Power & Market

In my previous article, I looked at how government regulations have created an an uneven playing field that favors natural gas and oil over coal. This time, we'll look at how regulators favor some types of "renewable" energy over others while biasing the system against nuclear energy.

Wind and Solar Favored Over Bioenergy

Renewable energy accounts for 11 percent of US energy use. The country has gone from preferring bioenergy for all three energy applications of renewable energy development to favoring wind and solar energy:

(a) In transportation, a now stagnant 5 percent of fuels are biofuels and the sector is seeing a small but growing number of heavily subsidized electric vehicles targeted for fueling with wind and solar.

(b) Heating includes a now stagnant 7 percent biomass and a small percentage (but also growing) of solar and geothermal.

(c) Electricity consumption includes a now stagnant hydro and biomass at 7 percent and 1.5 percent, respectively, while wind and solar are rapidly growing at 7 and 1.5 percent, respectively.

Again, changes have occurred mainly in the electricity sector. Germany uses only 13 percent renewable energy but has among the world’s highest levels for electricity at 38 percent of consumption, albeit at relatively high prices, compared to 17 percent in the US. Germany is continuing to use all three renewable energy sources for power generation: wind, solar, and biomass (renewable energy crops, e.g., grass biomass). The US is adding mostly wind, recently more solar, and little, if any, renewable energy crops. Germany favors all renewable energy generators with cost-based electricity prices (or so-called feed-in tariffs) in contrast to US bidding and subsidies favoring wind and solar.

US politicians, especially Democrats, favor wind and solar while hiding the true costs. Wind and solar have been favored by subsidies offered through complicated tax credits or shelters that are not even based on environmental externalities. The biggest of the two major wind subsidies expired at the end of 2019, but it has expired and later been extended in the past. Electricity monopolies absorb higher costs for transmission and load following required by the intermittent output from wind and solar in increasing consumer electricity rates. Regulators and utility monopolies won’t even disclose the economics and environmental impacts of load following.

At the CNN Climate Crisis Town Hall with presidential candidate Elizabeth Warren, moderator Chris Cuomo cited Germany as a model when asking: “When it's bright and sunny, they generate so much wind and solar that it can flood the market and puts the wholesale price almost to zero. When it's dark in the wintertime, when they need the power, they have to use nuclear, they have to look for other sources. Can the ambition meet the reality of phasing out fossil fuels?” Senator Warren replied that she would “put a lot of money into” the research and development of storage technologies.

The US will likely be able to continue expanding wind and solar, since the intermittent loads can be exported throughout regions and national levels are still low compared to Germany. However, the Democrats’ plan to rely solely on wind and solar for electricity and transportation needs will fail without significantly more breakthroughs in storage technology.

Meanwhile, US politicians are suppressing bioenergy. Since the 1990s, electricity mandates and subsidies favoring wind have made biomass power uncompetitive, and some states such as Minnesota have even mandated that renewable electricity be supplied by only wind and solar. After US ethanol mandates drove up production and grain prices too quickly from 2005 to 2008, the nation enacted mandates requiring production from the cellulose in biomass fiber, even though it costs too much to process.

Brazil has shown that it is possible to grow high-yielding renewable energy crops such as sugar cane for the production of low-cost vehicle biofuel when the biomass waste is used to cogenerate electricity and the waste heat is used for process heat. Only when utility monopolies in Brazil have blocked the sale of excess electricity have the abundant wastes become a disposal problem and made costs less competitive.

Meanwhile, the US has not been adding nuclear power plants while Germany has mothballed about half of its plants. Nuclear power isn’t growing due to the higher costs created by safety regulations. However, the US Price-Anderson Act favors the industry with a cap against liability claims arising from nuclear incidents.

It has become something of a tradition in the free market corners of social media to express shock and dismay over the possibility that New York congresswoman Alexandria Ocasio-Cortez (AOC)—an avowed "democratic socialist"—has an economics degree from Boston University.

This is how it works: AOC makes a statement that is notably antimarket, prosocialist, or generally clueless about general concepts from the field of economics.

Her critics then post responses questioning whether she actually has a degree, or saying that she must have not been paying attention in class, etc.

Here are a few examples:

But why is it so hard to believe that she has a degree in economics? It seems that far too many people have rather inaccurate ideas about what is taught in economics programs nowadays.

The truth is that there is little emphasis on understanding markets in economics programs, and little emphasis on the value of markets. The emphasis is now on using economics to justify state action in the economy. And any bias that may have once existed in favor of unhampered markets in these departments is vanishing.

The idea that economics is the dispassionate study of understanding how hiring is affected by an imposed price floor (i.e., a minimum wage) or how opportunity cost affects consumer choices is rapidly becoming hopelessly outdated.

