George Steinbrenner passed away today. As a lifelong Yankee fan, I always had mixed feelings about the Boss. Way too mercurial, but it's hard to argue with his results.
The Boss, a businessman first and foremost, would surely appreciate the business sense in the timing of his death. Because of the Bush tax cuts, death taxes for 2010 are zero. They were meant to stay that way, but in order to get the tax bill passed at all, Bush had to compromise by including sunset provisions. So, get this, next year when they expire the rate goes back to 55%. Steinbrenner is worth $1.3 billion. Thus the timing of his death is worth $700 million to his heirs. Had he passed away next year, the tax bill would have been enough to force his kids to sell the Yankees.
Here's a prediction: towards the end of the year, I believe there will be a lot of "soft" suicides by people with substantial assets. If they are sick anyway they may simply allow the process to accelerate. There may even be a spike in more deliberate suicides. Suicide cancels the obligations for a life insurer, but it will certainly beat the tax man.
This may seem like a very cold-hearted prediction, but what's really cold-hearted, and perverse, is the existence of a tax system so penal and complex that people may literally make life and death decisions based on its rules. It is a system beyond simple repair. The entire edifice must be razed and something simple and fair must take its place.
Here are the current odds of various events happening according to Intrade prediction markets (before year end):
Republicans take over House 56%
Republicans take over Senate 14
Sarah Palin runs for President 61
Sarah Palin gets nominated 18
Harry Reid wins reelection 53
Cap & Trade becomes law 17
Obama reelected 60
Bin Laden Captured 5
Someone drops the euro 10
And you can put a stake in real money movie futures becoming a reality. Cantor Fitzgerald has laid off the staff members who were going to be involved after lawmakers, led by Blanch Lincoln, bowed to film industry pressure.
The New York Post (my favorite paper) pointed out that LeBron might pass on the Knicks for no other reason than New York tax rates are much higher than the other cities/states he's considering. They estimate he will pay over $12 million in New York City and state taxes over the life of his contract.
(Note: see the linked piece above to read about Total Real Debt per Capita.)
Hmm. Looks like no contest. Since they will all pay him roughly the same amount (due to salary caps), these tax differentials will be highly meaningful.
Let's see what the market at Intrade is saying about where LeBron is heading...
Probability
New York 7%
New Jersey 7
Cleveland 24
Chicago 3
Miami 63
This culinary item-to-be has come to light because someone named Travis Wright raised $145 million to invest in commercial real estate but then decided - without telling his investors - that he was plowing his money into the Candwich instead. While it remains to be seen which is the better investment, the SEC has taken issue with his approach.
In my previous post, you can see that if one adds up the major categories of taxation, the U.S. is among the highest taxed countries in the world, although it is not the worst. BUT, I did not include inheritance taxes or property taxes. I believe once these are added, not to mention all the nuisance taxes we pay every day, we likely have the distinction of being the highest taxed nation in the world.
I was travelling with my family by ship in the Baltics this month, a trip I can highly recommend. All the cities are quite beautiful, with St. Petersberg being a real stand-out (as long as you stuck to the pre-Soviet neighborhoods).
At almost every stop some fellow tourist would ask the local tour guide about tax rates. In Finland, our tour guide announced that the top marginal rate was 70%. She said this – devoid of irony - right after telling us about how the Finns kept the Soviets at bay for several generations. Top marginal rate in Russia these days? 13%. Not sure who won and who lost.
(Note: I have since learned that Finnish taxes aren’t quite that high, but they’re still high.)
This got me wondering about tax rates around the world. In March, I wrote a piece on net debt levels around the world, which gives us an idea for which direction taxes could head in different countries (see: http://thenakeddollar.blogspot.com/2010/03/currencies-watch-out-for-race-to-bottom.html). But what about right now? How bad is it out there?
I decided to look at tax rates in countries big and small. Some of the results you may find surprising. My methodology is simple: I take the highest marginal rate for personal income taxes, corporate taxes, value-added taxes (or sales taxes), and capital gains taxes, and I add them all together to get a tax “score.” Obviously, this is simplifying something that can be highly complex. The U.S. tax code, for instance, weighs in around 20,000 pages. Further, different taxes affect people differently. But I think as a rough pass, it is instructive.
The envelope please…
Obviously, the lower the score, the better. A few observations:
·The EU countries, which have desperate amounts of debt, are already highly taxed. Raising taxes further is unlikely to raise more revenue. It will only succeed in raising non-compliance, which is already very high and not a social taboo.
