Fractals of Change

What Vermont Employers Are Telling Us (about the need for natural gas beyond the pipeline)

"Every day we wait costs us $7,000!" the CEO emailed to my new company, NG Advantage. Turns out that trucking compressed natural gas (CNG) to his factory and using it to replace dirty #6 oil will reduce his fuel costs by almost half – more than two million dollars a year. His company spends as much on fuel as it does on raw materials. Some of his competitors are located on natural gas pipelines; they are undercutting him in the marketplace.

"My company is putting new machinery into facilities located on the pipeline," a CFO told us. Unless we can cut the amount we're paying for energy, no new investment is going into our Vermont plant. "When are you going to be able to start delivering?"

"Beginning of 2013," we told him. He wishes it were sooner; so do we.

"We'll pay back the cost of the burner upgrades in the first three months of using natural gas," the plant engineer said. "Our boiler people are all over it. This is something we need to do."

"Our hospital can save about one million a year, half our fuel bill. We were going to have to stop burning #6 oil anyway; it's too dirty."

"It's good to be able to save money and reduce pollutants. We don't think well have much trouble getting our Act 250 permit revised to allow us to reduce our emissions." Our prospects are looking at replacing oil products with much cleaner – and cheaper - natural gas.

"You have competition." The emergence of a competitor selling trucked natural gas from New Hampshire has made our job both easier and harder. When we were the only company planning to deliver this new product, prospects were more skeptical even though they were eager for the cost benefits. Now the question is more whom to buy from than whether to buy. Competition also reassures customers that they will pay reasonable prices and have options if one company doesn't give them good service. That's the way it should be.

"Food processing businesses want a Vermont seal, but they won't open new plants anywhere that doesn't have a supply of natural gas." That quote came from a Regional Development Council which has been bringing us together with their members and helping introduce them to the concept of natural gas.

"We need you to start service ASAP. Why are you beginning with a compressor station in Vermont where everything is hard to permit?" That's a good question. We are also looking at a compressor site in New Hampshire to better serve eastern Vermont, New Hampshire, and Maine. Adjacent territories provide backup for each other and better service for our customers.

One reason we started in Vermont is because we're Vermonters. Another reason is that our planned site in Milton, Vermont is the best place we could find from which to serve customers in Addison, Rutland, Lamoille, and Washington counties as well as adjacent New York State. Even though the pipeline will eventually come to Addison and probably Rutland and will then be the cheapest source of natural gas, businesses in those counties tell us that they need to do something about the high price and uncertain supply of oil products now.

Our CEO, Neale Lunderville, led the state's surprisingly speedy and effective recovery efforts from Tropical Storm Irene. We know that Vermonters, Vermont businesses, Vermont communities, and Vermont state government can move quickly in an emergency. If alternatives to oil for industrial use aren't delivered quickly, our economy will suffer much longer lasting damage than it did from Irene. New energy-dependent companies won't locate beyond the pipeline (which is most of Vermont). Companies which have a choice will shift investment and production to plants located on natural gas pipelines; other companies will simply be unable to compete and have to close. We have to move quickly.

That's what Vermont employers are telling us.

Related post:

Back to Business

Choosing Cloud Applications - The Easy Choices

The first question in choosing an application – in the cloud, on the desktop, or on server – is "will this choice affect our ability to serve customers?" If the answer is no - as it is with bookkeeping for us at NG Advantage LLC, then you want to go for a safe choice that'll get the job done and not be a distraction. If the answer is "yes", as it is with our monitoring and truck routing applications, you have a much tougher decision, which I'll blog about in some future post.

We bought QuickBooks Online as our bookkeeping application but it's not perfect. If we weren't used the desktop version of QuickBooks and if I didn't know that Intuit, the publisher of QuickBooks, is a reputable company which is likely to be around for a while, we would've done a more thorough search. But startups are all about speed; we need to spend time thinking about our customers and their needs. We could get ourselves in trouble with a really bad bookkeeping package; but we won't serve customers better or get more customers even if we have the world's best bookkeeping. As I wrote previously, we are only using cloud applications so that's all we considered for bookkeeping.

Must Haves for Customer Uncritical Cloud Apps

1. All of the data needs to be in the cloud – all of it. If there's something local you have to back up, you're not getting data which is safe from any local disaster, the primary benefit of the cloud, or the secondary benefit of data which is accessible from anywhere.
2. The company which maintains the data in the cloud needs to reputable and around for the long haul OR you need a very good plan B in case they go bellyup or screw up. Ideally you have both. With Intuit we get the reputable company part but not a good plan B because they don't support a simple backup away from their service which you might use to get going somewhere else. We protect the best we can by downloading transactions (without some detail) and the chart of accounts to Excel and then storing the spreadsheets with a cloud backup service.
3. You need to understand what is backed up and when. QuickBooks uses mirrored servers (two copies of everything) and also backs up half an hour. We could stand to lose half an hour of bookkeeping; we'd just reenter.
4. You need to be comfortable using the app. Almost everything comes with a 30 day free trial. Steel yourself to start over if you hate the app during the trial as painful as it'll be to reenter your data and learn yet one more app. Quit as early in the trial as you can so you can try a competitor; if you hate the competitor even worse, you may still be in the trial period for the first app and can go back. You learn a lot about what you need when you're actually trying to do something.
5. You've got to be able to get support from the company by phone, email, or online chat – ideally all three. QuickBooks only has phone support which drives me crazy; I don't like talking on the phone or being on hold. Test support early in your test of the app but beware: the vendor may know you're on a trial and move you to the front of the queue.

Nice to Haves for Customer Uncritical Cloud Apps

1. Ideally the application runs in a browser –QuickBooks does. That means you can use it from any machine which supports web browsing. However, not all browsers are the same. Some QuickBooks functions only work in Internet Explorer – that's a pain for me because I like to run Firefox. It's also means that there may be a problem accessing functionality on a Mac. If you have to download an app to your computer to access your data, then you have to be very sure that the app runs on Windows or Macs or Linus or whatever your clients are. And it means you probably can't access your data or application from a tablet like an iPad – likely to be a problem in the future.
2. The application should support smart phone access from whatever smart phones you use. This may not seem important now; good chance it will be soon.
3. The application should support a common data format which allows you to easily switch to other vendors of the same application. Quickbooks Online does not have this. The leading applications in each category can afford to make it hard for you to switch; the challengers often do offer an easy exit to allay your fears of trying them.
4. A big user base is both a recommendation in itself and a source of self-support through bulletin boards. Also can be used to pressure the vendor if they do something outrageous.

Related posts

Switchboard in the Cloud

A New Business Belongs in the Cloud

Back to Business

Switchboard in the Cloud

Several decades and companies ago Solutions Inc. was on the 4^th floor of Vermont National Bank building in Montpelier. We'd grown so we needed a switchboard that the receptionist (remember receptionists?) could use to route calls to support, sales, spouses who needed to pick up the kids, or whomever. The device we needed cost – I think - $6000 which was more money in 1984 than it is now. We didn't have it and the bank wouldn't lend it to us; they had a hard time evaluating our software as an asset. They weren't swayed by the argument that they could always repossess the switchboard since it was right there in their building.

No big deal. Some customer paid a big bill and we bought the thing and switched happily ever after – or at least until we grew some more and needed more lines and extensions.

Fast forward to 2012. Our new company NG Advantage LLC doesn't really have an office yet; that'll come when we have permits and a physical plant. We take calls on our cell phones as often as we do on our landline phones. We each want to have our own voice mail message; we need a dial by name directory; we need voicemail, obviously. Receptionists are a thing of the past and so is the person who reprograms the switchboard when you get a new employee. Sometimes I want my extension to ring wherever I am – like on my home phone or mobile phone; sometimes I want it to go right to voicemail – and I want an email with the content of every voicemail that I get.

So what does the switchboard cost that does all this? Don't know; don't have one. A switchboard is a kind of server and NG Advantage doesn't buy servers; we rent them in the cloud. For this application we use phone.com. This doesn't mean we did a full evaluation of all the alternatives; it means we googled; looked at a few websites; read some reviews; signed up for a free trial; and we're sold. There may be better alternatives we haven't tried; but phone.com so far does what we want.

For $14.88/month ($9.88 if paid annually) we get two incoming numbers (actually one would do). Even though we have only two numbers, we can handle an unlimited number of simultaneous calls! In the old days we would have needed to have enough physical lines from the phone company, each at about what this full service costs, for each simultaneous call we wanted to be able to handle.

We get an UNLIMITED number of virtual extensions. "What's a virtual extension?" you ask. It's something or somebody a caller might want to reach. "Sales" is a virtual extension; general voicemail is one; I'm an extension; Mary is one; so is each other real or virtual employee. We put our virtual extensions on business cards and in our email signatures and they're in the dial by name directory.

