Obama Finds A New Way to Strangle US Economy

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The scary question is, is he continuing to wound this recovery on purpose or by accident?

And which answer is worse?

Last Tuesday, President Obama announced his "Action Plan on Climate Change."

One of main "actions" is to kill a core piece of the US energy sector.

Among other things, he promised to use the Environmental Protection Agency regulation of carbon emissions to phase the U.S. out of coal fired power, even for existing stations.

Of course, environmentalists praised this move as a bold step against global warming.

Unfortunately, they're not very good at the economics of this.

So, I ran the numbers. And what I found was infuriating but not surprising: Regulations like this are the principal things slowing U.S. economic growth.

Did the Math

In the first four months of 2013, according to the Energy Information Administration, the cost per million BTU of power station coal was $2.35, while that for natural gas was $4.43 (other fuels were more expensive).

If the 11.9 quadrillion BTU generated by coal-fired stations in 2012 is exchanged for gas, the next cheapest alternative, the cost increase would be $2.08 x 11.9 billion, or $25 billion -- every year.

That's the cost of just one regulation, which the EPA imposes with a flick of its wrist, so to speak.

Of course, environmentalists will tell you that new environmental regulations have gains too. But in this case the carbon emitted by the (relatively clean) U.S. coal fired stations is a tiny fraction of the world's total. What's more, the obstinate refusal of the planet to warm up over the last 15 years is pushing reality to the very edge of the global warming models; it's becoming increasingly clear that the warming effect of atmospheric carbon is much less than the doomsayers predicted.

If that's the case, and the entire global warming effect is less than 2 degrees Celsius by 2100 (for example, similar to the 0.6 degrees Celsius warming in the 20thcentury), then the benefit from avoiding it is pretty close to zero, and the benefit from zapping all the U.S. coal fired power stations is a tiny fraction of zero.

Take another example, the Keystone pipeline, phases 3 and 4, currently being held up by the U.S. State Department. The current differential between West Canadian Select crude and West Texas Intermediate crude is a $16 discount for the Canadian product, according to the Chicago Mercantile Exchange.

The new pipeline is scheduled to ship 510,000 barrels per day of oil from Canada to the U.S. market - so each day's delay in approving the pipeline costs $8.16 million. With the unnecessary delay so far having been well over a year, it adds up.

Plenty of Examples

There are innumerable other examples. The CAFE automobile fuel economy standards introduced by President Obama in 2011, mandate average fuel economy of 54.5 miles per gallon by 2025. That standard is far too aggressive; it will be very expensive and difficult to meet - and the cost will be passed on to car buyers - or possibly to taxpayers if the auto manufacturers have to be bailed out again.

There is an additional more serious cost, not mentioned in the publicity, of the additional fatalities from the flimsy playthings Detroit will have to manufacture to meet the new standards.

If Washington wants Americans to use less gas, let them impose an additional gas tax, which is visible for all to see. Consumers will make their own decisions how much tax they want to pay - and the new tax will help solve the budget deficit (or be used to reduce other taxes), increasing GDP instead of reducing it.

Good Intentions and the Road to Hell

I think this German example is the poster child of government's misguided abuse of the markets.

Germany has a complicated and intellectually elegant system of "green" taxes on existing energy producers, combined with subsidies for renewable energy sources.

As a result 21% of Germany's energy in 2012 was produced from renewable sources. The cost of this, however, was that German consumers paid 36% more for their electricity than the EU average. Frankly, if I was a German consumer, global warming would have to reach to 5 degrees Celsius starting next week before I thought that kind of additional cost was worthwhile.

Bottom line: The overall cost of regulation is incalculable, because there are so many of them, by no means all environmental. The outrageous cost of large Federal infrastructure projects, which have to use union labor and wait untold years for approval, is another area of regulatory bloat.

If you look at long-term productivity data, you see that U.S. productivity growth fell sharply around 1973 - from 2.8% per year from 1948-1973 to 1.8% a year from 1973-2012 - and 1973 was just about the time all the big regulatory agencies got going (EPA 1970, Occupational Safety and Health Administration, 1970, CAFÉ auto emission standards, 1975.)

Compound that 1% annual productivity differential for 39 years, and you can conclude that without the drop, we would all be about 45% richer today.

What's more, the periods of exceptional regulatory enthusiasm, like the Carter and Obama administrations, have given the country the weakest growth.

The solution for investors? Put at least some of your money in countries where regulation is light and economically intelligent, such as Singapore and Chile.

About the Author

Martin Hutchinson is the Global Investing Specialist for Money Map Press. A British-born investment banker with more than 30 years of experience, Martin has worked on both Wall Street and Fleet Street. He is now the editor of the Permanent Wealth Investor, where he focuses on "Alpha Bulldog" stocks that pay high dividends covered by earnings. In his Merchant Banker Alert, Martin uncovers the fastest-growing companies in the fastest-growing economies and brings those ideas back home to you. For more information about these services, call our VIP Services group at 855.509.6600 or 410.622.3004.

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