It's Even Worse Than You Think Page 15
Trump’s insistence that he can learn any subject in minutes and that the best advisers reside in his head stands in contrast to Obama’s approach. Obama often told Holdren that the memos he received about science issues should be longer and include more details. “Obama had a solid understanding of science and he asked questions that reflected his deep knowledge.”
The Trump administration asserts that science budgets are rife with what it calls “duplication and inefficiencies” that supposedly would not exist in corporate labs. Mick Mulvaney, Trump’s budget director, ordered federal agencies to identify research and development “programs that could progress more efficiently through private sector R&D, and consider their modification or elimination where Federal involvement is no longer needed or appropriate.”
Generations of politicians have relied on the budgetary unicorns of duplication, waste, and inefficiency. The Trump administration is notable for its zeal in promising more results from much less money so long as the tax dollars are spent by business, not government, or not spent at all. There is evidence aplenty that business is often as inefficient as or more inefficient than government.
In proposing sharp reductions in spending on science, Trump is trying yet again to get a free lunch. Indirect costs are things like administration, building space, utilities, and insurance in case the building catches fire or floods. In other words, they are part of the cost of scientific research. How much universities charge for overhead is a legitimate issue, but it is closer to a paper cut on a finger than the sort of budget-devouring waste that Trump imagines.
Nuclear physicist Rush Holt sees both contradiction and irony in the Trump approach to science, especially climate change and global warming. Holt holds a 1979 patent for an efficient solar heat system using salty water. He was a professor at Swarthmore before serving sixteen years in Congress as a representative from New Jersey and then, in 2015, becoming president of the American Association for the Advancement of Science. The association has been America’s leading organization promoting scientific research and defending freedom of scientific inquiry since 1848.
The Trump administration budget, combined with all the vacant science positions in government and the dismissal of expertise, vexes Holt.
“It appears that much of the federal agency work on climate change is being slowed down or stopped, even as you have Scott Pruitt from EPA and others saying, ‘climate science is so uncertain we don’t know enough to take economic actions,’ ” Holt said.
The logical response to such uncertainty would be more scientific research. Much of the research in climate science is done through two federal scientific agencies, the National Oceanic and Atmospheric Administration and the National Aeronautics and Space Administration. “And yet they are cutting the very research programs that might tell us even more,” Holt said in an interview.
“The silence from the Trump administration on science is ominous. It’s not just that he has not gotten around to appointing people to many science posts,” Holt added, but that Trump “doesn’t seem to have any sense that people from science can help him with what he is trying to do.”
Doubling the economic growth rate from around 2 percent to 4 percent or more was a key promise that candidate Trump made to voters. More than 80 percent of American economic growth in the four decades ending in 1949 came from technological innovation, economist Robert Solow of the Massachusetts Institute of Technology showed in 1956, work that won him a Nobel Prize three decades later. Other research shows that at least half of American economic growth since World War II stems from advances in science and technology.
Knowledge-based industries refers to the eighty-one American industries that generate the most patents and trademarks. They accounted for 45.5 million American jobs in 2014, roughly 30 percent of all jobs. Those jobs paid on average almost half again more than all other jobs. That margin of extra pay has been growing, from an extra 22 percent pay in 1990 to an extra 46 percent 2014, according to the Commerce Department.
The share of national economic output, the Gross Domestic Product, by these knowledge-based industries is growing. They accounted for 38.2 percent of the economy in 2014, up from 34.8 percent in 2010. Most significantly for Trump’s plan to expand American exports, these knowledge-based industries accounted for 61 percent of American goods exported in 2014.
There is one piece of knowledge we can deduce from the Trump budget cuts. Spending less on scientific research is not a policy to make or keep America great and it certainly is not a policy to put American workers first. Neither is raising the price of electricity, the most ubiquitous product of the modern age, yet that is what Trump set out to do immediately upon taking office.
Stocking the Swamp
Donald Trump handed out an important promotion on his first working day as president. It appeared to be a routine appointment, curious only because the official being promoted was a Democrat, a holdover from the Obama administration. The promotion didn’t garner a single line in The New York Times, The Washington Post, or The Wall Street Journal.
Understood in context, however, this promotion was a key to understanding how Trump would address his pledge to “drain the swamp” in Washington, block the revolving door between industry and government boards, as well as fulfill the core promise of his inaugural address, to act on behalf of forgotten Americans struggling to get by.
“We are transferring power from Washington, D.C., and giving it back to you, the American People,” Trump said moments after swearing to faithfully execute his duties.
For too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished—but the people did not share in its wealth . . . the establishment protected itself, but not the citizens of our country. Their victories have not been your victories; their triumphs have not been your triumphs; and while they celebrated in our nation’s capital, there was little to celebrate for struggling families all across our land. That all changes—starting right here, and right now, because this moment is your moment: it belongs to you. . . . January 20th, 2017, will be remembered as the day the people became the rulers of this nation again. The forgotten men and women of our country will be forgotten no longer.
