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May 4

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Depreciation Schedule Important to Investment and Growth

Today’s Bloomberg BNA Daily Tax Report story covers the uncertainty about depreciation allowances and how it is impeding new investment and job growth in the restaurant and retail sector.

Legislation (H.R. 1265, S. 687) pending in both chambers would make permanent the 15-year depreciation schedule, which lawmakers and lobbyists said would provide businesses with the certainty they need to make long-term plans. The legislation is not scored, though a two year-plan covering tax years 2010 and 2011 that was enacted in December 2010 cost $3.6 billion over 10 years.

“There are projects to renovate retail spaces that are being delayed because of the uncertainty in the tax law right now,” Bernstein said. “And those delays in remodeling projects cost jobs.” Delays cost construction jobs, construction materials, the potential for increased foot traffic and sales, and more employment in the store or restaurant, she said.

Koenig said once the extenders phase is passed and substantive work on tax reform resumes, it is possible that lobbyists will ask lawmakers to look at an even shorter depreciation schedule.

“We would argue that 15 [years] may even be too high,” he told BNA, noting that in the restaurant industry, the franchisee/franchisor agreement often states that significant structural improvements must occur over a six- to eight-year period.

“We actually think that unlike some other extenders that may look at tax reform as a threat to their existence, we think we have a good story to tell in the tax reform debate,” Koenig said. “Ideally, we could argue that potentially a permanent fix for depreciation in this area could be less than 15 years.”

Lunsford agreed that something shorter than 15 years would make a big difference for her Pizza Hut restaurants.

“I don’t want to be greedy,” Lunsford said. “Would I like 10? Sure. But 15 is a heck of a lot better than 39.”

 

These points are concurrent with the key points from my recent Ways and Means written testimony on the impact of slower cost recover allowances:

  • Determinates of U.S. Investment: Over the past three decades economics and finance experts have examined the question of whether financial variables such as cash flow and cash stocks  have  a significant effect on investment. Numerous economic analyses and surveys have concluded that financial factors are important in determining investment levels. For example, a 1998 empirical analysis by Professors Gilchrist and Himmelberg concludes that for the average firm in their sample, cash flow and cash stocks raise the overall response of investment to an expansionary shock by 25% relative to a baseline case where financial frictions (capital market imperfections) are zero.
  • Accelerated Depreciation, the Cost of Capital, U.S. Investment and Jobs: If accelerated depreciation for equipment is repealed and replaced with economic depreciation which is generally longer than the current Modified Accelerated Cost Recovery System (MACRS), the cost of capital for new equipment will rise and investment is likely be as much as $191 billion lower in 2015 compared  to the baseline.  Each  $1 billion decline in investment is associated with a loss of 23,300 jobs.
  • Bonus Depreciation and U.S. Investment: Since the 4th quarter of 2007, which marks the beginning of the recession, through the 4th quarter of 2011, U.S. equipment investment has increased by 3.4%. Given the weakness of consumer demand during this period (real personal consumption expenditures increased only 1.8% during the past 4 years) it seems likely that accelerated and bonus deprecation have played a major role in sustaining investment in equipment.

As policymakers contemplate fundamental tax reform they need to weigh carefully the possible consequences of eliminating accelerated depreciation in return for a lower corporate income tax. It may be well to consider “paying for” corporate income tax rate reductions with cuts to entitlements for upper income individuals rather than eliminating proven investment provisions such as accelerated depreciation. Another option would be to move toward a consumed income tax where all investment is expensed.

Apr 19

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Renewable Energy Sources Not Delivering ROI to Taxpayers

I met with House Subcommittee Chairman Paul Brown (R-GA) ahead of my testimony House Subcommittees on Energy and Environment and Investigations and Oversight and the Committee on Science, Space and Technology this morning. I will discuss how costly renewable energy sources (solar, wind, biofuels) receive lion’s share of federal subsidies but are inefficient and yield minimal return to taxpayers. Cutbacks should be considered to help shore up our spiraling U.S. debt. Watch live here:http://mfile.akamai.com/65778/live/reflector:39667.asx?bkup=39949&prop=n

Feb 2

Tax Reform and U.S. Investment and Job Growth

Fed-Ex Chairman Fred Smith said tax reform was a key element for restoring strong U.S. economic growth.  The Bowles-Simpson plan is his preferred approach, but he would like to see continuation of the now expired expensing provisions for capital investment in the stimulus bill.  See today’s CNBC segment here:

His company and many others took advantage of the very powerful reduction in the cost of capital for investment from 2008-2010 via the Economic Stimulus Act of 2008 and subsequent legislation.

