Niskanen Notes
The Next New Kid on The Block? Natural Gas Facing Competition from Cheaper Alternatives
The energy transition story across the Midwestern US has remained largely consistent over the last few years. Utilities that were once dominated by coal are now using increasing amounts of natural gas to produce their fuel mix, as waves of natural gas plants are being proposed and built on the remains of old retired coal plants. It was not that long ago that fracking and natural gas were being touted as the 21st century solutions to the world’s energy needs, providing cleaner cheaper energy than traditional fossil fuel sources. Embodying this trend is Indianapolis Power & Light Co.’s new $600 million Eagle Valley natural gas plant in southwest Indianapolis, enabling them to produce a majority of their fuel mix through natural gas.
However, an E&E article by Jeffrey Tomich last week provides evidence that investors, and even some regulators, may be pushing the pause button on building new natural gas plants and are considering renewable, and potentially cheaper, energy alternatives.
The cost of renewable energy technologies has dropped so drastically that proposals to build natural gas plants, viewed as sound economic and investment decisions four or five years ago, are now becoming increasingly difficult to justify.
Mark Dyson, of the Rocky Mountain Institute, recently co-authored a study that looked at whether renewables and distributed energy are more cost-effective options than natural gas generation in replacing retiring fossil and nuclear plants. In examining four case studies of proposed gas plants, Dyson found:
“…clean energy portfolios to be cost-competitive with proposed gas-fired generation” and in three of the four cases found that the clean energy portfolios cost “8-60 percent less than the proposed gas plant, based on industry costs forecasts and without subsidies.”
Moving beyond simple price comparisons, the energy grid desperately needs to be updated to improve its security and flexibility in responding to changes in electricity demand, and renewables are able to adequately provide these attributes. Although no utility in the Midwest has been denied permission to build a natural gas plant, an administrative law judge in Minnesota recently ruled that the state’s second largest investor-owned utility, Minnesota power, failed to prove the need for a new $700 million gas plant because they did not adequately consider all the alternatives. This ruling, along with the overwhelming and diversity of benefits renewable energy can provide, should be taken notice by utilities if they plan on maximizing returns on their investment. No company wants to invest $1 billion only to find out that 4 years down the road a cheaper, efficient, and more popular product is on the market.
How Slowing Immigration Will Impact Prospects for Economic Growth
An article by Abagail Hauslohner and Andrew Ba Tran in today’s Washington Post provides evidence that Trump administration policies are not only slowing the rate of illegal immigration, but of legal immigration as well. A slowdown in immigration will inevitably impact the administration’s ambitious efforts to spur the growth rate of GDP.
Even without taking immigration into account, U.S. economic growth faces daunting demographic headwinds in the decades ahead. A post I wrote for SeekingAlpha early last year detailed three major demographic trends that have turned unfavorable to growth:
- A slowdown in the overall rate of population growth from over 2 percent per year in the 1960s and 1970s to about 0.3 percent today. In coming years, deaths will begin to exceed births.
- A rise in the dependency ratio (the ratio of the non-working-age population to the working-age population) from about 0.48 as recently as 2010 to 0.58 by 2025.
- A reduction in women’s labor force participation, which peaked at about 60 percent at the turn of the century but has now fallen to about 58 percent.
According to data from the Pew Research Center, immigration accounted for about half of the growth of the U.S. population over the past half century. Without immigration, population growth is expected to turn negative over the next 50 years.
According to the Pew report, immigration contributes to economic growth in three ways. First, it increases the rate of population growth as a whole. Second, it has a favorable impact on the dependency ratio, since immigrants are on average younger than the native-born population. Third, the educational level of immigrants has been trending up, boosting productivity growth.
The administration talks boldly of returning U.S. economic growth to rates in the 3 to 4 percent range, last experienced on a sustained basis 50 years ago. Falling immigration rates, added to other demographic headwinds, make such a growth target increasingly implausible.
Trump, NATO, and the Purpose of American Military Power
With a biannual summit with America’s NATO allies fast approaching next month, a number of stories have come out recently documenting President Donald Trump’s view of the Atlantic alliance. Unsurprisingly given statements he has made since his campaign, the president neither understands how the alliance works, nor the benefits it provides. Recent news reports suggest that Trump believes America’s allies are not spending enough on defense; that “NATO is as bad as NAFTA;” the alliance is too costly; and the United States might be better served by a partnership with the alliance, similar to the one Sweden has, without being a formal member (though White House officials claim the last point was a joke).
There has been a great deal of concern over how the American president’s disdain for the country’s European allies plays into the hands of Russian President Vladimir Putin—who, the White House announced today—Trump will meet with in Helsinki following the NATO summit. But there is something equally concerning about the president’s views on the NATO alliance: his understanding of the purpose of military power.
