The long term view on energy

We have an energy problem in this country.  Our government, like our businesses, looks to the next political quarter instead of the long term.  A few weeks ago, President Obama spoke to reporters about the need to create a long-term energy strategy, and reduce our dependence on oil.  Unfortunately, each of the last seven Presidents has said exactly the same thing.  I personally defended Persian Gulf Oil in the Middle East, enforcing United Nations sanctions against Iraq, which amounted to an oil embargo.  I saw the United States Fifth Fleet, based in Bahrain, up close.  I can say that maintaining a base in Bahrain does not come cheap.  Why do I bring this up?  Our government spends a substantial amount of money subsidizing energy.  Additionally, the government does not regulate carbon, which means the external costs of the greenhouse gas emissions are borne by the general public.  Finally, fossil fuels have significant health impacts.  Over 10,000 people a year die from the particles emitted by coal-fired plants.  Additionally, hundreds of miners die quietly around the world.  As we watch the nuclear calamity that is taking place in Japan, it would be wise for us to consider the role of the Federal Government in creating this energy policy, and the failure of President after President to chart a new course for the United States with regards to energy policy.

We have an elaborate electricity grid, an infrastructure that badly needs modernized.  Consumers are ignorant for the most part about where their electricity comes from, they just want to be able to flip the switch and power their gear, without having to pay too much. Unfortunately, the myth of cheap energy has Americans convinced that it is our divine right to $.99/gallon gasoline and cheap electricity.  Our development in sprawled across the country, and people still pine for that isolated lot with two acres and a great view.  Unfortunately, without cheap energy, our house of cards will fall apart.

The Federal Government is positioned to help bring our country into the 21st Century.  First of all, our electricity infrastructure needs updated.  One agency that has a big role in the energy sector is the Federal Energy Regulatory Commission (FERC). FERC has jurisdiction over interstate electricity transmission, through the Public Utilities Regulatory Policy Act (PURPA). FERC is attempting to build new, modernized high power transmission lines for renewable energy; however, they face opposition at both the state level as well as from utility trade groups like the Coalition for Fair Transmission Policy. The commission represents utilities that want to make sure the costs of those lines are borne by the folks getting the power. Ultimately, between NIMBY concerns over siting new lines, and fights over who will pay, these are many obstacles to creating a new infrastructure capable of empowering large-scale clean energy production. The Federal Government can also nurture decentralized, local renewable power generation through policies like Feed-in Tariffs.

With energy consumption in transportation, our sprawled development is problematic.  Government needs to encourage smart growth, as it will pay dividends on lowering per capita energy consumption.  For example, in Southeastern Massachusetts, a commuter rail line is being designed to consider smart growth when planning station locations.  However, transportation consumption revolves around the automobile.  The Obama administration did a good job of getting automobile manufacturers to support a significant increase in CAFE standards. While it is not as progressive as Europe or Asia’s standards, it is still a significant improvement over Bush policies, and the rare effort that is supported by all stakeholders. One long-term issue for our transportation sector is what fuel will be used, and the infrastructure to use it. Right now we are invested in a gasoline infrastructure. Electricity is a more sensible step, but the authors here advocate for hydrogen. Hydrogen would require a significant investment in infrastructure; additionally, as a fuel, to provide the range expected of modern consumers, it must be highly pressurized – making it very difficult to use as a transportation fuel, especially in automobiles. Whatever route we go, it will be incumbent on the Federal Government to work with stakeholders to build the infrastructure necessary to support whatever becomes the ‘new’ fuel.

Ultimately, the main hurdle to the Federal Government charting a long-term energy policy is political will.  President Clinton hit the third rail when he proposed a Carbon tax early in his first term.  Both parties define prosperity around energy consumption.  The Democrats frame clean energy development as “Green Jobs” but haven’t challenged the Republican Party, or the American people, to seriously confront climate change, peak oil, or the various external costs of fossil fuels.  The myth of cheap energy goes on.  As it does, so does the piecemeal Federal energy policy, from President to President.


Our mental models and the financial crisis

Cover of "The Divine Right of Capital: De...

