Tag: Private Sector

The Private Sector & Climate Change: Holding Corporations Accountable

Posted on July 16, 2018

The future or our planet depends on us taking action against climate change. The United States of America needs to take a closer look at the economic policies that encourage and allow companies to contribute to climate change and global warming.

There are a number of actions that our country could be taking to reduce our carbon footprint and lessen the progress of climate change, however, there are significant barriers in place that hinder these efforts.

Many of these barriers stem from corporate action. Companies that benefit from the continued use of energy sources that contribute to climate change have a vested interest in hindering the progress of solutions that will move us away from the status quo. Below are a few examples of how corporations have done this:

In the six years prior to 2017, rooftop solar panel installations grew by as much as 900% in the United States. Each year, more and more Americans were taking steps to install solar panels on their roofs, lessen their carbon footprint, and contribute excess energy back into the grid to further diminish the carbon footprint of others who could not afford solar panels. The New York Times reports that in 2017, growth in solar panel installations came “to a shuttering stop.” This was largely because of “a concerted and well-funded lobbying campaign by traditional utilities, which have been working in state capitals across the country to reverse incentives for homeowners to install solar panels.”

In addition, Instead of cutting residents a break for helping solve the climate crisis, the utility companies —led by the American Legislative Exchange Council (ALEC) and the Edison Electric Institute (whose lobbying efforts ratepayers actually underwrite)—are lobbying for the end of “net-metering” laws that let customers sell excess power they generate back to the grid.

Moreover, lobbying is frequently combined with political contributions to, and coordination with politicians. Arizona, whose capital lies in the “Valley of the Sun,” has incredible potential for solar power. However, according to Tuscon.com last year in May, “A federal grand jury has indicted a former state utility regulator and his wife for taking bribes.” The former regulator took those bribes for approving a rate hike for the areas utility company. Despite this indictment, coordination between politicians and utilities in Arizona has not stopped. For instance, environmental groups in Arizona have proposed a constitutional amendment to the Arizona ballot that would require that 50% of Arizona’s energy needs be met with renewable energy sources by 2030. Inside Climate News reports that “a senate committee passed a separate bill—which an APS spokeswoman said the utility had proposed—that would add a second ballot initiative with a nearly identical title” The most recent bill has similar language to the one proposed by environmentalists but includes a “safety valve” that would not allow full implementation of the bill. This approach is designed to confuse and halt progress toward renewable energy.

Arizona is not the only state that has experienced corporate lobbying against climate change solutions, nor is net metering the only issue where corporations have succeeded in moving forward with policies and activities that demonstratively harm the environment. For instance, fracking continues despite numerous studies that show significant damage to the environment and public health.

There are a number of ways that we can hold corporations accountable and stop actions that negatively affect the environment.

Get Money Out of Politics

Too frequently, our politicians are able to be swayed by campaign contributions that lead to decisions that harm the American people, and put the future of our planet in jeopardy. It is all too easy to find the enormous contributions made by companies that contribute to our carbon footprint:

According to Open Secrets: Oil and gas companies have so far contributed over $14 million to all candidates in the 2018 election cycle, electric utilities have contributed over $11 million, natural gas pipeline companies have contributed almost $2 million, and coal mining companies have contributed over $800 thousand.

If we get money out of politics legislators might be more likely to vote for policies and ideas that benefit their constituents, the environment, and the world.

Taxes That Reflect The True Cost of Pollution

A “Carbon Tax” is traditionally considered an “economist’s solution” to fighting climate change. In short, the Carbon Tax Center describes that “A carbon tax is a fee imposed on the burning of carbon-based fuels.” There are two strong arguments for why a carbon tax is both necessary and would work.

It holds carbon producers and consumers accountable for the damage that their actions have on the environment. To put that damage in perspective, National Geographic reports that “Extreme weather, made worse by climate change, along with the health impacts of burning fossil fuels, has cost the U.S. economy at least $240 billion a year over the past ten years.” Economics Help describes that “The idea of a tax is to make consumers and producers pay the full social cost of producing pollution.” Money raised by the government from this tax could be used to finance initiatives that will further reduce carbon emissions (e.g. subsidizing renewable energy or carbon capture.)
It creates incentives to for both consumers and producers to act in ways that will reduce their carbon footprint. Producers may invest in ideas that will reduce their carbon emissions to avoid paying as much in taxes. Price increases on items or utilities that include this carbon tax may result in consumers looking to alternative energy sources, or consuming less.