If you call NG Advantage and dial (dial?) my virtual extension, 502, the IP phone on my desk might ring; you might go right to voice mail; my cell phone or my home phone might ring. I can program this to fit where I'm working, put it on autopilot by time of day, or even make it depend on who's calling. (I could make this so complicated that I do nothing else but reprogram my virtual extension but I don't).

We can get more incoming numbers for $4.88/month if we want to have a virtual presence in more places. We get "free" IP phones to put on our desks for $4.88/month and can plug them in wherever we have IP. My phone rings whether I'm at home or plugged into an Ethernet port somewhere else. However, you can also buy and use your own IP phone by paying a one-time set-up fee of less than $10.

We get 300 minutes of free domestic outbound calling and pay $.049 for each extra minute. We don't sit around at our desks much and usually call from our cell phones so this doesn't matter much; other businesses are much more sensitive to the cost of outbound calling than we are and they can buy more bulk minutes or unlimited plans. We also get free conference calling.

Our business of trucking natural gas is capital intensive. We have to buy lots of expensive trailers and other equipment. But just BEING in business isn't nearly as capital intensive as it used to be. You don't have to go out and buy a bunch of servers (and pay people to keep them running); you don't need specialized servers like switchboards; you just rent what you need from the cloud and it grows with you.

Related posts:

A New Business Belongs in the Cloud

Back to Business

 

 

A New Business Belongs in the Cloud

Way back in 1997, when I decided to start a new business, I went out and bought QuickBooks for bookkeeping and a server to run it on. How very twentieth century. Servers are the bane of new companies. They crash; they don't get backed up when they should; and – perhaps most important – they are only in one place at one time.

My new company, NG Advantage LLC, is not located in just one place even as a startup. Cofounders and I are working out of our homes. A number of us need access to the bookkeeping; sometimes we're not home but still want to access the bookkeeping. It would be very inconvenient to have it located in only one place on only one computer. It belongs in the cloud where all of us who need to can access it from wherever we are. I bought (actually am renting) QuickBooks Online. We don't have a server.

In fact we are not planning to buy ANY servers in the immediate future. What applies to bookkeeping applies to most of the other things we do. We're going to stay in the cloud for everything we plan to do right now including – especially including – critical applications depended on for customer service. And I'll write about what we do and our experience with the cloud applications we try in case our experience is helpful to others starting businesses and so that we can learn from your comments on what we're doing.

What if your cloud service provider is down? That's the first question people ask when they consider cloud computing for various applications. If you choose good vendors it won't happen often – but it will happen. Even Amazon has outages. But here's where you have to be very honest with yourself. What is more likely to be down: the triply-redundant, mirrored, multisource-powered, distributed server complex of a cloud provider or the server under your desk? Who's more likely to forget backup?

I know from the online user group that Quickbooks Online has had outages; I know I'll be furious when they happen. But I also know it won't be me trying to fix them. We won't keep all of our applications in one cloud. Hopefully we'll find something else to do when Quicken is down – even though any outage is bound to be at the worst possible time.

If your own operation is burned down or flooded (we Vermonters remember Irene), is your data better off with you or offsite somewhere? If you have to keep serving your customers and your site is down, wouldn't you like to be able to do that wherever you can get Internet access? Do you want to be out looking for new servers and trying to restore old backups, or do you want to be dealing with whatever problems your customers have? Our customer service application will be as reliable as it must be because it won't be in any one place and no single catastrophe will be able to destroy it.

Related posts:

Back to Business

Irene Lesson #3: Critical Data Belongs in the Cloud, Not Under It

Amazon S3 – Very Cheap Storage in the Sky

Back to Business

Retirement's over; I've been working on a new business. That's why I haven't been blogging for a while; startups are all-consuming.

NG Advantage LLC delivers natural gas "beyond the pipeline." Starting in early 2013 we'll truck compressed natural gas (CNG) from a compressor site we plan to build in Milton, Vermont to commercial users within a two and a half hour driving radius (see service area in VT, NH, and NY below). Large users of fuel will save 30 to 40% or more of what they're paying now for oil and propane while reducing CO₂ emissions by 26% and practically eliminating sulfur and nitrous oxide from their stacks. Businesses which are not on pipelines need these savings to compete with those who are served by pipeline gas. Energy intensive businesses also need protection against the global uncertainty in oil prices.

So, if the savings are so great and it's good for the environment as well, why don't businesses like NG Advantage already exist?

Good question and there's a good answer. Until 2008 the prices of natural gas and oil products moved pretty much in lock step. If one or the other got a little out of line, there were enough users that were dual fuel – primarily power plants – to switch and bring prices back to parity on a per BTU basis. But new technology has come into the gas fields: horizontal drilling and hydraulic fracturing (unfortunately called fracking). America's recoverable reserves are an order of magnitude larger than they were originally thought to be. Production is increasing rapidly.

This is disruptive innovation in the same sense that the Internet was: it changes all the rules in the energy business. It no longer makes economic sense to build a new nuclear or coal plant in the US; electric rates are remaining stable or going down because the marginal cost of electricity depends on natural gas prices. Energy-intensive businesses are being built in the US again. And it now makes economic sense to truck natural gas to major consumers who can't get it from a pipe.

The US benefits especially from natural gas because it is NOT easy to transport – it must be either liquefied or compressed and must be carried in special vehicles (although it is safer to transport than oil or propane because it is lighter than air). It was only practical to use natural gas directly from a pipeline; it is now practical to truck it short distances as well. But the market for natural gas –unlike oil - is more local than global because pipelines don't go under oceans. Europe is stretching for new supplies and increasingly dependent on Russia for natural gas. North America has an abundant supply – President Obama says 100 years' worth; so natural gas prices are much lower here than in Europe or Asia. Our reindustrialization benefits from this energy price disparity. So does our effort to reduce our dependence on foreign oil.

Fifteen years ago I founded ITXC, which became a big company and went public, because it was clear that the invention of the Internet would take most of the cost out of telephone calls and the big telephone companies – including AT&T where I then worked - were in no hurry to crater their revenues for the benefit of their customers. There was an opportunity for new companies looking for new customers and willing to offer radically lower prices to succeed. This is another such opportunity since existing oil companies won't be in a hurry to turn natural into a competitor beyond the pipeline. We won't be the only ones to take advantage of the opportunity, but it's important to be first or among the first

Unfortunately current trucking technology doesn't support the economics of serving residences or businesses which use less than 150,000 gallons of oil or propane annually or 100,000 gallons in a six month period. We may be able to move downscale some; others will need pipelines before they can take advantage of natural gas.

Vermont Gas Systems is planning an expansion southward of their line in northwestern Vermont; that's a good thing for those residences and businesses along the path of the expansion. Since it'll be several years before the expansion is built, NG Advantage will serve major businesses along the route until the pipeline gets to them. And we'll serve businesses in Vermont and parts of New York and New Hampshire which have no immediate prospect of pipeline connections. I'd be surprised, though, if we don't end up developing markets which will then be served by pipelines faster than they would have been otherwise. That's fine with us, a measure of success; we just move our trucks out further to new areas.

We're starting to hire so we are creating jobs. But many more jobs will be created and retained because energy-intensive businesses in rural areas, where many costs are low but the price of energy is high, will be able to compete in an irreversibly globalized economy. In Vermont both food processors and manufacturers fit that definition.

Anyway, it's good to be back in the private sector. I'll blog when I can, not just about natural gas but also about how starting a business now is the same and how it is different than it was 15 years ago – not to mention lessons learned.

Related posts (while I was talking myself into doing this):

Natural Gas Disrupts the Energy Industry

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

Good and Bad News about the Safety of Natural Gas Fracking

Guest Post on Controlling Medical Costs

My brother, Lee Evslin M.D., who is a pediatrician and who runs the Makai Ola Clinic on Kauai, wrote the email below in response to my post Medicare – The Promise That Can't Be Kept. He has a very different (and more qualified) point of views; so I asked if I could run this as a guest post. Of course, I'm reserving the last word for myself in a post to come.

Hi Tom,

Your blog on Medicare was interesting. Your line of reasoning though is an example of a concept you have spoken about since we were young.  You are looking at the problem through the same thinking that got us into trouble in the first place.  The problem will never be solved without a new way of dealing with ill health.  

Michael Pollan wrote an op ed article for the NY Times which does a fair job of describing one part of the problem. His article was about the "elephant in the room".

He is basically talking about the health care costs stemming directly from the food we eat. Health care in America is costing us 2.3 trillion dollars per year. This is twice what is paid on a per capita basis in Europe. For this staggering cost, we rank 37th among developed nations in health care outcomes. It is estimated that 75% of our health care costs are spent on chronic diseases.

