The Wealth of Nations, Revisited

I have not been riding on my trusty horse Blog for reasons obvious to anyone who lives here in this beautiful valley in NW Wyoming. There are a lot more enjoyable ways to spend what little time we have than sitting in front of a computer screen. The long string of subzero days and nights has unfortunately driven me back to my mancave and I have been mulling over a fundamental concept. What is wealth? From what does it derive? Is wealth money? Is money wealth?

This little digression started with a comment by my son some time ago when he noted a pundit commenting that so many $Trillions had “vanished” in the latest downturn. This puzzled him, so he asked me “Where did those $Trillions go?” It was an intelligent question and I tried to explain the disappearance as part of a general “deleveraging” of wealth assets going on over the world. Money isn’t” wealth”, I told him. Money is a symbolic representation of wealth. I knew I wasn’t getting through to him when he insisted that if it was money, it had to go somewhere! His perception was that money and wealth were equivalent, which would be true if our money was a denarius or a Morgan silver dollar, or a $20 gold piece. Unless money was in a cask on a Spanish Galleon going down in a hurricane off Hispaniola ending up with the scallops, when one person lost money, another probably received it, a zero sum transaction, voluntary or not.

This conversation became a loop in my head leaping down axons to dendrites as I mulled over the concept of wealth from a myriad of standpoints. It’s impossible to escape money, the economy, and economic statistics on the state of the economy flooding us non-stop from a media obsessed with economic news.

I fled as a participant in the Sickcare industry some years back and I have been spending a good part of my time catching up with my education that was interrupted by too many years learning the medical trade.  I particularly wanted to study the dynamics of civilizations, their rise and fall, and how our civilization has changed our world and how our changing world has altered our societies. I began at the beginning with the Big Bang and ambled cosmologically taking side trips into physics, astronomy, and geology, hop scotching  forward and backward and into side alleys that looked interesting. As I examined the whole span of human history, what stood out to me was the period after about 1750, which happened to be the the nascent industrial revolution as  the premier innovation of the past 350 years. Within this revolution have been other important innovations starting positive feedback loops helping to sustain and accelerate the changes which began the Industrial Revolution.

But what has this got to do with wealth and money?? Coinage had been in existence long before 1750 to facilitate trade and commerce and economic growth. Why is there so much more wealth in the world now than in 1750 and will  wealth continue to grow exponentially in the same way  going forward?

There were prominent thinkers at the time taking note of the changes, among them Adam Smith who published “The Wealth of Nations”, widely regarded at the bible of modern classical economics. Smith was by no means the first to think about economics. There are a scattering of economic writings as far back as Aristotle  but Smith’s achievement was  in laying out terms like capital and labor and land and how they intersect to influence an economy. It is no coincidence that the term capitalism came into being as the system that most adapted to the industrial revolution in the West. Capitalism of course existed well before 1750 to facilitate trade and grow a nation’s wealth and influence and in  it’s ancestral form was termed Mercantilism which followed the feudalism period of the middle ages. But let’s get back to wealth. There certainly was a lot of wealth before 1750. Wealthy civilizations existed in the Mesopotamian and Harappan and Aztec and Mayan  Civilizations. The Romans, the first big Empire possessed enormous wealth. How did they accrue it? In the case of the Romans, they largely took it from their neighbors. . There was wealth, then as now, concentrated into few hands. Keep in mind that by the time Christ was born, there were probably only 300 million people in the world. By 1750 it had about doubled. By 1900 the number had more than doubled to 1.6 billion and the doubling time up to the present has been getting shorter and shorter. Why did it take so long to double the first time, 1700+ years, and why has the doubling interval grown ever shorter? Could the industrial revolution have had something to do with the exponential population boom? Up until the industrial revolution population growth was largely linear but after the industrial revolution the curve leapt up resembling a hockey stick, the classic yardstick of exponential growth. About 1750 a lot of things beside population also started growing exponentially, in this case Industrial Capital, industrial machines, energy production,food production, and, wealth production.  An intelligent observer should always be wary of the classic trap that association is not necessarily causation. I found early on in my quest that I had to ruthlessly simplify, in much the same way that Occam’s Razor is used as a technique of understanding a complex system. The Razor states that all things being equal, the simplest explanation is often the best. This notion did not start with Occam and in fact goes far back to Aristotle and Ptolemy. So I put the origin of wealth creation into the simplest form: You need a resource. You need people to harvest that resource and accumulate that resource. If the harvest involves picking up or digging the resource, all able bodied people are equal and the harder you work, the more resource you accumulate. It takes energy to harvest a resource, in this case human energy. The next logical step was to find ways to speed up the harvest. Get more people into the act but don’t let them keep the resource. Slavery. Animals were used as well because they possessed a lot more energy than people. Thus we now have energy from labor combined with a resource. Let’s say that this resource is copper and perhaps other easily accessible metals. Early on, people discovered some nifty uses for soft malleable copper. It made a nice plate, and decent tools. Someone discovered that if you combined a soft metal like copper with another like tin or zinc, and melted them together, you could get a much harder and stronger tool by taking the energy of fire, the energy of a tool maker and producing something with value added above the value of the resource  itself. Thus was born the Bronze Age. The clever tool and plate makers found ways to make their tools better and faster and trading them for items the toolmakers needed, maybe livestock or firewood or perhaps pretty stones for the toolmakers wife. It didn’t take long for early prospectors to find other metals that were beautiful as well as durable and portable, like gold and silver. The toolmaker could trade for these and accumulate a pile of nuggets. Let’s call this capital. Whatever the resource, if a person could take his ingenuity and his energy or that of a slave to add value to a resource, he could then sell it for capital. Some of these early capitalists then made just the accumulation of capital their goal. A faster way to accumulate capital was to steal it, a little risky but a whole lot easier. With more capital one could even hire his wife’s dim witted burly brother to do his stealing. Find more knuckle draggers and maybe some smart officer material and cut them in to a little of the action and you now have an army who can steal on a bigger scale, again a whole lot easier than honest work. This in fact became the basis of the Roman Empire, stealing the wealth of all their neighbors and putting the vanquished to work making and growing things to send back to Rome. This worked real well for a long while as long as there were lands and peoples to conquer but eventually the Roman armies smacked into the law of diminishing returns and long supply chains. There were some pretty tough characters to the north who had little of the wealth that the Romans wanted but who could acquit themselves pretty well on their home terrain like the Teutoburg Forrest on the banks of the Rhine which ended Rome’s push north. Worthy opponents sprung up like Hannibal who used cavalry tactics and elephants to defeat much larger Roman Armies in the Punic Wars. Hannibal by the way, utilized some really unusual tactics besides Elephants like catapulting baskets full of poisonous snakes onto the enemy ships! By the end of the fifth century it was all over and a thousand years later only livestock grazed on Rome’s Palatine Hill overlooking what was left of the Forum.

