BHI, Mass. lawmakers again try to gauge revenues

From the State House News Service in the Berkshire Eagle:

BEACON HILL INSTITUTE

Forecasted fiscal 2019 growth: $690 million or roughly 2.8 percent

Paul Bachman of the Beacon Hill Institute said revenue growth has slowed down dramatically over the past few years, a situation he called "a little bit puzzling" given the 70,000 jobs created in the past year. But he said personal income growth has also slowed dramatically -- falling to 0.9 percent in the fourth quarter of 2016 after having been over 5 percent in earlier quarters — and now may be on track for a rebound.

"That's what's driving the less than robust tax revenue collections," he said.

Why Amazon should 'one-click' Massachusetts

BHI's latest op-ed over at the Boston Business Journal.

Private Activity Bonds for Buildings Would Create Jobs, Fast Track Construction, and Save Taxpayers Money

In Wake of Hurricanes in TX, FL, PR and VI, new PABS Could Leverage Private Sector Funds to Speed Rebuilding of Gov’t Buildings and Schools

BOSTON, MA— The economic and fiscal benefits of the proposed Public Building Renewal Act (PBRA) could save taxpayers billions while adding billions more to the economy if Congress decides to unlock the proven benefits of Private Activity Bonds for government buildings. That’s the bottom line of a new study released today from The Beacon Hill Institute (BHI) for Public Policy, which conducted an exhaustive economic analysis of the short- and long-term benefits of P3s for addressing an increasingly challenging public policy issue facing state and local governments. 

“Private Activity Bonds for buildings are a triple win for governments, taxpayers, and the economy,” said study author David Tuerck of BHI. “Our findings show that, in the short run, every dollar of new infrastructure investment made possible by the PBRA will add $2.80 to the U.S. economy.  At the same time, taxpayers save nearly 25 percent over the life of these projects compared to traditional building methods, while these projects are delivered on time with guaranteed long-term performance”. 

These Private Activity Bonds would be utilized through a public-private partnership (P3) for a government building project.  A P3 is an arrangement under which a public entity and a private entity work together to build and maintain a public infrastructure project, such as a courthouse or a public library or schools.  Presently, the use of P3s in the U.S. to develop public buildings is limited because, unlike transportation infrastructure projects, public buildings are not currently eligible for private activity bonds. This unnecessary impediment prevents public building P3s from combining tax-exempt financing with private, taxable financing, resulting in an increased cost of financing that is passed on to our state and local governments. 

The Public Buildings Renewal Act (PBRA), introduced by U.S. Senators Dean Heller (R-Nev.) and Bill Nelson (D-FL) and U.S. Representatives Mike Kelly (R-PA) and Earl Blumenauer (D-OR), would allow state and local governments to use up to $5 billion of tax exempt bonds for P3s to construct and renovate public buildings.  The Joint Committee on Taxation scored this legislation, estimating a low cost of $18 million over five years and $48 million over 10 years.  

The pending tax reform legislation could be an opportunity to pass PBRA, which currently enjoys significant bipartisan support from the Ways and Means and Senate Finance Committees.

At a time when hundreds of billions will be needed to rebuild Puerto Rico, US Virgin Islands, Florida and Texas, PBRA could provide a critical financing tool to speed the recovery effort while minimizing cost overruns and guaranteeing long- term performance without deferred maintenance.  According to the Houston Independent School District, 22 of its 245 schools had extensive damage that will keep them closed for months and about 53 have “major” damage, according to school officials. 

Further, if Congress were to make Private Activity Bonds readily available (without a $5 billion cap as proposed in the PBRA), the cost savings and economic effects would soar. Under this scenario, BHI researchers assumed that P3s would expand to 20 percent of all applicable state and local government building, and generate $2.796 billion worth of new buildings.  Under this scenario, expanding Private Activity Bonds would increase real GDP by $8.285 billion and create 43,200 jobs in the first year.  The increase in economic activity would increase federal and state income tax collections by $860 million in the first year.   