·Switzerland, though landlocked, is quite literally an island, economically speaking. How glad are they they’re not in the EU?
·Asia and Eastern Europe, generally, score quite well.
·Hong Kong does not surprise me. I used to live there, and I did my taxes once a year on a postcard. Despite the low rates, the government would run surpluses most years (and was somewhat embarrassed about it).
·Singapore is sure doing something right. They have net assets of 188% of GDP (you read that right – net assets – their sovereign wealth exceeds their debt), so they will actually have room to reduce the world’s second lowest tax burden even further.
·The U.S. is right up there among the more highly taxed nations of the world. (Note: I added an “average” state income tax to the federal, something I also did for Canada where they have high provincial taxes. I also added an average sales tax.) In fact, the U.S.’s score probably understates things, because there are more miscellaneous taxes here than can be counted, something not captured by these numbers. Ever look at your cable or hotel bills? Taxes and more taxes. I also didn't include inheritance taxes or property taxes, both killers in the U.S.
I wrote another piece a while back called Are We Socialist Yet?
(http://thenakeddollar.blogspot.com/2009_08_01_archive.html) Certainly, high marginal tax rates are a key tenet of socialism. I concluded that America had already been for some time. Obama is not leading us on a path to socialism, we got there a while ago. Republicans, save Reagan, played an active role in this. Obama is merely hastening the slide.
I got very excited a couple of weeks ago when I heard that Cantor Fitzgerald had received regulatory approval from the CFTC to go ahead with their plans to create movie futures (which would trade on expected box office receipts). Now, it appears they are dropping their plans because the new financial overhaul bill will apparently scotch the idea for good. The film lobby – which hated the idea - got to Washington lawmakers. By “got to,” I mean bribed with campaign donations.
As you know, I am an avowed prediction markets enthusiast, so I find this highly disappointing. One also wonders what this is doing in a bill that is supposed to correct what’s wrong in the financial industry. After all, movie futures don’t exist, so why is there a need to “fix” them. Welcome to Washington, where every leviathan-like bill is an opportunity to take care of one’s friends.
Just took the family on a cruise in Northern Europe and the Baltics. It was all quite beautiful. However the coastlines of Denmark and Germany are quite literally littered with windmills. Personally, I don't mind the aesthetic, but people seem to have different takes on this.
Denmark get 20% of its energy from wind, but they also have the highest utility rates in Europe.
Helsinki was a particularly pretty city, and it was interesting to learn how the Finns kept the Soviets and communism at bay for decades. The Soviets basically tried to annex Finland during World War II when they thought no one would notice, but their efforts failed (other than winning a bit of land in the north). But for fans of irony, I offer you this: Finland's top marginal tax rate is 70% while Russia's is 13%.
The case I laid out in the previous piece isn't ideological, even though some of you seem to be taking it that way. It's simply fact-based reasoning. The math of renewable energy is highly problematic.
There are investment implications to this that everyone should consider. Consider that the U.S., Europe, and Japan are functionally broke (see Currencies - the Race to the Bottom). Where do you think they will start cutting first? Yes, they'll have to start cutting entitlements, but that always leads to nasty street demonstrations (see: Greece). When politicians look at the cold hard facts, I think all the subsidies and tax breaks for renewables will end up on the chopping block. You may not like this fact, but you would probably like many of the other prospective cuts even less.
I had a meeting with a German bank about six months ago, and they said they had financing available only for Germany related projects...except for alternative energy, for which they had a huge financing appetite. This was a quasi-state bank, so the mandate was coming from politicians. Of such stuff bubbles are made.
Some European countries such as Spain, which went solar-happy, have already started to cut back. This counter trend will likely prick the investment bubble in alternative energy, which will once again have to make it on its own, non-subsidized, merits. I would be very leery of these investments right now.
In the salons of the coastal elites, it is a given wisdom that renewable energy sources are “the answer” - the answer to perceived climate change, the answer to our foreign oil dependency, the answer to how to feel good about yourself…the Answer.
In Washington, politicians can’t throw tax breaks at people and businesses fast enough, prodding them to install all manner of solar, wind, and geothermal devices.
Indeed, these energy sources are seductive. The wind blows, it’s free. Harnessing it, while not free, is certainly clean. Good stuff. The sun shines on us, why not use it? And so on.
The problem isn’t that these energy sources are bad, per se. They’re not. You’re probably thinking that I’m now going to tell you that the problem is economics. Yes, there’s truth to that argument; most renewables aren’t economic without subsidies, which is to say they aren’t economic. But some of them are close, and getting closer, so let’s put this aside. Let’s assume they are all inherently economic and can compete on an equal footing with traditional energy sources.