Over the next 1300 years as world population increased slowly, forests were cleared, crops were planted and towns were built mostly by hand or with the help of draft animals. Wind and water power was utilized early on for transportation as well as in grain mills. The energy for heat and for iron manufacture came initially from wood and charcoal and gradually migrated to coal, a more concentrated form of energy. The invention of the steam engine was a crucial first step helping to kickstart and then drive early  industrial production. The first primitive models were used to pump water out of the coal mines and then as water pumps generally. Improvements by James Watt and others added efficiency and with modifications to produce rotational torque, steam engines were used to power all manner of manufacturing machinery and as motive power for tractors, ships and locomotives and eventually electrical power generation. Today steam turbines generate the bulk of the world’s electricity. It’s crucial to keep in mind that it isn’t steam that is creating this seemingly limitless energy. It’s concentrated carbon in the form of coal, gas and oil that provides the energy to generate steam and what a vast ocean of energy it has been. It is the existence and consumption of  vast almost FREE energy sources that has powered and empowered the industrialization of the world. Fossil energy is viewed as income to the industrial world, fuel to the industrial machines, a magical powerful force that when channeled into man’s machines has displaced the work of millions by virtue of its concentrated energy. OPne barrel of oil is equivalent to 25000 hours of human labor, 12.5 years.Each American uses 25 barrels of oil a year, equivalent to 312 hard working laborers. If you include gas and coal, it jumps to 700 laborers, or Energy “slaves.” Early economists saw this energy as vast income to the society, to be treated as income to be spent to enrich and benefit mankind. In a real sense, fossil fuels have been THE source of our wealth both directly and indirectly. The countries that have used the most fossil fuels per capita have historically been the wealthiest at least in terms of GDP. It takes a vast amount of energy to power an industrial society and the countries with the greatest fossil endowments and the capacity to utilize fossil energy, Europe and the US, have up until recently been dominant in the world economy. AS recently as the 1970’s, the US with 4-5% of the world’s population was using 80% of the world’s oil. Even now that 4%  of the population is still consuming 25% of it’s oil. Economists are unanimous that it is energy that is the lifeblood of our industrial economy. It is so obvious as to almost not bear mentioning. Mainstream economists do not view Fossil fuels as capital or as EF Schumacher called them “natural capital.” If it were viewed as capital, it might be seen as something to be conserved and deployed when appropriate for the benefit of man, not as mere income to be spent. I have seen comments by economists that fossil resources are just one of many important natural resources necessary for a functioning industrial economy. Should some fossil energy resources get in short supply, a modern technologically driven economy will substitute other energy fuels to power the economy. I can recall visiting a nuclear reactor in Oak Ridge TN as a child and being told that nuclear power was the future of energy that  would be “too cheap to meter”. I also recall in the 1960’s when nuclear fusion research was in full flower.  Pollution free Fusion power plants would be probably be coming on line in just a few decades just in time to replace our  aging first generation fission plants. Popular Science magazine covers were full of dazzling views of cities of the future and ideas as chimerical as an airplane in every garage. This unbounded faith in future energy technology probably partially explains the collective yawn of ridicule when M King Hubbert, a Shell geophysicist stood up and presented a paper the the annual meeting of the American Petroleum Institute in San Antonio Texas in 1956 and predicted that US oil production would peak in about 1970 and fall thereafter roughly approximating a bell curve distribution. When 1970 came and US oil production plateaued and fell as he predicted, little was made of his 1956 presentation. In 1956 production was still rising but here 56 years later is what the curve of US oil production looks like:Image

It is not a beautiful Gaussian bell distribution. It resembles the Grand Teton in my backyard with the secondary peak in the 1980’s representing the giant Alaskan North Slope field  That little nipple at the far right is frac oil from the Bakken, the Eagle Ford and other fields.    EF Schumacher along with other some non-mainstream economists has stated that Energy follows rules of its own that may bear little relation to conventional supply and demand and substitution concepts that so dominate classical economics.  I regard Fossil Energy as the sine qua non of our industrial economy, the bedrock source of wealth and that a shortage or depletion of these fuels, primarily oil, will crash the industrial economy. My opinion is a minority one shared by a few resource economists and a scattering of energy and resource bloggers. Labor and capital existed long before free fossil energy. Wealth was accumulated slowly. It took free concentrated fossil energy combined with labor and capital to drive civilization up the hockey stick of exponential growth.It is the consequences of that energy driven exponential growth that I would like to cover in a future post. For now I would like to summarize by saying that energy is the basis for and the root of our industrial wealth.

It is not a beautiful Gaussian bell distribution. It resembles the Grand Teton in my backyard with the secondary peak in the 1980’s representing the giant Alaskan North Slope field  That little nipple at the far right is frac oil from the Bakken, the Eagle Ford and other fields.    EF Schumacher along with other some non-mainstream economists has stated that Energy follows rules of its own that may bear little relation to conventional supply and demand and substitution concepts that so dominate classical economics.  I regard Fossil Energy as the sine qua non of our industrial economy, the bedrock source of wealth and that a shortage or depletion of these fuels, primarily oil, will crash the industrial economy. My opinion is a minority one shared by a few resource economists and a scattering of energy and resource bloggers. Labor and capital existed long before free fossil energy. Wealth was accumulated slowly. It took free concentrated fossil energy combined with labor and capital to drive civilization up the hockey stick of exponential growth.It is the consequences of that energy driven exponential growth that I would like to cover in a future post. For now I would like to summarize by saying that energy is the basis for and the root of our industrial wealth.

Is Shale Gas The Next Bubble?

In President Obama recent  state of the union address , he made the comment that  “We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy.” It is a statement I have heard and seen reported in a variety of areas including statements from  Oil and gas groups like the API,  as well as mainstream media like Bloomberg and the NYT. Presidential SOTU addresses are generally best ignored as  meaningless election year promises of fixing the economy, remaking education and restoring the American Dream, whatever that is, or was. The promises  and claims made by Obama and the micro-cephalic that preceded him are usually taken with less than a grain of salt by his captive audience and I daresay by the nation. Some of the claims in past SOTU’s have been absurdly unrealistic like Bush’s promise of a “hydrogen economy” but Obama’s hundred years of supply comment was patently bogus. I was dismayed that the media just swallowed it as if it were true. In this  blog I will try to  examine the basis and motivation for his  bogus or mistaken assertion.

First: We don’t have 100 years of natural gas. I have spent more than a week looking at production and consumption data from a myriad of sources and fair warning to the reader, finding consistent data is difficult and my advice to the thoughtful reader is to believe nothing unless you can verify it independently and  personally, including my data! So let’s start with the basics. Oil and gas data is collected and collated from many sources and reported to various state and Federal agencies on varying time scales with inconsistent terminology. How and what  these sources  report appears to be a function of their bias. After sorting through piles of data,I reminded of Lily Tomlins observation”No matter how cynical I get, I find I just can’t keep up.”

Now to basics. Terminology. I have derived this terminology from the following organizations: USGS, EIA, API, IEA, Potential Gas Committee(Colo School of Mines) as well as the usual wiki and google searches.

You start with Resources and Reserves. It is vital to understand what these terms mean.(I would advise the reader to sketch out on a blank sheet of paper the branching tree of reserves and resources as it can be very confusing.  The  RESOURCE BASE  is all the gas in place everywhere. It includes easy to get, hard to get, impossible to get. It is subdivided into Probable, Possible and Speculative Resources. Probable  is the most important category. Current producing fields are said to have 537 Trillion cubic feet(TCF) + a trivial 13 TCF from unconventional Coal Bed Methane(CBM) giving a  probable resource of 550 TCF. The US currently consumes 24 TCF/year, or 66 Billion Cu ft/day. For simplicity I will ignore speculative and possible resources but they will explain the 100 years of supply comment by Obama. Resources may or may not be economically or commercially producible. To decide that, we move to the next big category: Reserves. Reserves can be produced with current technology and funding . They are subdivided into Proved(proven), reserves and Unproved Reserves. Some organizations call these unproved  Reserves  or technically recoverable Reserves.  Allowing these synonyms has led to confusion and obfuscation.   Proved Reserves are subdivided into Developed Reserves and Undeveloped Reserves. A Developed Reserve includes drilled wells that are producing in place. The money has been spent, the wells are drilled, and no significant capital expenditure(CAPEX)is needed. Undeveloped reserves will require additional funding to put in new wells but the resource is assumed to be there as a near certain Reserve. These Proved Reserves  are  the highest category for acquiring funding  and are also called P90 Reserves.   This means there is a 90% or greater chance of successful development and extraction. Until Dec 2009, this was the only category that companies could also use as collateral for a loan. In Jan 2010, this was changed when Unproved Reserves were allowed as reportable reserves by companies to  investors and the SEC . This is significant and potentially problematic. These Unproved Reserves are further subdivided into Possible Unproved Reserves and Probable Unproved Reserves. Probable unproved are given the P50 technically recoverable designation and Possible are given only a P10 probability. The reliability of these reserve numbers is unknown.  Previous to 2010, companies used these reserves only for internal planning and couldn’t use them as part of their publicly reported reserve base.  Various third party analysts and rating groups can and do examine these reserve figures. I would offer that these are caveat emptor figures. (Recall what happened with the various independent rating agencies looking at mortgage securities.) So let’s total up the various categories of Reserves and Resources and see how much gas supply the US has. If you add up both Resources and Reserves, you get a big number of 2170 TCF. Dividing that by current annual consumption I get 90 years of supply, not 100. Let’s call it an Obama rounding error. Keep in mind that only 273 TCF of gas is in Proved reserves which the country can count on. This is 11 years based on 24 TCF annual consumption. If consumption goes up then the years of availability goes down.