Furthermore, the economic effects are cumulative over time as tax-exempt P3s increase the quantity and quality of the public infrastructure.  In ten years, the expansion of P3 projects would: 

•  increase public buildings by $85.90 billion
•  create 32,400 jobs
•  increase real GDP by $8.06 billion
•  increase federal personal income tax receipts by $643 million
•  increase state personal income tax receipts by $146 million

Congressman Mike Kelly (R-PA), lead House sponsor of PBRA, noted, “This new study confirms what so many have been saying all along: the Public Buildings Renewal Act is a win-win-win for American infrastructure, jobs, and taxpayers. I expect many more members of Congress to see this report and join the bipartisan effort to unleash the power of Private Activity Bonds to help solve our nation’s public infrastructure crisis. We have a real chance to repair countless schools, hospitals, courthouses, and more, while reviving our local economies. We can’t afford to let this opportunity slip away.” 

Senator Dean Heller, lead Senate sponsor of PBRA, remarked that, “Now is the time to use the success of P3s in the infrastructure sector as a financing model for repairing our public buildings and other cornerstones of our communities, particularly public schools and libraries. By empowering the private sector, this commonsense idea spurs innovation and will ultimately allow our country’s public schools and universities? to do even more, including save money. I’ll continue to urge my colleagues to support my Public Buildings Renewal Act so that Nevada and Americans around the country can benefit from the impact P3 investment has on our local economies.”

The complete study is available here.

September 19: How gun control endangers lives and keeps guns in the hands of the rich; A presentation by John Lott

How gun control endangers lives and keeps guns in the hands of the rich


A presentation by John R. Lott, Jr., PhD President,  Crime Prevention Research Center

September 19, 2017
5:30 p.m.
Suffolk University Law School

120 Tremont Street, Boston

First Floor Function Room

The Crime Prevention Research Center (CPRC), was founded by Dr. John R. Lott, Jr., an economist and a world-recognized expert on guns and crime. Lott has held research or teaching positions at several academic institutions including the University of Chicago, Yale University, the Wharton School of the University of Pennsylvania, Stanford University, and Rice University, and was the chief economist at the United States Sentencing Commission during 1988-1989. 



He holds a PhD in economics from UCLA. He has published over 100 articles in peer- reviewed academic journals and written eight books, including More Guns, Less Crime, The Bias Against Guns, and Freedomnomics.

This event is co-sponsored by Stephen B. Jeffries and The Beacon Hill Institute for Public Policy Research.


For more information, contact 855-244-4550 (ext. 1).

How Massachusetts ranks in Cato's Freedom 50 Index

Here is the link to the 2016 Freedom in the States index.

Institute releases 15th annual State Competitiveness Report and Index

BOSTON - (July 29, 2016) Massachusetts once again secured the top spot on the Beacon Hill Institute’s 15th Annual State Competitiveness Index (SCI). The index measures the ability of states to grow their economies and increase personal income. Massachusetts has retained the number one position each year since 2011. 

The BHI competitiveness index is based on a set of 43 indicators divided into eight sub-indexes – government and fiscal policy, security, infrastructure, human resources, technology, business incubation, openness, and environmental policy. Known in the field as a “productivity index”, the BHI ranking distinguishes it from more narrowly-focused measures that target only taxes, high technology, quality of life, or economic freedom.  The State of Washington’s Department of Commerce gives high grades to the BHI Index for its transparency, methodology and variability. 

North Dakota once again finished second, followed by South Dakota, New Hampshire, Iowa, Nebraska, Minnesota, Rhode Island, Vermont and Texas. While the rankings in sub-index measures were far from uniform, states that paid attention to fostering a well-educated and healthy workforce scored well.  Rhode Island’s rise may be temporary and due to a one-time multi-billion dollar Initial Public Offering by a major bank in 2014. 

Massachusetts showed formidable strengths in its human resources (for example a high number of residents with health insurance and low infant mortality rates), technology (as a recipient of National Institutes for Health grants to local institutions and its large base of science and engineering graduates and high-tech employment), and business incubation, where Massachusetts draws the second top ranking in terms of venture capital per capita and ranks eighth in IPO dollars per capita.  New Hampshire which has bounced around in the top 20 for the past 10 years appears to have regained its footing. 

“Since we do not have oil, gas or mineral deposits, human capital has become our natural endowment, our ticket to progress,” notes Frank Conte, project manager for the BHI report. “The strong showing across most sub-indexes demonstrates that Massachusetts workers are productive. The workforce is one major reason that the Bay State remains attractive to innovative industries and allows us to overcome the perennial soft spots in our economy:  the cost of labor, high housing and utility costs.” 

The lowest-ranked states were West Virginia (46), New Jersey (47), Alabama (48), New Mexico (49) and Mississippi (50).  