Sure, twenty years ago that sort of thing could still often be observed. But microeconomics of that sort is now about as fashionable as other relics of that time, such as the Backstreet Boys.

Basic principles that were once a given—i.e., the notion that making labor more expensive means that employers buy less of it—are now out the window.

But this trend didn't start yesterday. For decades now, economics has been moving further and further away from teaching microeconomics and how firms and households work. Instead, by the late 1990s economics was well down the road of constructing elaborate and purely hypothetical mathematical models that had little bearing on everyday life. These model builders claimed they could predict the future, but of course, they completely missed the huge financial crisis of 2008.

Another trend in recent decades has been toward conducting an enormous number of studies that produce statistical correlations. But as the correlations can be interpreted any number of ways, they often end up being used to support whatever policy the researchers prefer. Out of this has come the drive to make economics into a discipline that depends on tinkering and trial and error. Some now insist we can't really guess what the results of a policy might be until we "test" it using methods from the physical sciences.

This is now what's fashionable, and a December article at Quartz tells us, "the new era of big data…has led economists to revisit the wisdom of some long held assumptions."

Those old "assumptions" are what many people wrongly think is a focus of economics instruction. Last year, for example, Vox happily reported that in a new introductory economics course at Harvard "[t]here’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts." Moreover, it's getting easier to get through an economics program without any knowledge of economics because economists are increasingly less interested in economics proper.

As I noted here at mises.org last year, economists nowadays seem to spend a lot of time ripping off the insights of historians, sociologists, psychologists, and political scientists. They then slap some new labels on the research and give it names like "behavioral economics."

In the sorts of "economics" classes that focus on such topics, one learns that government planning is what gets a poor country out of poverty. They learn that people can't be trusted to make decisions for themselves. They learn that bailing out billionaires in the financial sector again and again has no real downside, morally or otherwise.

There's no reason to believe that a student with an economics degree is going to graduate with a deep understanding of how government intervention distorts markets or impoverishes consumers. The theoretical foundations behind such things are mentioned, of course, but at many institutions they are most certainly not emphasized.

Far more likely, one learns in these programs that central banks can be relied upon to fix almost any economic problem faced in the course of a business cycle. And if a certain problem becomes especially difficult, the answer surely lies in giving the central bank even more power.

Moreover, economics students believe all sorts of fantasies that most normal people would easily identify as obvious nonsense were they not told otherwise by "wise" economists. Only economics students, for example, are naive enough to think that central banks are "independent" and nonpolitical institutions. This is why the most revealing research on the Fed as a political institution is conducted primarily by political scientists. (For example, see John T. Woolley's "The U.S. Federal Reserve and the Politics of Monetary and Financial Regulatory Policy.")

So, it's entirely plausible that AOC took any number of economics courses and came out with good grades after learning virtually nothing accurate about entrepreneurship, wages, money, or consumer choice. What she did learn on these topics was likely built on the premise that the state ought to be intervening in and tinkering with all these things.

AOC appears to have the same beliefs that many economics grads do.

Meanwhile, AOC's critics make fun of her for being a bartender. But they're getting things backward. Being a bartender is possibly the best thing on her CV. These snide remarks about "the bartender AOC" seem to assume that bartending is some sort of disreputable line of work that only idiots pursue. It's not. "Serving" in Congress is much less impressive. Besides, tending bar is likely one of the more instructive things AOC has done as far as understanding markets goes. There's certainly no reason to assume that the economics faculty at BU was any help in this regard.

President Trump's pardon of Michael Milken would have delighted Murray Rothbard. Milken, who was famous for his "junk-bond" takeovers of various companies, served twenty-two months in prison for federal crimes that involved market trading. Murray Rothbard thought that Milken was a hero. As he explained in an article written in 1989: 

 During the 1960s, the existing corporate power elite, often running their corporations inefficiently—an elite virtually headed by David Rockefeller—saw their positions threatened by takeover bids, in which outside financial interests bid for stockholder support against their own inept managerial elites. The exiting corporate elites turned—as usual—for aid and bailout from the federal government, which obligingly passed the Williams Act [named for the New Jersey Senator who was later sent to jail in the Abscam affair] in 1967. Before the Williams Act, takeover bids could occur quickly and silently, with little hassle. The 1967 Act, however, gravely crippled takeover bids by decreeing that if a financial group amassed more than 5% of the stock of a corporation, it would have to stop, publicly announce its intent to arrange a takeover bid, and then wait for a certain time period before it could proceed on its plans. What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the "leveraged buyout").

The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.

The establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the establishment media to sneeringly refer to their high-yield competition as "junk" bonds, which is equivalent to the makers of Porsches persuading the press to refer to Volvos as "junk" cars.