If you include Probable Resources  and Proven Reserves, you are up to almost 23 years of supply . If you include all  resource categories you get 90 years. This is a generous scenario assuming everything will be produced at any price from everywhere, but remember even this unlikely scenario is impossible if you are talking about $2.60 /million BTU gas. There is no way the O &G industry can survive at these prices, and at these low prices you can ignore the all years of supply estimates. The media and most especially organizations like the NYT, Bloomberg, Fortune  Magazine among others, have written articles promoting the inexhaustible abundance of fossil energy given new technology which is leading straight to a new American Energy Independence. Many of these articles are using  questionable data of energy lobbying groups, confusing and inconsistent  data from the Federal data set of the EIA, and out of the mouths of  campaigning politicians who either are mistaken,   lying or being deliberately evasive. Bill Clinton remarked that “you can’t get elected by promising people less.” What is coming out of the Obama administration and the corporate media is nothing less than propaganda using manipulated statistics and data. In a recent interview, the financier Warren Buffett  described the housing bubble as a case of national  “mass delusion.” It will be my contention that the current yammering about making America “energy independent” is another example of mass delusion, promoted by politicians and corporate financial oil and gas interests. To understand how we came to this current bubble of nat gas, we need to look at fracking, or using techniques of fracking or fracturing the source rock. Gas is trapped within pores in the rock. Some rocks are permeable to oil and gas flow and some aren’t. Shale rock holds lots of gas and oil in some areas and fracking opens up this rock and enhances flow rates. Fracking technology is not new.  Almost 100 years ago, drillers were dropping dynamite and nitroglycerin down wells to fracture the rock.  A  variety of fracking  has been  used by various drillers since. In the 1980’s a man named Mitchell devised more sophisticated  and efficient horizontal drilling fracking methods using high pressure water, sand and chemicals. This technique to get at previously hard to get tight gas really took off in the past 10 years after Devon Energy bought out Mitchell  and others got into the technology.  With no barriers to entry other that obtaining finance, all manner of investors and oil and gas companies have started a veritable gold rush. The major gas fields in order of development and production are the Barnett in Texas, the Fayetteville in Arkansas, Haynesville in Louisana, and the Marcellus in PA, NY and W Va. Early gas flows, particularly in the Haynesville field  were huge, in the range of 3-7 Billion CF/D! These early gushers were hyped to investors and the media as a new dawn. Fracking was promoted not as a  new drilling method but as a manufacturing process leading to a long production life and a flat extended hyperbolic production profile. Companies flooded these neighborhoods bidding up lease prices from a few hundred dollars an acre to $30,000/acre for example in the Haynesville. For the early entrants, natural gas prices(click to enlarge)

were high and lease costs were low and production was abundant. The smart operators hedged their production forward to lock in these good prices. There were a few doubting Thomases who noted that fracking was 3-10 times more costly than old time vertical bore technology, and it seemed to be messing up water wells in some areas, but if all the hype was correct, then vast new reserves were available and millions and billions of dollars were there for the taking. America would be free from foreign energy supplies, we could convert our car and truck fleet to gas, we could permit new gas terminals and export gas to the world, cut our trade deficit………the American Dream was back!

Didn’t happen.  But the cheerleaders kept cheer leading, Wall Street kept shoveling, Investors, foreign and domestic kept flocking,  and the gas kept flowing. Unfortunately, the weather kept warming, the economy kept tanking, and all of sudden in the past 6 months gas prices started dropping, and dropping and dropping! Today there is talk of $2 gas. With the forward hedging contracts expiring, the emperor is starting to be seen as lacking clothes, by a few people. We are starting to see thoughtful studies of how much gas is really there and at what price.  Goldman Sachs and others including the independent geology analyst Arthur Berman have looked at the profitability of the various shale gas regions. Profitable gas price levels if you include all lease and production costs are in the range of $6 to $9 gas to break even.  And surprising to me, it does appear that we are at or past production peaks in the Barnett, the Fayetteville, and many other regions. Only the Haynesville is increasing.The expensive plays like the Haynesville  have break even costs in the $9 range.  Even the big players like Chesapeake and Exxon are cutting back drilling and shutting in their wells . Fracking was promoted as the answer for the world’s energy needs. Poland was said to have huge potential. Exxon fracked in Poland and gave up after spending $75 million but this and other dry holes have been generally under reported. And inexplicably,in a recent preliminary release, the EIA  appeared to slash the size of the shale gas resource.  Ominously, only recently has the extent of the negative cash flow in the fracking players come to light.  According to analysis by ARC Financial Research, the 34 top U.S. publicly traded shale gas producers are currently carrying a combined $10 billion quarterly cash flow deficit.  Obviously this cannot continue for long. The low gas prices are predicted to remain low, below $5 for the foreseeable future according to the EIA. True or not, this has consequences for states like my native Wyoming for government budgets and for  over leveraged  and highly indebted O & G companies. Eventually gas prices will have to rise. Absent a pretty rapid price recovery for natural gas, this bubble will pop. I plan to look at other aspects of shale gas and oil in future posts including investment implications.

My Proposal to fund Wyoming Government

The Corpus Callosum column by Jonathan Schechter is always worth a look in the Jackson Hole News and Guide .  His columns in the Jan 11 issue inspired me to make a few comments. To refresh your memory, Jonathan discussed how economic activity and taxable sales related to that activity have changed in the past 5 decades and particularly in the past 10 years. This mirrors changes in the state and national economy in the same period.  In the 1950’s and “60’s the US was a balanced dynamic economy producing goods and services not only for its own citizens but worldwide. The industrial expansion following WW 2 fueled a growing middle class who produced “things” from our abundant resources generating real wealth and rising incomes to a growing middle class. Government’s funding model was to tax companies and individuals involved in this post war boom. By making things, companies and individuals could buy things. From a government funding perspective, government could tax the things , and the people and companies making this real wealth. That government funding model has faltered as Schechter pointed out in his beautiful graphs. So what is government to do? If you want government services at the state and local level you have to pay for it somehow. The national level is a growing disaster which will not concern us here.

What has changed  is the economy’s anatomy. We went from a balanced manufacturing economy to a FIRE economy(Finance, Insurance & Real Estate). This FIRE economy has escaped paying taxes at the rate being paid by the   Primary and Secondary sectors of the economy. This partially explains the enormous growth in this Tertiary economy. They have escaped taxes by accounting tricks, deferring income and a rewrite of the tax code benefitting them at the expense of the sectors of the economy producing real wealth. This can change. This Tertiary economy makes money off of money. This economy makes nothing of value, creates no real wealth. Government has only lightly taxed this segment. It is time to tax the Tertiary economy. How?

1.   Tax all income equally. That means capital gains income is taxed at the same rate as ordinary earned income. That would include payroll taxes,medicare taxes, and applicable state taxes. President Ronald Reagan made this  change in the Tax Reform Act of 1986. It must be reinstated. My personal preference is to lower tax rates on all earned income for both individuals and corporations. Currently for example Hedge funds, investment funds, and principals in  LBO corporations pay at the low capital gains rate of 15%!  In recent years individuals have netted over a $BILLION dollars in a single year.

2.   Tax financial transactions. This can be a tiny tax on equity, bond, futures, CDS, insurance and real estate transactions, IPOs and  derivatives. It can be paid by the purchaser or the issuer of the trade. In the globalized economy there are hundreds of $Trillions in just derivatives. A 0.1% tax would yield hundreds of billions alone. Collecting it will take effort. No one wants to pay taxes and the financialized economy has shown itself to be the world champions of tax evasion.

3.   Tax only the users of particular services. Use the dump, the highway, the schools and universities, the airport, Teton Pass Plow trucks………..pay for it.

4.    Tax property to discourage speculation. Once a structure is on the property and is put to a use, it is taxed at a higher rate than raw property. States like Wyoming are famous tax havens for the ultra wealthy who buy huge parcels, ranches and the like and pay little in the way of taxes. The obvious challenge is not taxing legitimate farmers and ranchers into oblivion. This can be done. Keep property taxes for your home low. Wyoming has very high property taxes.