Policymakers often compare a state’s performance with that of “leading technology states (LTS).” However, these states do not always prove to be competitive according to the SCI. Massachusetts (1) Minnesota (7) and Texas (10) are the only LTSs to finish in the top 10.  Other LTS states ranked as follows:  Colorado (14), Connecticut (32), North Carolina (15), New York (27), California (35), Pennsylvania (36), New Jersey (47) and Virginia (12).  

“By improving its ranking on the index, a state can realize substantial increases in personal income,” observed Conte. “Since its inception, the index has been highlighting the micro-foundations — the right mix of policies and endowments — that lead to prosperity. It remains a useful guide. ”

The report is available here. 

Energy infrastructure options essential to Massachusetts economy

A six-member conference committee is hashing out the details of an extensive energy bill now in two separate bills S. 2400 and H. 4385. The Beacon Hill Institute does not advocate for or against any piece of legislation. However, the Institute provides economic analysis of current proposals related to its research portfolio. Some key observations are in order.

The debate over hydropower from Quebec, natural gas or other renewables such as offshore wind and solar is absolutely critical if the Commonwealth is able to meet the goals outlined in the Global Warming Solutions Act. Everyone wants to reduce greenhouse gas emissions but that goal requires hard thinking, particularly since both coal and nuclear power plants will be closing down. Debates about pipelines generate much heat and little light and ignore the pressing need for reliable, cost-effective sources of energy.

Section 30, would amend current law by adding the following language: “Nothing in this section shall be construed to authorize the department to review and approve a contract for natural gas pipeline capacity filed by an electric company.”

To foreclose on possible construction of energy infrastructure, the direct intent of Section 30, would be shortsighted. In fact, the new language would pose severe economic consequences to the Commonwealth of Massachusetts, which already faces competitive disadvantages on energy costs. According to the Institute’s 2014 State Competitiveness Index, Massachusetts ranks first for having the conditions in place that provide for a high level of per capita income and continued growth. But energy has been a persistent disadvantage for Massachusetts since the Institute began ranking states in 2001. Last year in a sub-index that measures infrastructure Massachusetts ranked 44th when considering electricity prices per kilowatt hour. High-tech manufacturing could use the break in the form of competitively priced energy.

Some energy realism is in order. It is clear from the current economic and climate change literature that natural gas is essential to meeting the goals of a cleaner environment in both the short and long term. The state needs to preserve its options to build such facilities.

ISO-New England, which manages the region’s power grid, notes “wind and solar energy have been expanding dramatically though it will be several years before they generate a significant portion of the region’s electricity.” That means natural gas remains essential. By 2022, natural gas is expected to generate 55% of electricity.

In 2012, the ISO studied a scenario whereby 28 dirty plants would be retired. The grid operator found that “approximately 6,000 MW of resources would need to be replaced, repowered or retained to satisfy both generation and transmission reliability requirements. Given current trends, the majority of replacement resources would be natural gas-fired generation.”

The ISO report diplomatically highlights the shortcomings of renewables saying the “reliable large-scale integration of these resources presents challenges for grid planning and operation.” These include variability, (lack of wind and sun), issues “behind the meter” which make it difficult to forecast demand, and transmission limitations. These shortcomings inherent in renewables make Section 16 of the bill, which would double the state’s Renewable Portfolio Standards, all the more harmful.

Closing the door on natural gas would be a policy mistake.

Latest BHI contributions to NewBostonPost.com: Social Impact Bonds, Independence Day

Here are the latest BHI columns over at NewBostonPost.com.

Frank Conte: Social impact bonds for public health programs

Imagine a public health program that reduces the incidences of childhood asthma. Or imagine another one that assigns a home visiting nurse to women pregnant with their first child. Don’t stop there. Imagine another program that identifies children under six who are at-risk of abuse and another one that helps the mentally ill out of restrictive institutional settings and into meaningful community housing.

The more cynical among us who suffer from “compassion burnout” may say that there’s very little imaginative about the public health programs noted above that have been launched in states like California, New York, New Mexico, Oregon and South Carolina. Read more.

David Tuerck:  Independence Day

It is customary this holiday week to remind ourselves why the American colonies declared their independence from Britain some 240 years ago. The Declaration of Independence provides the answer in the form a list of tyrannical acts attributed to King George III. Among their grievances, the authors cited the “swarms of Officers” that the King sent out to harass and steal from them, the creation of “arbitrary government” for the purpose of imposing “absolute rule” and the imposition of taxes without their consent. “A Prince” they said, “whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.” Read more.

