Pain at the Plug?

On Friday the EPA announced a “proposal to cap the amount of heat-trapping greenhouse gas emissions from new power plants. Coal-fired plants -- unlike most natural gas facilities -- won't meet the standard without costly technology to capture and store carbon emissions.”

The EPA argues that today’s coal powered electric plants discharge a disproportionate amount of CO2 into the atmosphere.  The industry argues that the technology required is not tested and that the requirement is therefore unreasonable and possibly a costly mistake.  Finally, their statement mentioned that added costs must be passed along to customers resulting in “more pain at the plug than Americans have experienced at the pump…"  That’s certainly a colorful way of phrasing what we all know – there’s no magic money tree.

As utility costs increase due to regulation, fuel costs, or for any other reason, they must recover those costs from somewhere.  They can lower dividends, but that will likely drive the price of their stock down.  I personally own a small number of utility shares, as do many other small investors.  These dividends yield a better return than savings accounts, but if they go down and the investment becomes more risky, investors will be harder to find.  Bankers will also be less inclined to make loans or will do so at higher interest.  This may seem like their problem until they go to the regulatory board and plead for rate increases to cover higher costs.  Then we will see it in our bills and hear the outrage of our neighbors.  Doubtless the media will have a field day covering stories of increased hardship just as they do when gasoline prices spike.

The EPA and environmental advocates make a good case that these costs are already out there – what economists call external costs – hidden in the free discharge of CO2 and “sulfur dioxide, nitrogen oxide and heavy metals (such as mercury and arsenic) and acid gases (such as hydrogen chloride), which have been linked to acid rain, smog and health issues.”  These are health and quality-of-life issues.  But when those costs are captured, it is the consumer or taxpayer who pays.

Headlines like this are easily ignored as unimportant.  What’s in it for me?  But economic understanding brings us to a different conclusion.  Even when the changes are desirable and beneficial, it’s not the corporations or the government that pays. The evidence is in the article:  “Mississippi Power has raised rates 15% this year and plans an additional 3% increase next year to help pay for the new Kemper County plant [which employs this technology], whose price tag has risen from an initial $2.4 billion to $3.8 billion…” 

This will affect you each time you switch on a light or TV, or recharge your phone, or your refrigerator or furnace snaps on.  We have become so dependent on electricity, and there are few substitutes.

Who Killed Princess Di?

When I saw the story about Halle Berry testifying in support of a proposed law to limit the ability of paparazzi to photograph the children of public figures, I was once again reminded how we Americans bring problems on ourselves.  The article explains how Ms. Berry’s daughter is afraid to go to school because of her experiences with aggressive photographers.  Other celebrities have backed this proposal in California and similar ones in other states.

The article makes very clear the motivation of these photographers.  It’s all about money.  Paparazzi are, by definition, freelance photographers.  They take the pictures that they believe they can sell to magazines and tabloids.  The magazines and tabloids, in turn, only buy the pictures that they believe will earn them a profit.

It’s the economic process in action.  Instead of someone else, usually the government or corporations, spending money and then getting it back from us through higher taxes or higher prices, this is a case where we spend money that, at the end of the chain, causes people to behave badly.  The media's profits from sales to us are used to offer big bucks to those photographers who get the most intimate and invasive pictures.  Americans get excited and snap up the tabloids as they wait in checkout lines or tune in to celebrity-gossip TV shows.  There is a market for those photos, and the simple answer to stopping the harassment is to go to the source – the nosy element of the public that creates that market.

The irony of the situation is that these same people who buy the magazines are the ones who will tell you how they love these celebrities.  They see their movies or watch them on TV, buy the products they endorse and adopt their political viewpoints.  They are the last ones who would intentionally bring harm to their heroes or their families, yet their very behavior starts a chain of transactions that does just that.

The question then is, how many mourned the loss of Princess Di, who “died in a car accident while speeding away from paparazzi in Paris with boyfriend Dodi Fayed,” while they were at the same time in some way responsible for the presence of those paparazzi?  Can they even see the connection between behaviors sparked by an unhealthy obsession with celebrity and such unfortunate incidents?  Even if conspiracy theorist are right about her death not being an accident, the guaranteed presence of paparazzi would have been used to mask the supposed plot; and this can be traced back to the behavior of some of the very people who were most shocked and saddened by her death.