It took Trump three days to forget the American people and their struggles. The promotion letter he signed was among the first of many actions showing that rather than draining the swamp, Trump was turning America’s capital into a lucrative paradise for the greediest predators on Wall Street and their clients. And rather than blocking the revolving door, this promotion and subsequent actions greased its pivot.
The promotion went to Cheryl LaFleur, who was elevated from member to chair of the Federal Energy Regulatory Commission, known as FERC. While it is a tiny agency with fewer than two thousand employees, FERC wields enormous power. How much you pay each month for electricity, part of the cost of the natural gas you use to boil water, and part of what you pay to fuel your car is determined by this agency. FERC licenses hydroelectric dams and determines the level of water behind them. It decides who can build oil and natural gas pipelines as well as high-voltage electric transmission lines. It sets the prices customers pay these monopolies and the profits the owners earn. And it oversees a growing and complex system of wholesale electricity markets that operate in more than half the states, a system Wall Street easily manipulates to jack power prices and generate colossal profits.
FERC’s financing is unusual. It is a federal agency, yet taxpayers do not cover its budget. The money comes from fees paid by the electric utilities, fossil fuel pipelines, and other energy interests it is supposed to regulate in the public interest. This financing arrangement is one reason the agency is often cited as the prime example of a regulatory agency that acts more like a handmaiden servicing the companies it regulates than a guardian of the interests of customers, or what economists call regulatory capture.
By law the commissioners are supposed to mak
e sure that both the prices paid by consumers and the profits earned by utility owners are fair. The legal standard for this is called just and reasonable. Often, though, FERC puts its thumb on the scales. For example, FERC allows oil pipelines to charge 54 percent more than their net profits to cover the federal corporate income tax. That would be entirely appropriate except for one crucial fact: Congress exempted most pipelines from this levy in 1986. Similarly, when interest rates fell in the twenty-first century, the commission maintained monopoly profit margins that ignored the cheaper cost of borrowed capital, another policy favoring the industry that finances the commission. And the commission approved electricity auctions under rules that by their very design tend to raise prices and are built on the assumption that electric-generating companies would follow textbook economics rather than find ways to further manipulate these markets to earn unjust and unreasonable profits.
A president who wanted Washington to act in the interests of forgotten Americans could find no better agency than FERC to reform as a demonstration of resolve to drain the swamp. For starters, just appointing one commissioner with a résumé as a consumer advocate would help. LaFleur, like all the other commissioners, came from an industry FERC regulates. She had been CEO of National Grid USA, an electricity monopoly in the Northeast owned by British investors. Her votes and written opinions had long established her as a guardian of industry. When presented with complaints, backed up by strong evidence, that Wall Street traders had manipulated the New England electricity auctions, LaFleur proved to be a sightless sheriff, blind to the evidence of price manipulations that cost consumers dearly.
In promoting LaFleur, Trump also forced the resignation of Norman C. Bay, who was the chairman. Bay was the only commissioner with a bent toward enforcement of the just and reasonable rules, as might be expected of the former chief federal prosecutor for New Mexico.
With Bay out, the commission had only two members, not the three required for a quorum. It was the first time in the four decades since Congress created FERC, or in the decades-long history of its predecessor agency, the Federal Power Commission, that it lacked the quorum necessary to make decisions.
The lack of a quorum blocked the planned Nexus Pipeline, a $2 billion project to build a 256-mile high-pressure natural gas pipeline in Ohio and Michigan, including a compressor station with a whopping 130,000-horsepower engine to squeeze natural gas into the pipeline. For comparison, each engine on a Boeing 777 generates only 110,000 horsepower.
Also stopped were eight proposed liquefied natural gas terminals to export the relatively clean fossil fuel found in abundance using modern fracking technology. Seven of the projects are on the Gulf Coast, the other at Jacksonville on Florida’s Atlantic coast. Delays in approving those projects hurt American construction workers, but benefited Australia, Qatar, and other countries that were signing long-term contracts to export boatloads of liquefied natural gas.
These delays in energy projects did not square with Trump’s America First strategy, his promise to focus on creating jobs, or his declared support for fossil fuel industries. The damage could have been stopped by simply naming new commissioners and getting them swiftly confirmed by the Senate. Instead, the Trump administration dawdled. Soon $50 billion worth of energy projects stalled because of Trump’s laxity.
More than a hundred days after he took office, Trump finally got around to making two nominations. His appointees were classic revolving door.
The first was Rob Powelson, a member of the Pennsylvania board that regulated utilities in the Keystone State. He was considered a nasty foe by consumer and environmental groups. Powelson openly expressed contempt for farmers, environmentalists, and just average Joes and Joans who complained that virtually unregulated fracking for oil and natural gas in Pennsylvania fouled water supplies, stank up the air, and pulverized paving, burdening taxpayers with the costs of mitigating damage to water supplies and replacing roadways. Powelson, speaking at a pipeline industry conference, brought up protesters at FERC who had accused it of bias in favor of pipeline owners. Said Powelson: “The jihad has begun.”