Workers are saying: Show me the money! NYT "This Was to Be the Year of Bigger Wage Gains. It’s Not."

Neil Irwin in the New York Times.

The unemployment rate is low by any historical standard at 5.3 percent. Businesses are complaining of worker shortages in industries includinghealth care, construction and trucking. Household-name companies like Walmart and McDonald’s have announced increases to their pay for low-wage workers. 

Add those together, and it would seem to point to 2015 as being the year American workers start seeing substantially larger paychecks. The only problem: There is no real evidence in the economic data that this is happening.

Co-hosted Atlas Network event a success; Learning the threats to Mexico's reform movement

Thanks to all those who attended Monday's special event at the Park Plaza Hotel with Armando Regil, the Founding President of the IPEA, Institute of Strategic Thinking Agora in Mexico. Co-hosted with the Atlas Network the event drew more than 25 liberty-minded individuals who heard Regil tell how he established a market-oriented think tank in a virtual one party state of Mexico. Regil's work is hard but he's determined to get reform front and center in Mexico, which has long been plagued with governance problems including the collateral damage of the war on drugs and crony capitalism. Regil's success has been based on his insistence that civil society -- life outside of the State-- be respected and nurtured so that citizens can build the market institutions vital for prosperity. 

We look forward to working with the Atlas Network and the very capable Brittany Cobb,Development and Events Manager in the future.

BHI to the Natural Resources Defense Council: Re-learn Economics 101

Beacon Hill Institute at Suffolk University Response to Laurie Johnson of the Natural Resources Defense Council. The response was written by BHI Executive Director David G. Tuerck. 

Available in PDF format at www.beaconhilll.org

March 13, 2015

Laurie Johnson, an economist at the Natural Resources Defense Council, recently posted a blog entry that sharply criticizes recent BHI studies of the EPA’s Clean Power Plan.  It is important, in reading this blog, to understand that Dr. Johnson’s job is to defend tooth-and-nail an organization whose purpose is to promote what it deems to be environmental protection at any cost to economic activity at home and abroad.
  
Now let’s see what Dr. Johnson has to say and how she is willing to mislead her readers and resort to her own brand of junk economics in order to defend her employer’s agenda. 

Johnson:  First and foremost, it [the BHI study] is not an analysis of the Clean Power Plan (CPP). The CPP sets limits on a very specific industry, the electricity system. BHI applies a back-of-the-envelope calculation to an economy-wide carbon tax analysis done by the Department of Energy's Energy Information Administration (EIA). As such, the electricity grid and the changes that would result to it in response to clean energy incentives and energy efficiency savings in the CPP are entirely absent from the analysis. 

BHI:  In order to analyze the effects of the CPP, it is necessary to determine the cost of achieving the reduction in carbon emissions aimed for the EPA. Because the EIA analyzes a scenario in which carbon emissions are reduced by about the amount intended by the EPA, its analysis provides a useful benchmark for the cost of achieving the intended reductions in emissions. This cost, put by the EIA at $10 per tonne of carbon eliminated, helps get us to an estimate of the cost of the EPA rules on the economy. 

Johnson:: While EPA's analysis does show electricity price increases, it also shows electricity bill decreases, because we will be wasting less energy. Further, because the amount of labor associated with clean energy investments is many times higher than the amount associated with fossil generation, you actually get net job increases from the type of investment changes the CPP will promote, not the phantom losses BHI projects.

BHI: The idea here is that consumers should thank the EPA for raising the price of electricity since the higher price will induce them to conserve on electricity and thus reduce their bills.  This would be much like thanking the oil companies for raising the price of gasoline since the higher price will induce drivers to use more public transportation.

Dr. Johnson’s excuse-making squares nicely with the NRDC’s environmental-purity-at-any-cost philosophy.  One gets the impression, in reviewing the NRDC’s lobbying efforts, that it would have us throw out our TV sets, ride bicycles to work and eat only vegetables organically grown in our home gardens.  We wonder if NRDC flaks should also consider turning off their computers.

As for the argument that “clean energy” utilities are all to the good because they require more labor to construct than fossil-fuel plants, we have to wonder if Dr. Johnson slept through her courses in cost-benefit analysis on the way to her PhD.  One of the canons of cost-benefit analysis is that labor belongs on the cost side of the ledger when comparing costs and benefits.  If we did not classify labor as a cost, someone could use cost-benefit analysis to argue against using machines to move dirt on the premise that we create more jobs by letting men equipped with shovels do the job.    