Who Would Really Pay a Carbon Tax?

Just before Thanksgiving I came across this opinion piece on the Internet where the writer bemoans the President’s apparent neglect of climate issues among his new priorities.  The writer favors a carbon tax on those naughty utilities that burn coal to generate electricity for our homes and businesses.

But who would ultimately pay such a tax?  These magic-money-tree thinkers, who don’t understand the economic process, tell us “a recent analysis from the Congressional Research Service found that a modest carbon tax of $20 per ton that rises 5.6 percent annually could cut the projected 10-year deficit by 50 percent — from $2.3 trillion down to $1.1 trillion. If designed correctly, a carbon tax could help shift the burden of paying for pollution (and solutions to it) from taxpayers to polluters…” No problem.

Unfortunately, we all know that if costs go up for utilities, the following will happen.  Utilities will petition their state boards that oversee rates seeking relief, that is, permission to charge us more.  Barring permission to do so, or perhaps in addition, these new regulations will make utilities appear as riskier businesses, causing investors to demand higher returns, causing share prices to fall (which would effect the value of pension funds, college endowments and similar conservative investments).  It will also increase their cost of raising capital for improvements either by selling more shares of now lower-priced stock or borrowing at now higher interest rate based on their higher risk.  Eventually they can use this as a basis to raise rates, passing the increased cost along to their customers.

The idea of polluters paying rather than taxpayers is fallacious.  The higher costs eventually get back to you and me.  It's a shame that this new tax will once again hit hardest those who can least afford to pay, by making it part of everyone's electric bill.

Maybe the President or one of his advisors understands that the time to raise taxes, directly or indirectly, on the poor and middle class is not when we are trying to avoid slipping back into recession as Europe recently has done – or maybe not.  This magic-money-tree thinking is everywhere!

The Magic Money Tree

I wrote about this issue over a year ago, but this recent article gives me an opportunity to reinforce the idea.  Data from a Bankrate.com survey shows that truly free checking accounts are becoming less common and that other banking fees are increasing as well.  The cause, of course, is the well-intentioned efforts of our government to play hero by protecting us from those evil bankers.

What a large number of Americans don’t seem to understand is that there is no magic money tree to fund programs, pay insurance claims or make up for business losses brought about by regulations.  The money in our economy moves within the system and does not appear out of thin air.  When shoplifting increases, the store loses in the short term but eventually finds a way to pass losses along to their customers in the form of slightly higher prices, otherwise they go out of business.  If the local government workers get a raise in pay or benefits, our taxes increase or some other expense must be cut.  If regulations on credit cards change in the name of consumer protection, the banks figure out other ways to make up for it.  We are all part of that system, and actions within the system can usually be traced back to our money.  This reduction in “free” checking and increase in other fees is a typical example.

Some wonder why stores, banks or insurance companies don’t just take it out of their “obscene” profits.  The answer is fundamental to investing.  If you are willing to settle for a low return on your money you choose a low-risk investment.  Put it in the mattress for absolute safety but no return.  Put it in an FDIC-insured bank account for a small amount of interest.  The more risk you take, the more return you deserve, because sometimes the risk doesn’t pay off.  That’s why stocks, investments in businesses, usually return more than bonds, which are merely loans to companies.  Usually government bonds pay less than corporate bonds for the same reason.  In general, if you buy shares of a company that drills for oil or flies airplanes you take on more risk than if you buy shares of a company that delivers electricity to your house.  If your friend wants you to invest in a new invention or to start a new business, you expect a much higher return.  (Hint: If anyone tells you of a high-return investment that's "a sure thing," you can bet it's a scam.)

As companies face new threats, their risk increases so they owe their investors a higher return.  Threats may be the possibility of increased lawsuits, new government regulations, or merely facing the unknowns of being first to enter a new market.  They shouldn't permanently take these losses out of profit, which represents a return on overall investment, because the risk is higher, not lower, and their investors deserve a higher, not a lower, return.  They are not just being greedy or evil.  The result, however, will often be that we, the consumers, pay more for the same product or service as an indirect result of that added risk.

 Perhaps politicians understand this and are just trying to fool us when they take credit for a new law or mandate to protect us, but let’s give them the benefit of the doubt and assume that they don’t get it either.