Scholarly work over the last two decades including some by ACCF Scholars John Shoven and Dale Jorgenson have shown that favorable investment provisions and the investment tax credit have a powerful impact on generating new investment.  ACCF research shows that each one billion dollar increase in investment is associated with 15-22,000 new jobs and conversely decreases investment, cut employment by the same amount:

Other ACCF research conducted by Dr. Allen Sinai shows that had the U.S. had a consumed income tax (where all investment is expensed) real US GDP would have been 5% higher in the 2001-2004 period.  

Feb 2

My Thoughts on State of the Union Address

This week I offered my reaction to President Obama’s remarks on energy policy in his State of the Union address:

 

Renewables: Time to Move On

By Margo Thorning

Chief Economist, American Council for Capital Formation

President Obama announced expansion of domestic oil and gas drilling which is a positive step. But then he renewed his commitment to backing renewable energy sources. There’s a time for stubbornness and a time to move on.

The Department of Energy’s EIA shows that new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional, available and secure natural gas and coal resources.

And in a world of real tradeoffs, every dollar spent on expensive renewable energy is money that could have been used by households and business for purchasing consumer goods or productive new investments that make economic sense. Increasing aggregate demand is key to strong U.S. job growth; spending more than is necessary on energy is a drag on overall demand for goods and services. Indeed, there is a direct linkage between energy use and economic recovery, as in recent years each 1 percent increase in Gross Domestic Product in the U.S. has been accompanied by a 0.2 percent increase in energy use. Inexpensive energy from conventional energy sources for electricity generation and transportation fuels is critical for restoring U.S. economic growth.

High U.S. electricity prices are a real burden on U.S. consumers. USA Today recently reported “households paid a record $1,419 on average for electricity in 2010, the fifth consecutive yearly increase above the inflation rate.” This “jump has added about $300 a year to what households pay for electricity. That’s the largest sustained increase since a run-up in electricity prices during the 1970s.”

Meanwhile, subsidizing renewables costs jobs and slows economic growth, burdening taxpayers by grabbing up a massive share of tax code subsidies. In 2010, an estimated 76 percent of the $19.1 billion in federal tax incentives went to renewables and for energy efficiency, conservation and alternative technology vehicle projects while only 13 percent went to fossil fuels, according to the Congressional Research Service. Some renewable electricity enjoys negative tax rates: solar thermal’s effective tax rate is -245 percent and wind power’s is -164 percent.

Frankly, there are many more efficient ways to boost our economy, even just within the energy sector. Chief among them, of course, would be to give the thumbs-up to the Keystone XL pipeline, which is slated to bring real jobs and lasting economic impact to America (rather than China, which is more than happy to gulp down traditional energy in a fashion that is far less “clean” than here).

Doggedly pursuing bad policies isn’t leadership. It’s just a bad investment that harms the very Americans the President’s administration is trying to help.

Dec 5

Dodd-Frank and the Welfare State

Great opinion columns by Robert Samuelson in Washington Post and Peter Wallison in Wall Street Journal.

Repeal of Dodd-Frank’s authorization for Fed to supervise all significant non-bank financial firms would help avoid future financial meltdowns by discouraging ”herding behavior,” promote economic stability and growth, thus easing the economic burden of supporting the U.S. welfare state.

Nov 29

Why Swiss Nuclear Phaseout Will Be Costly

See my thoughts on the economic impact of Swiss nuclear phaseout in today’s Wall Street Journal.

 

Nuclear Exit Comes With Costs

Switzerland’s Reliance on Reactors Means Switch to Other Sources Will Be Expensive

By GORAN MIJUK

ZURICH—Going green isn’t cheap, as Switzerland is about to discover.