5.   Maintain the estate tax. Wealthy expatriates flock to states like WY to avoid taxes in their former abodes. Close that loophole and give them nowhere to hide. Make the estate high enough to allow legitimate businesses to pass on their businesses to their heirs.

6.   Tax the 1%. Tax all income.  Does this mean an income tax for Wyoming? Do the math. WY has finite fossil and mineral wealth. Put all or most of the income in a trust fund for our kids. An income tax is on all income. Romney’s tax rate on $25 million is 13.8%. What is yours?

7.   Put a carbon tax on fossil energy to reduce its use and encourage conservation. Our oil, gas and coal will last longer and give us time to develop energy alternatives.

8.   Reduce the cost of government. Government employees are the last segment with taxpayer paid pensions and  gold plated health care plans. Mind you, pay them well so they can afford to save for retirement…………just like the rest of us. The working taxpayer must pay their salaries, not their perks. Government pensions are bankrupting other states and are a growing share of Wyoming’s budget.  In fairness, existing employees were promised a retirement pot. Give them a fair lump sum pot based on what the rest of us could afford to put away. I think 10% of their salary would be a fair number for each year of work. Have them pay their health insurance like the rest of us and it ends when they quit. To pay these exorbitant unfunded retirement pensions, states are imposing austerity on the citizens and their children. This is  blatantly unfair to the rest of society.

Summary: The Tertiary economy has become a wealthy oligarchy by avoiding taxes paid by the working wealth producing members of society. They will resist paying their fair share with all means at their disposal.  There is simply no other way to fund necessary government than taxing the Tertiary Economy.

 

Peak Oil and Strategies for a sustainable future in Jackson Wyoming

The following discussion is an attempt to bring to the fore The Most important event of our time. That event is called PEAK OIL.