Economics Help describes that “the social marginal cost (SMC) of producing the good is greater than the private marginal cost (PMC) The difference is the external cost of the pollution. The tax shifts the supply curve to S2 and therefore, consumers are forced to pay the full social marginal cost. This reduces the quantity consumed to Q2, which is the socially efficient outcome (because the SMC=SMB)” Therefore, the tax adjusts the price of good to take into account the harm that it is doing.

Carbon Taxes are also proven to have worked elsewhere in the world. British Columbia imposed a carbon tax of 10 Canadian dollars per ton of carbon dioxide in 2008 and then raised that tax to 30 Canadian dollars per ton by 2012. The New York Times reports that the tax “reduced emissions by 5 to 15 percent with ‘negligible effects on aggregate economic performance… It encouraged people to drive somewhat less and be more careful about heating and cooling their homes. Businesses invested in energy efficiency measures and switched to less polluting fuels.”

Get the Incentives Right

Each year, the U.S. government subsidizes a range of economic activities. It is important that those subsidies encourage economic activity that will help reduce our carbon footprint and climate change.

Unfortunately, many subsidies support industries that are contributing to climate change. Researchers at Oil Change International recently found that “Government giveaways in the form of permanent tax breaks to the fossil fuel industry – one of which is over a century old – are seven times larger than those to the renewable energy sector.” These fossil fuel subsidies, including both federal subsidies and state subsidies, total to $20 billion annually.

That said, the renewable energy industry has also received a number of subsidies through the years (varying though different administrations and not to the level of those for the fossil fuel industry). These subsidies have contributed to substantial growth in the renewable energy sector. Eighteen percent of the United States energy needs are now provided by renewable energy. The Environmental and Energy Study Institute states that the U.S. has reduced its emissions “by about 760 million metric tons since 2005.” The increase in renewable energy usage has contributed significantly to that reduction.

These subsidies for renewable energy There are also other benefits to renewable energy subsidies. Quartz Media reported that “the fossil fuels not burnt because of wind and solar energy helped avoid between 3,000 and 12,700 premature deaths in the US between 2007 and 2015” and that “the US saved between $35 billion and $220 billion in that period because of avoided deaths, fewer sick days, and climate-change mitigation.”

Incentives need to reflect economic activities that will help the environment, Americans, and the world, not harm them.

Get the Penalties Right

While incentives are important for companies that are working to help the environment, it is equally important to include penalties for companies that are harming the environment.

Most Americans are familiar with the largest oil spills in the United States like the BP oil spill, also called the Deepwater Horizon oil spill, in 2010. However, large spills that get covered in the news are only a portion of the problem. According to the latest data from the Bureau of Ocean Energy Management, excluding the BP oil spill, 287,416 barrels of oil (or 12 million gallons of oil) were spilled in the U.S. between 1964 and 2015. That equals over two hundred thousand gallons of oil a year. The BP oil spill added another 4.9 million barrels of oil spilled, totaling over two hundred million gallons of oil. (There are 42 gallons of oil in a barrel.)

A number of news organizations reported in 2015 that BP would pay more than $20 billion in settlement claims as punishment for the Deepwater Horizon oil spill. The Justice Department called the settlement historic and quoted Attorney General Loretta Lynch in saying “Building on prior actions against BP and its subsidiaries by the Department of Justice, this historic resolution is a strong and fitting response to the worst environmental disaster in American history…BP is receiving the punishment it deserves, while also providing critical compensation for the injuries it caused to the environment and the economy of the Gulf region.”

However, when you dig deeper into that settlement, that “historic” amount of money isn’t so large when you take into account U.S. tax laws that allow corporations to write off natural resource damage payments, restoration, and reimbursement of government costs. Forbes reports that ultimately “BP should be able to deduct the vast majority, a whopping $15.3 billion, on its U.S. tax return. That means American taxpayers are contributing quite a lot to this settlement, whether they know it or not.”

In other cases, companies are given penalties that can be considered negligible when their annual earnings are taken into account. The Real News reports that “In the last 12 years, Marathon Petroleum Corporation, who manage one of the largest petroleum pipeline networks in the U.S., has had 61 incidents… including recent spill of 42,000 gallons of diesel. In the same week they had to pay A fine of three hundred thousand dollars for another spill last year.” In reference to this three hundred thousand dollar fine, Sierra Club’s Jodi Perras pointed out that Marathon is “a 13.8 billion dollar company…. they will expect to have a 330 million dollar profit this year. And so they are paying $335,000 for that spill in 2016. That’s pennies to a company like that.” Ultimately, Marathon Petroleum Corporation is being fined 0.1% of their annual profits.

Penalties should be large enough to encourage constructive steps towards reducing future accidents and harm to the environment, and when they are large enough, the burden to pay them should be placed on the company, not taxpayers.