In our studies, we do, in fact, cite job losses as a collateral damage related to higher electricity prices.  But those job losses are the result of losses in production that are brought about by higher electricity prices.  Jobs are part of the cost of producing something, but when we produce less of something workers get laid off.             
                  
Johnson: Using EIA's carbon tax analysis, BHI then does a theoretically bizarre back of the envelope calculation:   First, it multiplies EIA's projected electricity price increase by electricity consumption (by sector) to get the total electricity cost increase consumers would supposedly pay under its non-CPP CPP analysis. It then uses an (incorrect) estimate of the climate and health benefits of each ton of pollution reduced (the so called "social cost of carbon," or SCC), and subtracts that from its estimated increase in electricity expenditures to estimate a final change in electricity price.  That makes absolutely no sense. The correct way to do this sort of analysis (assuming you were actually modeling the CPP) is to analyze the price effects of a policy on the economy separately from the environmental and health benefits of the policy. Environmental and health benefits are not electricity prices, and should never be fed into a model as if they were.

BHI:  We don’t need a lecture on cost-benefit analysis from someone who considers make-work jobs a benefit in modeling climate change legislation.   So we will try to give Dr. Johnson a refresher course on the task of estimating the effects of green energy policies on the economy.  

Let’s compare two methods by which the government can get utilities to substitute green for conventional power:  mandates and subsidies.  What the EPA has done is issue a mandate, the effect of which is to compel utilities to substitute more expensive power for coal-fired power.   That’s why the mandate raises electricity prices – indeed, causes them to “skyrocket,” per President Obama’s promise.

Subsidies work differently.  When the government subsidizes wind and solar power, there is an initial fall in electricity prices as the subsidized power is dumped into the grid.  Ultimately, price will rise as demand rises, but the initial impact is the opposite of the impact of a mandate.  

The subsidies aren’t free.  They require the public to pay the taxes out of which they are funded.  But the reduction in electricity prices partly offsets the burden of these taxes.  In effect, the reduced electric rates serve as a way to compensate the taxpayer for making it possible for society to reap the (supposed) benefits from reduced emissions. 

The problem with modeling a mandate is that we can identify the cost it imposes by estimating the rise in electricity prices.  But then how do we account for the social benefits touted by the likes of Dr. Johnson?  The answer is to do what we did:  Calculate the effect on price as the effect net of those benefits.  
We find it ironic that we were faulted in this critique for having thus downplayed the effect of the EPA rules on electric rates.  Perhaps Dr. Johnson isn’t comfortable with the fact that the rules inflict net harm on the economy even after we make a generous allowance for the environmental benefits they confer. 

It seems that she might have been more satisfied if we had reported higher levels of economic harm than we did, in fact, report. 

Or maybe the answer lies in the position taken by the NRDC that individuals and firms burdened by the anti-carbon mandates advocated by the NRDC do not deserve compensation.  The argument that they do is defensible under the “Takings” clause of the Constitution – an interpretation the NRDC staunchly opposes.  It seems that Dr. Johnson is loath to ascribe any benefit to the reduction in carbon emissions out of fear that someone will then want to find out about the costs. 

Johnson: Even though the aforementioned calculation is nonsensical, we should note that it does not use the main estimate used by analysts for climate and health benefits from reducing carbon pollution, of approximately $40/ton (btw, this value itself is likely to be significantly underestimated). Instead it uses $10/ton. Worse, it calls this $10/ton a market-based benefit measure. It is not clear where it gets this price, but one thing we know for sure: there is no "market price" for carbon pollution (i.e. what people are willing to pay in the market to reduce a ton of carbon pollution). That's the whole point!!! We have an environmental mess on our hands that we are trying to fix precisely because polluters are not charged for the pollution costs they impose on others (economists call this an "externality").

BHI:  The $10 SCC represents the tax on carbon that would induce a reduction in CO2 emissions to levels sought by the EPA in issuing the CCP mandates, as modeled by the EIA. The imposition of this tax would raise the market price of emitting carbon from zero dollars to $10.  Now think of the alleged climate benefits as social costs that are avoided by reducing carbon emissions.  If a tax of this magnitude would bring about the reduction in CO2 emissions sought by the EPA and if that reduction were “socially optimal,” then the tax would raise the price of electricity by the social cost that is avoided as a result of the last unit of electricity that is withdrawn from the grid under the tax. 