The Economic Spider Web

Earlier (July 9, 2012) I addressed the problem of juries without economic understanding assuming that no one is really hurt when big corporations or someone else’s insurance pays for a legal verdict.  This mindset often causes corporations to minimize costs by paying a settlement rather than the added expense of a court battle where the odds are stacked so heavily against them.  The point I made was that whether it’s paid after a long trial or as a result of one of those out-of-court settlements, the money does not come from some secret stash or magic money tree.  It comes indirectly from you and me.

The sight of this wonderful spider web while on one of my weekly nature walks reminded me to expand on this topic.  When the fly or bug hits a spider web, the spider hiding in the corner feels the vibration and quickly locates its prey.  The signal is sent through the web and gets back to the spider.  For the spider, this is good news.

On the other hand, when a corporation or government or anyone else we do business with spends more money, the effect is the same, but it’s bad news for us.  Most companies are in business to make a profit.  When expenses increase, profit decreases.  To offset this they either reduce other expenses or increase their prices.  If an action affects a whole industry, it’s very easy for everyone to raise prices.  (Look at how different brands of gasoline go up and down at the same time when they all face an OPEC action or bad weather near the refineries.)  We end up paying more for these cost increases whether the reason is higher utility rates, shoplifting, legal actions, higher taxes, or anything else.  We are all connected, like the web example and the cost comes back to us.

Take cigarettes as an example.  States sued the tobacco companies.  The cost of those legal settlements was merely passed on to smokers in the form of higher cigarette prices  Since all companies were affected,  no one was afraid to raise prices.  The effect of the suit was equivalent to raising cigarette taxes, but raising taxes would have been perceived as "punishing" the wrong people.  Ironically, after the settlement, tobacco companies' stock price and profits continued to rise.  As it turned out, the Attorneys General looked like heros, the tobacco companies prospered and smokers paid the price.

A more recent example comes as a survivor of the Aurora, Colorado shooting is preparing to sue the theater.  Who do you think will ultimately pay for that?  Everyone who plans to see a movie at any theater in the future will be affected by higher prices to cover the additional liability costs.

It is the same story with government spending.  Decisions made in Washington or your state capitol or town hall indirectly affect your wallet.  Local or state politicians, who proudly declare that a new bridge won't cost you anything because it's federally funded, would like us to forget that our federal taxes pay for that bridge and for every other similarly funded project in America. It is our money.  When governments force utilities to buy a certain percentage of their power from higher-cost "green" sources, we end up paying through higher electric bills.  When governments subsidize a product or go deeper into debt, the subsidy or the interest on the new debt is paid for with our money.

It's important to remember that these things don’t happen in a vacuum.  Just as the vibrations of the web reach the spider, the vibrations caused by added costs or higher taxes set up economic vibrations that eventually find their way to our wallets.  To believe in some magic money tree or other isolated source of insurance, government or corporate funds is to delude ourselves.  Many politicians and lawyers would be very happy if we continued to delude ourselves in this way.

The Economic Process

Recently my son told me that he was closing a checking account, one he had opened in college.  They were raising fees and the minimum balance to avoid the fees.  I told him that he could thank Congress and their consumer-protection efforts for placing new restrictions on credit cards and banks.  When they ban certain practices, the banks adjust, changing the rules of the game because bankers are a lot smarter than politicians when it comes to business and finance.

I refuse to believe (as the government apparently does) that we are not smart enough to protect ourselves by closing accounts, moving away from credit cards with the highest interest rates and forcing the banks to compete for our business.  Instead we have an elaborate dance between the banks and Washington, turning personal finance into a moving target and wasting time and money on all sides.

The economic process, the law of supply and demand along with corporations’ need to make a profit to stay in business, always have a way of circling around and finding the funding they need in our wallets.  No matter how people try to tinker, there is no magic money tree; you don’t get something for nothing.  Banks, insurance companies and other organizations can only get money by taking it from customers (in exchange for something we value).  When additional costs are imposed, they stay in business by figuring out how to get customers to pay for them.

Yesterday’s newspaper reported another regulation reducing the amount banks can charge retailers for credit card transactions.  Half way through the article was the statement:  “Banks have warned that they will make up the lost revenue by shifting costs to consumers.”   This is a no-brainer to those who understand the economic process, yet citizens keep looking to the government and government keeps getting credit for these well-meaning efforts.  The ones who are hurt the most are the ones who can least afford it, small customers who don't have those minimum balances.