What Happens When The Government Tightens Its Belt? (Part II)

Posted on June 3, 2011

In a recent post (What Happens When the Government Tightens Its Belt?), I used a simple teeter-totter diagram to show how the government’s financial balance is related to the private sector’s financial balance in a closed economy. With only two sectors – government and non-government – I showed that a government deficit necessarily implies a surplus in the private sector.

As expected, this accounting truism ruffled the feathers of a flock of readers who have been programmed to launch into an anti-government tirade at the mere mention of the public sector and to regard the dangers of deficit spending as an unimpeachable fact. And while you’re certainly entitled to your own political views, you are not, as Senator Moynihan famously said, entitled to your own facts.

Other, less impenetrable minds, agreed that the private sector’s financial position must improve as the government’s deficit increases in a closed economy, but they argued that I had not demonstrated anything meaningful because I ignored the financial flows that occur in an open economy.

I still hope to convince both groups that they are acting against their own economic interests when they support policies to balance the budget or reduce the deficit, either by raising taxes or cutting government expenditures. So let’s continue the exercise and, as promised, extend the argument to the more realistic open-economy in which we actually live.

In an open economy, income flows into and out of the domestic economy as residents and foreigners buy goods and services (exports minus imports), make and receive payments such as interest and dividends (factor income) and make net transfer payments (such as foreign aid). Each country keeps track of these payments using a balance of payments (BOP) account, which summarizes the international monetary transactions that take place between the home country and the rest of the world. The BOP has two primary components – the current account and the capital account – and we can use either one to show whether, on balance, money is flowing into or out of a country.

When we incorporate these international flows, we transform the closed-economy accounting identity I used in my previous post:

[1] Domestic Private Surplus = Government Deficit

into the open-economy accounting identity shown below:

[2] Domestic Private = Government + Current Account

Surplus Deficit Balance

or, equivalently,

[3] Domestic Private = Government + Capital Account

Surplus Surplus Balance

When the current account balance is positive, it means that we in the private sector (households and domestic firms) are accumulating net financial claims on foreigners. When it is negative, they are accumulating net financial claims on us. Thus, a positive current account implies a negative capital account and vice versa.

To see this in the context of the teeter-totter model, let’s initially hold the public sector’s balance constant at zero (i.e. let’s assume the government is balancing its budget so that G = T). With the government budget in balance, Uncle Sam is a “weightless” entity on the teeter-totter, so that the private sector’s financial position will simply reflect the “weight” of the capital account. Suppose, first, that the current account is in surplus (i.e. the capital account shows an equivalent deficit):

The image above depicts the benefit (to the private sector) of a current account surplus (a.k.a a capital account deficit), and it is the outcome that many of you accused me of sidestepping in my previous post. Of course, the U.S. does not have a current account surplus, so let’s address that point before moving on. (And lest anyone begin to hyperventilate, I’ll also address the fact that G ≠ T). First, the current account.

Sticking with (G = T) for the moment, we can show how a current account deficit impacts the private sector’s financial position. As the capital account moves from deficit (diagram above) into surplus (diagram below), we see that the private sector’s financial position moves from surplus into deficit.

But does this all of this hold true in the real world, or is it some kind of economic chicanery? Let’s check the facts.

Equations [2] and [3] above are not based on economic theory. They are accounting identities that always “add up” in the real world. So let’s firm up the discussion about the implications of government “belt tightening” by running through some examples using the real world data found in the table below (Hat tip to Scott Fullwilir for sharing the file. All of the data comes from the National Income and Product Accounts (NIPA) and the Flow of Funds.)

Let’s begin with the data from 1998 (Q3), when the public sector deficit was just 0.01% of GDP and the current account deficit was 2.56% of GDP. Plugging these numbers into equation [2] above, the identity tells us (and the data in the table confirm) that the private sector’s balance must have been:

[2] Domestic Private Sector’s Balance = 0.01% + (-2.56% )= -2.55%

Here, we can see that the private sector’s financial position was deteriorating because it was making large (net) payments to foreigners. Because this loss of financial resources was not offset by the public sector, the private sector’s financial position deteriorated.

To see how a bigger government deficit would have improved the private sector’s financial position, let’s look at the data from 1988 (Q1). As a percent of GDP, the current account balance was 2.59%, nearly the same as before, while the government’s deficit came in at a much higher 4.2% of GDP. We can use Equation [2] to see effect of the larger budget deficit:

[2] Domestic Private Sector’s Balance = 4.2% + (-2.59%) = 1.61%

In this period, the private sector ends up with a surplus because the government’s deficit was large enough to more than offset the negative effect of the current account deficit.