Peak Oil is the term coined by a Texas geologist by the name of M. King Hubbert to describe that point in the earth’s history when mankind has consumed one half of all the petroleum that is available. After that peak, also known as Hubbert’s Peak, production of oil will go into decline. Using clever statistical methodology, Hubbert predicted at The national API meeting in San Antonio Texas in 1956 that US petroleum production would peak about 14 years hence and thereafter go into irreversible decline. He was ridiculed and persecuted for the next 14 years but in 1970, it happened. He had nailed it. US production has been in decline ever since although it has blipped upward about 10% since 2005. He also predicted dire consequences for the US Economy based on his predictions and for this and other reasons he is regarded as the father of Peak Oil. Few people then understood the consequences of Peak Oil and few today as well but finally prescient people worldwide are starting to sound the clarion call of what Peak Oil will mean to our lifestyles.
Where does oil came from? It was a result of photosynthesis in which CO2 and water combine with solar energy to form glucose and in the process release Oxygen.. Glucose fuels the growth and development of the organism which adds mass and complexity, perhaps becoming green algae.. During a period of global warming several hundred million years ago algae and other organisms proliferated, thrived and then died, falling slowly to the bottom of a warm prehistoric sea. If conditions were right, something called a nutrient trap could develop and these organisms were not broken down by oxygen and the carbon instead of being returned to the surface as CO2 became instead sequestered in an accumulating mass of carbon rich matter. I will gloss over the additional details of conversion and oil formation and skip ahead to Pennsylvania when an entrepreneur named Edwin Drake drilled the first commercial oil well in 1859. America was thus first to the petroleum banquet and it was this discovery and utilization of an unimaginably rich and concentrated energy source that fueled an explosive industrial expansion. We have consumed in a period of only 150 years what it took the world more that 100 million years to produce. And now as Richard Heinberg has stated in his book of the same name, “The Party’s Over.”. It is typical of organisms and communities that experience an unexpected energy subsidy to go through a process of overshoot and collapse. We are entering what another well known writer on peak oil, James Howard Kunstler has coined “The Long Emergency.”
The world is today producing about 74 million barrels per day (Mbd) of crude oil. This is just crude and doesn’t include other categories such as ethanol, biofuels etc. WORLD PRODUCTION has been on an undulating plateau since about 2005. The US consumes ¼ of that total. Imports peaked in 2005 at13,714,000 barrels per day and has declined to 11,755,000 per day in the last full year of statistics (2010). This represents a drop of 2 million barrels per day primarily due to the prolonged and severe recession. US production reached a low of under 5 million barrels per day in 2005 but has rebounded over 10% in the past 6 years, primarily due to the Bakken Shale fields in ND. In 2010 the figure was 5,512,000 barrels per day. Put in percentages in 2005 the US was importing 72.5% of its oil products and by 2010 that figure had dropped to 68%. I caution the reader that there are a myriad of categories of petroleum production and the figures are often manipulated to reflect the authors bias or agenda. If you look at all sources of production including lease condensates and so called refinery gains, bio fuels, ethanol production and compare these net imports/exports then the numbers change significantly. For example it drops our imports to about 50%. I have chosen to make my comparisons of crude oil alone. I hope that isn’t terribly confusing. My sources for these figures are the EIA. The link: http://www.eia.gov/totalenergy/data/annual/pdf/aer.pdf. Figures to remember: The US is 4 ½% of the population and consumes 25% of the world’s oil.
It is absolutely fundamental for the reader to grasp how phenomenally important oil has been to the transformation and development of modern society. It is much more than a fuel. It is the feedstock for plastics, fertilizer, pesticides, paints, fabrics, and lubricants, pharmaceuticals, and a myriad of building materials. Indeed, one author has written that oil will eventually become too valuable to use as a transportation fuel.
Oil is the basis of our economic system, a point largely missed by contemporary economists who maintain that it is the allocation of capital and labor that forms this basis. Our growth economy exists because of oil. It is also the basis of our credit and debt based financing of the economy. Oil promotes growth by its very efficiency as a low cost energy source. The low cost energy of oil fuels almost all of our industrial machines and it is in effect itself a kind of machine that converts energy into wealth. It is analogous to having thousands of slaves at our beck and call every day. My 200 hp pickup truck thundering down the highway does the work of 4000 people! Many of the empires of ancient times became empires on the basis of the energy harvested from slaves. At one point it is said that ancient Rome had a ratio of slave to free of 9:1, which was an unsustainable ratio. The contemporary American has the equivalent of 50 slaves working for him 24 hrs a day. This will also prove to be unsustainable. Petroleum has been a primary or contributory cause of many recent wars with the Iraq fiasco only the most recent example. The inevitable depletion of this, the most important energy source ever discovered, will alter our lives going forward like no other event in national or world history.
It is time for us residing in this beautiful isolated valley to recognize the reality of Peak Oil and how it will shape the future of Jackson Hole. We can either shape our future adapting in the context of petroleum depletion or fall prey to its effects. I believe that local governments are the best qualified to evaluate our local dependency on oil and what strategies we might employ to try to attenuate and mitigate the impacts of scarce and expensive oil upon our community. I have little expectation of help at least initially from our state or national government. Fortunately we in Jackson have had some farsighted local leaders who love this valley and who have tried to provide a culture of sustainability, community organization and responsible energy consumption. I believe it is now time for the people of this area to come together and devise a master strategy for the future life of our town. I hope Jackson will survive as a healthy place to live and work and raise families but if it does, it will certainly be in a much different form than it is today. If it does, it will become intensely local. Angus Thuermer, one of the editors of the Jackson Hole News and Guide newspaper, remarked to me that Jackson lies at the” end of the food chain.” We are indeed a long way from any metropolitan area. Without petroleum no one and nothing arrives in Jackson. And that means virtually all our food, our fuel, our building materials, our medical supplies, even our elk feed. What do we make in Jackson? Nothing. How would we cope if that pipeline went dry, or if the electrical grid failed? Some of you who were here in the winter of 1978 remember what it was like when the mercury plummeted to 60 below zero. Power lines contracted and snapped, the ceiling in the courthouse collapsed and travel came to a standstill with no electricity, no gas, and no lights. Eventually temperatures moderated but that event gave me a foretaste of what cataclysmic energy deprivation felt like. Our future energy shortages will probably involve shortages of individual energy components, perhaps like what China is experiencing at the moment. In Chendu, the capital of Sichuan province, a city of 10 million, trucks have been lining up at the three stations who have diesel, waiting hours to receive their paltry ration of 40 litres..Gasoline is $4.54/gal in some towns in the eastern Sierra and almost $10 in the Hebrides when they can get it. Maine-iacs in the state of Maine are being asked to conserve electricity because of short supplies. These are places at the end of the food chain too.
My point is that it is time that we develop a plan for coping with energy resource depletion before it is upon us. An event of this magnitude will almost certainly involve a task force approach to assess our vulnerabilities and strengths and local resources to devise our survival plan. This may involve formulating a risk management approach of scenario creation looking at every important component of the community such as communications, policing, delivery of essential services, access to food and water, care of our vulnerable members and all of this to be done in a context of scarce or expensive petroleum or electricity. This town has done a lot of this work already, for example powering all of its municipal operations with renewable energy, but equally important besides crisis management is to look at what changes we might undertake to make this valley and its towns more livable. For most of the 20th century we built our towns to service the automobile and our expanding sprawling suburbs. The existence of sprawl was only possible because of virtually free seemingly inexhaustible energy. In retrospect, it was a terrible expensive mistake. The outlying suburbs are ultimately doomed. We are fortunate we live in a small place and haven’t had the room to expand like our neighboring states to the south and west. But we should take action now. At the very least, we should mandate energy efficiency in all aspects of our lives. This is not something we can leave to market forces. Increasing efficiency is easy. It is the low hanging fruit. This must involve all aspects of county and regional planning. We will need to look at our civic structures and building codes. We should use carrots as well as sticks to ensure compliance. We need first to educate and convince our citizens of the necessity of our task but we will need their cooperation. Increasingly as we localize, we will need to rely more and more upon each other personally. For example, we may need to think of abandoning plats for new suburbs composed of single-family homes and mobile homes. In a cold mountain valley, they are energy hogs. We should look at contiguous structures of higher density with super insulated building envelopes, fuel stingy appliances and perhaps earth sheltered or solar thermal augmented design features. Germany is doing this today. Offer our builders options to reduce administrative and permit costs if they can find ways to build green. For example I would waive all permits if a builder could increase the energy efficiency of a building say, 50 or 100 % over a conventional building. Building material costs can only increase in the future and we must build for extended building lifespan. We should abandon single use zoning and move immediately to mixed use where people could live and work and shop in the same place. Some current absurd codes that require so many parking spots per unit need to be abolished. I recently returned from northern Italy and in Bolzano people can walk to obtain all the necessary and enjoyable niceties of life. The streets are crowded with folks on foot and on bicycles that are easily rented in the town square near the train station. Cars are discouraged but not prohibited. And striking to an American’s eyes, very few people are FAT. Small trucks supply the stores, offices and habitations with their necessary supplies. Many of the workers live on site. The first floors seemed to be shops and restaurants, the next floor was often office space and above the offices were apartments and homes. Alleys allowed the offices and retail shops to function without disturbing pedestrian traffic. We could do this in Jackson. As another local example, we have a sprawling largely single floor hospital that is energy profligate and inefficient as are most hospitals. We have staff and nurses who cannot find affordable housing often coming from great distances over perilous roads from Star Valley and Idaho. Why don’t we have a 4 or 5 story hospital with housing and necessary shops for our staff? I was in just such a hospital in France 30 years ago after a skiing mishap. The nurses lived on site in the hospital in their convent. Why don’t we adopt a livable sustainable sister city instead of cities overseas with which we have little in common. Certainly there are state and federal regulations that will have to be changed to accommodate a healthy new dynamic but it just those existing regulations that have let us to our current predicament.
This discussion must begin with life’s basic necessities starting with food and water. How can we procure our food locally? How many people could this valley support if we had to feed ourselves? Maybe we should think about permitting sustainable farming practices around our periphery if the soil is suitable for agriculture. That flat fertile land in the National Elk Refuge looks very suitable for agricultural production for the town of Jackson. Kelley Warm springs could be a good place for a geothermally heated greenhouse. We may want to look at a drilling plan to try to prospect for other hot rock geothermal areas to heat our greenhouses .Why not produce electricity domestically? Our consumer owned utility allows net metering but why cannot Lower Valley or our state government help offices and homes become individual mini power plants delivering power to our local grid with wind or PV solar or local hydro? A lot of electricity available on the regional grids is lost to transmission losses. We have a recently rebuilt dam on Jackson Lake, which probably could supply the entire valley with cheap hydroelectric power. I believe it could be done without disrupting wildlife, our recreational businesses or visually impairing the beauty of that great lake. Of course all of these ideas involve difficult trade offs and compromise but obtaining a source of renewable clean energy is a potentially huge payoff.
This is a valley dependent on tourism. Will the tourists continue to arrive from the far-flung corners of the empire if gas or JP4 jet fuel goes to $10, $20 or $50 a gallon or if it becomes rationed? There is one way that they could arrive. That is by rail, the way visitors to Yellowstone used to arrive. Trains are unique in that their engines can run on almost any fuel from electricity to coal to corncobs. The same cannot be said about planes or buses or heavy trucks. Our valley electricity could supply those trains and streetcars and trolleys to move our guests who will always want to see this, the most beautiful valley in America. We should move to electrify our entire national transportation infrastructure immediately. It will take time to lay track and build a rail network but Wyoming is one of the richest states in the country per capita and we need to start this immense project while we still have surpluses. Where will the money come from for this massive project that will rival the interstate highway network in scope and cost? Our country has subsidized automobiles and highway based transportation and aviation for almost a century. The gas tax is $0.18 a gallon and the tax on jet fuel can be as little as 4.4 cents!! We need to drastically raise the tax on petroleum while there is still petroleum to tax. Alan Greenspan recently suggested $3.00/gallon, which is about what Europe charges. In fact it may need to be more because they already have a rail infrastructure. There is no way we can repair and maintain all our roads and bridges nor should we. We need to prioritize our key travel corridors and gradually abandon non-essential maintenance on hard surfaced highways. Get used to gravel roads. They are in your future. Asphalt comes from what? And concrete is extremely energy costly to produce. The 8-lane concrete and steel highway bridge across the Mississippi to Minneapolis  cost a small fortune and will have a limited lifespan. A steel rail bridge is far cheaper and faster to build, inspect and maintain. Forget airport expansion projects anywhere. Perhaps they can morph into transportation hubs for a variety of transportation options but air travel will likely become what it was in the dawn of aviation, a conveyance of the wealthy. If you have traveled on France’s bullet trains or Italy’s sleek Eurostar streamliners that silently blow past Ferraris on the autostradas, you’ll soon forget the pleasures of removing your shoes under the grim faces of the TSA.
Our community may need fewer hotels and restaurants in the post Peak Oil Era as our population and businesses strive to live within the carrying capacity of this valley. A lot more of us will probably be engaged in farming and ranching and gardening and few of us will have careers in marketing and human resources. Eventually Wyoming may come to resemble what it looked like at the turn of the last century. It seems to me that that would not be such a bad thing.

A Dangerous Solar Storm

The current ongoing solar flare has inspired me to re post from my old blog an article dealing with solar storms which pose a real and serious danger to the electrical grid and other complex electronics of our industrial society. Enjoy the Aurora!

The old blog may be accessed Black Swan from Outer space which includes some important graphs and images.

The solar cycle or the sunspot cycle refers to the 11 or 22  year cycle in which the amount of sunspots counted on the surface of the sun increase and then decrease over a period of years. Whether you are in a waxing or waning phase is one of the determinants of good long range high frequency radio reception. I am a Ham and aficionado of short wave radio and we hams tend to keep up on where we are in the sunspot cycle. While googling on the sunspot cycle, I  stumbled upon an reference to  a perfect storm scenario of  damage to our communication and  navigation infrastructure and  our electrical grid  as a consequence of a possible future severe solar storm. Some of the links were hysterical apocalyptic reports from bloggers gone batty but the single useful link was a 132 pg paper from the National Academy of Sciences 1.5 day meeting in May of 2008 entitled

Severe Space Weather Events–Understanding Societal and Economic Impacts.http://books.nap.edu/openbook.php?record_id=12507&page=9

I have a long time interest in astronomy, astrophysics, and communications  and I found the paper well written and fascinating. Severe Space weather is a  very significant low probability-high consequence event that I would like to address in  this blog.