Cover via Amazon

Marjorie Kelly, in her book The Divine Right of Capital, constructs a bold critique of the role that stockholders play modern corporations.     She compares stockholders to the aristocratic feudal lords of yore, who made rent on “assets” into perpetuity without lifting a finger.  Instead, Kelly argues that both the employees who work to create corporate wealth, and the communities that provide the resources necessary to create that wealth, should earn a larger share of the wealth.  Kelly examines the framework of the corporation as it was first conceived, how the corporations in the United States were initially granted state charters to only serve the public good, and how that public purpose was eroded in our courts.  Examining the state of affairs today, Kelly concludes that all players, including stockholders, CEOs, Wall Street firms, and even you and I, are all complicit, but no one is guilty:

“We fool ourselves if we think we can find the enemy somewhere.  Our anger at the system leaves us like the farmer in The Grapes of Wrath, who when his farm was repossessed couldn’t find anyone to shoot.  There isn’t anyone to shoot.  The problem is our internal maps, and rethinking those can require some vilification of outmoded views.  But we must remember that we’re vilifying the value system of wealth discrimination – not the wealthy themselves.  Respect for the right to attain wealth is integral to the American psyche.”  (Kelly 99)

Kelly is absolutely right here; we all operate based on the internal maps, with their arbitrary assumptions and logic, to try to make a good life for ourselves.  Certainly, when one examines the litany of shenanigans that occurred in the recent financial crisis, it is easy to spot villains like Bernie Madoff; when reading deft accounts of the crisis, like Michael Lewis’s The Big Short, it is easy to ask how our economic game could be rigged as it is, and how we could have been so blind to the massive speculative bubble that would take down the global economy.  However, Lewis’s narrative is perhaps the most relevant to Kelly’s critique here, because the 20 or so people that saw the asset bubble for what it was were outliers, consistently critiqued by the establishment.  Their mental models were slightly off from the mainstream, most memorably Michael Burry, the one-eyed medical school graduate who was obsessed with the stock market from the age 12, and built a successful stock-picking blog that he wrote in the wee hours as a resident into his own hedge fund.    However, the majority of operators in our economy are simply following the rules of the game, to the best of their ability.  The idea of the American dream, which is echoed whenever a mother tells a child, ‘you can do anything you want,’ is a critical part of the American psyche.  Kelly is attempting to shift our mental models, so that we can see that our current paradigm doesn’t quite live up to the ideals of that American Dream; we are not the ‘Land of Opportunity’ we think we are.

Kelley identifies a critical fault in the current paradigm: the idea that shareholders ‘own’ the company, and the companies they own are required to maximize shareholder return above all other concerns.  Employees, who’s knowledge and ideas create the wealth of the 21st century, should under that paradigm be paid as little as possible.  However, Kelly brings a different mental model to bear:

“The principle is simple: efficiency is best served when gains go to those who create the wealth.  Thus, instead of aiming to pay employees as little as possible, corporations should distribute employee rewards based on contribution – while recognizing that in any humane social order, a living wage is the basic minimum.  Likewise, corporations might aim for a decent minimum stockholder gain but drop their focus on maximum gain.  The legitimate goal is reward based on contribution.  Since the contribution of stockholders has shrunk dramatically, their gains should shrink also.  It simply defies market principles to continue giving speculators the wealth that employees create.” (Kelly 108)

In light is the recent Global Financial Meltdown, it is helpful to consider what role those speculators played in the inflating asset bubbles, and the growth of subprime mortgage bonds into the dominant investment vehicle between 2005-7.  But step back for a moment and consider what would have happened if the rising productivity of the last decade were not entirely bequeathed to stockholders, but if employees got their share?  What if communities, instead of giving tax breaks to draw corporations like Boeing to move, instead received their share, and invested it in our crumbling infrastructure and public schools?  In short, both individuals and communities would bear some of the fruit of their own industry.  The system would be more efficient, and given the recent speculative disasters, we certainly wouldn’t be any worse off.


Works Cited


Kelly, Marjorie. The Divine Right of Capital.  San Francisco: Berrett-Koehler, 2003.  Print.