Earlier this year, in the wake of the meltdown at the Fukushima nuclear plant in Japan in March, the Swiss government and parliament decided to get out of nuclear-power generation by 2034.

Switzerland has been a net exporter of electricity during the past few decades, profiting from the production of cheap nuclear energy and huge hydropower reserves. This has helped it build a strong machinery and engineering industry, nursing industry giants such as ABB Ltd and Sulzer AG, which benefited from stable and reliable electricity supplies.

But since the country’s five nuclear-power plants generate about 40% of its electricity, the switch-over to other forms of power generation is going to be costly.

“According to our initial estimates, we expect investments of some 100 billion Swiss francs ($108 billion) to replace the reactors,” says Sabine von Stockar from Energiestiftung Schweiz, a renewable-energy think tank. This, Ms. von Stockar says, doesn’t include the cost of dismantling the plants, which she expects could reach 1 billion francs to 5 billion francs for a single reactor, depending on its size and age.

The Swiss Federal Office of Energy puts the cost of dismantling the reactors and disposing of nuclear waste at around 20 billion francs. Swiss consultancies Infras and TNC Consulting, which conducted a study on behalf of environmental groups such as Greenpeace, expect investment of around 65 billion francs to be needed by 2035. The Infras and TNC estimate doesn’t include the cost of decommissioning the reactors.

The Swiss decision came in response to rising popular fears about nuclear energy following Fukushima. While Swiss lawmakers have kept the door open to re-introducing nuclear power if the technology can be made safer, environmental groups have lauded the move and believe the phase-out can be managed without jeopardizing the economy. But utilities, business groups and economists fear the switchover risks curbing growth.

“Phasing out nuclear power in Switzerland will have harsh consequences for economic and job growth due to the very likely large increase in electricity prices,” says Margo Thorning, chief economist at the American Council for Capital Formation, a U.S. think tank.

Because of the high proportion of Switzerland’s power derived from nuclear generation, Ms. Thorning expects the economic impact to be deeper than in Germany, where nuclear energy makes up only some 25% of the country’s electricity mix and which had also announced a withdrawal from nuclear power in the wake of Fukushima.

Felix Brill, an economist at Zurich-based consultancy Wellershoff & Partner, says, “It is difficult to assess the economic impact of a phase-out because of the many long-term legal and technical variables.” But some researchers have come up with estimates. A study conducted by the Centre for European Economic Research, a state-funded German consultancy, found that a comparatively fast phase-out over 20 years could dent Switzerland’s gross domestic product. The consultancy calculated that should reactors go offline in suc
h a short time-frame, GDP growth could be slowed by 0.4 percentage point a year for a period of more than 30 years because of higher electricity prices. A researcher at ETH Zurich, Switzerland’s leading technology university, calculated that electricity prices could rise some 77% within the next 15 years if nuclear energy is replaced by renewable energy sources.

Environmentalists, however, expect price increases to be digestible. Stefan Batzli, head of the Swiss non-profit Agency for Renewable Energy and Energy Efficiency, says the country can produce all of its electricity needs from renewable sources by 2030, with the bulk stemming from hydropower, followed by solar and wind energy, part of which will have to be imported. But to achieve this goal, consumers need to reduce consumption by some 15%, something he expects can be achieved by using the most energy-efficient electric devices. “The U-turn will cost money. But it is worthwhile as Switzerland will become less dependent on other countries,” Mr. Batzli says.

Others even expect a boom for renewable energy firms that offer efficient electricity solutions. A study by consultancy McKinsey found that Switzerland could create some 16,000 new jobs in the sector, which on a global scale is expected to attract investments of some 540 billion francs by 2020. Engineering giant ABB has already moved deep into the field. “These factors create opportunities for us to supply more intelligent products and systems,” says Peter Leupp, head of ABB’s power systems division.

Large Swiss power utilities, which produce and distribute electricity, such as Axpo Holding AG, which, until this summer, were working on plans to build new nuclear facilities, disagree with this view. They warn that Switzerland’s energy security is at stake and that the country could face power bottlenecks that may lead to price rises and business interruption. Axpo Chief Executive Heinz Karrer has repeatedly warned that “Switzerland’s energy independence is at risk and that the government’s decision will bring high costs for citizens.”

