's proposal to build America's first offshore wind farm used similarly deceptive tactics, suggesting the project could cost the region $64 million to $134 million in tourism dollars. These findings were included despite polls that showed less than 3 percent of potential tourists would change their plans if the farm were built and despite ample studies of actual tourists' behavior in areas proximate to actual wind farms in Europe.

BHI Response: Mr. Conathan must not have read BHI's report on Cape Wind carefully. BHI did, in fact, conduct a statistical survey of tourists that were on the very Cape Cod beaches where the Cape Wind turbines would be visible. The fieldwork for these two surveys was done under contract with, and under the supervision of, David Paleologos, President, DAPA Research, Inc., an experienced pollster and professor at Suffolk University. The attitudes of European tourists on European beaches, cited by Mr. Conathan, are irrelevant to the Cape Wind project.

Mr. Conathan also fails to cite the recent contract between Cape Wind and the utility National Grid that priced its electricity at 19.4 cents per kilowatt hour in 2016, escalating 3.5% per year for 20 years. This is almost double the current electricity rates for Massachusetts.

Offshore wind power is more expensive, unpredictable, less reliable and less efficient than conventional energy sources. These features make wind power costly to electricity consumers, especially businesses in energy intensive industries. This is why wind power was abandoned as a source of reliable electricity at the dawn of the industrial revolution. These inconvenient economic truths force advocates like Mr. Conathan to resort to "deceptive tactics," half- truths and baseless accusations.

Wednesday, August 10, 2011

Re: Hands off my beer

The Alcohol and Beverage Control Commission (ABCC) has reconsidered its requirement that local brewers use locally-grown ingredients. While this is a welcomed step, the episode raises an interesting (read: disappointing) question about how policy is made in Commonwealth.

The ABCC stated that it:
endeavors to support and enhance the agricultural community, ensure the long-term viability of agriculture, and support farms that protect the common good in many ways including maintaining open spaces in communities.
These are honorable goals; supporting a local industry is always nice, and who would not like more open space? But at what cost? This issue is not presented, or so it seems, even considered.

-How much forest land will have to be converted to farm land to grow all these ingredients?
-Is this the most efficient use of this land?
-Would participating in trade with other states allow state farmers to produce a more valuable crop?
-What are the costs to other industries? ie forestry, craft brewing or other types of farmers.
-What is the revenue effect?

There is not an indication that any of these costs were considered. When only the benefits are considered, and touted, incomplete, and often incorrect, policies are proposed.

We encourage that any policy proposal have a thorough and complete Cost Benefit Analysis preformed. I find it troubling that red tape of this sort is implemented without considering the costs.

Friday, August 5, 2011

Hands off my beer

As a home brewing enthusiast (currently drinking an O.E. clone, Oktoberfest in the bottle, and plans for a double brew of a Black and a Tan in the next few weeks) and craft beer drinker, the recent news about licensing changes has confused and concerned me. The Alcoholic Beverages Control Commission plans to make it difficult for craft brewers, unless 50 percent of their grains and hops are grown in state.

While I'm sure there was deep thought, and a detailed Cost Benefit Analysis of the new proposal, I'm unable to find it.

Increasing costs, and implementing barriers to entry, on an emerging industry, which provides the best regional beers in the US (in my expert opinion) in addition to many local jobs is no way to encourage job growth.

Promoting rent seeking in the agriculture industry, does little to encourage axillary industry boosts, such as tourism.

I think of my daily afternoon lesson on my walk home, presented by the
Duckboat Captains the local version of oral history on wheels, 'the Beantown Pub is the only Pub in the world where you can drink a Sam Adams while looking at his grave.'

Helping the local hops industry, in favor of the local craft brewing industry is down right ridiculous. I have seen many policy proposals that use bad logic and reasoning to justify them, but this policy lacks even that low bar (pun intended). It is on par with the Candlemaker's Petition for trade protections from an unfair foreign power, The Sun.

Wednesday, August 3, 2011

Spending cuts? Not quite.

Baseline:
We could expect to receive $39.084 trillion in revenue between 2012 and 2021.
We could expect to spend $46.055 trillion in outlays in the same period, for $6.971 trillion in expanded deficit. Per the CBO

Change:
The bill signed yesterday "calls for up to $2.4 trillion in savings over the next decade."

I'm honestly not sure what will happen to revenue projections for the next ten year. Being a two handed economist, on one hand, lower government spending should leave opportunities for a more efficient private sector to step in. On the other hand, given the uncertainty of the of the federal gov't to pay its bills, markets have frowned. (The S&P 500 is down 1.58% in the last five days).

We can expect spending to decease to $43.655 trillion over the next ten years, and assuming that revenue stays constant, an increased deficit of $4.571.

Is an average annual spending of $4.366 trillion really a huge spending cut, as many popular media sources state? As a comparison, in FY2010 the US spent $3.456 trillion, and the ten years leading up to that year averaged $2.614 trillion. Assuming compounded annual inflation of 3 percent, the average is $2.945 trillion.

