CAT | Econ
The WSJ is reporting that ethanol subsidies may end by August. If so, that is fantastic news.
Sen. Dianne Feinstein (D, Calif.) said in a statement that she had reached an agreement with Sens. Amy Klobuchar (D, Minn.) and John Thune (R, S.D.) under which a 45-cent-a-gallon tax credit for blending ethanol into gasoline would expire on July 31. A 54-cent-a-gallon tax on imported ethanol would also expire at the end of the month.
Some $1.33 billion in savings would be used to reduce the $14.29 trillion U.S. debt. A third of the savings—an estimated $668 million—would be used to extend tax credits, such as those for alternative-fueling infrastructure like ethanol pipelines that some producers hope to build.
Shortly after my last post, the Senate re-voted on whether to eliminate ethanol subsidies, and this time, the measure passed, 73-27. Apparently many Democrats who voted against the earlier measure on alleged procedural grounds voted for it in this instance. Though perhaps they voted for it because it was attached to the Economic Development and Revitalization Act, which the Washington Post posits is unlikely to obtain final senate approval.
On June 14, 2011, the Senate voted on a bill to repeal $6 billion in annual ethanol tax subsidies. These ethanol subsidies are wasteful and unhelpful to Americans, as I have discussed in prior posts. For example, ethanol production requires a large amount of land area, some evidence suggests that ethanol costs more energy to create than it yields, using corn for fuel increases the price of food, ethanol adversely impacts fuel economy and damages older vehicles, and even damages newer vehicles when in high enough concentration (see the prior three links for more information).
Despite the fact that politicians almost uniformly agree that the nation has a debt problem, and thus needs to either decrease spending, increase taxes, or both, the measure failed, because there were not enough votes to overcome a filibuster.
There are two sources of blame for this. First are the Democrats, who overwhelmingly voted against the bill. Supposedly one of the major reasons was because Harry Reid whipped against the bill due to alleged procedural problems. Though I think the more likely answer is so that Democrats can attempt to grandstand about creating or preserving jobs, no matter how worthless the jobs are. (For example, President Obama recently remarked on the Today Show, that “there were ‘structural issues with the economy. . . . You see it when you go to a bank you use the ATM, you don’t go to a bank teller.’”) It’s true that subsidizing ethanol will preserve jobs in the ethanol industry. Though of course if those jobs are worthless, then the government might as well be paying people to dig holes and then fill them up again. It is inexcusable that Democrats would overwhelmingly continue to support ethanol subsidies when the evidence simply shows that they do more harm than good.
But the more surprising source of blame are a select group of Republicans, led by Grover Norquist (not a senator), the founder of the Americans for Tax Reform. The ATR members have signed a pledge that they refuse to raise taxes for any reason except for economic growth. Norquist ordered the members of the ATR to withhold support for the anti-ethanol bill because eliminating the ethanol subsidy, to Norquist, would be tantamount to raising taxes.
I disagree with the rationale for Norquist’s order on two grounds. First, tax subsidies are spending just as much as they are tax increases. If the government agrees to give me $10 at tax time (spending) or agrees to give me a $10 decrease in tax liability at tax time (subsidy), the net effect is the same: the government transfers $10 of wealth to me. Likewise, the tax subsidies that the ethanol industry receives are a transfer of wealth from the government to private businesses. Whether they are characterized as a tax increase or spending cut is immaterial. The key question we should be asking is whether the costs of this tax subsidy exceed the benefits.
That leads me to the next objection I have to Norquist’s order, specifically, that Norquist unequivocally refuses to consider the merits of legislation that “raises taxes,” simply because he believes that it “raises taxes.” Norquist refuses to consider the costs and benefits of what he thinks are a tax increase, even if they benefits would vastly exceed the costs. This of course will impede bargaining with any politician who believes that solving the federal debt problem requires a combination of spending reduction and tax increases. And this problem is exacerbated by the fact that Norquist’s definition of “raise taxes,” is much far too broad.
Payday lenders have often been accused of taking advantage of consumers by charging exorbitant interest rates to low-income consumers who borrow from them. Some proposed legislation, including a referendum on the ballot in Montana, seeks to cap the annual interest rate payday lenders and certain other lenders may charge to 36%.
The argument for the legislation is that low-income consumers are taken advantage of by payday lenders, who charge interest rates as high as 400% per year. This argument is somewhat persuasive in that low-income consumers going to payday lenders often lack financial savvy and fail to understand the ramifications of taking on a high-interest loan and then failing to pay it back promptly.
The contrary argument, which I find more persuasive, is that a cap on payday loan rates will drive payday lenders out of business, and thus eliminate the payday loan option for consumers who truly need payday loans. John Koppisch at Forbes.com writes:
Payday and other non-bank consumer lenders take tremendous risks handing over money to customers they often don’t know and who have a very high default rate. These lenders don’t have the FDIC or TARP safety net enjoyed by banks. They need to look the borrower in the eye, size up their employment record, financial situation and sincerity, and then make an educated guess on whether they’ll see their $75 or $2,000 ever again.