Obesity is a major factor in causing cardiovascular disease and diabetes. Cancers of the prostate, colon and breast are also thought to at least partially be caused by our western diet. Obesity in America has almost tripled since 1987. Obesity (defined as a BMI over 30) has gone from about 13% of the population in 1987 to about 33% of the population in 2004 and an amazing 66% of the population are considered overweight. It is said that we are the fattest nation in the history of the world.

Bottom line is America's processed food industry is taking American government subsidies and producing food which has led to an epidemic of obesity and ill health. Chronic diseases are costing all of us 1.7 trillion dollars (75% of 2.3 trillion dollars).

Fix our food and we would go a long way to fix America's health care cost problem. Michael Pollan's point though is that this is not so easy. The processed food industry has enormous influence and even in Obama's crusade on health he was not able to take on the food industry at the same time as he went after the insurance companies.

The literature has numerous studies showing that everywhere the standard American diet goes, chronic diseases follow right behind. I have listed a few of the more commonly mentioned studies below:

In the 70s, a large study followed Japanese men and their diets as they moved from Japan to Hawaii and then to the west coast of the US. Heart disease rose with exact proportion to their adoption of the western diets.

BBC News reported recently that the British Journal of Psychiatry published data on 3500 government employees who were followed over five years. They found that those eating a diet "high in processed foods had a 58% higher risk of depression than those who ate very few processed foods."

They then subdivided those who were in the whole food group into two subgroups; those who ate mostly whole foods and  those who ate somewhat less whole foods.  Those eating the higher quantity of whole foods had 26% less depression than those who just ate somewhat less.

The Heart.Org reported recently on a study published in Lancet.  They presented the extended follow-up of a study known as The Diabetes Prevention Program (DPP).  The first results, published in 2002, showed that lifestyle change (diet, exercise, and weight loss) resulted in 58% less new cases of diabetes than in the placebo group. They also compared these results to patients put on metformin (a diabetes drug). The metformin group had only 31% fewer new cases of diabetes. In other words, life-style changes prevented diabetes almost twice as well as drug therapy and lifestyle changes also decreased the number of new-onset diabetics by almost 60% over those who did not change lifestyles.

The Archives of Internal Medicine reported on a German study which followed 23,153 adults ranging in age from 35-65 years. They were followed for 7.8 years. The four factors studied were:

Adherence to a diet which was high in fruits, vegetables and whole grain foods and low in meat consumption;

Never smoking;

Having a body mass index (BMI) less than 30 (A BMI of 30 and above is considered obese.);

Exercising 3.5 hours per week;

Those that followed all four positive lifestyles showed a dramatic decrease (78%) in the risk of developing one of four common chronic diseases. There was a 93% decrease in diabetes, an 81% decrease in heart attacks, a 50% decrease in strokes, and a 36% decrease in cancer. Can you imagine the profit and publicity from a drug that had the same preventative effects?

The diet described above, which is high in fruits, vegetables, and whole grain foods, and low in meat consumption, is the basis of the increasingly popular Mediterranean Diet. The Mediterranean Diet also includes nuts, legumes, olive oil, wine, and fermented dairy products such as yogurt and natural cheeses.

The Mediterranean Diet has proven beneficial in numerous studies. One Italian study showed that 50 of 90 people (56%) were cured of metabolic syndrome (high blood pressure, high blood sugar, and obesity) after 10 years on a Mediterranean Diet as opposed to only 12 of 90 people (13%) improving on a low fat diet. Other studies have shown the Mediterranean Diet to be associated with a decrease in abdominal fat, decreased risk of dementia in the elderly, decreased allergies in children and improvement in the health of the cells lining the blood vessels.

These studies speak well for themselves. The evidence is truly pouring in from around the world.  Processed foods and diets high in sugar and unhealthy fats are making us fat, plagued with chronic diseases and increasingly depressed. 

Bottom line:  The cost of medical care could be decreased dramatically if we stopped poisoning ourselves with our food and unfortunately "poison" is probably not too strong a word.

The food is one part.  The second part is quite complex but involves the industry of pharmaceutical and medical interventions that has grown around the fact that we have become unhealthy as a population by the food and lifestyles we have chosen or adopted.  First, we make ourselves really unhealthy and then we spend trillions treating the symptoms and not treating the underlying causes. There is an old analogy concerning treating a sink with a clogged drain by mopping the floor rather than by unclogging the drain or turning off the tap.  We will never solve the fact that our medical care will bankrupt the country until we fix our food and pay our medical care industry more money for reversing disease than we pay for applying really expensive bandaids.

Your Brother Bill

Medicare – The Promise That Can’t Be Kept

The promise was simple: once you reach 65, Medicare will assure that your medical costs don't become a catastrophic burden to you or children who might feel obliged to care for you. Since President Lyndon Johnson signed the Medicare bill in 1965 and gave exPresident Harry Truman the first enrollment card, the definition of "catastrophic burden" has been lowered many times by both Republicans and Democrats, the cost of medical care has skyrocketed as has the number of possible (usually expensive) medical interventions, and life expectancy has increased. The promise cannot be kept!

Geezers like me who recently reached 65 on the average had put in only on dollar for each three dollars of benefits we'll receive. That's a huge UNEARNED benefit. We didn't know that we'd be ripping off those still working but we are. The cap has been taken off earnings subject to Medicare tax; rich people pay a higher tax on their earnings than poor people. Premiums for recipients have been raised for those who are still classified as high earners. Payments to providers have been cut back forcing other users of health services to subsidize Medicare. But the funding gap keep growing inexorably as the number of workers supporting each retiree shrinks, we live longer and longer, and ever more ingenious (and expensive) medical procedures are invented. Raising taxes on the rich wouldn't solve the current problem let alone the future one; there's no one to pay for our care but us and our kids. Charging the kids more now means there's an even bigger gap when they retire. The promise cannot be kept!

The future of Medicare is a lousy campaign topic because there is no good answer. Politicians made us a promise they can't keep. We believed what we wanted to believe. And now there'll be a Medicare default plus an expensive Medicare bailout. There's no one to sue. We have to pay the piper both in terms of benefits we won't receive and money we'll have to pay.

Cutting benefits to current retirees is both unfair and absolutely necessary. We were promised our medical needs would be taken care of, so we didn't make any provision other than the Medicare tax we were paying. We didn't think we were getting something for nothing. We didn't have the chance to choose a different option. But we getting $3 of care for each $1 we paid. Our premiums can – and should – go up on a means-tested basis. Which procedures are covered should be more tightly restricted, although we should retain the option of paying for them ourselves if we or our heirs can. I'd like the option of opting out, self-insuring for routine stuff, and buying only catastrophic insurance. It may be, however, that giving me that option and forgoing my already higher premiums would make the problem even worse. Perhaps the more well-to-do ought to be able to buy themselves part way out. There is no answer that's fair to those already in the system or close to retirement. It's just a question of limiting the damage. The promise cannot be kept!

We can't keep the promise to today's workers that they can have medical care from 65 to the grave at almost no expense to them or their heirs. We need to tell them the truth and let them make some choices now. Private insurance can provide plans for retirement coverage – but it is hard to convince a twenty-something to forgo current expenditures to pay for those impossible to imagine days as a geezer. But young people do pay into retirement funds; they do (sometimes) save for their own kids' college. Under compulsion, they're paying for Medicare now; but we're spending every penny they're paying. I don't think it's a terrible injustice for those who have money but failed to buy insurance to have to sell their (or their heirs) assets in order to pay for the medical care they want. We spend our retirement funds on our other priorities. I would've sold my house to pay for my stent if I'd had to – or chosen a lifestyle that let me work around a damaged artery. What's essential is to present these options to current workers today so that they can still make a choice. We cannot make them promises that can't be kept!

I'm sure you've noticed that I haven't talked about what should happen to those who couldn't afford insurance and can't afford medical care. That's a different, although still critical, problem. The Medicare problem is a promise made to us who had alternatives, a promise there is no one to pay for except us, which turns out to be a promise that can't be kept. The sooner we recognize the default, the less the pain of curing it.

Related posts:

Rep. Ryan's Budget: Change You Can Believe In

Medicare's a Fraud – And I'm the Beneficiary

We Can't Have All the Medical Care We Want

Why Republicans (Finally) Opposed SOPA and PIPA

Originally House bill SOPA (Stop Online Piracy Act) and Senate bill PIPA (Protect IP Act) were bipartisan bad policy. The Senate version was reported unanimously from The Judiciary Committee and was supported not only by Chairman Patrick Leahy (D-VT) but also by the Senior Republican on the committee, Orrin Hatch (R-UT), These bills, written largely by Hollywood lobbyists, would have done great harm to Internet-enhanced freedom both in the United States and around the world. They were a massive over-reaction to the real (although not well quantified) problems of content piracy and counterfeit goods on the Internet. Oh yeah, they also helped protect Hollywood from "new media", legitimate or otherwise.