The fact that this $10 benefit (avoided cost) is minuscule in comparison to the private costs of the increased electric rates suggests that all the benefits combined are far lower than the $10 that we were willing to allow.  

The reality is that neither the EPA nor Dr. Johnson has a clue as to the magnitude of the avoided social costs.  Many economists argue that the social cost of carbon should be assumed to be zero due to the uncertainty as to the level of warming that is induced by CO2 emissions, and the level of harm that said warming would produce.  There is significant leakage of CO2 emissions into the United States from other countries that do not impose reductions in CO2 emissions.  In recent years, firms in energy intensive industries, such as Dow Chemical and BASF, have located production in the United States to take advantage of the lower energy costs due to the surge in domestic fossil fuel production.  Higher electricity costs due to the CCP would send electricity intensive companies and their emissions, such as manufacturing, looking to relocate aboard.  This would reduce any benefit from the reducing carbon emissions in the United States.  Economists call this term leakage or unintended consequences.          
      
We nevertheless ascribe some social value to the EPA rules in line with the hypothetical tax assumed in the EIA modeling.  We do not “feed” the supposed benefits of those rules into the model as prices. Rather we feed them into the model as partial offsets to the price increases brought about by the EPA rules in reflection of the EIA modeling on which our analysis is based.                    

Johnson: Which takes me to my penultimate point: BHI's net "cost" calculation (quotes because the CPP actually has a high net benefit, not cost) is dramatically inflated because it removes "co-benefits" from reducing carbon pollution emissions. These are all the lives saved, heart attacks avoided, asthma attacks avoided (and many more benefits) due to reductions in other pollutants on top of the carbon pollution reduction--that also happen to decline when you reduce carbon pollution. Fossil-backed industry analyses try to argue over and over again that because these "co-pollutants" are regulated under other statutes of the Clean Air Act, somehow they don't count. That defies common sense, and I doubt anyone whose paycheck doesn't rely on making assumptions like this buys it. It's like saying that if you start an exercise regime to lose weight, but also get the myriad of other health benefits associated with exercise, these "co-benefits" don't count. Does that make sense? Of course not.

BHI:  If my goal is to lose 20 pounds and if I can lose that 20 pounds by taking diet pills, then I can’t justify joining a gym because, by doing so, I can lose the same 20 pounds.   It is no answer to say that I might as well join the gym and lose 40 pounds.  The Centers for Disease Control recommend that healthy individuals get at least 150 minutes of moderate exercise per week.(1)  Dr. Johnson would have us believe that another 150 minutes of exercise would provide the same health benefits as the first 150 minutes. 

As we explain in our reports, particulate matter is currently regulated under the National Ambient Air Quality Standards (NAAQS). The NAAQS sets standards “based on such criteria and allowing an adequate margin of safety, are requisite to protect the public health.”(2) These standards are reviewed every five years to confirm that they are up to date with the most recent scientific research available.(3)  Any reduction in particulate matter that might be attributed to the EPA rules is either (1) already provided for by the NAAQS or (2) greater than that provided for by the NAAQS and therefore unnecessary.
    
Johnson: Finally, BHI applies a "coal intensity" multiplier to calculate its estimated state-specific electricity price increases. For example, the average percentage of electricity generated from coal in the U.S. is 40%; if a state's electricity is 80% coal generated, BHI assumes the electricity price increase in that state is twice its national average estimate. That's like saying if the average percentage of smokers across the US is 10% of the population, and 20% of a population in a given state smokes, then the price of cigarettes will be double in that state. Not to mention: electricity is imported/exported across state lines, so even if this silly calculation made sense, it pays no attention to the actual market structure of electricity generation and consumption.

BHI:  We used this calculation to distribute the U.S. net costs to the states, before calculating the change in electricity prices.  Intentionally or not, Dr. Johnson confuses price differences with cost differences. 

Again, to use the author’s analogy let us suppose that Congress raised the tax on cigarettes but not cigars or other tobacco products.  If we wanted to allocate the harm to smokers to the individual states, we would need to distribute the tax to industries based on their tobacco sales and then adjust for the portion of those sales that is accounted for by cigarettes.  So, we would adjust the total tobacco sales in each state by the ratio to cigarette sales to total tobacco sales in that state.  

