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Economic Currents

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The Hawaii Clean Energy Initiative (HCEI): Watt, Me Worry?

The connection between the emerging field of sustainability science and the economics of sustainable development has motivated a line on interdisciplinary research inspired by the notion of “positive sustainability.” This notion is founded on three principles or pillars: (1) adopting a complex systems approach to modeling and analysis, integrating natural resource systems, the environment, and the economy; (2) pursuing dynamic efficiency, that is, efficiency over both time and space in the management of the resource-environment-economy complex to maximize intertemporal well-being; and (3) enhancing stewardship for the future through intertemporal equity, which is increasingly represented as intergenerational neutrality or impartiality. I argue that the Hawaii Clean Energy Initiative (HCEI) fails to satisfy all three pillars of sustainability, and consequently fails to achieve the "sustainability criterion" put forward by Arrow, Dagupta, Daily et al: that total welfare of all future generations not be diminished. HCEI shrinks the economy, contributes negligibly to reduction of global carbon emissions, and sparks rent seeking activity (pursuit of special privilege and benefits) throughout the State of Hawaii.

The HCEI, introduced in 2008, is a partnership between the State of Hawaii and the U.S. Department of Energy intended to lead Hawaii toward energy independence. How well does the HCEI comport with the three pillars of sustainability mentioned above? Unfortunately for Hawaii residents and their long-term welfare, not very well, despite almost unshakeable political support state-wide. The problem is not clean energy, pursuit of which, in advanced technology forms, is a worthy policy objective. The problem, rather, is the current approach to the initiative itself, with its emphasis on mandates, subsidies, and picking winners. It just doesn’t add up, starting with the HCEI goal: “...achieve 70% clean energy by 2030 with 30% from efficiency measures and 40% coming from locally generated renewable sources.” (After accounting for 30% efficiency, 40% of remaining energy use is 28%, for a total of 58% clean energy, not 70%).

What about alleged benefits of HCEI? Here’s a brief reckoning:

  • Strengthen our economy: Very doubtful. Renewable energy mandates and subsidies, coupled with the continuing monopoly power of Hawaii’s electrical utility, especially under the present revenue decoupling scheme, will maintain energy prices high, reduce consumer and taxpayer welfare, and accordingly, shrink (weaken) the economy. This was a key message of Nobel Laureate, Joseph Stiglitz, in his special lecture on sustainability at the University of Hawaii at Manoa in February 2012.
  • Increase our energy security: Not likely. Abundance of shale oil and gas is changing the global energy market, including prices and geographic sources. The future should see lower oil and gas prices and less dependence on supply from the Middle East. Even with the current high price of low sulphur fuel oil, current-technology renewable energy is not competitive in Hawaii without subsidy. Is it really better for consumer welfare to have higher, but allegedly stabler prices? Concern about supply disruption seems wildly exaggerated. After all, the mission of the U.S Pacific Fleet, headquartered in Honolulu, is to provide maritime security throughout the Asia-Pacific region, including commercial shipping to the State of Hawaii. And a natural disaster, severe enough to impede fuel delivery, would, in all probability, cause major damage to local energy infrastructure. Less severe disasters might cripple the vulnerable renewable energy sector without preventing maritime delivery of fuel. Security is enhanced, not diminished, by the diversity of energy sources.
  • Reduce our carbon footprint: A large, costly shoe for such a small foot. Hawaii currently imports about 40 million barrels of oil per year or about 0.1 million barrels per day. World-wide fossil fuel consumption (oil, coal, natural gas) comes to about 250 million barrels of oil equivalent per day (see annual data from the International Energy Agency or the U.S. Energy Information Administration). Accounting for the carbon intensity of the different fossil fuels, Hawaii’s contribution to global carbon dioxide emissions is on the order of 0.01%. HCEI will not meaningfully prevent climate change nor save the planet.
  • Make Hawaii a world model for energy independence: And serve as a model of welfare erosion as well. A common justification for independence among HCEI proponents is “keeping the money at home,” which represents crude, modern day mercantilism (exports are good; imports are bad), an economic policy that was discredited over two centuries ago by Adam Smith (The Wealth of Nations) in favor of international specialization and voluntary exchange (Endress, 2012, Economic Currents, UHERO). Pursuing independence, foregoing the welfare gains from trade, shrinks the economy.
  • Create a cleaner, more sustainable environment: Does this alleged benefit measure up to the three sustainability pillars?
  • Systems Approach: HCEI is a single-agenda program that downplays its interaction with and impact on the Hawaii’s wider economic-ecological system. Renewables are land-use and water-use intensive. Wasteful over-investment in renewable energy (i.e., subsidies and tax credits) may come, for example, at the expense of optimal watershed protection against invasive species. Marine resources, vital to sustainable tourism in Hawaii, may similarly receive inadequate attention.
  • Dynamic Efficiency: Mandates and subsidies are notoriously inefficient, because they reduce consumer and taxpayer welfare. Take the solar tax credit for example. For the fiscal year ending June 2012, Hawaii tax revenue lost due to solar tax credits (i.e., subsidies) amounted to $170 million; the Council on Revenues has adopted forecasts based on the assumption credits will rise to $240 million in the current fiscal year. That’s very likely to be an under-estimate, given the solar-installation frenzy that the commission’s announcement has engendered in anticipation of a possible credit crack-down by the Hawaii State Legislature.