In other words, payday lenders take massive risks on making loans to customers who walk into their office on short notice and with financial emergencies necessitating a payday loan. Risk is costly, which is why loans always cost more money when they are for riskier borrowers. Payday lenders don’t charge low interest rates because many of their borrowers default – far more than those who borrow through more traditional loans. To make up for the loss, payday lenders must charge higher interest rates. A payday lender may make a large profit on one payday loan, but much of that profit is likely to be used to offset the losses from defaulted loans.
If the amount of interest a payday lender can charge is capped, then to make the same amount of profits, a payday lender will have to hope that far fewer people default on their loans. That won’t happen. Instead, payday lenders’ profits will shrink, likely so far that they’ll be pushed out of business. Koppisch again:
Laws like this usually end up putting dozens of mom-and-pop outfits out of business and sending hundreds of employees to the unemployment line. Expecting the measure to pass, nationwide chains such as Advance America have already closed outlets in [Montana]. The interest rates allowed are just too low to cover the losses from deadbeats. In 2008, a 24% interest-rate cap took effect in Washington, D.C. and soon every licensed payday lender had disappeared from the market and such loans were no longer legally available anywhere in the city. A 36% cap began July 1 in Arizona, forcing many payday loan companies to shut down.
The idea of capping payday lending rates is heavy-handed, misguided legislation. A better proposal would be to require payday lenders to provide clear information on the costs of each payday loan to each consumer. If consumers are fully aware of the costs of a payday loan, there is no good argument why they should not be allowed to obtain one. Clear language in payday loan contracts, brochures, and interactions with consumers would be far more helpful than a cap on interest.
The green car industry is facing a pivotal time in the coming couple of years which will decide whether it is ready to become the main stream. The UK based company Moneysupermarket, has done extensive research into the green car industry in order to judge the likely outcome.
Green cars- Fuel is the key
Fuel prices are continuing to rise and this isn’t a trend which will reverse as oil reserves continue to dwindle. Scientists at the Oil Depletion Analysis Centre, which advises the major oil companies, projected that oil production would reach its peak in 2011 unless the lifestyles we currently lead change. What would follow would be a decline in availability and hence a boom in prices.
This may be the key moment for the green market to take control, with the major car manufacturers all increasing the range of environmental cars they offer. There are differing routes through which the car manufacturers are tackling this problem, and likelihood is that they won’t all survive. Honda and BMW appear to be advocating the hydrogen route, while Renault, Nissan and Mitsubishi are tackling the problem with the electric cars. Availability is the key problem for hydrogen, with their not being enough hydrogen filling stations available. Indeed, the number of registered hydrogen filling stations around the world is 100. To put this into perspective, there are 121,446 conventional filling stations presently available in the USA alone. As for electric, the practicality issue is still a problem. With the most practical electric car available on the market at present, the Nissan Leaf, having a range of just 100 miles before it needs a recharge.
However, a number of states are tackling the problem of a lack of hydrogen stations by making them more available by funding various schemes. As for electric cars, their range will obviously improve as technological advances are made. The electric cars of today are far more practical and powerful than the ones available just five years ago.
The price of fuel may also prompt people to make the switch to an environmental motor. Presently, to do the average annual mileage of 12,000 miles in a Ford Fiesta would cost $1710 per year. However, in a Nissan Leaf this cost would be reduced to an annual payment of $220, which amounts to a saving of almost $1,500. This difference is only going to increase as the price of fuel rises.
Additional costs and incentives
A Nissan Leaf is almost $13,000 more expensive than a Ford Fiesta. This is an extra expense which is hard to justify for most families. However, New York governor George Pataki is currently finalising his “energy reduction plan”, which will potentially save drivers of environmentally friendly vehicles $5,400 a year through tax breaks. Many other states are likely to follow New York’s lead as the importance of being green becomes ever clearer.
Your employer is also a consideration, with leading internet company Google, having started a programme where each employee will be offered $5,000 towards the purchase of a new environmentally friendly vehicle. This has recouped $10,400 of the price difference already. Then there comes insurance firms, many of whom will offer a discount to drivers of environmental motors. This is the case with Travelers Insurance, who offer a 10% discount to all environmental drivers, which can save a driver anywhere between $90 and $500 per year.
Will the green car industry succeed?
The above research has uncovered that there is the potential to recoup almost $11,000 of the price difference between the Leaf and the Fiesta. This leaves a $2,000 difference which will take just 15 months to recoup through fuel savings. Therefore, the cost benefit of owning an environmental motor is already there for some. However, as fuel prices rise, base environmental car prices drop and more states offer tax breaks to environmentally conscious motorists, the number of people making the move to an environmental vehicle will increase. The hardest point will be making the initial move, due to the need to adapt your driving style and the way you fill up your car. However, once this is done its likely that you won’t look back and manufacturers without a viable environmentally friendly model should begin to worry. The next two years should be the big turning point.