The other appointee was Neil Chatterjee, the top energy adviser to Mitch McConnell of Kentucky, the Senate majority leader. Having worked for the energy industry, Chatterjee was just the kind of revolving door veteran Trump promised to drain from the swamp. Chatterjee was also a cheerleader for the burn-drill-frack school of fossil fuel management that loves Kentucky coal and detests environmental regulations, the attitude that has diminished the quality of life in parts of Pennsylvania and other states where fracking abounds.
While the Powelson and Chatterjee nominations were pending before the Senate, Trump nominated a new FERC chairman, with LaFleur expected to stay on as a member until her term expires. This time Trump chose Kevin McIntyre, an energy industry lawyer known for pursuing the interests of energy producers against consumers. McIntyre was co-chief of the worldwide energy law practice at the law firm Jones Day. His clients, the White House said, come from every area FERC regulates—electric power, hydropower, natural gas, and oil.
The choice of McIntyre disturbed Daniel Sponseller, a Pittsburgh regulatory lawyer whose clients are consumer organizations and unions that assert that the electricity auctions are rigged to favor power plant owners. Sponseller was litigating electricity price manipulation claims that FERC refused to investigate, a refusal that surely would continue under McIntyre. “You can’t find a law firm more oriented to the energy industry and to electricity-generating companies than Jones Day,” Sponseller said, with its “massive District of Columbia and nationwide energy practice representing the big corporations and always litigating against consumers and energy-purchasers. Drain the swamp, indeed.”
With these nominations, there was no chance that the Trump administration would relieve struggling Americans of the rule that forces them to pay for a corporate profits tax on pipelines that the pipelines are exempt from. This fake tax, by the way, results from a rule adopted by the commission after close and secret coordination with the pipeline industry. After I exposed this fake tax charge and estimated the cost to consumers at about $3 billion per year, Congress ordered a study. The official estimate for Congress put the cost at nearly $2 billion. Either way, customers are being forced to pay a tax that the pipelines do not owe. The extra money inflates their profits, already at bounteous levels FERC sets, by 54 percent. To paraphrase Mel Brooks, it’s nice to be a pipeline owner.
Any president worried about struggling Americans could end this unjust and unreasonable expense and at the same time make a powerful point about draining the swamp. All it would take is naming FERC commissioners who insist that monopoly utilities charge customers only their actual costs plus a reasonable profit without any charge for fake taxes. Another approach would be to send a bill to Congress requiring pipelines to refund, with interest, all the taxes collected but not turned over to the Treasury.
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Likewise, a president concerned with forgotten Americans struggling to pay their bills would have a keen interest in holding down electricity prices, which are crucial to the profit margins and investment decisions of many businesses that use juice in vast quantities. Consider the New England electricity market after four energy traders from Goldman Sachs and one from Deutsche Bank got together as Energy Capital Partners. The partners bought a fleet of seventeen electric power plants. Just five weeks later they announced plans to shutter their biggest electric power plant, Brayton Point in Massachusetts. Buying an expensive facility just to close it would not make sense in industries like manufacturing, but under the electricity market rules approved by LaFleur and other FERC commissioners, it was an exceptionally lucrative move.
The market in which utilities buy electricity to distribute to their customers operates under the aegis of FERC. These auctions, in periods from a few minutes up to a year, are what economists call single price or clearing price auctions. All the power plants in a market, hundreds of them, file bids to sel
l electricity. Assume the average cost of generating power is $10 per unit and the average bid is $12, which would make for a handsome profit for winning bidders. But there’s a wrinkle in the auction rules. The bids are arrayed from lowest to highest. Every bid is accepted in order of rising price until all the needed electricity is supplied. Those whose bids are too high get nothing. The wrinkle is in what happens to the successful bidders: every power plant gets the highest price, the price set by the last successful bidder. So imagine that the average cost of producing power is $10, the average bid is a very profitable $12, while the last winning bid is $2,000. Under the single price or clearing price auction every successful bidder gets $2,000.
There are also capacity auctions, which operate under the same rules. Owners of electric power plants promise to make their electric-generating stations available in the event they are needed to supply an extra or unexpected customer demand for juice. These capacity auctions are like paying car dealers to keep a pink car of every model on their lots just in case someday a customer wants one without delay.
In theory, such super-high prices encourage investors to build new power plants. The idea is that investors will look at the prospect of getting two hundred times the cost of generating electricity, even if it is for a short period of time, and decide to build new power plants. That the prospect of super-large profits will attract new investment is textbook economics. But there is a fundamental problem with this theory. It assumes Wall Street traders and power plant owners behave like the elegant mathematical models of Chicago School economics professors, not like greedy individuals out to make every buck they can. In practice, these single price auctions create a powerful incentive to restrict the supply of electricity. If each investor was limited to one power plant, the concept might work. But when investors own fleets of power plants, the incentives change. If they close one power plant, or schedule it for maintenance so it is not available when demand for electricity is greatest, the clearance price can be pushed higher. The incentive is to withhold, not expand, the supply of electricity.