The key to understanding the magnitude of this low frequency/high consequence(LF/HC) solar storm event is the foreknowledge of the way our complex society is organized. Modern industrial society is characterized by a series of complex interwoven networks, like a massive Venn diagram or spiderweb. It is a web of dependencies and inter dependencies in a complex adaptive system highly reliant upon electrical energy. I have discussed such system vulnerability in previous discussions and one particular aspect of this system vulnerability has to do with how these systems are organized. One example I offer is how information travels between computers and servers corralled and mediated by appropriate software. The engineers and managers of such systems are of course under the thumbs of bean counters who demand low cost high speed networks, ie., efficient networks. They do not emphasize robustness. A robust network would have multiple alternative nodes and pathways  and back up systems which would normally go unused except in a system overload or failure. Building robustness into the system costs money and as a consequence in many systems as in the general world, bottom line considerations rule.Such efficient systems are vulnerable to failure or collapse.

The most vulnerable part of our system is the electrical part, as electrical energy drives virtually all aspects of modern communications, command and control functions, finance, navigation and transportation . Electricity is distributed in most of our societies though electrical grids and that is the rub. We tend to generate our electricity in huge ie efficient  water cooled power plants and distribute this electricity boosting voltage by giant transformers to overcome the resistance in the transmission lines. Once the electricity reaches its destination, step down transformers restore the electricity to low voltage current we can use in our homes and factories. Electricity and magnetism are blood brothers and we have now come to how   electromagnetic superstorms  from our sun could overwhelm and collapse our electrical grid.

The sun is a dynamic hydrogen fusion reactor which occasionally erupts releasing huge amounts of energy in the form of coronal mass ejections(CME) and solar flares. The magnitude of such storms is captured in a paragraph from the NAS paper:

A major turning point in our understanding of space weather came with the discovery of coronal mass ejections (CMEs) in the 1970s and with the recognition that these, rather than eruptive flares, are the cause of non-recurrent geomagnetic storms.16 Large-scale eruptions of plasma and magnetic fields from the Sun’s corona, CMEs contain as much as 1016 grams or more of coronal material and travel at speeds as high as 3000 kilometers/second, with a kinetic energy of up to 1032 ergs.17 Eruptive flares and CMEs occur most often around solar maximum and result from the release of energy stored in the Sun’s magnetic field. CMEs and flares can occur independently of one another; however, both are generally observed at the start of a space weather event that leads to a large magnetic storm. To be maximally geoeffective, i.e., to drive a magnetic storm, a CME must (1) be launched from near the center of the Sun onto a trajectory that will cause it to impact Earth’s magnetic field; (2) be fast (≥1000 kilometers/second) and massive, thus possessing large kinetic energy; and (3) have a strong magnetic field whose orientation is opposite that of Earth’s.18

Some recent solar storms was a   blackout in Quebec during the magnetic superstorm of March 1989 and the disruption of the Anik Canadian  communications satellites in 1994, as well as some less well known events such as the disruption of Allied radars in 1942 by an intense solar outburst and the brief  loss of communication by Air Force One on a visit to China in 1984. The real Grand daddy superstorms were the storms of 1921 and  the so called Carrington Event in September 1859. Here is a description from the paper with a stunning conclusion :

The strongest geomagnetic storm on record is the Carrington Event of August-September 1859, named after British astronomer Richard Carrington who witnessed the instigating solar flare with his unaided eye while he was projecting an image of the sun on a white screen. Geomagnetic activity triggered by the explosion electrified telegraph lines, shocking technicians and setting their telegraph papers on fire; Northern Lights spread as far south as Cuba and Hawaii; auroras over the Rocky Mountains were so bright, the glow woke campers who began preparing breakfast because they thought it was morning. Best estimates rank the Carrington Event as 50% or more stronger than the superstorm of May 1921.

A contemporary repetition of the Carrington Event would cause … extensive social and economic disruptions,” the report warns. Power outages would be accompanied by radio blackouts and satellite malfunctions; telecommunications, GPS navigation, banking and finance, and transportation would all be affected. Some problems would correct themselves with the fading of the storm: radio and GPS transmissions could come back online fairly quickly. Other problems would be lasting: a burnt-out multi-ton transformer, for instance, can take weeks or months to repair. The total economic impact in the first year alone could reach $2 trillion, some 20 times greater than the costs of a Hurricane Katrina or, to use a timelier example, a few TARPs.

     Later in the paper I read estimates of $1-2 Trillion a year with estimates of 4-10 years to fully repair the damage. And that is just in the US! The crucial point to realize is that the US has not had a superstorm event of note since 1921 and 1859 when the electrical and communications infrastructure was in its infancy.

   Vulnerability varies across the country. Here is a map of the US with a circle of highest vulnerability as well as a map showing the percentages of transformers likely to be knocked out in a superstorm. Vermont appears at highest risk of 97 % and much of the southern states seem to be untouched.

http://www.blogger.com/blogger.g?blogID=5071600360293224636#editor/target=post;postID=2893806840157517367

The Midwest,NE and NW sections of the country

are at greatest peril. The barrage of accelerated particles from the sun disrupt and rearrange the earths magnetic field inducing ground currents which are amplified by the long grid transmission lines which act like giant antennas transporting dangerous current and voltages to distant regions, melting the copper windings in the huge transformers   as well as aging or damaging communication satellites and even posing grave risks to gas and oil pipelines. In such a blackout there is a cascade of breakers tripping and it is here that the real cancer of dependencies begin to manifest itself. With a loss of electric power, you have a loss of for example, water power. In many facilities like hospitals and defense establishments back up generators would kick in for a time but lack of water dooms electrical production due to lack of cooling, not to mention lack of water for human and animal consumption and agriculture and industry.

Communication is lost and much of the grid is under the command and control of computerized systems. Most of the large transformers are one off structures taking months to re manufacture. It is not possible to do field repairs in most cases and backup transformers are not routinely stockpiled. An additional complication is that is is difficult or impossible to model such a cascade of failures or run drills to prepare for such exigencies without shutting down vast areas of production and distribution of electricity. The paper lists the various agencies and branches that would have to respond to such a disaster and it is obvious that NASA and NAS are working hard to develop mitigating strategies to deal with such an apocalypse of electrical failure. For example, new frequencies and computer codes have been developed to add robustness to  GPS navigation but a sentence in the paper said it will be fully implemented in perhaps 15(!) years. An early warning system is obviously part of the preparation but the stunning speed which the particles can make the 93 million mile trip from the sun adds another layer of complication. It can arrive in as little as 17 hours as  in the Carrington Event and predicting the magnitude of the impact is problematic. Shutting down a grid for what amounts to a false alarm would be extremely costly and disruptive. A useful link is NOAA’s space weather prediction center which I will link. Naturally they have their own Facebook page.  http://www.swpc.noaa.gov.

 

My final comment deals with my skepticism of the level of adult behavior and competent leadership from our national government which was showcased for all to see with Katrina, a Category 3 hurricane.

   It is uncommon for the government to post alarming information to the general public and the core of the ruling class generally spare no efforts concealing worrisome negative information from the 310 million sheep who are waiting for an opportunity to get milk from the Federal tits, as my former senator Al Simpson patronizingly remarked recently. Deficits are an order of magnitude higher than stated, most banks are insolvent, Social Security, Medicare and Medicaid are soft brown fetid mush looking for a fan blade,public sector pensions are killing the states and we’re in a depression with no effective economic and political planning.  As a  final digressing aside, our  dear leader spends his time going on daytime yap TV “The View“,here answering the burning questions of the day concerning, Lindsay Lohan, his Blackberry and Snookie. I know he feels he has to do his bit with bread and circuses and brainless politicking but performances like that fill me with dismay. My real abiding fear is that  if such a solar superstorm were to occur today, it would be clusterfuck on steroids.

A new way to fund Government


The Corpus Callosum column by Jonathan Schlechter is always worth a look in the Jackson Hole News and Guide .  His columns in the Jan 11 issue inspired me to make a few comments. To refresh your memory, Jonathan discussed how economic activity and taxable sales related to that activity have changed in the past 5 decades and particularly in the past 10 years. This mirrors changes in the state and national economy in the same period.  In the 1950’s and “60’s the US was a balanced dynamic economy producing goods and services not only for its own citizens but worldwide. The industrial expansion following WW 2 fueled a growing middle class who produced “things” from our resources generating real wealth and rising incomes to a growing middle class. Government’s funding model was to tax companies and individuals involved in this post war boom .By making things, companies and individuals could buy things and people went from being citizens to becoming consumers. This was a time of real economic growth fed by very low energy costs and a huge economic advantage enjoyed by the United States who did not have her industrial base bombed to rubble as did Europe and Japan.  It was a time of low debt, rising productivity and rising incomes across all strata of society. This economic model started to change in the 1970’s and ‘80s and the broken economy of today bears little resemblance to the economy of 50 years ago. But what has changed? How has it changed?