Trump’s frequent invocation of the cost of the alliance as animating his opposition to it echoes his justification for suspending U.S. military exercises on the Korean Peninsula at the summit with North Korean leader Kim Jong-un in Singapore earlier this month. Yet, as I noted in a Twitter thread following that summit, the fiscal justification is at odds with the president’s frequent boasts about the increased level of defense spending his administration has overseen.
Why does the president think the defense budget needs to be so large?
The United States spends a lot of money on its military. One of the major reasons why it does so is the need to project military power across transoceanic distances to defend allies, such as those in Europe and South Korea. If America’s allies increase the financial burden of defending the alliance, then the United States should be able to decrease its defense budget. If the United States decides it should no longer maintain these commitments, there is less need to project military power to Eurasia—and therefore little need to maintain its current level of defense spending.
Why is this important? Military power is an instrument of national policy. President Trump, however, seems to see it as a symbol: a manifestation of national—and, quite likely, personal—power. The military as an institution has little reason to push back against this view if it secures the resources necessary to fulfill its preferred strategy. Yet a military that serves symbolic purposes risks losing the limits its instrumental purpose places on its use.
Can Trump and Kim Muddle Through in Singapore?
President Donald Trump will meet with North Korean leader Kim Jong-Un later today in Singapore for bilateral talks on the latter’s nuclear weapons programs. There is a great deal of risk involved with this summit. But if the talks with Kim do not produce North Korean disarmament, does it necessarily mean disaster?
The fundamental issue in the study of international relations is how difficult it is for states to credibly commit to an agreement. In the absence of an international sovereign to enforce agreements, a certain amount of trust is required. That need for trust is why remarks by National Security Advisor John Bolton, and others, referring to a “Libya Model” for North Korean nuclear disarmament are so unhelpful. While President Trump has walked back rhetoric about a Libya model with regards to North Korea, there are other problems with his ability to credibly commit to an agreement. Two stand out in particular. For one, Trump has already suggested by walking away from the Iran nuclear deal that agreements by one administration—unless ratified as treaties by the Senate—are only good for the tenure of the administration that made them. Two, the President is mercurial to the point that it is unclear whether he will stand by any deal he might make himself.
And these problems are only on the American side of the table. North Korea does not exactly have a stellar history of honoring its commitments either.
Does this inability to credibly commit mean the Trump-Kim summit will end in disaster? Not necessarily. In a post today at the Washington Post’s Monkey Cage blog, Elizabeth Saunders of George Washington University argues that major changes—either good or bad—are unlikely to result from the summit. According to Saunders, there are structural issues that will make it difficult to change the status quo for good or ill. If change does occur it is not likely to be evident until well after the summit.
There are very big risks that could materialize from the summit given the individuals involved. So there are good reasons to be concerned about the outcome. However, Saunders is most likely correct that the likelihood of such a result—while not zero—is low. Instead, both the United States and North Korea will continue to muddle through in their frequently confrontational relationship—with the odds favoring neither lasting détente nor disastrous war. Given the price of a devastating war on the Korean Peninsula, that might be the best anyone could hope for.
Trump Administration’s Attack on Pre-existing Conditions Proviso Hits the Most Popular Feature of the ACA
In an attempt to invalidate the proviso of the ACA that prevents insurance companies from charging higher premiums to people with pre-existing conditions, the Department of Justice has joined a lawsuit against the Affordable Care Act brought by several conservative states. Critcs say that the legal basis for the suit is weak, but the political reasoning behind the DoJ action seems even weaker. The ACA as a whole has been gaining steadily in popularity. According to a Huffington Post poll of polls, a majority opposed the law until late 2017, but support now exceeds opposition by 50.4 to 39.5 percent.
Stranger still, the pre-existing condition proviso, targeted by the DoJ, is the most popular single feature of the ACA. Even back when a majority still opposed the ACA as a whole, a Kaiser poll found that strong majorities across parties supported protections for people with pre-existing conditions.
The lawsuit highlights a key problem in health care policy: Many chronic conditions are inherently uninsurable. Conventional standards require that an insurable risk must be fortuitous and that an actuarially fair premium must be affordable. Conditions like Type 1 diabetes meet neither criterion. For someone with diabetes, a lifetime need for insulin (and other care) is no longer a matter of chance – it is a certainty, and an actuarially fair premium would often exceed the income of the insured person. Overturning the proviso would not just mean raising premiums for those affected. Rather, many would lose access to health care altogether. As many as 50 million Americans could be affected.
Congress needs to come up with a fix. Any such fix – universal catastrophic coverage would be my first choice – should be implemented in an orderly fashion while ACA protections continue. A quick fix implemented under the emergency conditions that would prevail if the courts suddenly declared the ACA unconstitutional would be unlikely to result in a fair and lasting solution.