Alpiq Holding AG, the country’s largest utility, which runs the Gösgen nuclear plant and has a sizeable stake in another nuclear power station, is preparing for a worst-case scenario. Just weeks after the government decided to discontinue nuclear power, the company embarked on a hefty restructuring and warned in October it will post a net loss this year because of heavy asset impairments. In September, Alpiq started a search for a new chief executive. Analysts expect a renewable-energy specialist to replace current interim CEO Hans Schweickardt in the next few months.

Competitor Axpo, the second-largest utility, which is currently hammering out a new business plan for the post-nuclear era that is likely to include massive cost cuts, is embracing the change too. Reflecting the new reality, the state-owned utility elected Martin Graf, a vehement anti-nuclear politician, to join its board, where he will represent the Zurich government, which holds a stake in the firm. “I am personally convinced, that Switzerland can survive without nuclear power,” Mr. Graf says. “In fact I am sure it will thrive with a purely renewable strategy.”

But the task of revamping Switzerland’s energy landscape is gargantuan even though 60% of the country’s energy production already comes from renewable hydropower sources. Wind and solar energy currently contribute only 0.2% of Switzerland’s energy consumption, while electricity from biogas and wood makes up about 1.9%. Several efforts to use geothermal energy, in which deep holes are drilled into the ground to tap underground heat, failed because of earth tremors or lack of the underground water that is needed to keep facilities running profitably. Likewise, efforts to upgrade several hydropower stations to produce more electricity have failed because of environmental concerns.

For this reason, Switzerland may have to compromise and stretch out the decommissioning phase for its nuclear plants to 2050, and also use carbon-dioxide-emitting gas-powered facilities, energy firms and researchers say. Konstantinos Boulouchos, professor for energy technology at the ETH, says that in such circumstances a nuclear phase-out is “possible and economically supportable.” However, experts warn that much will depend on the legal framework and subsidies, which the government has yet to hammer out.

Nov 8

EPA’s Sum Effect = Net Loss

My response to this week’s question on National Journal Energy & Environment Policy Experts Blog:

 

The clean air rules put forward by the Environmental Protection Agency will have a profound impact on our struggling economy.

EPA’s own data show that the CAA of 1990 have had a negative impact on GDP and growth see figures from EPA modeling here. The new rules are certain to add the uncertainty to the cost of electrical generation as well for other energy using and producing industries. Signs of the impact of uncertainty on the U.S. economy can be seen in the fact that gross private domestic investment is still $327 billion lower in the 3rd quarter of 2011 than in the 4th quarter of 2007 see chart. Each $1 billion loss in investment is associated with 15,000 to 22,000 fewer jobs.

In my testimony from February 2011 to the House Energy and Power Subcommittee on the impact of EPA’s regulation of GHGs under the Clean Air Act, I highlight that if U.S. capital spending declines by $25 to $75 billion, in 2014 there would be an economy wide job loss of 476,000 to 1,400,000 when direct, indirect and induced effects are included. As a result, GDP would be $47 billion to $141 billion less in 2014. See testimony here. 

Given our weak economy we should slow down EPA’s implementation of additional air quality regulations across the U.S. U.S. industry still faces huge uncertainties with additional regulator initiatives including Dodd Frank, health care and deficit reduction. The uncertainty created by EPA’s regulatory policies will exacerbate our weak economic recovery.

Oct 27

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Great Discussion with Eighth Grade Atlanta Class on Energy and Climate Change Issues

I had a great dialogue with a group of bright eighth grade students today at Westminster Schools in Atlanta, GA.  We spoke for close to an hour over Skype on a lot of interesting topics including whether or not we should have a carbon tax, if and when the price of renewables like solar panels and hybrid cars will ever come down, and whether or not the government should be funding green energy projects after Solyndra.  The students also asked my opinions on the Kytoto Protocol.

