The Slow Walk to Silent Surrender

More and more businesses and industries are buying into the climate orthodoxy that human activities are the primary cause of climate change .  And, democratic candidates for President are making it a wedge issue that will put further pressure on business and industry to get on board.

While a large number of scientists support this hypothesis, for a variety of reasons, it still is only a hypothesis that relies on complex computer models that have been built using a large number of assumptions that attempt to fill gaps in knowledge.  While short term business objectives may justify going along to get along, there is an unexplored alternative that would not compromise the business community and damage our economic system.

Instead of being politically correct and accepting the climate orthodoxy and the actions that flow from it, industries and businesses should lay out an action oriented agenda that neither accepts or rejects the orthodoxy.

The United States is making more progress than most developed countries in reducing greenhouse gas emissions, some of which is the natural evolution of technology and some due to wrong headed policies that suppress fossil fuel use.  

Instead of accepting renewable standards biased in favor of wind and solar, a focus on incentives to shift to natural gas and revive the nuclear option would be more cost-effective.  Nuclear has two big hurdles—fear and cost.  The fear that has resulted from nuclear accidents that did not result in any casualties can be addressed by a well developed communication initiative that focuses on why nuclear should be the preferred option for reducing emissions and why it is in consumers interests to support it.  The cost issue is more difficult but it is not an insurmountable hurdle.  Two major cost drivers are the regulatory approval process and the lack of reactor standardization.  The progress being made with smaller modular reactors holds promise in lowering costs, increasing public comfort and, in competing with wind and solar.  The case needs to be made for a level playing field in power generation benefits consumers so that alternatives can be judged fairly.

The unneeded and wasteful subsidies for ethanol should be eliminated by demonstrating that tail pipe emission standards can be met without an ethanol mandate and that the production process actually leads to an increase in CO2.  Ethanol manufacturers should not be given a free ride.

Sea level rise, independent of the human component, is a serious problem but one for which near term solutions are readily available.  Coastal regions need to revise building codes so that new structures are not allowed so close to the waters’ edge that damage from sea rise and coastal storms is almost inevitable.  Currently, flood insurance is subsidized by the Federal Government, lowering the true cost of insuring coastal structures.  This subsidy should be eliminated.  Most of the Netherlands is below sea level and yet the Dutch have developed technology for mitigating the effects of flooding, Industry should support a vigorous program to adopt some of that technology.  

While the natural process of decarbonization is taking place, industry ought to support and participate in research to better clarify and define the extent of human influence on climate as well as of other factors identified by the IPCC. The  IPCC identified uncertainties provide a solid basis for a collaborative research program for demonstrating that the science is not settled and developing a better understanding of factors beyond CO2 that influence the climate system.

For over 20 years, estimates of climate sensitivity have varied by a factor of three. Research should be pursued to make that estimate more precise.  Over the same time period, Danish scientist, Henrick Svensmark has been conducting research to better understand the effect of solar activity on climate and to demonstrating how solar related mechanisms affect cloud cover and cloud formation. Additional solar related research should make clear that the effect of solar activity on warming has been underestimated in making attribution determinations.

A recent audit of temperature data by Dr. John Mclean has raised serious questions about the data bases that are the foundation for models and projections of future climate catastrophes.  The data bases from the Hadley Center and NOAA should be independently audited to validate or refute McLean’s findings.  We already know from work by Professor John Christy that US temperature measurements have seriously over estimated actual temperatures. 

 Collaborative research on natural variability, the actual impact of increasing CO2 levels since the warming effect is not linear, and on improving models in order to add to our state of knowledge and demonstrate that industry is being part of the solution and not the problem.

Americans are sorely in need of being educated on what is realistic in terms of emission reduction impacts.  If the US adopted all measures that are minimally economically plausible, the effect on global warming and climate would be marginal because the sources of emissions and increased atmospheric levels of CO2 are China, India, and developing nations that show no real inclination to reduce their use of coal or to accept lower levels of economic growth.

The alternative to taking a stand on principle and engaging in a constructive, realistic action agenda is to get rolled and rolled often.  The threat to the capitalist economic model is growing as evidenced by the percentage of people who believe socialism is preferable and by the support for the Green New Deal.  Proponents of the Green New Deal and similar programs must be challenged to show the cost of these programs, their effect on the economy, as well as on global warming.  That information would be sobering.

Past business strategies for confronting the climate orthodoxy have not worked. They have resulted in losing but losing gradually.  It is time to try a third way that is based on challenging climate advocates to join in a collaborative research and policy initiative.  They will most likely reject such an approach because they are winning. But that would demonstrate that they are more interested in scoring points than in developing cost-effective solutions.  That would put then on the defensive.