Internet denizens used the net and social media to fight back…and companies like Google and Facebook lobbied in more traditional ways as well. Wikipedia went dark for a day in protest exciting a rebuke from former Sen. Chris Dodd – yeah, the guy who received special treatment from the mortgage companies he defended in Congress, who is now the CEO of the Motion Picture Association of America:

"It is an irresponsible response and a disservice to people who rely on them for information and use their services.

"It is also an abuse of power given the freedoms these companies enjoy in the marketplace today, It's a dangerous and troubling development when the platforms that serve as gateways to information intentionally skew the facts to incite their users in order to further their corporate interests."

Wikipedia, of course, is a free service; it's supported by donations. But Dodd thinks it is inappropriate for it to withhold service for a day to make a point. Of course, we all know what happens if a content provider can't reach agreement with a cable service - blackout. But that's OK; it's just about the money. But I digress.

By and large the first politicians to desert SOPA and PIPA were Republicans. This surprised many of my more liberal friends since, at heart, this is a civil liberties issue and they think of Democrats as being more committed to civil liberties. Here's Dan Gillmor:

"Two more Republican senators have withdrawn support for Internet censorship today, adding to a growing unease in Congress over what lawmakers had been poised to do with SOPA/PIPA. But the Democrats, for the most part, are still firmly in support of this pernicious legislation.

"For example, both California senators, Dianne Feinstein and Barbara Boxer, are co-sponsors of PIPA. They've taken Hollywood's side against Silicon Valley and the great majority of their constituents -- choosing to help an industry that holds back progress over one that creates it…

"I lived in Vermont for many years, and was a huge fan of Patrick Leahy, the longtime Democratic senior senator from the Green Mountain State. His ardent desire to pass PIPA is a sad reminder of how a man who once believed in civil liberties -- freedom of speech in this case -- has become a bought-and-paid-for hack on some issues, such as this one.

"Yes, many powerful GOP members -- especially Texas Rep. Lamar Smith, chief sponsor and author of SOPA -- remain firmly on the copyright cartel's side. But it won't be long, if current trends, before we'll have to call the Republicans the party of progress on this issue."

Now I do hope Republicans can become known as "the party of progress" on many issues, but I'm afraid I know the true reasons why Republicans quickly switched sides on this debate. It wasn't even the campaign contributions.

It was the content.

In domestic movies, Republican types are often the villains - evil bankers, car company executives, nuclear power plant operators, defilers of the environment. Oh, they don't always wear GOP pins, but we know who they are.

On the other hand, how many movies have you seen about evil environmental activists, labor leaders (since On The Waterfront), alternative energy developers, or community activists. These are always the good guys. And obviously Democrats.

When push came to shove, the Democrats stuck with the people who have portrayed them so nicely… and the Republicans got their revenge.

Don't worry, though; there's sure to be a sequel.

Related posts:

SOPA and PIPA are Bipartisan Bad Policy, Really Bad Policy

Reader Comments on SOPA and PIPA Internet Blocking Bills

The Energy State of the Union Annotated

President Obama recognized the importance of natural gas and the new, disruptive technologies which have made at least 100 years of this fuel available to us; that's the good news from the State of the Union Address. The bad news is that the President appears to have learned a lot of wrong lessons about the proper role of government in innovation and appears poised to take a lot of wrong-headed actions. Here's that section of the speech as reported in The New York Times with annotations by them (NYT) and by me (TE).

POTUS: And nowhere is the promise of innovation greater than in American-made energy. Over the last three years, we've opened millions of new acres for oil and gas exploration, and tonight, I'm directing my administration to open more than 75 percent of our potential offshore oil and gas resources. (Applause.)

NYT: An administration official declined to explain exactly what this potentially huge expansion of offshore activity meant, except to say that the Interior Department would be announcing new lease sales in the coming weeks. Those sales will not include areas the administration has already ruled off-limits, including most areas off Florida and along the Atlantic Coast, the official said, so it is not clear how the president reaches his target.

— John M. Broder, reporter

POTUS: Right now -- right now -- American oil production is the highest that it's been in eight years. That's right -- eight years. Not only that -- last year, we relied less on foreign oil than in any of the past 16 years. (Applause.)

TE: That is good news but obviously most of the increase in domestic production comes from actions taken before the present administration was in charge. Also a recession-related decrease in demand cut into imports. But still good news.

POTUS: But with only 2 percent of the world's oil reserves, oil isn't enough. This country needs an all-out, all-of-the-above strategy that develops every available source of American energy. (Applause.)

A strategy that's cleaner, cheaper, and full of new jobs. We have a supply of natural gas that can last America nearly 100 years. (Applause.)

And my administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. And I'm requiring all companies that drill for gas on public lands to disclose the chemicals they use. (Applause.)

TE: Amazing how he managed not to say the f-word, fracking or even the proper names for the innovations which are unlocking vast stores of both oil and natural gas, hydraulic fracturing and horizontal drilling. He did make a nod to opponents of hydraulic fracturing with the line about disclosure of the content of the fluids used in the process when drilling is done on public lands, actually good policy from my POV.

POTUS: Because America will develop this resource without putting the health and safety of our citizens at risk. The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don't have to choose between our environment and our economy. (Applause.)

TE: Applause! (Interestingly Boehner was applauding during this section the speech but Biden wasn't.)

POTUS: And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock –- reminding us that government support is critical in helping businesses get new energy ideas off the ground. (Applause.)

TE: Ahem. In 1865 Col. Edward A. L. Roberts received the first of his many patents for an exploding torpedo; it was used not for war but increasing production from hydrocarbon formations. He died a wealthy man. The co-inventors of modern fracking combined with horizontal drilling were Joseph Clark and Riley Farris. By vastly increasing the supply of natural gas, they have arguably done more for energy independence, energy abundance, and lower carbon emissions than all the well-intended grant-funded green efforts in the last twenty years. That being said, surely some aspects of government and university basic research must have helped: perhaps studies of geology, sound wave propagation, GPS technology, and many other things. The President is right that government has a role in funding basic research.

POTUS: Now, what's true for natural gas is just as true for clean energy. In three years, our partnership with the private sector has already positioned America to be the world's leading manufacturer of high-tech batteries. Because of federal investments, renewable energy use has nearly doubled, and thousands of Americans have jobs because of it.

TE: Whoops. Wrong conclusion. There were no government incentives for fracking as opposed to other means of gas production, no special tax credits for this technology, no mandates that we use fracked natural gas rather than alternatives, no tariffs to prevent us from buying foreign natural gas when it was cheaper, no DOE-led grant programs tucked into the stimulus bill for hydraulic drilling. The wealth of natural gas didn't come about because of "federal investments"; it is a result of plain old-fashioned marketplace economics. Growth in "renewable use", on the other hand, is only because of government programs, just as the President says; that's why much of it unsustainable and, as the President points out later in his speech, why the "green jobs" created will die back without further subsidies while the direct jobs in drilling for natural gas and building pipelines are here for a long time to come and the indirect jobs in American manufacturing enabled by cheap domestic energy are "sustainable" – as long as the savings are not eaten up by subsidies for energy sources which aren't ready for prime time.

POTUS: When Bryan Ritterby was laid off from his job making furniture, he said he worried that at 55, no one would give him a second chance. But he found work at Energetx, a wind turbine manufacturer in Michigan. Before the recession, the factory only made luxury yachts. Today, it's hiring workers like Bryan, who said, "I'm proud to be working in the industry of the future."

Our experience with shale gas, our experience with natural gas, shows us that the payoffs on these public investments don't always come right away. Some technologies don't pan out; some companies fail. But I will not walk away from the promise of clean energy. I will not walk away from workers like Bryan. (Applause.)

TE: Unfortunately Mr. Ritterby's new job may not last past the expiration of tax credits for wind turbines at the end of this year. Our experience with shale gas (fracked natural gas) shows us that effective technologies can be developed by the private sector with no help from the government other than possible funding of basic research. The example of a government program the President should examine is corny ethanol: that set of incentives, mandates, and protective tariffs has led to less fuel efficiency, higher prices not only for fuel but for food as well, and probably environmental damage. The private sector goes down many blind allies as well; but it can't double down and insist that we use more expensive products – at least not unless it can hire lobbyists to convince congresspeople that such laws are needed. Anyway, it was ethanol the government was "investing" in while the natural gas answer to environmental and economic problems was developed outside the Washington Beltway.