Throughout the conversation I underscored the fact that climate change is a global issue and therefore needs a collaborative approach that brings on all nations, particularly developing nations like China (whose GHG emissions exceed those of the U.S.).  I also highlighted the importance of making wise choices in energy subsidies and not to pick risky ventures that don’t attract private investment.  Any type of policy approach to tackle climate change must look at the costs and benefits, particularly now with our struggling economy.  U.S. proposals like cap and trade, carbon tax and others that don’t bring developing nations to the table put a strain on our industries and economy, resulting in job loss, higher energy prices and drops in household income, something our economy doesn’t need now.  In the end, there is little to no reduction of greenhouse gases globally.

I am very appreciative to participate in today’s discussion and am very encouraged to see such inquisitive students that are open to both sides of a complicated debate.  Thanks also to their enthusiastic teacher who served as a great moderator.

See the Power Point presentation I shared with the class.

ACCF presentation for Westminister Schools 10 27 11

 

Oct 24

See my op-ed in The Hill today

You can read my op-ed “The High Price of EPA Regulations” in The Hill newspaper today.

The high price of EPA regulations

By Dr. Margo Thorning, senior vice president and chief economist of the American Council for Capital Formation – 10/24/11

The Environmental Protection Agency (EPA) faced scrutiny on Capitol Hill again this week over the high costs of its record number of environmental regulations.  During a hearing of the House Oversight and Government Reform Subcommittee, the agency’s air chief denied consequences of the Clean Air Act on jobs and the economy and argued that her agency’s rules relating to automobiles and fuel economy actually creates jobs and support small businesses.

These claims echo those of EPA Administrator Lisa Jackson, who testified earlier this summer before the Senate Environment and Public Works Committee and cited specious economic benefits of the Clean Air Act Amendments of 1990.

An EPA report “The Benefits and Costs of the Clean Air Act from 1990 to 2020” states that the economic value of the Act’s air quality improvements will “reach almost $2 trillion for the year, a value which vastly exceeds the cost of efforts to comply with the requirements of the 1990 Clean Air Act Amendments.” The EPA report goes on to state that “Even if one were to adopt the extreme assumption that air pollution has no effect on premature mortality–or that avoiding such effects has no value—the benefits of reduced non-fatal health effects and visibility improvements alone are more than twice the total cost of compliance with 1990 Clean Air Act Amendment requirements.”

The much-touted $2 trillion claim is based on survey data that asks individuals what they would be “willing to pay” (called “stated” WTP) for a small increase in life expectancy and the wage differential between occupations of different riskiness, such as a commercial fishermen compared to an office worker (“revealed” WTP). The academic surveys of WTP used by EPA have no link to overall economic activity and do not address how (or if) WTP affects the components of GDP (consumption, investment, government spending and net exports). “Willingness to Pay” responses by survey participants or the wage differential between occupations with different levels of risk do not create any new jobs, cause any investment or increase levels of spending in the U.S. economy.

Ironically, EPA’s own simulations with its macroeconomic model stand in stark contrast to its WTP claims.  Its modeling shows that the CAAA has significant negative impacts on U.S. GDP growth over the 2010-2020 period. GDP declines by $79 billion in 2010 and by $110 billion in 2020 relative to the baseline forecast.

By 2020, there is a tiny increase in GDP ($5 billion) under the labor force adjusted case. Note that EPA’s calculation of a $5 billion increase in GDP in 2020 when health benefits are included is only a tiny fraction (0.25 %) of the $2 trillion in claimed “economic benefits” from the CAAA.

Other EPA regulations both enacted and pending, should also be evaluated using accepted methods to quantify their costs and benefits. For example, the proposed National Ambient Air Quality Standards (NAAQS), the new standards for industrial and utility boilers and the revisions to the Clean Water Act will raise costs and increase uncertainty for the private sector, states and municipalities. New, tighter emission standards should not be imposed with out careful review of their costs relative to their benefits.

No one disputes the important need to implement reasonable pollution and environmental regulations to improve clean air quality. But given the continuing weakness of the U.S. economy, stubbornly high unemployment rate and sluggish investment spending, a careful examination of actual economic and health benefits from these regulations are greater than the costs.

Dr. Margo Thorning is senior vice president and chief economist of the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies. www.accf.org.

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