The Future of Energy

This will be the third and final blog I will be writing on the book The Quest by Daniel Yergin.  Below I will discuss the future of energy, including renewable energy.  One form of renewable energy is the conversion of plants that we grow to ethanol that can be used to turn the engines of most types of vehicles and airplanes.  Another is to convert the sun, wind, and movement of water to electricity.

At present, almost every renewable energy has a problem competing with hydrocarbons economically when the cost of pollution is not included.  To generate electricity, nuclear fuel, coal and natural gas are cheaper than renewable sources unless tax incentives are in place.  However, with oil now above $100 per barrel fairly consistently, we are not far from the point where sugarcane based ethanol is competitive with gasoline all the time.

Biofuel is the broad name for the creation of something that will replace gasoline.  Sugarcane is the most efficient source of biofuel because everything else must be converted to sugar before it can be refined into ethanol. That is why the U.S. focus on using corn to convert to High Fructose Corn Syrup and then into ethanol is not cost competitive with Brazilian sugarcane.  However, Brazil does not have enough sugarcane for the world.  So there is room for others to move their agriculture in this direction.  Meanwhile, research is ongoing, looking into the potential ways algae, various forms of agricultural waste, and weeds that grow on marginal land could be converted to fuel so that more corn is available as food.

Electricity is the holy grail of clean renewable energy and this is actually where the most of this book was directed.  Electric cars would be the cleanest for the environment, but there is a great need for further developments in the technology before they will receive wide consumer acceptance.

There are two basic facts about electricity beyond transportation.  The first is that we already use a lot of it and as the economy grows we will use more of it.  The second is that electricity demand varies according to the weather and time of day. These facts mean that coal and natural gas will have to be used to generate electricity because renewable forms (other then hydro) need efficient storage batteries to be developed for when the sun or wind is not present. For the foreseeable future, all forms of sourcing electricity will have to be used to satisfy demand.

if there were a solution for nuclear waste, nuclear energy would be seen as an essential critical component by environmentalists.  In fact, despite this problem, nuclear energy was gaining momentum as a non-CO2 emission source of electricity until Japan suffered its recent Tsunami generated radiation release and all political momentum for more nuclear energy stalled out.

The other big issue for non-CO2 emitting energy is “Not in my backyard” ism (“NIMBYism”).  We don’t have a solution for nuclear waste because Nevada residents don’t want the nuclear waste buried in Yucca Mountain even though the desert offers the most stable environment for such storage.  We will never have enough hydro, wind or solar unless a massive number of locations are found for each.  Until there is a solution for NIMBYism, we will have to continue to burn coal and natural gas (generating CO2 emissions) to generate the electricity that the economy needs.

However, advances in technology are still likely outside the U.S.  Research is ongoing almost everywhere there is a critical mass of educated people. But the U.S. is lagging.  I was stunned to read in the book that in the U.S. spending on pure scientific research within corporations has been completely eliminated.  Now, the U.S. government, primarily through the Department of Defense and the Department of Energy, is responsible for funding all basic scientific research within the U.S.

The time line is simply too long for the private sector to fund renewable energy research without any current returns.  It took over 40 years to develop the scrubbers that remove SO2 from coal plants and prevent acid rain.  It took 15 years to figure out an economical way to get methane from coal beds.  In these times of difficult budgets, many people do not support government funding of this research but without it, the economic benefits of discovery will flow to other countries and leave the U.S. economy that much worse off.  Such spending created the Internet and the economic benefits have repaid the taxpayer many times over already.  It is not a large amount of money.  The total 2008 Research and Development budget was equal to two weeks spending on the War on Terror.

As I discussed in the 2^nd posting, much of the rest of the world (other than the U.S.) is committed to finding economical forms of non-hydro carbon energy to address the issue of global warming and pollution.  In the case of China and India it is a necessity; because if they increase their standard of living based upon a hydrocarbon platform as the U.S. and Europe did, they will drive up the price of oil to levels that will both hold back their economic development and hasten the complete utilization of the global resource.  There is now an on-going global race to develop the technology that we need to have sufficient energy and reduce pollution.