POTUS: I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here. We've subsidized oil companies for a century. That's long enough. (Applause.)

It's time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double-down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs. (Applause.)

TE: By all means take the" taxpayer giveaways" away from oil (and gas and nuclear and coal) companies. But giving them to new politically-connected industries is exactly the wrong thing to do. Yes, the government should support research into many energy sources including renewable ones. Once these sources become competitively viable – and some of them will, the winning technologies will be good for America and good for the world and its environment – just as natural gas is. Government doubles down when it makes a mistake (see ethanol above); private investors move on to the next new avenue until they find something that works. That's the lesson I wish the President had learned from our recent energy past.

Nevertheless, the President is absolutely right that the abundance of American natural gas is a very, very good thing.

Full disclosure: I have invested in line with my beliefs and will benefit as an investor if inexpensive, clean natural gas displaces oil.

Related posts:

Natural Gas Disrupts the Energy Industry

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

We Can End Energy Subsidies

Good News for the New Year

 

 

    

Could Romney Give Us Tax Reform Without Even Getting Nominated?

The President's own National Commission on Fiscal Responsibility and Reform recommended a much flatter tax structure and elimination of most tax deductions and credits in their draft report. The President – and almost everyone else – ignored their recommendation. Ex-candidate Herman Cain made a 9-9-9 flat tax almost famous before he sunk from view. Ron Paul advocates a very flat income tax – zero . The other Republican candidates have advocated flatter taxes without much fervor. But Mitt Romney's incredible political miscalculation in attempting to withhold the fact that he pays only 15% of his income in taxes may have actually given us a leg up on tax reform.

The fact is that we do have a somewhat progressive federal income tax. The 40% of families with the lowest incomes don't pay any income tax at all as a group. The rich AS A WHOLE pay a higher rate than the rest of us. But the statistics obscure huge individual variances in taxes paid because of a tax system riddled with loopholes and special exceptions – like the so-called carried interest deduction and concessionary rate for capital gains, which probably are the reasons why Romney paid such a low rate (see a great post by my friend Fred Wilson who benefits from these concessions but argues they should be eliminated).

These exceptions are not only unfair – they also corrupt government. Politicians get campaign contributions (at least) from those who benefit from the loopholes. Working to add loopholes or defending the ones that are already there attracts lobbyists with full purses like… chose your simile. Individual loopholes don't attract much opposition since the pain of giving a few people a break is spread over the rest of us taxpayers.

Often loopholes are justified as tipping the economic scales in favor of some perceived common good. Unless you're a renter or take the standard deduction, you probably like the deduction for your home mortgage – realtors certainly do. But how do you feel about the tax credit for corny ethanol production, which was just allowed to expire this year? It managed to simultaneously drive up the price of energy and food, while probably doing some environmental damage along the way. Besides leading to bad government by providing congresspeople with a bottomless pit of favors to give out or protect in return for campaign support, loopholes are bad economic policy.

Here are some numbers from the Congressional Budget Office for 2007 (latest available, unfortunately, since some of this must have changed in the recession):

	quintiles
	1st	2d	3d	4th	5th	all		top 10%	top 1%
Individual Income	(6.8)	(0.4)	3.3	6.2	14.4	9.3		16.2	19.0
Social Insurance	8.8	9.5	9.4	9.5	5.7	7.4		4.5	1.6
Excise	1.6	1.0	0.8	0.7	0.4	0.6		0.3	0.1
total	3.6	10.1	13.5	16.4	20.5	17.3		21.0	20.7

Almost all income including interest on tax free bonds for the well-to-do and cash benefits for the not-well-to-do is counted. Note that, on the average, families in the lower two quintiles (low income 40% ) actually paid negative income tax – as groups they received more in earned income, child care, and other tax credits than they paid in income tax. However, people in these two quintiles DID pay a healthy share of their small incomes for social insurance including social security and Medicare (the table properly attributes the payments made by employers to the employees). The wealthy paid a somewhat higher share of their income in income tax; the top 20% paid more than twice the rate of INCOME tax that the 20% immediately below them paid; the top 1% pay 19%, more than the top 10% as a whole who pay only 16.2% (had enough percentages yet?). For those concerned with tax equality (not what this post is about), the top 1% had 19.4% of all pretax income in 2007, just as the occupiers suspect, but, on the other hand, paid 39.5% of all individual income tax.

Takeaway, statistically, we have a somewhat progressive tax system. But loopholes make it unfair.

Let's assume, for this post, that the current actual progressivity is fair. We should then collect these rates from various income groups with a straightforward tax on all income WITHOUT LOOPHOLES. The nominal tax rates would be lower, of course, but the money collected from each group would be the same.

The benefits to the country of a tax system without loopholes would be huge.

1. Fairness, fair, fairness. People with the same incomes would pay the same taxes.
2. Actual visibility into how much people are paying according to level of income.
3. A huge decrease in the cost of complexity – (not great for some accountants and lawyers).
4. A huge increase in efficiency when investments are made because of anticipated profit rather than anticipated tax benefit.
5. Eliminating the opportunity for congresspeople to sell tax breaks in return for contributions.
6. Lower rates make the special treatments unnecessary. If the top rate is 20%, it's hard to argue that capital gains or dividends need a special 15% rate. That argument is more compelling (although I still don't believe it) when marginal rates are north of 30%.

Maybe Romney's embarrassment will force him to advocate closing all loopholes for everyone. Maybe Gingrich will demonstrate his economic independence by doing the same. Maybe President Obama will listen to his own advisory commission and introduce a bill for tax simplification. Won't it be a great campaign if candidates are outdoing each other in closing loopholes and lowering the nominal tax rates? Unlike most government programs – certainly unlike tax breaks – tax simplification really will create jobs by making work more rewarding (less taxed because "unearned" income is taxed more than it is now) and making economic decisions more rational.

Related posts:

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Good News for the New Year

The End of the Age of Incentives

What is DirecTV Selling?

Ostensibly this is a warning to set our parental controls – grandparental in our case. Looks to my jaundiced eye like a pitch for the pay-per-view porn channels in case we didn't realize "changes have been made."

Borrow a Book with Your Kindle

If you're an Amazon Prime member and if you own a Kindle, you can borrow books "free" – one book per month, anyway. You do this through the Kindle Owners' Lending Library. You can go to the Library from your Kindle Fire directly from the Fire bookstore; if you have an older Kindle, you go to the Kindle Store and click on "See all categories…"If you're on your computer and you find a book on the Amazon website, it'll tell you whether or not it can be borrowed from the library.

It's up to authors whether or not to make their books available for borrowing. Only book with US rights (currently) and whose eBook editions are exclusively available on Kindle are eligible. So why would you want to do this if you're an author? I bet you weren't even going to ask.

But here are the reasons:

1. Authors like to be read.
2. Authors actually get paid when their books are borrowed even though the customers aren't paying (except by buying a Kindle and signing up for Prime).

Amazon has an ingenious system for paying authors. Each month they put $500,000 into a pool (this month they've added $200,000 more). The pool is divided between authors in proportion to the number of times each author's titles are downloaded from Amazon. So authors have an incentive not only to make their books available to the library but also to promote the fact that their books can be borrowed there.

And guess what. Two books by me are available in the Kindle Owners' Lending Library. One is hackoff.com: an historic murder mystery set in the Internet bubble and rubble, a real murder mystery featuring an entrepreneur, a hacker, VCs, bankers and diverse other suspicious characters and informed by my stint as a CEO of a company which went public during the bubble – all fiction, of course. The other is my very much shorter The Interpreter's Tale set in Barcelona, wandering in and out of Gaudi architecture, and peopled with pickpockets, terrorists, separatists, and, of course, a hacker. This story used to be an Amazon Short before that category became part of Kindle.

Related posts:

The Interpreter's Tale

New Excerpt from The Interpreter's Tale

hackoff.com is a Finalist for the Lulu Blooker Award (didn't win, though)

The World Economic Forum at Davos Continued (contains an extract set in Davos, of course)

 

 

Decline in Banking and Government Sectors Good for the Economy

We need government and we need banks; but we don't need government to be as big as it's grown and we don't need banks which are too big to fail. When sectors like government or banking grow out of proportion to the benefits they bring, the economy as a whole suffers from a misallocation of resources.

So headlines like these from The Wall Street Journal this morning are good news:

BofA Ponders Retreat

Bank of America has told U.S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen.

Banks Overhaul for Leaner Era

The investment-banking industry, notoriously prone to cyclical hiring and firing during booms and busts, is in the midst of a retrenchment that may be more far-reaching.