      I think the most useful model of economic activity is to divide the economy into three segments: the Primary Economy, the Secondary Economy and the Tertiary Economy. I first read about this construct in The Wealth of Nature, by John M Greer. The Primary Economy is that segment involved in bringing resources to the wellhead, to the mouth of the mine, to the railhead at the edge of the forest for example. The Secondary Economy takes those resources ( eg.,oil, timber, oil and coal, and minerals) and delivers them to factories and workshops where people make things and sell them. This industrial production fueled a huge increase in services to those productive members. The sons and daughters of miners and farmers and factory workers became lawyers, doctors, economists, teachers, insurance salesmen, financiers and………bankers. This brings us to the Tertiary Economy. This Tertiary economy is the part of our economy which makes money off of money. A sound banking  and finance sector is crucial to the health and growth of the Primary and Secondary economies, taking in deposits and making loans, providing liquidity to the productive members working in the primary and secondary economies.  The members of the Tertiary Economy formerly made money by  loans to the Primary and Secondary economy, by putting them in Debt and charging interest on the debt. Keep in mind the Tertiary Economy while valuable to the other two, does not create wealth. Ideally, the Tertiary Economy facilitates real wealth creation by the Primary and Secondary members. Government  taxed the real wealth creators in  the Primary and Secondary Economies. This was the government funding model that Jonathan describes in his article.  In Wyoming  and Teton County it was working, that is until the last few years. But the secondary economy has been losing out to the Tertiary Economy for the past 30 or 40 years. The Tertiary economy has become the dominant segment of the economy. Fifty years ago the manufacturing economy was three times the size of the financial sector. Today that ratio is reversed.  The government doesn’t tax the Tertiary economy at the same rate as it taxes the Secondary economy. Members of the Tertiary economy have manipulated the political system and the tax code to their advantage so as to pay low or even no taxes. Their income is shifted away from earned income to the capital gains rate of a maximum of 15%. It is no accident that most of the 1% club lives within the Tertiary Economy.

       I would like to summarize how I would fund government in the current recessionary environment. In general I believe you tax what you want to discourage or where you want to find income. You might tax smoking or alcohol to reduce consumption for example, or tax imported oil to reduce the trade deficit. The tertiary economy should be taxed at the very least at the same rate as the working economy. Even a famous conservative, Ronald Reagan in the Tax Reform Act of 1986 raised the capital gains rate to the same as ordinary income. Warren Buffet, one of the nation’s richest billionaires also has come out in support of this concept. If you want to encourage jobs and earned income, the tax rate should be low.  But instead the tax rate is low or non existent for members of the Tertiary Economy. Goldman Sachs, the world’s most powerful Investment bank in some years has paid No taxes. IN 2008 they were at the 1% bracket despite receiving Billions in taxpayer largesse. It is time for local state and federal taxing authorities to tax the Tertiary economy which creates no real wealth but amasses fortunes and stop taxing economic activity, people and companies who create things and who actually work for a living.

I offer the following concrete suggestions to fund government. Some of the ideas are my own and some have been suggested before. Some would not be possible without changes to current tax law.

1. Capital gains rate at the same rate as ordinary income. FICA, Medicare and state income taxes to be assessed the same as in ordinary income.

2.Tax all financial transactions which would include real estate both commercial and residential, equity, bond and mutual funds trades, derivative trades, bank loans, hedges, insurance premiums etc.  For example, the amount of derivatives in the world economy is estimated in the $ Hundreds of Trillions ! Just a 1% tax on dervatives would yield trillions of dollars. That would raise a stock trade for me at Charles Schwab from $8.95 to $9.04!  Over 70% of US equity trades are said to be high frequency trades(HFTs), computer generated trades which add to the volatility of US markets benefitting only the tertiary folks in the investment banks and hedge funds.

3. Tax LBO and hedge fund activity at the same rate as ordinary income.  Many hedge fund managers have made in the hundreds of millions to billions in a single year and yet pay no more than 15% capital gains rate. This would only reinstate the policy of Ronald Reagan.

4. End subsidies to companies in the tertiary economy. Under current tax law, the overseas income of corpations is often shielded and deferred, sometimes forever. The  aircraft leasing arm of  Gerneral Electric has used this dodge for decades and it’s corporate taxes are often way below 10%.

5. Lower earned income and corporate taxes from a top rate of 35% to say 20-25% in the non financial sectors but make it a flat tax that will be paid regardless of deductions.

6. Wyoming is a state where the 1% club flock to, to avoid punishing regional and state taxes. There are many ways to tax the  unearned or inherited wealth of  these newcomers arriving from elsewhere. Many Chinese and Asian newcomers are moving money out of their countries to avoid taxes. The uberwealthy newcomers to Teton County have driven up the cost of housing to levels unaffordable to what’s left of our middle class.

7. Regardless of the incorporation structure, taxes to support  necessary government expenditures should be paid by anyone who straps on shoes and walks our soil and that would include non profit corporations, churches,and state and local buildings.   

8. Tax all unproductive wealth. Under current Wyoming law billionaires can shield hundreds of millions by for example setting up a ranch corporation of thousands of acres and pay little or nothing in property taxes because they are taxed at an agricultural rate. The nuts and bolts of a law going after this time honored dodge of the wealthy  and money launderers while not punishing productive farmers and ranchers would of course have to be worked out. Taxing raw land and raw lots at a rate to discourage buy and hold socially unproductive investment would free up the land for productive use. The way it is done now is to tax the land with a structure on it at far higher rate  than raw land. Use it or lose it.

9. Institute a carbon tax on the transportation sector. Road and port construction and maintenance should be 100% supported by users.. An easy first step is toll booths on the Interstates. Many states do this now. Commercial aviation pays little in the way of fuel taxes while using vast amounts of fuel burned in inefficient turbine engines spewing an enormous carbon load. Even private aircraft pay a trivial tax of only about  20 cents a gallon while the average automobile taxes are $.51/gallon, which itself is only about 6%.

Of Course I am aware that these suggestions are anathema to the  upper caste financial elites of the world who have purchased our political leaders and molded our tax laws at great personal expense. I have tried to explain how our economy has changed in the past several decades and continuing the current tax system of taxing earned income and ignoring unearned income needs to change.  In an upcoming blog I will attempt to lay out our economic future if we fail to enact some or all of these ideas. Sadly, I think the most likely scenario of state and local economies will be default. As James Schlessinger has said, we seem to have only two modes, complacency or panic.

Spring Creek Ranch Economic Forum

 

 

        This past week  I had the opportunity to attend a forum entitled”22 in 21″ purporting to examine the shape of the Jackson Hole economy in the 21st century. It was organized by Jonathan Schechter and the Charture Institute and was held at the exclusive Spring Creek Ranch Resort. Jonathan Schechter is a management consultant who writes a biweekly column, in our local weekly newspaper, the Jackson Hole News and Guide on economic matters  entitled Corpus Callosum.

     His recent column focused on the revenue shortfalls to local and state government funding over the past decade. His column was as always, clearly written and detail oriented, replete with beautiful graphs and devoid of conclusions, recommendations or an obvious agenda.

    I will comment on the forum agenda, what it was trying to address or achieve a bit later but I simply must remark upon the mystifying choice of Corpus Callosum as the title for an economic column. I wonder how many of his readers know the meaning of Corpus Callosum. For those who don’t, I offer the follow brief summary of brain function as I understand it as a medical doctor.

     Mammalian brains look alike but what distinguishes our human brain is the extra development of its cortex, the mass of cells lying on the surface of the brain just inside the skull.

    The Cerebra Cortex is composed to two hemispheres, the right and the left.