People like Michael Milken perform a vitally important economic function for the economy and for consumers, in addition to profiting themselves. One would think that economists and writers allegedly in favor of the free market would readily grasp this fact. In this case, they aid the process of shifting the ownership and control of capital from inefficient to more efficient and productive hands—a process which is great for everyone, except, of course, for the inefficient Old Guard elites whose proclaimed devotion to the free markets does not stop them from using the coercion of the federal government to try to restrict or crush their efficient competitors.

Thank to Thorvaldur Gylfason for pointing out his 2009 article examining the economic implications of Iceland's small population of only about three hundred thousand people.

Gylfason noted how Icelandic politicians have claimed that the country's small population was "our most serious social evil," and that the critical mass for a well-functioning society must be much larger than was currently available.

But Gylfason notes:

Yet, medieval Florence and Venice flourished with 70,000 and 115,000 inhabitants. They were better situated in Europe and better served by sea lanes than Iceland was and could, therefore, easily make up for their small size through trade. Economic integration is vital to small countries. The population of ancient Athens was 200,000. Too small? Hardly.

Or take modern Barbados (pop. 300,000), independent since 1966, a prosperous and stable democracy where virtually every child completes primary and secondary school and life expectancy matches that of the US. Is Barbados too small? No. Barbados has not even felt it necessary to pool its currency with its eight neighbours comprising the East Caribbean Currency Union (ECCU, pop. 600,000). Since 1975, the exchange rate of the Barbados dollar has been kept fixed vis-à-vis the US dollar at a rate of 2 to 1 (and the ECCU, meanwhile, pegged the East Caribbean dollar to the US dollar at a rate of 3 to 1).

Is there a lower bound on population below which countries cannot stand on their own feet? Yes, but it seems to lie far below 300,000.

The answer lies in free trade. Gylfason writes:

Fuelled by free trade, small nations have increased in number. Without external trade, many small nations would be inefficient on account of their small size and would seem, on economic grounds, to need to merge with larger nations. Foreign trade relieves small nations of this need by enabling them to reap the benefits of scale and scope through trade.

This is how trade has helped increase the number of sovereign states over the years. Without vivacious trade, the costs of small size to many countries would almost surely outweigh the gains. The inability of a small country to benefit from specialisation by exploiting its comparative advantages would by itself be disastrous.

Not that everything is fine when a society is small:

Even if small countries can succeed by being open and peaceful, their small size presents challenges. Strong checks and balances are imperative in small, heavily politicised, clan-based societies to prevent relations between politics, banking, and business from becoming too cosy, not to say incestuous. Here Iceland failed. High-quality recruitment into political service and careful selection of key public officials, from abroad if needed, are also important in a small country with a small pool of appropriate local talent. Here, too, Iceland missed the boat.

But the benefits do outweigh the costs, Gylfason concludes:

Some observers at the time thought Belgium and Portugal were too small to be viable as independent countries. The tables were turned in the twentieth century when centrifugal forces prevailed, facilitated by the worldwide liberalisation of trade after World War II. Iceland attained home rule in 1904 and transformed itself from economic parity with today‘s Ghana in 1900 to parity with Scandinavia in 1980 (Gylfason 2008a). Gradual liberalisation of trade from 1960 onward played an important role in Iceland’s transformation.

One consequence of the social accord that tends to go along with small size may be a shared interest in education, as children in cohesive societies are less likely to be deprived of schooling. Countries with 300,000 or fewer inhabitants keep their young people in school a year longer on average than larger countries, in the sense that the small countries have an average school life expectancy—i.e., the expected number of years of schooling that will be completed as measured by UNESCO—of 13 years compared with 12 years elsewhere.

Another consequence of small country size, especially in a strategic location, may be that neighbours may be willing to share the costs of national defence. France spends 2.4% of its GDP on national defence compared with 1.1% in Belgium and 0.8% in Luxembourg. This tendency may offset some of the higher per capita cost of public services in small countries. Moreover, and this may surprise you, small countries tend to have less corruption than large countries as measured by Transparency International. In 2008, the Corruption Perceptions Index—which ranges from 1.4 in Somalia to 9.4 in Denmark—was 4.6 on average in countries with 300,000 or fewer inhabitants compared with 4.0 in larger countries.

As I noted in this article, both the empirical and theoretical evidence suggests that smallness is no impediment to growth and economic success. Smallness means more openness to trade, less aggressiveness militarily, and studies have shown that small countries have better growth rates in many cases.

In his book Human Scale, Kirkpatrick Sale covers this topic of the "ideal" size for a political entity. Sale suggests that an independent city or city-state probably reaches its ideal size for self-rule around fifty thousand people. He also notes that medieval cities that were larger than this tended to break themselves up into smaller, adjacent independent pieces, with the idea being that large scale breeds alienation, crime, and political dysfunction.