In conclusion, we are not going to run out of oil or any other hydrocarbon in the next 100 years because rising prices will generate technological developments that increase supply and motivate conservation.  Technological progress will be made on global warming because the rest of the world wants such technology and even in the U.S., there are profits to be made from green activities.  A Cap and Trade Policy would hasten U.S. based Research and Development (with jobs remaining in the U.S.) but such progress will be developed somewhere in the world for use everywhere if the U.S. fails to innovate.  The U.S. will remain dependent on its current mix of electricity sources until technology improves and NIMBYism is overcome; progress will be made in small ways until there is a federal policy or when a renewable cost advantage emerges.

Scientific Proof of Global Warming and Why Cap & Trade is the Way to Go!

The Quest by Daniel Yergin devotes a fair number of pages to explaining how Carbon dioxide (CO2) was proven to be a critical component of the atmosphere allowing the earth’s climate to be maintained.  This blog will summarize how we know that CO2 traps heat and the issues that prevent curbing U.S. CO2 emissions in the near term.

CO2, as well as methane and nitrous oxide, are part of the atmosphere.  98% of the 62 mile thick atmosphere is oxygen and nitrogen.  The other 2% prevent the sun’s infrared rays from rebounding into outer space by trapping the heat in the rebounding infrared rays and redistributing them throughout the atmosphere.  This balance of incoming heat during the day and the portion trapped for use during the night keep the earth temperature in balance and hospitable for life. 

John Tyndall in 1859 placed coal gas into a spectrophotometer and proved that it was opaque and darkened.  This was proof that it was trapping infrared light.  He repeated the experiment with water and CO2.  They were opaque and trapped heat.   Thus for over 150 years science has had the opportunity to test and retest this theory and no knowledgeable scientist challenges it.  As a non-scientist I don’t understand how this is proved, but I trust Mr. Yergin and other scientists to have disputed this conclusion if it were not true, and no one does.

In the 1890’s, a Swedish chemist named Svante Arrhenius set out to determine what effects a change in CO2 content would make in the atmosphere.  His calculations showed that cutting CO2 in half would reduce the global temperature by 4 to 5 degrees centigrade and doubling CO2 would increase the global temperature by 5 to 6 degrees.  Since this was a mathematic calculation, supercomputers have since confirmed these sorts of values.

There are many natural sources of CO2 and methane, and the earth has had many periods of rising and declining temperatures.  But none of these periods had the vastness of the current global population of homo sapiens.  So how to prove that human activity was increasing CO2 and having an effect on climate.

At first, in the time before and after WWII, it was thought that the oceans absorbed CO2.  However, scientific research finally suggested that the oceans both absorbed and released CO2.

The ability to measure CO2 was developed and the air above Hawaii, which eliminated many of the sources that cause CO2 content to vary closer to ground, was tested.  Through the years, it showed that the CO2 in the atmosphere increased from 316 ppm in 1959 to 325 ppm in 1970 to 354 ppm in 1990.  Studies of Antarctic ice allow for measurements of CO2 going back 400,000 years.  They show a natural range of between 200 ppm and 270 ppm, likely coinciding with the ebb & flow of the ice ages.  It is now 387ppm.

Since man discovered and started to burn hydrocarbons, the atmospheric CO2 has steadily increased.  The coincidence of timing and lack of variation in this increase is proof to me that mankind is responsible for increasing CO2.

While much of the world accepts this conclusion, it must be noted that the Republican Party and much of its voter backing doubts the science or the value of the predicted outcomes.  They have questions: Some models predict 450 ppm will be where CO2 levels off, but how warm will that be? Will it change existing weather patterns?  Can the U.S. afford to move too quickly away from its established hydrocarbon use?  Why should the U.S. do it and not the Developing Economies as it will affect employment levels?

So where is the world going?