Not really the killer spending cuts that you've read about? I suppose when the original spending bar is set so far out of the U.S.'s ability to pay, even large cuts don't bring it back in line.

(HT to: Cafe Hayek for many of the sources.)

Monday, July 25, 2011

Where is my money going?

Even for a numbers geek, such as myself, U.S. spending is a hard thing to wrap my head around. Realizing I indebted myself hundreds of thousands of dollars to buy a house was hard enough.

Reviewing state budgets that throw the word 'billion' around is hard to envision, but possible. ie The state spent more then 5,831 of my houses on Debt Service in 2010. (This is harder to envision when the state does not label, or mislabels data. $1,948 billion, really?)

That is why I love what alot of people are doing with graphical representation of information

http://www.wheredidmytaxdollarsgo.com/

Does just that, allowing me to see, on average, where my federal tax dollars are going.

A state level one could be very interesting...

Friday, July 22, 2011

A 25% Massachusetts gas tax hike would mean loss of 1,000 private sector jobs

























With gas prices falling in Massachusetts, state leaders are thinking about increasing the gas tax. Just how much the Governor and legislature are willing to raise the tax is unclear.

But assume that the legislature approves a new 29 cents per gallon tax (up from 23.5 cents) representing a 25 percent increase (not unlike the last hike to the state sales tax). What would that mean for the state's economy?

Using its State Tax Analysis Modeling Program, the Beacon Hill Institute estimated that a 25 percent increase would not help the Commonwealth's economy as it tries to add jobs.

Compared to a baseline of no gas tax increase, the state would have 1,170 less private sector jobs, while adding 600 public jobs in the first year. Riding the brakes would have consequences. At the margin, less employment means consumers will have less money to spend, so while gas tax revenues increase by $152 million, the state would collect $5 million less in sales tax, not to mention that companies will be selling less. Similarly, with 570 total less full time equivalent jobs, state personal income tax collections would decrease by $8 million.

In total , instead of collecting $152 million more in gas taxes, the state would see a total revenue increase of only $116 million, due to dynamic effects. At the cost of lower employment, income, disposable income and investment, raising the state's gas tax is a bad policy at a bad time.

Tuerck: Support "Cut, Cap and Balance"

Having reviewed the House-passed Cut Cap and Balance Act of 2011, I have reached the conclusion that the Senate should adopt this legislation and send it on to the President. The Act provides the only effective solution to the country’s budget crisis, which is to cap federal spending well below current levels. The provision to cap spending at 19.9% of GDP by 2021 would bring spending back toward its historical norm and prevent the kind of binge spending that we have witnessed over the past two years. This is the only way to prevent a repeat of the misspending that has brought us to this point. I urge Senators Brown and Kerry to vote yes.

David G. Tuerck
Executive Director, The Beacon Hill Institute
Professor and Chairman, Department of Economics
Suffolk University

Thursday, July 21, 2011

BHI on the Sales Tax Holiday proposal

CBS-Boston's Jim Armstrong interviews Paul Bachman on the proposed sales tax holiday for August 2011.

Video Link:

Monday, June 20, 2011

Taming the Amazon with taxes

Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector.
To get around the ruling, some states are expanding what it means to be physically present. For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.

In February, the Texas comptroller demanded that Amazon.com pay $269 million in back sales taxes because a subsidiary operated a warehouse near Dallas. Amazon is appealing the order.

Last year, New York enacted a law that said Internet retailers' practice of paying commissions to marketing agents based within the state constituted a presence. Arkansas, Colorado, Illinois, Rhode Island and North Carolina quickly followed with similar laws.
Bills are pending in Arizona, California, Florida, Hawaii, Massachusetts, Minnesota and Pennsylvania. Texas lawmakers passed such a measure, but Gov. Rick Perry vetoed it. Now legislators are trying to resurrect the bill by attaching it to a larger budget measure. The matter is now before a conference committee.
California estimates it loses at least $200 million a year in uncollected tax from online sales, $83 million from Amazon.com alone. A bill that has passed the state Legislature would force Seattle-based Amazon and others to collect that tax from California residents.

Amazon, Overstock.com and other big Internet retailers cite the Quill decision as their primary defense against collecting sales taxes, but they also argue that collecting tax in the District of Columbia and the 45 states where a sales tax exists would be extremely complex and expensive.

"There are over 8,000 taxing jurisdictions in the United States," said Jonathan Johnson, president of Overstock.com, which has offices only in Utah. "We think it's wrong that states are trying to cause out-of-state retailers to be their tax collectors."

Monday, June 13, 2011

Has the optimal gas tax been identified?

Mass High Tech's Kyle Alspach
In 2007, a study in the Journal of Economic Literature found that the ideal average gas tax for the U.S. would be $2.10 a gallonhttp://www.blogger.com/img/blank.gif. At the time, the average tax was 40 cents a gallon — 18.4 cents for federal and 22 cents for state (it’s currently 23.5 cents in Massachusetts).