The Distortion of Rose Colored Glasses

 Some political scientists are postulating that authoritarian countries can offer their citizens high incomes by adopting or supporting private enterprise.  Since authoritarians have the power to get things done, authoritarian capitalism could cause democracy to lose its appeal.

Since World War II, the most economically successful countries have been democracies—mainly the US, Western Europe, Japan, Canada, and South Korea. Two political scientists, Roberto Fao, University of Melbourne, and Yascha Mounk, Johns Hopkins University, recently wrote that “sometime in the next five years, the total GDP of countries rated “ not free” …will surpass that of Western democracies.” They include in the “not free” Russia, China, Turkey, and Saudi Arabia. They believe that a growing number of countries are learning to combine autocratic rule with market oriented institutions.  To bolster their case, they point out that 60 years ago, western democracies accounted for two-thirds of global GDP while today it is one-third.  This is a non-sequitur.  It was western democracies and their capital investments that promoted the globalization that led to the wider distribution of global wealth.

Authoritarian capitalism is characterized by enforcing strict control by the state while the means of production is controlled by private owners  for their profit.  The benefits of capitalism come at the expense of personal freedom. There is an explicit partnership between government and big business and a willingness by the government to support capitalists at the expense of citizens and consumers.  China’s President Xi’s hostility to the private economy is evident by his state first philosophy and by favoring government connected enterprises.

There is no doubt that authoritarian governments can channel investments into favored industries and eliminate obstacles that could hinder their performance.  Turkey is a country that has gone through rapid industrialization that now has the world’s 17thlargest GDP.  And China has experienced double digit economic growth for the better part of three decades, at least that is what has been reported.  Authoritarian capitalist countries have out performed the US and other democratic capitalistic countries over the past decade and that has led to questions about the staying power of democratic capitalism.

But Turkey, China, and Russia are experiencing economic problems that raise questions about how well they can maintain private capitalism while repressing human rights and personal freedom.  While high rates of economic growth are the price of maintaining political power, political interference in economic decision making can lead to misallocation of resources because decision making is concentrated and not dispersed.  High rates of growth are also necessary to keep their populations sullen but not mutinous. The quality of life in these countries is not good.  In a mathematical quality of life calculation, the US was number 5 while Russia, China, and Turkey ranged from 73 to 81.  So, while the economic performance of these three authoritarian capitalist countries might seem impressive it comes at a very high price for their citizens.

The notion that authoritarian capitalism might replace democratic capitalism would turn on its head the belief that top down centralized economic direction will prove more lasting and superior to the benefits of dispersed economic decision making that characterizes democratic capitalism and its ability to respond quickly and accurately to consumer tastes and shifts in demand.  Freidrich Hayek’s Road to Serfdom made the convincing case of why democratic capitalism is superior.  

Democratic capitalism in the US is beset with a number of challenges which are giving socialism its recent appeal.  Some of our problems are the consequence of the influence of big companies on laws and regulations which distorts market forces and breeds crony capitalism.  The increasing power of Congress over how companies and industries act is what promotes crony capitalism and creates the view that the system is rigged.

The High Price of Staying Alive

In recent decades, medical science has madespectacular advances in treating life threatening diseases like cancer.  A growingpercentage of new chemotherapy treatments are now in the form of oral drugs, immunotherapy is being used more widely, and gene altering therapiesarebecoming ever more promising. Advances in other fields of medicine are just as spectacular.  But, and there always seems to be a but, these new treatments are incredibly expensive and getting more so.

Our ability to increase our knowledge about treating life threatening  diseases is outstripping our ability to make their costs reasonable.   This dilemma is ethically challenging as well as being a major public policy challenge. Some European countries use a cost-effectiveness standard to approve some very expensive cancer treatments. If a treatment costs hundreds of thousands of dollars but only adds a few months of life expectancy, it may not be approved.  As a society, we find this type of rationing abhorrent.  At the same time, we have not resolved how best to handle the high price of new life saving drugs which also are regressive and result in involuntary rationing.

Pharmaceutical companies probably come in for more criticism for high drug prices than they deserve.  Some price drivers are beyond their control.  Developing new drugs is expensive and some research suggests that only 1 in 10 new drugs prove safe and effective.  The cost of failures needs to be recovered or a company will go out of business.  The cost of drug development for companies that develop multiple cancer drugs can range from $2 to $5 billion per drug.