Now, to return to the task of distributing the cost of the EPA rules across states, Suppose Massachusetts produced 10% of total U.S. electricity and used coal to produce 50% of its electricity, compared to 40% for the United States as a whole.  We multiply the total the net costs of switching from coal to more costly fuels for the United States by 10% and the result by 50% divided by 40% to compute the cost to Massachusetts.  We then used this cost figure to calculate the effect or energy prices.  
       
Johnson: I don't even need to go into the already discredited STAMP model BHI plugged its silly price estimates into, or the fact that BHI has been denounced by its own host university for politically-driven research plans that did not follow the university's rules or match its mission.

BHI:  The apparent basis of this criticism is that we draw on the precepts of Economics 101 in reaching our conclusions.   To wit:  “Supply equals demand.” Or “If a government policy causes the cost of producing something to rise, its price will rise, too.”  This orthodoxy is especially troubling for green advocates who aim to deindustrialize the country in the name of fuzzy climate change objectives.  You can find our defense of the STAMP model from a critique by the liberal Institute for Economic Policy and Taxation (ITEP) at http://www.beaconhill.org/STAMP-Method/ResponsetoITEPbybullet2014-0531.pdf

Additional point: 

One final smear was Dr. Johnson’s reference to a grant proposal that we once wrote (but was never funded), in which we suggested that if state renewable energy rules lead to higher electricity rates, the state might want to consider repealing them.  By seeking to convince the grantor that our work might have policy relevance, we allegedly “sought to manipulate economic research by producing reports that came to conclusions before performing any research.”   In the fevered imagination of the NDRC and other groups, even a hint that research that might produce policy changes adverse to their ideological agenda is proof positive of a sell-out to carbon interests.
     
Our work, however, puts the lie to this claim.  Recently, we reported that rules mandating green power could well end up reducing electric rates in three states – Rhode Island, Illinois and Maryland.   This is not because we sold out to environmentalists in those states but because our methodology yields different results for different states, depending on what the data show.   

It is odd to be attacked by a group that has used junk economics to further policy goals at the public’s expense.  Among its credits, the NRDC succeeded in stopping a measure that would have brought water to drought-stricken Central Valley of California.  The NRDC doesn’t like video games so it issued a report in which it greatly exaggerated the amount of power consumed by people who play them.  It has been behind an EPA rule that would double mileage standards at the cost of safety. 

Finally, our host university did not denounce our work.  It complained that we didn’t follow certain procedures.  We have asked the university to reconsider its complaint on the argument that we did, in fact, follow its procedures. 

Johnson: Enough said.

BHI: Indeed!

Notes:

1 Centers for Disease Control and Prevention, “How much physical activity do adults need?", http://www.cdc.gov/physicalactivity/everyone/guidelines/adults.html 
2 U.S. Code § 7409 - National primary and secondary ambient air quality standards. http://www.law.cornell.edu/uscode/text/42/7409
3 U.S. EPA, “Process of Reviewing the National Ambient Air Quality Standards, http://www.epa.gov/ttn/naaqs/review.html.

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

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. 

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.

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.

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

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.

State Tax Collections - U.S. Census Bureau

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

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)

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.

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.)

Update: Keynesian v. Classical Methods in Modeling State Tax Policy (November 2013)
 
Response to Rep. Hunter (March 2014)

An Appeal to Facts in a “Fact Check”:  Response to Critique of BHI's Renewable Portfolio Standards studies (November 2013)

Response to the Union of Concerned Scientists' "Critique" of BHI's RPS studies (January 2013)

BHI’s response to TP’s Climate Progress blogger Michael Conathan’s critique of NJ wind farm study (August 2011)

The Beacon Hill Institute’s Tax Analysis Modeling Program: A Response to Charney (April 2010)

The Beacon Hill Instituteʹs Analysis of Pennsylvania Tax Policy: STAMPing Out the Nonsense from Our Critics (July 2009)

Information about the BHI State Tax Analysis Modeling Program (October 2012, rev)

A brief primer on the motive fallacy. 

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.

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

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.

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

Muddling through!

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

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.

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."

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.

WCVB-TV Boston covers BHI's Big Education Study: $1.3 Billion Easily Cut From School Spending

WCVB-TV (Channel 5) on BHI's Study: $1.3 Billion Easily Cut From School Spending

It's time to revisit the foundation budget. Read the study from the Beacon Hill Institute.

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.