The problem is capacity. Renewables will not – cannot – ever be more than a fairly small fraction of our energy consumption because of fairly mundane reasons like land capacity. For a great perspective on this, I highly recommend William Tucker’s book, Terrestrial Energy.
Let’s go through these one by one.
Wind Power
O-klahoma, where the wind comes sweepin’ down the plain…
Yes, it does, and T. Boone Pickens wants to build lots of wind turbines there to take advantage of America’s “wind corridor.” He sure sounds compelling in those ads, and wind power is certainly growing. Right now, there is about 30,000 MW of wind capacity in the U.S., up considerably from a few years ago. This is the equivalent of about 40 power plants. That’s nice, but it’s only about 1% of our electrical needs (and, obviously, a much lower percentage of our overall power needs).
Actually, 1% overstates things quite a bit. The real contribution of wind is much lower, because wind mills generate electricity only about 30% of the time. Wind just doesn’t sweep down the plain all the time. It also doesn’t always sweep when you want it to. For instance, peak electrical demand is in the summer, but this is when the wind doesn’t blow (much).
Why not store the energy then? You can’t, because the technology isn't there. This is one of the most important things to understand about our electrical grid; electricity must be produced when it is being consumed, and it is a balancing act. Produce too much, and you get electrical surges. Too little, and you get brown outs.
You can see why wind is highly inconvenient. You simply can’t control when you get it, and as a result, it would be impossible to run an entire grid on wind. In Denmark, they get about 20% of their power from wind, but they couldn’t do it without being heavily reliant on coal as the “stabilizer.” (The Danes have the highest electrical rates in Europe, but I know, I promised to assume economics away…)
With conventional energy sources such as coal, oil, and nuclear, the output can be controlled to match demand. I can hear what you’re thinking: so what’s wrong with simply using wind to augment the power supply? Nothing, except that it will never amount to much. This is where some very simple realities get in the way.
Wind turbines are becoming gigantic. The one above is the largest in the world and produces 6 MW of power (when the wind’s blowing). It would take 125 of these to approximate just one typical power plant. So, the question for all of us is, where you going to put these babies? They completely alter the visual environment, and they make noise. Oh, and they kill birds.
Ted Kennedy and Robert Kennedy Jr., committed environmentalists both, bitterly fought a plan to put a wind farm of the shore of Cape Cod. Their problem? They’d have to look at them.
Do you know where wind blows the hardest? Across the tops of mountain ranges. Are you prepared to look at turbines like these along the tops of mountains?
You can see the problem, and yet even if people came to terms with the aesthetics, you could put turbines everywhere and it still wouldn’t add up to much power. It would take over six hundred thousand turbines like the one above to supplant our current power plants, assuming the wind blew constantly. Since it doesn't, it would take over two million. Never going to happen.
Solar
Solar may be closer to the heart of the environmental movement than all others, but it, too, will never amount to a hill of beans. The story is similar to wind: solar just can’t do any heavy lifting.
At the equator on a sunny day, 950 watts of power shines down on a square meter. That’s about 9 light bulbs’ worth. There is no way, short of violating the laws of physics, to enhance that number. In the U.S., the number is more like 400 watts over the course of a sunny day. We’re down to 4 light bulbs. However, we cannot convert 100% of this energy into electricity. Current technology captures about 15%. Half a light bulb, more or less.
If we covered every roof top of every home in America with solar panels we could likely power the lighting needs of our homes, but only during the day when the sun is shining. During the night, when we actually need lights, panels are useless.
-->As with wind, electrical power can't be stored at large scale.
The basic problem here is that solar power isn’t very, well, powerful. Sure, you can construct huge arrays like this…
…but they don’t accomplish very much. For instance, let’s say you went really big, and you created a solar array somewhere in the U.S. the size of five hundred football fields (roughly a square mile). How much power would you get? The answer is roughly 150 MW, and only during the day when the sun is out. A typical power plant produces about 750 MW. So supplanting one power plant would require five square miles of panels. This is not compelling.
Supplanting our entire electrical supply with solar would require turning the entire state of South Carolina into one large solar panel. Or...maybe we should stick them out in the desert. Seems logical. Senator Feinstein has proposed paneling over 500,000 acres of the Mojave Desert. But again, we run into mundane practical problems, even before considering things like the environmental impact of covering that much land. When solar panels collect dust and grime, they lose much of their effectiveness, so they must be cleaned frequently. Where, exactly, are we going to get the water needed for cleaning in the middle of the desert? And who's going to be out there wiping down 500,000 acres of panels?