The largest cost in new drug development comes from regulatory requirements to prove a drug is safe and effective.  FDA requires preclinical testing and then three clinical trials before applying for approval.  This whole process can take 10 years.  After approval, a company has to monitor for side effects and conduct related tests.

Although there are a number of pharmaceutical companies, the only competition is in who can get to the market first with a FDA approved drug.  Once a drug is approved and under patent there is a legal monopoly.  Price is based on what the market will bear because there is no competition.  Manufacturers maintain a monopoly until their patents expire but too often generics are priced close to the patented drug price.  Again, no competition because usually only one firm is approved to  manufacture the generic.

Manufacturers give steep discounts—30% or more—to private purchasers like Sams, Pharmacy Benefit Managers (PBM) that administer prescription drug programs for employers, insurance companies and Medicare Part D, and hospitals.  With a lack of pricing transparency and poor communication, these drug providers can charge above competitive prices.  PBM’s for example, receive a share of the discounts they negotiate, so they have an incentive to keep list prices high. 

Since the price of these specialty drugs is less in many foreign countries than in the US, it is clear that lower prices can be achieved here.  

Since manufacturers are monopolies, they should be regulated as other monopolies are. The utility regulation model might be a useful approach. A body similar to State Corporation Commissions would approve prices charged and the rate of return that recognized risk and the need to recapture R&D expenses. Strong but reasonable returns would provide the incentive for continued investment.  

The cost of FDA approval is the major component in drug pricing.  But FDA is highly risk adverse. It doesn’t get blamed for the consequences of delays on bringing drugs to market but it does when a drug has unintended consequences.  Reducing red tape, streamlining the clinical trial process, modifying agency incentives would reduce approval costs.  In approving applications to produce generics, FDA should conduct a form of “dutch auction” where awards go to one or more firms that offer to charge the lowest retail price.

Insurance companies should be required to provide patients with information about the prices that a range of suppliers charge and explain better their formulary tiers and the rationale for drugs included in them.  Greater transparency about sources of supply and prices will engender greater competition.   The FTC should regularly review the vertical prescription drug structure to identify anti-competitive and anti-trust actions that are taking place.  Currently, each component in the supply chain has an incentive to keep prices high and to limit transparency.

Finally, barriers to drug importation should be reduced and Medicare/Medicaid should be allowed to negotiate prices like other sources do.

The insurance and drug lobbies are clear examples of Bootlegger and Baptist actions that result in poorer treatment for life threatening diseases.

A Rock and a Hard Place

The White House is pressing automakers to support its plan to freeze CAFÉstandards and roll back those promulgated by the Obama Administration which would have raised the CAFÉstandard to 54.5 mpg by 2025.  While on its face, auto manufacturer support would seem to be a no brainer but few things are as they appear on the surface.

The Administration is on firm ground in that the Obama regulations provided for a mid-course review of feasibility. Increasing the average miles per gallon to 54.5 is technologically feasible. Unless the mix shifts to compact, hybrid and electric categories, 54.5 mpg is an “aspiration”.  That would require a major change from what is taking place now with buyers moving to SUVs and pickups.  While CAFÉadvocates point to possible technology improvements in internal combustion engines, they down play the impact on the price of new vehicles. Estimates put the averageprice increase at $2000 per vehicle.

The biggest uncertainty is California which is threatening to sue if there is a roll back.  The odds of California prevailing against a Trump EPA are not great for two reasons.  First, CAFÉwas designed to reduce air pollutants; not greenhouse gases. Second, California has to apply for a waiver to set its own standards.  The effect on global warming if California prevailed in litigation is almost too small to measure even if the emission reductions of state that can opt-in to the California standards are included.  It fails any realistic cost-effectiveness test.

The problem for the manufacturers is that they prefer the rollback but can’t be sure that it will withstand judicial challenge given the Supreme Court’s decision on EPA’s ability to classify greenhouse gases as pollutants.  If the rule making is stayed pending judicial action, which no doubt will involve going all the way to the Supreme Court, there could be a new Administration before then and it would likely settle with California and re-establish stringent standards.  Being risk adverse keeps manufacturers from all out support.

If the Administration was not going forward with its E-15 ruling or if there was a chance of it being withdrawn, there might be stronger incentive for manufacturers’ support.  But that is not going to happen.  The Administration will not do anything to put Iowa at risk in 2020, so there is almost no possibility of not moving forward with the E-15n rule making. That is going to present auto manufacturers with a number of problems as most void warranties for vehicles using higher than E-10.