The $2.10 figure takes into account greenhouse gas emissions, local pollution and oil dependency, along with the costs of congestion and accidents.

To make the tax palatable, economists say the government could cut taxes in other areas — say, the income tax for consumers or corporate taxes for businesses.
The tax trade-off seems like a reasonable idea but revenue-hungry politicians would never take up the offer.

In the rush to move toward a Pigouvian tax model, supporters of higher taxes tend to forget that such excise taxes are regressive. More than they did in the past, low-income workers rely more heavily on jobs in the suburbs and most use cars to get there.

Wednesday, June 8, 2011

BHI releases study on education spending in Massachusetts

The Commonwealth of Massachusetts could cut more than a billion dollars from education spending without measurably affecting the performance of public schools. This is a finding of a study released today by the Beacon Hill Institute and entitled, Why Massachusetts Should Spend Less on Education. Read more.

Complete study is available at beaconhill.org.

Monday, June 6, 2011

Video: David Tuerck testifies on H.R. 735

Testimony from BHI Executive Director David G. Tuerck begins at approximately 22:00 into this recording.



Text of BHI testimony in PDF is here.

Friday, June 3, 2011

Beacon Hill Institute testifies before U.S. Congress

Full testimony is available at BHI's website

David G. Tuerck
Department of Economics and Beacon Hill Institute
Suffolk University, Boston
June 3, 2011

Testimony Relating to the Government Neutrality in Contracting Act (H.R. 735) Before the Subcommittee on Technology, Information Policy, Intergovernmental Relations and Procurement Reform, Committee on Oversight and Government Reform, U.S. House of Representatives


Chairman Lankford, Members of the Subcommittee, I am Professor and Chairman of Economics and Executive Director of the Beacon Hill Institute at Suffolk University in Boston. I appreciate the opportunity to submit this testimony.

I will direct my comments at “H.R.735, and Project Labor Agreements: Restoring Neutrality to Government Construction Projects.” H.R. 735 effectively nullifies a February 2009 executive order from the Obama Administration “encouraging” federal agencies to consider using PLAs on construction projects costing $25 million or more.

My comments are my own and do not represent the sentiments my employer, Suffolk University. Nor do they represent my support for any organization or private interest that might stand to benefit from the passage of H.R. 735.

I would like to offer my strong support of this measure, subject to just one caveat. The caveat is that “neutrality” falls short of what is called for. What would be better is an outright ban on PLAs of the kind that was in force during the Administration of President George W. Bush, who forbade the use of PLAs on federal construction projects.

This subcommittee already knows how PLAs work. The adoption of a PLA amounts, in effect, to the conferral of monopoly power over the supply of construction labor on a select group of construction unions. The putative reason for adopting a PLA is to assure labor “stability.” But the real reason is to confer monopoly power on a select group of unions and to discourage bids from contractors who use other unions or nonunion labor.

The construction unions use the word “stability” as a euphemism for promising not to cause trouble. But the threat of trouble is mostly an empty one. A genuine worry arises only when an owner uses nonunion labor, in retaliation for which it has to put with antics of the kind for which Boston’s International Brotherhood of Electrical Workers is famous. But Boston building owners are on to the IBEW and are showing increasing willingness to say no to intimidation.

In my written testimony I provide the core argument against PLAs: PLAs are supposed to correct for a problem for which the best correction is simply not to adopt a PLA. The problem is that certain contractors – the PLA-union contractors – are so burdened with collective bargaining agreements that they would have a hard time performing a job on time and on budget, but for the PLA. The adoption of a PLA, however, amounts to a needless rescue operation for the PLA unions and their contractors. The best way to avoid cost overruns and delays is to encourage, not discourage, bids from contractors, whether unionized or not, who are able simply to bypass the collective bargaining agreements that hobble the competitiveness of the PLA-union workers and their contractors.

That’s the crux of it. A ban on PLAs is not an anti-labor measure. I am personally involved in a New York case in which the plaintiff contractor is suing because its union has been excluded from PLAs that are being foisted on the City of New York by a different union organization and a complicit mayor. And, anyway, there is nothing pro-labor about a practice that is aimed at protecting the jobs and wages of 13% of the construction workforce at the expense of the other 87%.

The research entity I direct at Suffolk found that PLAs increase school construction costs in two states by 12% to 18%. Reliable hard estimates of this kind are rare because the disparity between construction projects makes it difficult to get statistically significant results from sample data. Fortunately for policy makers grappling with this question, however, it is possible to dispel the case for PLAs merely by pointing out the fatuous reasoning on which that case is predicated.

Adopting a PLA serves no purpose other than to put the PLA-union fox in charge of the project chicken coop. Fortunately, and as I observe in my written testimony, there is growing recognition even on the part of union-friendly observers that the argument for PLAs, and to mix my metaphors, never held water in the first place.

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