RBS Bids to Shrink to Glory

The needed contraction in the financial industry would have happened sooner if there hadn't been the bipartisan bailout known as TARP; it would also have been more abrupt. IMHO the economy would've recovered quicker if we hadn't cushioned the way down for investment bankers; others argue that that an abrupt banking contraction would have tanked the economy worse. We'll never know who is right.

The fight now is to make sure that banks don't get further bailouts and that too-big-to-fail banks get smaller. The prognosis is not great. The European Central Bank is continuing to print money to "lend" to its member banks at concessionary rates (1%) in hopes that these banks will turn around and lend some of it to their feckless governments, thereby keeping the governments afloat and earning high profits for the banks so that they can repair their damaged balanced sheets. Note that this is a scheme which protects employment in BOTH the banking and the government sectors.

Here in the US the government sector shrinks slowly from one employment report to the next. Meanwhile the private sector creates more jobs than are lost in government although not enough to bring the unemployment rate down as fast as we'd all like to see. Particularly good news is that manufacturing employment here is growing.

Government employment also would have contracted much more abruptly without the local government bailout contained in the Stimulus Bill. One can make a better argument, again IMHO, for cushioning the downsizing of government during a time when the need for government services increased than for bailing out banks. But the states and local governments by and large didn't take advantage of the reprieve to make the structural changes that were needed or even to get control over the cost of public sector retirement benefits.

Those who benefit from megagovernment – including those in the private sector serving government or exploiting grants, preferences and mandates – will fight to regrow government. As tax revenues recover along with the economy, the temptation to let government grow again will grow. That'd be a mistake. Just like bailing out banks.

Related posts:

Jon Hunstman: Wall Street's Big Banks Are the Real Threat to Our Economy

The Inconvenient Recovery

Another Day, Another Bank Bailout

Confessions of a Stimulator

 

Reader Comments on SOPA and PIPA Internet Blocking Bills

If either House bill SOPA (Stop Online Piracy Act) or Senate bill PIPA (Protect IP Act) or something in between passes both houses of Congress and is signed by the President, Internet censorship, unreachable websites, and forbidden searches will be the law of this land – just as in China. I blogged last week about the dangers these bills pose in return for helping Hollywood assure that none of its content is pirated. Readers have weighed in with some more data, questions, and amplifications. In addition, there is more useful information from twitter which I'll pass on below.

Vermont Tiger reader Will Workman commented:

"Okay, so I'll protest this law as soon as someone shows me a better way to protect intellectual property on the internet. By some estimates, 15% of all internet commerce involves stolen IP, either media available online, or offers to sell knockoff goods…

"So I repeat, are you just going to condemn a "Hollywood lobby" or are you going to propose a better way to stop the rampant IP theft on the internet?"

As he says, piracy is a real problem. Turns out that the "Internet Industry" has presented an alternative to address these real problems of piracy. According to ReadWriteWeb:

"The OPEN act sponsored by Rep. Darrell Issa, R-Calif., and Sen. Ron Wyden, D-Ore., would allow the International Trade Commission to order online ad networks and payment processors to sever ties withe foreign websites that are targeted by patent infringement claims…

""[The OPEN Act's] approach targets foreign rogue sites without inflicting collateral damage on legitimate, law-abiding U.S. Internet companies by bringing well-established international trade remedies to bear on this problem," AOL, eBay, Facebook, Google, LinkedIn, Mozilla, Twitter, Yahoo and Zynga wrote in a letter to Issa and Wyden in December."

In other words, OPEN seeks to sever the money links to pirate sites and stop otherwise legit sites from profiting by supporting them but does NOT include blocking our access to parts of the web.

Tiger reader Aaron S. Hawley wrote:

"Yes, it is bad policy. Fortunately it died last year with COICA but has been resurrected. What are the dots connecting Leahy to the lobbyists that cause him to peddle this kind of legislation in the first place? Last I checked, Hollywood is in Los Angeles, not Vermont. Does he owe favors for being in the Batman movie?"

Tiger reader Robin of Stowe responded to Aaron:

"According to the F.E.C., our Senator Leahy has been paid over $1,000,000 since 2000 by the entertainment industry. Here is the legislation they paid for.

"BTW, our Senior Senator was not in any way mis-led. He went in with eyes wide open, knowing the job he had to do. His record of Hollywood protecting legislation goes back over several sessions of Congress."

I emailed Robin and asked for a source for this allegation. Robin gave me a link to a page on Leahy on opensecrets.org. It says that his top two contributors since 1989 have been Time Warner and Walt Disney Company and that his top three contributor categories are Lawyers/Law Firms, TV/Movies/Music, and Lobbyists. There is a disclaimer which is important: "The organizations themselves did not donate, rather the money came from the organizations' PACs, their individual members or employees or owners, and those individuals' immediate families. Organization totals include subsidiaries and affiliates." The top metro areas in contributions to the Senator are Washington, DC and Los Angeles-Long Beach (which includes Hollywood).

To be fair, it does make sense for organizations to contribute to congresspeople who agree with and support their positions. These are the people they want to see re-elected.

A tweet pointed me to sopaopra.org. This is a cool site which lets you sort SOPA and PIPA opponents and proponents by how much they have received from the Movie/Music/TV industry, the Computers/Net industry, or the difference between the two amounts. Not surprisingly there is a high correlation between positions and contributions. Senator Bernie Sanders (I-VT) and Rep. Peter Welch (D-VT) are not listed as either opponents or proponents so contacting them may be a very good idea for Vermonters. Non-Vermonters can reach their congresspeople through http://www.usa.gov/Contact/Elected.shtml.

You can also sign a petition at whitehouse.org asking the President to veto these bills or anything like them if they ever reach his desk. You have to sign up with whitehouse.org to do this, but you can ask that President Obama not send you any messages.

Related post:

SOPA and PIPA are Bipartisan Bad Policy, Really Bad Policy

Jon Hunstman: Wall Street’s Big Banks Are the Real Threat to Our Economy

Coddling big banks has been a bipartisan effort. TARP passed in the Bush administration, and President Obama appointed TARP architect Tim Geithner as his Treasury Secretary and reappointed Fed Chairman Ben "bailout" Bernanke. Mitt Romney's background is in the financial industry and he thinks the bailout was necessary; look for more bank bailing should he become President.

Jon Huntsman has taken a strong and intelligent stance against bank bailouts and proposed a concrete plan for eliminating too-big-to-fail banks and allowing community banks to flourish – they can be allowed to fold if they fail. If he can manage a third place or better showing in New Hampshire Tuesday, Americans may have a strong and experienced alternative on the ballot in November.

This is Huntsman's statement on too-big-to-fail banks:

Rebuilding our economy and restoring trust in our government will require a leader with the independence to implement bold reforms that take on the establishment, from Washington to Wall Street.

Thus far, however, we are the only campaign willing to confront honestly and directly one of the greatest threats to our long-term economic prosperity: Too-Big-To-Fail Wall Street banks.

In 2008, with the nation's economy in crisis, Washington and Wall Street offered American taxpayers a Sophie's Choice: spend hundreds of billions of dollars to save big banks from failure, or witness the collapse of our financial system and irreparable economic harm.

This was not only a betrayal of the public's trust; it was also a betrayal of our free market system, which only works when every business plays by the same rules.

Taxpayers were promised those bailouts would be a one-time, emergency measure. Yet today, we can already see the outlines of the next financial crisis and bailouts.

The six largest financial institutions are significantly bigger than they were in 2008, having been encouraged to snap up Bear Stearns and other competitors at bargain prices.

These banks now have assets worth over 66% of gross domestic product – at least $9.4 trillion – up from 20% of GDP in the 1990s.

Dodd-Frank, which purportedly designed to fix Too-Big-To-Fail, has only made things worse. Not only has it left us with larger banks, but it imposes massive new regulations and unreasonable compliance costs on smaller banks, which hurts small business lending.

President Obama has offered no real solutions other than to demonize capitalism, which may score political points but does nothing to solve the problem.

My opponents have also failed to take on Wall Street with substantive reforms. This includes – unsurprisingly – the establishment's preferred front-runner, Mitt Romney.

Governor Romney, who has accepted more Wall Street money than any other candidate, has offered no concrete solutions to protect taxpayers in the event of a future financial crisis.

The Obama and Romney plan simply appears to be to cross our fingers and hope no Too-Big-To-Fail banks fail on their watch – a stunning lack of leadership on such a critical economic issue.

As president, I will break up the big banks, end future taxpayer bailouts, and restore capitalist principles – competition and creative destruction – to our financial sector.

We will accomplish this by imposing a fee on banks whose size exceeds a certain percentage of GDP, proving them an incentive to slim down and localize.