The revenue loss is a direct burden; but the overall loss is even worse. “Excess burden” is the additional welfare loss to Hawaii residents because subsidies distort prices and incentives in the economy, inefficiently drawing resources from other production sectors into the renewable energy sector. (The renewable sector gains at the expense of jobs and income in the rest of the economy.) On top of that is the added excess burden of tax friction: every dollar of tax revenue raised to finance subsidies costs the economy about another 25 cents. (Economists refer to this friction as the social cost of public funds.) And where do most of the solar panels now being installed in Hawaii come from? China, not the United States. Using welfare analysis made standard by economist Arnold Harberger, 1964, Professor Jim Roumasset and I estimate that the total amount of excess burden due to solar tax credits for this fiscal year will come to about $360 million. That’s $1million a day swirling down the state drain. The benefits and costs of other policy manifestations of HCEI should also be analyzed, including the interisland grid, feed-in tariffs and regulatory policies regarding consumer prices.

Intertemporal Equity: HCEI’s implicit rate of time preference is high; political imperatives are favoring the present over the future, despite public relations appeals to the contrary. Rather than allowing renewable technologies to advance with R&D and become commercially viable without subsidy, Hawaii is paying a high price and foregoing other productive investment to lock in current, suboptimal energy technology. When the overall economic-ecological system is considered, Hawaii is making inadequate additions to inclusive wealth and is thus in jeopardy of not meeting the sustainability criterion and stewardship for the future.

HCEI may serve State energy objectives, but it is not in the public interest (i.e., overall consumer/taxpayer welfare. HCEI does not enhance intertemporal well-being and can not help save the planet through meaningful contribution to global carbon reduction. And moral justifications for the HCEI fail to persuade: in what way is the undermining of sustainability in Hawaii, and hence, the intertemporal well-being of Hawaii’s citizens, a moral outcome?

So, what are the alternatives? The British energy economist, Dieter Helm (not a climate change denier), 2012, offers some constructive recommendations for rational energy policies in Europe and the United States: (1) Institute carbon taxes; (2) Increase investment in R&D for advanced renewable technologies; (3) Adopt natural gas as a transition fuel until advanced technology renewables are ready for prime time. The first two recommendations are best pursued at the national level, although Hawaii should have some comparative advantage in R&D for ocean and geothermal energy. As to the third recommendation, the natural gas option should be put on the table in Hawaii for serious study and debate. The current administration in the State of Hawaii seems open to that idea (Governor Abercrombie 2013 State of the State address).

--Lee H. Endress

References

Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., Levin, S., Mäler, G-M., Schneider, S., Starrett, D., and Walker, B. 2004. “Are We Consuming Too Much?” The Journal of Economic Perspectives. 18(3): 147-172.

Endress, L. 2012. “Keeping the Money at Home!” Economic Currents. The Economic Research

Organization at the University of Hawaii (UHERO). Posted Jan. 23, 2012.

Harberger, A., 1964. ‘‘Taxation, Resource Allocation, and Welfare,’’ in J. Due (ed.), The Role of Direct and Indirect Taxes in the Federal Revenue System. Princeton University Press. Helm, D. 2012. The Carbon Crunch. Yale University Press.

Smith, A. 1776. The Wealth of Nations. 1994 Modern Library Edition.

WORKING PAPER

 

 


Economists Debate How Quick to Cut

Posted March 5, 2013 | Categories: Hawaii's Economy, Blog

At the start of the first post-sequester week, economists at the annual policy conference of the National Association for Business Economics (NABE) in Washington D.C. debated options for U.S. fiscal policy.  Two leading figures from the right and the left took starkly different views of where policy should head in the near term, but agreed on (at least some) longer-term directions.