 The Left hemispheric cortex which I will call the left brain, is our dominant cortex. It is the “doing” part of the brain as opposed to the “feeling” portion of the brain, which is the right brain. The two brains are linked by the Corpus Callosum, a thick dense neural grid which functions as a sort of information superhighway between the two. The left and right brains are complementary but have very different functions. The left brain is data driven, a trillion cell C drive which interprets sensory and auditory input and stores and categorizes this data. It analyzes and prioritizes and judges.  It excels at pattern recognition and attempts to predict outcome based upon the data it has stored. It has the all important speech and communication centers in structures called Broca’s and Wernicke’s areas. The ego lives in the left brain.

     The Right brain is perhaps the seat of the soul. It is the emotive and feeling part of the brain. It attaches emotional meaning to the facts and events carried in the left brain. It is intuitive, artistic, creative, empathetic, and joyful, and when a human being experiences Nirvana or the deep inner peace of meditation or spiritual peace, it is the right brain which is dribbling the ball. The right brain specializes in analyzing non verbal cues like tone of voice or eye contact or body position to decide if what it is seeing is true or false. The right brain sees the big picture. It sees the forest. The left brain by contrast sees the trees. The Right brain has its head in the clouds. The left brain is grounded and down to earth, concrete. Again by way of review it is the Corpus Callosum which serves as the working relay and transfer station for all the activity going on between the Right and Left brains as it tries to integrate experience into some sort of balanced working model.

    My point in providing this brief and oversimplified neuroanatomy lesson is to illustrate the disconnect between conventional classical economic thinking

of economic progress and economic growth from what I saw at the “22 in 21” forum up at Spring Creek Ranch last week. The forum was almost entirely a Left Brain driven conference of economic accomplishment and history.

    The guest speakers included some well known and dynamic members in the valley in banking and tourism and real estate development and non profits. There was a mix of shameless self promotion and  anecdotes as well as some interesting history and intriguing facts. There was a fair amount of unrealistic wishin” and hopin” such as the comment that “what this valley needs is a direct flight between JH and San Francisco” to presumably facilitate the new information economy which of course was that speaker’s hope for the future.

      Many of the speakers rued the sharp drop in construction which of course meant the disappearance of middle class jobs. When I was working at Teton Village as a well paid construction worker a few years back many of those so called middle class folks were hard working carpenters and sheetrockers and concrete workers who only spoke Spanish! The notion that there is a sizable middle class in Jackson Hole is ludicrous. The conference was largely a convocation of the 1% club. As such it included their economic and growth assumptions which went entirely unquestioned and the lack of audience participation from a robust question and answer session was regrettable. The enormous issues facing Jackson Hole, the nation and the world were either lightly touched upon or entirely ignored. For example there was no mention of how Peak Oil could impact a remote valley entirely dependent upon oil fueling cars and airplanes for its tourists, its food and its supplies. Cheap fossil energy is the reason people can live and travel and spend money in Teton County. What is its future if Oil goes to $200/ bbl or $400/bbl or becomes scarce or rationed? It was just a few decades back that jet travel was almost non existent here. The likely possibility that passenger jet travel could decline or disappear in the next few decades was not mentioned. The airlines pay a miniscule tax on avgas and jet fuel even as the Federal government runs massive deficits. Fuel taxes are far under the maintenance or construction costs of highways, airports or bridges. I think we can count on an increase in fuel tax. Not mentioned.The massively expensive expansion of the Jackson Hole Airport was all deficit financed by Obama’s Reinvestment Act. The vast increase in Federal, private and consumer debt leading to a national or global economic depression was ignored as was the likely collapse of the European Union. How about  global climate change and its possible effects here ?Nada.

Tourism will probably always provide a cornerstone to the JH economy but was there any discussion how people could reach Grand Teton and Yellowstone Parks using other transportation options? Was Rail Mentioned? That is how tourists arrived 100 years ago. Was there any mention of ways to make JH more livable and walk able beyond our pathways? Was there any mention of local production of foods and manufacturing goods? We heard about the local success of Cloudveil for example. Thank goodness they are providing jobs……..in China.

    Jonathan Schechter’ theme was can we craft a 21st century economy which complements Teton County’s values, character and resources? I would say the answer to Jonathan’s posted question could be a guarded yes but the entirely Left Brain symposium I saw and heard At Spring Creek gave me no hope for optimism. If there was any activity in anyone’s Corpus Callosum at Spring Creek that snowy afternoon, it wasn’t evident to me.

     

I’m Back

This has been a long hiatus from blogging and now with the “termination dust” of new snow on the Tetons and outside temperatures less conducive to hiking and gardening and building, there is more time to reflect of all the interesting happenings in our world. I would like to draw attention to a recent post on thoildrum website and a valuable contribution by one of the long term editors who goes by the name of gail  the actuary. It is her take on The Limits to Growth hypothesis  from 1972 and how the recent world financial crisis might interact with their model. I will post the LTG illustration of various feedback loops as well as my response to her superb essay.

Here is the graph which will get the ball rolling:

And after you read her essay, here is my reply:

Blockbuster post, Gail. You added the necessary link to a likely affect of how debt based finance interacts with the LTG model and the various postulated feedback loops. Some of the comments were highly incisive and useful as well especially the comment of responses of non linear systems to these loops. The political financial powers know that the debt based house of cards is wavering and if you can’t keep the galley slaves pulling on the oars and making their payments, their whole world could collapse and every plan from Brussels to DC is an attempt to prop up the banks and prevent losses to the banks and the bond and equity holders, pension plans, hedge funds etc. All the plans are attempts to privatize the profit and socialize the risks and dump debts onto society and off the bank’s books. Will these central banks and financial elites succeed? I suspect this time they will fail and have to suffer losses. If they do again succeed they may find that their own heads may be at risk. If a debt cannot be repaid, it wont be repaid and banks will topple all across the world. The world is over banked and the TBTF banks need to fail to be replaced by new real domestic banks, not international casinos where the taxpayer backstops the house but doesn’t share in the profits.
I also have a bit of a quibble that I rarely see criticism of how GDP is calculated inconsistently not only in the US but across the world. It would seem obvious that the US deficit borrowing which counts as + GDP should be subtracted from GDP in all deficit years. That of course would lead to downward GDP revisions for the past decade. For example pulling off this years deficit would drop our GDP from $14.6 Trillion to $13 Trillion or so. It is hard for this writer to stomach the fact that a huge portion of our GDP is financialization, real estate transactions and various financial and insurance and governmental services which of course is paper pushing generating nothing of lasting durable value. We still produce “things” of course but that is now a trivial 9% of the economy and a good portion of that manufacturing is aerospace and defense and armament “things.” If you contrast how GDP is calculated for the US with countries that are not top heavy with paper pushers, countries such as the northern European countries and the BRIC countries where manufacturing is a much higher proportion of their economies, economies that produce things for export as well as domestic consumption, then you would find that the US share of world GDP would be lower than commonly assumed. The additional fact that increases the risk to a US collapse is how little the US produces of things that people need in their day to day activities as well as what industry needs in terms of tools, clothing, transportation, industrial tools, critical minerals and so forth. I now find that even box cutters which brought down 2 airliners in 2001 are almost entirely produced in China. If you add the political system which is held in universal contempt by a huge majority of citizens layered as a pathetic feed back loop to our current predicament, it would seem that all these factors are baked into a cake which is not going to turn out well no matter what is done, no matter what is proposed.Once a system has passed the point of no return, there may not be solutions to avoid decline and collapse. Growth may now be nearing an end as energy becomes ever more scarce and dear, and all those economic assumptions built up since Adam Smith may have to be tossed onto the dung heap of history.

Hiatus

I have been absent from the blogosphere for both family reasons(time to visit the kids and escape snowy Wyoming) and maintenance duties here at home and farm. I generally blog when I see topics of compelling interest and they certainly are out there in spades but the economic and social future is bleak with a president incapable of leadership and political parties incapable of rational thought. The financial establishment in Wall Street who should have been facing indictments and certainly jail time remain firmly in control having been instead bailed out by the hapless American taxpayer who derives his information from a clueless media and a managed political propaganda machine controlled by big finance and their sorcerer economists. The financial elites and the central bank continue on the  path of dollar destruction and unsupportable spending. The real Depression still lies ahead. I’ll be back as soon as I can find time to reflect.