Again, this is simply a property of the sectoral balance sheet identities. Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact.

So let’s go back to President Obama’s comment and the reason I wrote this blog in the first place. The President said:

“Small businesses and families are tightening their belts. Their government should, too.”

Wrong! When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts.

*An aside: I am aware that I have said nothing about the usefulness of the spending projects, the waste and inefficiency that exists with many government programs, cronyism, inequality, etc., etc. These are legitimate and important questions, but they are not the focus of this analysis. I wrote this series of blogs to try to get people to understand the interplay between the private, public and foreign sectors’ balance sheets.

What Happens When The Government Tightens Its Belt?

Posted on May 27, 2011

Imagine two people sitting on opposite ends of a 15-foot teeter-totter. The laws of physics dictate that the seesaw will balance if the product of the first mass (w1) and its distance (d1) from the fulcrum (i.e. the balancing point) is equal to the product of the other mass (w2) and its distance (d2) from the fulcrum.

Thus, the physicist can show that the teeter-totter will be in balance when the fulcrum is placed 6 feet from the end holding a 150lb person and 9 feet from the end holding a 100lb person. Moreover, the laws of physics ensure that an imbalance will arise if the mass or the relative position of one of the people is changed.

The laws of accounting allow us to demonstrate that similarly powerful concepts apply to the science of economics. Beginning with the simple identity for GDP in a closed economy, we have:

[1] Y = C + I + G, where:

Y = GDP = National Income
C = Aggregate Consumption Expenditure
I = Aggregate Investment Expenditure
G = Aggregate Government Expenditure

For economists, this is as obvious as stating that a linear foot is the sum of 12 sequential inches. It simply recognizes that the total amount of money spent buying newly produced goods and services will yield an equivalent income to the sellers of these products. Thus, it demonstrates that expenditures are a source of income.

Once earned, income can be allocated in one of three ways. At the end of the day, all income (Y) will be spent (C), saved (S) or used in payment of taxes (T):

[2] Y = C + S + T

Since they are equivalent expressions for Y, we can set equation [1] equal to equation [2], giving us:

C + I + G = C + S + T

Or, after canceling (C) from both sides and moving terms around:

[3] (S – I) = (G – T)

Equation [3] shows that there is a direct relationship between what’s happening in the private sector (S – I) and what’s happening in the public sector (G – T). But it is not the one that Pete Peterson, Erskin Bowles, or President Obama would have you believe. And I want you to understand why they are wrong.

To understand the argument, imagine that you and Uncle Sam are sitting on opposite ends of a teeter-totter. You represent the private sector, and your financial status is given by (S – I). Your budget can be in balance (S = I), in deficit (S < I) or in surplus (S > I). When your financial status is positive (S > I), you are net saving. When your financial status is negative (S < I), you are net borrowing. Uncle Sam’s financial status is equal to (G – T), and, like yours, his budget may be balanced (G = T), in deficit (G > T) or in surplus (G < T). When you interact, only three outcomes are possible.

First, it is conceivable that (S = I) and (G = T) so that (S – I) = 0 and (G – T) = 0. When this condition holds, the teeter-totter will level off with each of you experiencing a balanced budget.

In the above scenario, the government is balancing its receipts (T) and expenditures (G), and you are balancing your savings and investment spending. There is no net gain/loss.

But suppose the government begins to spend more than it collects in taxes (i.e. G > T). How will Uncle Sam’s deficit affect your position on the teeter-totter? The answer is as straightforward as increasing the mass of the person on the right-hand side of the seesaw. As Uncle Sam’s financial position turns negative, your financial position turns positive.

This should make intuitive as well as mathematical sense, because when Uncle Sam runs a deficit, you receive more financial assets than you lose through taxation. Put simply, Uncle Sam’s deficit lifts you into a surplus position. Moreover, bigger deficits mean bigger surpluses for you.

Finally, let’s see what happens when Uncle Sam tightens his belt. Suppose, for example, that we were able to duplicate the much-coveted surpluses of 1999-2001. What would (and did!) happen to the private sector’s financial position?

Because the economy’s financial flows are a closed system – every payment must come from somewhere and end up somewhere – one sector’s surplus is always the other sector’s deficit. As the government “tightens” its belt, it “lightens” its load on the teeter-totter, shifting the relative burden onto you.

This is not rocket science, but it appears to befuddle scores of educated people, including President Obama, who said, “small businesses and families are tightening their belts. Their government should, too.” This kind of rhetoric may temporarily boost his approval ratings, but the policy itself will undermine the efforts of the very families and small businesses that are trying to improve their financial positions.