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  • How It Ends

    Posted by Carl from Chicago on December 23rd, 2010 (All posts by )

    WIND POWER AND SPAIN

    Alternative power (wind & solar, primarily) survives because of subsidies that make it competitive with the traditional “base load” power sources of nuclear, coal, natural gas and hydroelectric power. These subsidies have to be passed on, in some form or another, to either the end user that pays the power bill or the taxpayer who funds it on behalf of all citizens.

    Spain, in particular, offered incentives that led to a large investment in wind power facilities. Spain was viewed as a “model” country for alternative power by greens as a result of these policies.

    Today’s WSJ had an article titled “Spain’s Cuts to Solar Aid Draw Fire” that summarized the situation:

    In Spain, solar-PV plants (cost) roughly 10 times the price utilities pay for power produced from conventional sources such as gas and coal.

    Since Spain is having financial problems, these subsidies are expected to be significantly reduced, by up to 30%. The developers of these wind farms are crying foul, saying that Spain is reneging on its commitments and offering up a form of the “expropriation” argument that often occurs over power investments of this type.

    20 billion Euros had been invested in the solar-PV plants in Spain… the tariff changes could force many solar producers in default on their debts.

    It is interesting that debt-holders assumed that citizens would want to pay ten times the rate of coal and gas power for “clean” wind power indefinitely. It doesn’t seem like a bet that is going to pay off for them.

    GOVERNMENT PENSIONS

    Another infeasible and indefensible scheme is also beginning to show cracks towards its inevitable collapse. This article describes the situation in the city of Prichard, Alabama.

    The financially troubled suburb of Mobile turned to bankruptcy court… when it simply ran out of money to meet pension obligations… Prichard proposed capping benefits to current retirees at $200 a month, down from monthly payments as much as $3,000.

    The obligations of many, many municipalities are unsustainable. Prior politicians promised benefits that can’t be paid without seriously reducing and impairing existing services. The type of “haircut” that Prichard was proposing seems very onerous but they have to pay for existing salaries and benefits and then the costs of the retired staffing on top of it is apparently impossible.

    At some point a new generation of politician will come into office and have to make the choice of either 1) raising taxes to unsustainable levels (and thus being thrown out of office) to pay for past pension promises 2) find a way to get out of the promises by either going bankrupt or somehow “cramming down” smaller payments.

    It is a good bet that many of the politicians will balk at raising taxes and seriously look at bankruptcy or some other way to reduce these costs simply because raising taxes during a recession when citizens are hard up is political suicide. The same forces (conflict avoidance, pandering) that allowed unions to amass such favorable terms while the fiction of pensions and 10% returns on investments compounded forever existed works exactly in reverse when the situation becomes dire; why would the politician try to sacrifice everything (including current workers) for past worker pensions and health benefits?

    In both these cases the fictions that citizens are willing to bear higher than market costs indefinitely for alternative power or to pay for lifetime pensions for people retiring in their 50’s is going to founder, and these consequences will ripple through the entire financial and governmental sector.

    This is how it ends.

    Cross posted at LITGM

     

    5 Responses to “How It Ends”

    1. clazy8 Says:

      I can only hope that the scale of the problem and the imminence of disaster will drive away political candidates whose main interest is self-aggrandizement, so that public office might be treated as the profound responsibility it rightly is.

    2. Carl from Chicago Says:

      Since I am from Chicago and Illinois I wouldn’t ever have such high hopes.

    3. Michael Kennedy Says:

      Unions’ response to the crisis will almost certainly result in a collapse of public support for them. The union leaders seem to believe they can bully the governments into funding these bloated pensions but they are delusional. When I was a teenager, I was a Teamsters member for a summer. During that time, I attended a strike vote. It was an education. The young members who had no family were all for striking to “show the company” they meant business. The older members with mortgages and kids in college were opposed. It was an economics class I never forgot. Now, common sense, as shown by those older members, seems to have fled even the Teachers Union, whose members ought to be more able to see the Big Picture.

      Amazing.

    4. cjm Says:

      unions are like bacteria, they only know one way to be.

    5. Shannon Love Says:

      The real flaw in public or private defined benefits pensions is the premise that the company or political jurisdiction would be just as fiscally sound 30-40 years down the road as they were when the union forced the pensions into place. This is a textbook example of statist thinking. Everything will always be like today.

      I think John Kenneth Galbraith is the most to blame for this. He created the idea, somewhat borrowed from Marxism, that corporations were “eternal.” They controlled markets and set prices so they would never face competition that would make them unable to pay benefits or even go out of business. In areas like the industrial northeast where big corporations anchored the economy, it followed that state and local governments could tax those eternal corporation whatever it took to pay for their own pension obligations.

      When the corporations proved not so eternal neither did the house of cards predicated on their immortality. Unfortunately, the associated unions seem completely unable to adapt. They are still stuck in the mindset of 1945-1965 when American big corporation ruled the planetary economy because of the fluke of WWII.