Conservative economist John Taylor argued for what he calls a "pro-growth" package of federal spending reductions that would bring the share of spending relative to the size of the economy down several percentage points over the next few years.  He pointed out that similar reductions accomplished in the 1990s under Bill Clinton were accompanied by strong economic growth.

Former Clinton economic advisor Laura D. Tyson countered that in fact more government spending is needed in the near term, targeted toward investments in infrastructure and related areas that are key to future growth.  In her view, high unemployment represents a "pure waste" of productive resources today, the result of inadequate aggregate demand in what has been a painfully slow economic recovery.  

We find more to agree with in Tyson's argument. While there is a fairly broad agreement that government debt burdens the economy in the long run (more on this in a minute), it is hard to buy Taylor's argument that cutbacks will so improve business confidence that they will boost activity.  In fact, we know that fiscal expansion can be particularly powerful in times like the present with large quantities of unused resources. And like Tyson, we are concerned that failure to address the current high rates of long-term unemployment risks persistent damage to growth prospects going forward. Now more spending is a nonstarter in the current environment. But we do think this argues for as much caution as possible when considering how rapidly to cut spending from current levels. Especially if the cuts are indiscriminate sequester-style slashing that hits all areas of spending without regard to their relative importance or impact.

Not surprisingly, the two economists also staked out different philosophical positions on the appropriate size of government. Taylor emphasized the manner in which government can crowd out private activity, and so advocated downsizing to historical averages. Tyson asked what makes 20% special, and she made the case for public investments, particularly in education, that could pay big dividends.

So where do the two camps agree?  On the need now for clear plans to address the burgeoning federal debt in the long-term, since failure to do so creates uncertainties that hinder private investment. Not to mention the unknown potential for a debt crisis further down the road. Tyson called for a credible long-term deficit reduction plan as soon as "politically feasible." Given the Beltway dysfunction of the past several years, even this economists' consensus view seems like a tall order.
 

--Byron Gangnes
 


Airlines Bet Big On Hawaii With 275,000 Additional Seats

Posted March 3, 2013 | Categories: Hawaii's Economy, Blog

The latest infrastructure report from the Hawaii Tourism Authority suggests that airlines are betting big on Hawaii and increasing airlift to the state. HTA expects the number of seats on direct flights to Hawaii will exceed 2.6 M for the three month period between February and April 2013. This is an increase of more than 11% from the same period last year, amounting to roughly 275,000 additional seats.

Most of the additional seats are on flights to Honolulu International Airport on Oahu, the state’s main air travel hub, but the Neighbor Islands will see additional direct service as well. Lihue Airport on Kauai and Kahului Airport on Maui will see 15,000 and 18,000 additional seats respectively. Direct airlift to the Big Island will remain flat with small gains in Kona International Airport offset by fewer direct flights to Hilo International Airport.

Direct flights from the US Mainland to Hawaii account for 126,000 of the new seats, an increase of almost 8% from the previous year. Two new non-stop flights from major East Coast travel hubs introduced last summer are providing a big boost. Hawaiian Airlines’ new flight from New York’s JFK added 24,000 new seats and United’s new flight from Washington Dulles added 19,000. Additional seat capacity is also planned from Oakland International Airport (+15,700), Portland International Airport (+14,200), San Jose International Airport (+11,200), and Seattle-Tacoma International Airport (+11,000). Bellingham International Airport located in north-west Washington 22 miles south of the Canadian border will also see a significant increase in air service to Hawaii with 17,200 new seats scheduled; including 11,500 seats to Kahului on new flights by Allegiant Airlines and Alaska Airlines.

 

 

More than half of the increased airlift is expected to come on international flights from Asia and Oceania. Flights from Japan are expected to increase by almost 20% with an additional 84,000 seats. Direct flights from South Korea will add 25,800 additional seats, up more than 30% from the previous year; in 2012 the number of Korean visitor arrivals to the state increased by almost 40%. Big increases in direct airlift from Australia and New Zealand are in store following strong arrivals growth in 2012. Scheduled seats from Australia will increase by almost 26,000, a 46% increase, thanks to new direct flights from Brisbane and Melbourne. Direct flights from New Zealand will also add more than 8,000 additional seats; an increase of 140%.

The data suggests that airlines are convinced there’s room for the state’s visitor industry to continue to grow even after record breaking arrivals numbers in 2012. Will airlines be able to fill all of these additional seats? Stay tuned to UHERO as we continue to follow the state’s visitor industry this year!

-- James Jones and Peter Fuleky


Should we increase Hawaii's minimum wage?

Posted February 24, 2013 | Categories: Hawaii's Economy, Blog

The following post is excerpted from UHERO's Brief "Should we increase Hawaii's minimum wage?"