Many of us can recall an earlier time when we had community banks that were actually a part of the community, instead of a faceless Wall Street entity. They sponsored our kids' baseball teams. You knew the president on a first name basis. Your small business or farm's credit was based as much on your reputation and character as your FICO score.

We need banks that are closer to our communities that, if mismanaged, are small and simple enough to fail – not financial public utilities.

The federal government cannot afford to wait until the next financial crisis is upon us to act, which will be too late and cost taxpayers too much.

Whether it is ending Too-Big-To-Fail, reforming the corrupted culture of Congress, or eliminating special interest preferences in our tax code, we need a president who is not indebted to the power brokers in Washington or on Wall Street.

We need a president who will take on the establishment from the outside, and deliver the bold reforms our country desperately needs. That is what I will continue to offer the American people.

Related posts:

Another Day, Another Bank Bailout

"Too Big to Fail" Assures Bigness – and Failure

Preparing for the Next Banking Crisis

When Regulation Is Justified

The Occupiers and Tea Partiers Are Both Right

 

Huh?

Posted a comment on CNN.com. See hilited contradiction below.

SOPA and PIPA are Bipartisan Bad Policy, Really Bad Policy

In China you can't get to some Internet sites: no Facebook, no YouTube, no Twitter. Search engines can't find the "Falun Gong" or "Tiananmen Square massacre". We would never do that kind of blocking here in the US, you say. Well, not so fast. If either House bill SOPA (Stop Online Piracy Act) or Senate bill PIPA (Protect IP Act) or something in between passes both houses of Congress and is signed by the President, Internet censorship, unreachable websites, and forbidden searches will be the law of this land.

The Arab Spring has been enabled by the inability of some governments to block Internet communication. SOPA and SIPA both require that Internet blocking tools be developed and deployed here. Maybe we trust our own government not to misuse these (I don't!); but do we really want to be responsible for the proliferation of censorship and blocked communication?

Why, you ask, would our Congresspeople want to impose censorship anywhere? Why would they want to slow down the most vigorous parts of the US economy?

The answer, at least, is simple. These are bills that Hollywood wants to protect its movies from online piracy, and Hollywood makes mega-campaign contributions and even gives Congresspeople bit parts in its movies. There is nothing partisan about campaign contributions.

To be fair, online piracy is a problem as are websites which sell counterfeit goods – especially counterfeit drugs. Owners of intellectual property including movies, books, songs, and trademarks are entitled to protection under the law. US Internet sites should not intentionally aid or abet domestic or foreign sites which are breaking the law. In fact we already do have laws on the books to protect intellectual property and prevent fraud.

Under the existing Digital Millennium Copyright Act (DMCA), websites like YouTube have an obligation to remove material subject to copyright from their sites – if they are notified by the copyright holder that the material is an infringement. Companies like Google have been punished by fines for KNOWINGLY facilitating the sale of counterfeit products. The key issue is that YouTube is NOT responsible for checking every video that you upload to make sure you have not violated someone's copyright. If there were such an obligation – similar to requiring the Post Office to open every piece of mail to check for fraud or contraband, there would clearly be no services like YouTube. Similarly your Internet Service Provider (ISP) is not liable if you use your connection to download pirated stuff. If the ISP has to be a censor, then the ISP would have to examine everything you do (read your email, for example).

SOPA and PIPA are nominally aimed at foreign sites since US sites which break the law can (properly) already be shut down. However, foreign sites are beyond the reach of US law; so, the SOPA and PIPA logic goes, we must block access to these sites from the US. Blocking sites means that US search engines can't point to them (just like China); US domain name servers (DNS), which convert links like www.thisandthat.com to IP addresses reachable on the Internet, must "forget" how to convert the forbidden links; and our ISPs can be required to block our access to forbidden websites – meaning, of course, that our ISPs must examine which websites we do access and will probably have to keep a log to prove they blocked us when they should. Social media sites will have to examine all user-submitted content to assure that it does not contain forbidden links.

Under SOPA and PIPA you won't be able to access the same Internet that you see in countries which value Internet freedom; we'll be more like China and less like what we used to be. Here in the US we operate Internet proxy servers, which are used by many Chinese to evade their government's censorship of the Internet. These proxy servers might well be illegal under SOPA and PIPA because they would also provide a way to reach websites which would otherwise be banned in the US.

Google and Facebook will hire a legion of lawyers and survive even SOPA and PIPA, which they oppose; startup social media sites will have a hard time getting funding when they can easily be bankrupt by possibly frivolous lawsuits over postings by their users. There might not be a next Twitter. You may or may not be a user of social media, but you are a beneficiary of the fact that social media innovation creates jobs here in the US where most of that innovation happens – unless we choose to shut it off.

On his website, Senator Patrick Leahy (D-VT), chair of the Senate Judiciary Committee and prime sponsor of PIPA, says:

"The PROTECT IP Act is supported by businesses and organizations across the political spectrum from labor unions to the Chamber of Commerce and the National Association of Manufacturers, from the National Association of Broadcasters to the cable industry.  "

He goes on to point out, correctly, that it was approved unanimously by all the Republicans and Democrats on the Judiciary Committee. The first part of the press release makes the statement that the bill contains:

"..authorization for both the Attorney General and rights holders to bring actions against online infringers operating an internet site or domain where the site is 'dedicated to infringing activities,' but with remedies limited to eliminating the financial viability of the site, not blocking access [nb. emphasis mine]."

However, the description of the bill further down in the same press release makes very clear that this is all about blocking access:

"The court is authorized to issue a cease and desist order against a rogue website.  If the court issues that order, the Attorney General is authorized to serve that order, with permission of the court, on specified U.S. based third-parties, including Internet service providers, payment processors, online advertising network providers, and search engines.  These third parties would then be required to take appropriate action to either prevent access to the Internet site [nb. emphasis again mine] (in the case of an Internet service provider or search engine), or cease doing business with the Internet site (in the case of a payment processor or advertising network)."

Senator Leahy is usually a defender of civil liberties. It seems in this case he may have been misled by his friends in Hollywood about the draconian nature of the protections they are seeking.

According to Wikipedia:

"Opponents of SOPA include Google, Yahoo!, Facebook, Twitter, DynDNS, AOL, LinkedIn, eBay, Mozilla Corporation, the Wikimedia Foundation, and human rights organizations such as Reporters Without Borders, the Electronic Frontier Foundation, the ACLU, and Human Rights Watch

"On December 13, Julian Sanchez of the Libertarian think tank Cato Institute came out in strong opposition to the bill saying that while the amended version "trims or softens a few of the most egregious provisions of the original proposal... the fundamental problem with SOPA has never been these details; it's the core idea. The core idea is still to create an Internet blacklist..."

"Computer scientist Vint Cerf, one of the founders of the Internet and Google vice president, wrote House committee chairman Lamar Smith, saying "Requiring search engines to delete a domain name begins a worldwide arms race of unprecedented 'censorship' of the Web," in a letter published on CNet…

"An editorial in Fortune wrote, "This is just another case of Congress doing the bidding of powerful lobbyists—in this case, Hollywood and the music industry, among others. It would be downright mundane if the legislation weren't so draconian and the rhetoric surrounding it weren't so transparently pandering."^"

If this were just a commercial argument between old line entertainment businesses like the movie makers and new media companies like Google and Facebook, the issue would not be nearly as important as it actually is. These bills are the equivalent of banning all guns because some guns are used in felonies; they are the equivalent of allowing the government to exercise "prior restraint" of newspapers because sometimes libel gets published. These bills would move the US in the direction of some of the worst practices of China and give comfort to the world's remaining tyrannies who are trying desperately to cut off free communication. These are bills which must not pass.

If you agree, please email your Congresspeople.

Good News for the New Year

The ethanol $.45/gallon tax subsidy is gone! Happy New Year. This could be a small opening wedge for both good energy and good fiscal policy. Bipartisan inaction (a techniques which Congress has mastered) let the 30 year old credit for corny ethanol, which cost us taxpayers $6 billion last year, expire with the end of 2011. This brave inaction was taken BEFORE the Iowa caucuses! BTW, this is a healthy recognition that a targeted tax break is every bit as much a subsidy as a government check.