Furthermore, the more distant a source of electricity is from where it's used, the more of it you lose during transmission, as much as 50% over 115 miles. Not a lot of folks living near the Mojave. Feinstein is nuts.
Like wind, solar can be a marginally useful way to augment our power needs, but it will never be a significant contributor.
Hydro
Hydro power is really another form of capturing solar power. The sun evaporates water and redeposits it in the form of rain. Some of this rain is at higher altitudes and flows in rivers to lower altitudes. Dam a river, let the water flow through turbines, and you have hydro power.
The Hoover Dam
Hydro was once a major power source in the U.S., but it’s now down to less than 3%. It’s clean, yes, but the problem is that most of the good sites have already been used, and it is unlikely that politics will allow for any new ones. Groups like the Sierra Club want to remove ones we already have, because they say spawning patterns for fish are interfered with.
There’s also the matter of space. The Hoover Dam created Lake Mead, which is 247 square miles. Can anyone imagine that such a project could happen today? Correct answer: no. Tolerance for any significant new dam project is probably around zero. Hydro power will only decline as a percentage of our electrical needs.
Ethanol
Whose bright idea was it (Jimmy Carter) to take one third of our nation’s corn crop to create fuel? I’m not pointing fingers (Jimmy Carter), but this was a bad, bad idea. For one, it has driven food prices higher since the price of corn flows through to all kinds of other foods (think things like fructose and cow feed). Higher food prices have actually led to riots in the third world (see: Mexican Tortilla Riots).
But, that aside, food just doesn’t store much energy, so you need a lot of it to get any results. Right now, the one third of our corn crop we are allocating to ethanol offsets less than 3% of our oil consumption. Tucker estimates that if you allocated every acre in the United States to ethanol production – assuming it was all arable – you’d offset about one-sixth of our oil needs.
Thank you for playing. Next.
Biomass
There's a big popular trend towards generating electricity (and home heating) by burning wood pellets. This is another innocuous idea, seemingly. Cut a tree, and another grows in its place. Environmentalists like burning trees because the released carbon is recaptured by the new trees that grow where the old ones were cut.
The problem, though, is the same as with corn: wood just doesn't store that much energy relative to its mass. To put it into perspective, one would have to cut and burn 56 million trees per year to match the output of one typical coal-fired plant. This is about 140,000 acres. If we replaced our entire power plant system with biomass, we would need to cut roughly 750 million acres of trees per year, or approximately one third of the land mass of the United States.
Once again, the simple math of it gets in the way of the best intentions.
Geothermal
Geothermal is mostly limited to places where magma comes close to the earth’s surface. In the U.S., this means California and Hawaii. California gets about 5% of its electricity from geothermal, which is great, but unless someone figures out how to tap much deeper magma sources, this is also a highly limited source of power.
-->Oh, and it smells really bad.
_____________________
Sorry, I know all this is a big buzz kill for many of you. Believing in renewables is so comforting. It's also fool's gold.
Right now, the U.S. is getting about 6% of its overall energy needs from renewables. Given all the practical constraints I've outlined, getting this to even 10% would seem remarkable, which leaves us with...conventional energy sources, specifically oil, gas, coal, and nuclear. They will continue to do the heavy lifting, and no amount of fairy dust will change that.
Not coincidentally, all four of these energy sources are continuously under fire from the enormously powerful environmental lobby. But frankly, until the Sierra Club, Earth First, and others come up with some solutions of their own, rather than just things they oppose, they have no credibility, at least not with me.
A large part of the answer, it would seem, would be to scale up our nuclear capacity. It's great stuff, nuclear. A few grams of matter holds as much energy as hundreds of miles of forests, sunshine, or wind. It's clean, and there's now a fifty year operating history in the U.S. without a single fatality. France gets 80% of its power from nukes. We should be more like France. (Did I just say that?)
In the 1970s, the Three Mile Island incident and the film The China Syndrome happened almost simultaneously. The combination was enough to cement public opinion for a generation. For the left, the "no nukes" movement still has a warm and fuzzy resonance. Some, though, are slowly coming around, because nukes don't produce greenhouse gasses. President Obama has even made some positive noises about nuclear power, so maybe there's hope.
Perhaps we need a movie about renewables. We could call it "The Inconvenient Math."