Raising the minimum wage may be one of the hottest issues of this years’ legislative session. Two bills have been introduced to increase the minimum wage and both bills also propose indexing the minimum wage so that it is adjusted for future inflation. President Obama made a similar proposal, to increase the federal minimum wage from $7.25 to $9 and index it for inflation, in his 2013 State of the Union speech earlier this month.

According to proponents, raising Hawaii’s minimum wage is necessary to help the working poor. However, as an antipoverty tool the minimum wage is undoubtedly inefficient. There is surprisingly little correlation between a worker earning the minimum wage and living in poverty (Charles Brown, 1988). Approximately one third of the minimum wage workers in the U.S. are teenagers and not heads of households. Furthermore, most teenagers earning below the minimum wage are not members of poor families. All but one recent study have found that past minimum wage hikes had no effect on poverty.1  These studies also find no evidence that past minimum wage increases have significantly reduced poverty. Only if a larger proportion of Hawaii minimum wage earners are members of poor households will raising the minimum wage prove successful in improving living standards here.


An obvious question is whether there is a better way to raise the incomes of low-income workers, one that does not raise these concerns. In fact there is: the Earned Income Tax Credit (EITC). The EITC is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

According to a 2007 study by the Congressional Budget Office (CBO), an increase in the minimum wage to $7.25, as was eventually passed that year, would increase wages by $11 billion, of which $1.6 billion would go to poor families. Increasing the EITC for large families and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families! The EITC does not directly raise labor costs to businesses, so it does not reduce the demand for unskilled workers. As a result, welfare recipients may be able to find jobs, gain job experience, and go on to earn higher wages as they accumulate skills.

So why increase the minimum wage when an increase in the EITC is a more effective way to eliminate poverty?  Clearly in today’s environment of fiscal austerity, increased spending to fight poverty has little chance of getting through Congress.  And, the EITC, like many government programs, has very high administrative costs.  The minimum wage, on the other hand, has practically no administrative costs.  Finally, policy makers may see raising the minimum wage as an important symbolic gesture of support to working families. No wonder the minimum wage is a popular tool among policy makers.

- Sang Hyop Lee, Carl Bonham, Atsushi Shibata

1 The one exception is Addison and Blackburn (1999), who find that minimum wage increases reduce poverty among junior high school dropouts. However, as Neumark and Wascher (2008) note, junior high school dropouts are older and unlikely to have small children; whereas most antipoverty efforts focus on families with younger children.

 

Read the Full Report


The Weakening Japanese Yen

Posted February 19, 2013 | Categories: Hawaii's Economy, Blog

Over the past three months the Japanese Yen has depreciated significantly against the US Dollar and other major currencies as policy makers in Tokyo try to kick start the Japanese economy. The Yen initially began to slide on speculation that newly elected Prime Minister Shinzo Abe would successfully pressure the Bank of Japan to ease monetary policy and finally kick the deflationary conditions that have plagued the Japanese economy. In mid January the Bank of Japan announced a pair of new policies designed to do just that. First the Bank adopted an explicit 2% inflation target and offered guidance that it would act to achieve the target as soon as possible. In addition to the new inflation target, the Bank announced a new round of quantitative easing that will begin in 2014 and continue indefinitely.

While these policies are not direct interventions in the foreign exchange market, there has already been an observable effect on the Yen. The prospect of an increased money supply thanks to "QE" and increased inflation eating into real Yen interest rates make the Yen less desirable on the margin. Over the past three months the Yen has depreciated by more than 15% against the Dollar, reaching levels not seen since mid-2010. A weaker Yen versus the Dollar, which means that a Dollar can be exchanged for more Yen and conversely that it takes more Yen to exchange for each Dollar, helps Japanese firms exporting goods to the US but makes American goods and services relatively more expensive for Japanese consumers.

 

The effect this swing in the Yen/Dollar exchange rate will have in Hawaii remains unclear. Given the volatile nature of currency markets it’s difficult to say whether the Yen will continue to depreciate against the Dollar, stabilize at current rates, or return to the long-standing trend of appreciation. However if there is a prolonged period of Yen weakness, Japanese visitors to Hawaii would start to feel the effect of reduced purchasing power in the State. Japanese visitors might cut back on shopping or opt for lower priced accommodations. Additionally given that Oahu hotels were almost completely full this year, Japanese visitors might start to get squeezed out by big spending visitors from fast growing markets like Australia, South Korea, and China. For now, we’ll just have to wait and see, stay tuned to UHERO for the latest updates!

-- James Jones

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