At the same time the $.54/gallon tariff on imported ethanol was also allowed to expire, and so cheaper ethanol made from Brazilian sugar cane will set a price limit on what American producers of corny ethanol can sell their product for. This competition matters because Congress did NOT eliminate that requirement that refiners add ethanol to our gasoline and diesel supplies. We are still going to buy the stuff whether we like it or not

It took an unusual left-right alliance for this significant inaction to occur. Originally the subsidies were supposed to promote energy independence and prevent carbon emissions. The left was disappointed to find that emissions may actually have increased as a result of ethanol subsidies encouraging the use of more and more of the existing farmland for fuel rather than food and forest land being converted to farms. Also, of course, the price of food has increased as the grain supply has been diverted to ethanol. The right's not-always-consistent suspicion of subsidies was confirmed by a National Academy of Sciences report (as quoted in The Wall Street Journal) saying that grain ethanol "could not compete with fossil fuels in the U.S. marketplace without mandates, subsidies, tax exemptions, and tariffs . . . This lack of competitiveness raises questions about the use of government resources to support biofuels." Even the farm lobby did not fight hard to keep the subsidy, recognizing that all of its subsidies are in danger in a time of general affluence for grain farmers.

Getting rid of the subsidy and the tariff is only two-thirds of the battle; there is still a nonsensical requirement that refiners put a 10% ethanol spike into our transportation fuel supply regardless of whether ethanol competes with other fuels on a miles per dollar basis. Congress would actually have to act to undo this requirement and Congress isn't much good at acting. Under old laws the required percentage of ethanol in fuel keeps going up on autopilot unless and until the EPA determines that there is not adequate ethanol available. So put this in your tailpipe and smoke it: since we are no longer subsidizing the use of ethanol with our tax dollars and since ethanol currently costs more than gasoline and since the refiners are forced to buy ethanol, the price of gasoline and diesel at the pump will go up. We will send this forced contribution to Brazilian sugar farmers and to any American producers who manage to reduce their prices sufficiently. Refiners who don't buy enough ethanol pay a penalty to the EPA, which, of course would get passed on to us.

Refiners aren't likely to have to pay the penalty for run-of-the-mill ethanol since there is enough of it around at prices below the penalty. However, there is a separate mandate for the amount of cellulosic ethanol (ethanol from nonfood crops) which must be blended into our fuel supply. Congress initially set 500 million gallons as the cellulosic ethanol number for 2012, but gave the EPA the ability to reduce the number in case sufficient quantities are not likely to be available. Given that NO qualifying cellulosic ethanol was produced in the US in 2011, the EPA has reduced the target to only 8.65 million gallons. And what happens, you ask, if that quantity is not available? Simple, refiners will pay a penalty of $.78/gallon for each non-existent gallon of cellulosic ethanol they don't buy (and presumably pass this cost on to us).

But let's look on the good side: we're two for three; the subsidy and the tariff are gone.

This is a great precedent for NOT passing any of the proposed subsidies for natural gas, which I believe will contribute greatly to solving energy, economic, and environmental problems without a government handout so long as there is reasonable, effective, and speedy regulation of extraction. Credits and subsidies for various forms of "renewable" energy are expiring; RIP. It'll take congressional action but existing tax and other subsidies for oil and nuclear power ought to also be repealed (and subsidy-free projects like the XL Pipeline be allowed to proceed). Heck, pretty soon we'll be taking tax breaks away from hedge fund managers. That'll be a real new year.

Related posts:

Natural Gas Disrupts the Energy Industry

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

We Can End Energy Subsidies

Why Does Iran Think It Can Get Away with a Blockade?

"If they impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz," says Iran's first vice president, Mohammad-Reza Rahimi, as quoted in The New York Times. According to the same article, about a fifth of the world's oil flows through the Straits. Kuwait, Iraq, Saudi Arabia and UAE all border on the Persian Gulf which would be bottled up by the threatened Iranian blockade.

So why does Iran think it can get away with that massive threat to both its neighbors and the Western economies dependent on this flow of oil. Let me count the reasons:

1. The US and Saudi Arabia have done nothing but grumble after uncovering an Iranian plot to blow up the Saudi ambassador in Washington.
2. The world has, of yet, taken no effective action against Iran's growing nuclear program.
3. The US once allowed Iran to hold its embassy personnel hostage for longer than a year.
4. Bands of ragtag Somali pirates continue hijacking ships – including oil tankers – despite patrols by NATO and other navies.
5. We continue to allow the payment of ransom for hijacked ships instead of recapturing them by force.
6. Some NATO countries (but not the US) play catch and release with pirates.
7. Despite some US progress towards independence from Middle East oil, the President can't bring himself to approve the XL Pipeline, accelerate drilling offshore in the lower 48 or in Alaska, or accelerate safe recovery of our vast natural gas resources (subsidies aren't needed, just intelligent regulation).
8. "Mr. Obama, his aides acknowledge, has no interest in seeing energy prices rise significantly at a moment of national economic weakness or as he intensifies his bid for re-election — a vulnerability the Iranians fully understand." –from the NYT article.

The article also says "In recent interviews, Obama administration officials have said that the United States has developed a plan to keep the strait open in the event of a crisis." I hope that's true. Presumably US and NATO warships will accompany tankers through the Straits. Hopefully Iran would back off in that case. But what if they miscalculate? We can't afford to be bluffing. The Straits is narrow and would be effectively blocked for a while by any wreckage. It can be reached by missiles fired from deep in Iran. The West would win eventually but better to avoid the dangers of Iranian miscalculation.

Here are a few suggestions for avoiding miscalculation:

1. Have NATO's navies finish their efforts against Somali pirates in order to concentrate on patrol in and near the Straits. Finishing means ending piracy by forbidding payment of further ransom and freeing the ships now being held hostage by force immediately. Until the pirates realize they have no options and that it is too dangerous for them to harm hostages, freeing these ships will probably involve some small loss of life; I don't say that lightly. But there will be more lives lost if hostage-taking continues to be rewarded. And many more lives lost if we have to go to war with Iran to keep the Straits open because Iranians confuse our forbearance towards pirates with weakness.
2. Put NATO ships on conspicuous station in or near the Straits; don't allow Iranian ships to come near them; and put Iran on notice that missile tests during this crisis they've provoked are too dangerous to allow and so all known launch sites will be destroyed in the event of any launch.
3. Take the steps approved by the Senate in a 100-0 vote to cut off companies which do business with Iran's Central Bank (this makes it very hard for Iran to sell its oil).
4. Approve the XL Pipeline and other projects which make North American oil and natural gas readily available.
5. Republican presidential contenders, who have generally taken a hard line on Iran, should announce that they will NOT politically attack the President when oil prices rise as a result of these tensions so long as we are taking speedy steps towards energy independence.

If we convince Iran that it can't threaten us with blockade, they may even realize they have to back off on nuclear weapons. On the other hand, if they think their threats deterred action against their oil exports, imagine what their threats'll be once they have a couple of nuclear bombs.

The Inconvenient Recovery

The US economy is improving. This improvement is inconvenient for both major political parties so it isn't getting much attention or credit. The improvement is slow – but might be faster if it got the recognition it deserves since improvement depends on consumer and business confidence.

The facts are that unemployment is coming down at an accelerating rate despite continued reduction in the government sector. The significant four week average for new unemployment claims is down. Consumer sales are up over last year. Inventories are still lean. Personal balance sheets are much more balanced than they were before the recession. Housing prices may finally have stabilized with the needle pointing right at affordable – especially with prevailing very low interest rates. The balance sheets of large corporations are stuffed with investable cash. The price of oil – always important to the American economy - has slid way off its highs and may have further to fall. Meanwhile abundant American natural gas is keeping a lid on electricity prices and creating jobs in both extractive and energy-dependent manufacturing businesses; some jobs are even coming back from China. Farmers are making scads of money. The rest of the world has apparently decided that the US is the best of a bad lot and is parking its money here, keeping our interest rates down and potentially making more capital available to invest.

So how come this isn't good news?

Well, if you're a partisan Republican it means that the Obama Administration hasn't completely wrecked the economy and he might even be able to run for reelection in an upturn – perish the thought; he'll certainly take credit for it if it happens. Moreover, how can you say you won't close tax loopholes for the very rich in this "struggling economy" if the economy isn't struggling?

If you're a partisan Democrat how do you argue that even more stimulus and government spending is needed when the economy inconveniently began to recover once Stimulus had run its course? How do you argue against tighter restrictions on collecting unemployment insurance if jobs are again available (I know that they're not readily available for everyone at every skill level everywhere)? How do you argue that we can't cut public sector jobs when the private sector is doing such a good job of taking up the job-creation slack?

If you're at the Federal Reserve, what is your excuse for continuing to manufacture profits for too-big-to-fail banks when a recovery is happening despite the facts that these banks are also too big to lend to small businesses and that large business have plenty of liquidity of their own.

It must be that I imbibed too much holiday cheer. How dare there be a recovery now?

Related posts:

"Too Big to Fail" Assures Bigness – and Failure

The Inconvenient Good News in the Employment Report

Jobs Coming Back from China