The U.S. is about the only developed country that does not have some policies in place to motivate movement toward limiting carbon usage.  China has woken up and decided that being green is an essential policy.  Chinese citizens are demanding cleaner air.  Their economic planners woke up at some point and realized that by 2030, their demand for oil would be greater than the world’s daily production if something didn’t change.  Economic planners realized that jobs would be created producing green technology.  Now China has a committed effort to become green.  India is also committed to being part of the solution to global warming.  But it is all haphazard at this point and there is little actual progress at cutting global CO2 emissions.

It seems to me that the U.S. should want to be part of the solution in that it will create new employment and prevent unforeseen expenditures from things we cannot predict about climate change.  I know my home is only 40’ above sea level and New York City, which drives my property value, is less.  Do we really want to see how high the oceans rise if all the ice melts?  Do we really want to see how rainfall varies if the atmosphere is warmer?  The CIA and the Department of Defense consider Global Warming a National Security Issue.

Yergin explains why Cap & Trade is the best way to manage the cost of controlling CO2 emissions.  Cap & Trade is controversial because some environmentalists don’t like the polluters being given “permission” to pollute and some conservatives don’t like the concept of there being an incremental tax that will be passed on to consumers.

Cap & Trade is a proven market based concept.  In the early 1980’s, lead in gasoline was a pollution problem.  Instead of simply issuing a regulation, the Reagan administration issued “lead permits” that the users of lead could buy and sell so they had the right level of permit for the lead that they were going to use.  Within 5 years, there was no more lead in gasoline.  The cost of buying more permits or the ability to monetize the permits held provided the economic incentive to develop alternatives to lead.

Acid rain was a problem through out the 1970’s & 1980’s.  Acid rain was caused by electricity plants in the Midwest burning coal and emitting sulfur dioxide (SO2).  In 1990, President George  H.W. Bush signed a bill that established an emission trading system for SO2.  The permits would decline over time making the permits more expensive.  Emissions trading of SO2 delivered larger reductions in SO2 emissions than the permits scheduled, at a lower cost then anticipated at the beginning and faster than a regulatory system would have.  By 2008, SO2 emissions were 60% less than those in 1980.

The U.S. has proposed Cap & Trade internationally but the Europeans prefer a regulatory approach.  Meanwhile, getting Cap & Trade passed has proven impossible for the Obama Administration owing to the aforementioned Republican intransigence, despite George W. Bush proposing that this be a priority in 2007. 

Nothing is going to happen in 2012 in the U.S., but I expect China and Europe to continue to lead the way on trying to come up with solutions to CO2.  So expect to see the economic benefits of this technology development to be centered in China, Japan and Germany.  Without Cap and Trade, there is no incentive in the U.S. to spend the money on Research and Development.  Embracing this even 10 years ago could have provided the U.S. with a significant lead on green job creation, not to mention placing the U.S. in the lead politically with the world. 

The key Republican objection to Cap & Trade is it would have the effect of a tax and thus harm employment.  This is not valid.  We don’t know what effect global warming has on climate, but there is a scientific basis to believe that the atmosphere’s CO2 concentration is increasing, that it does cause global warming and different temperatures will drive the weather patterns in new directions and raise the ocean’s sea level by some amount.  All that has to have some effect on disaster spending at a minimum, and the potential for massive costs in relocation of ocean side urban centers.  While there would be a near term cost increase, over time there could well be job creation and economic growth resulting from a conversion to new technologies that emit less CO2.

Alas, this is a political issue and nothing will change in the near term. However, after reading Yergin's The Quest, I can now explain why Cap and Trade of CO2 should be enacted.  

Energy Education: Peak Oil Concept, Valid or Not?

I recently finished reading The Quest by Daniel Yergin.  This book of over 700 pages has the sub-title, "Energy, Security, and the Remaking of the Modern World." I enjoyed Mr. Yergin’s previous book, The Prize, and I knew that this book discussed global warming.  I was hoping that he would explain the scientific support for global warming and any basis for doubting it.  He covered those subjects adequately enough for me to write a blog about The Quest.

However, when contemplating doing so, in addition to the scientific support for global warming, I felt that two other issues should be covered by the blog.  The first is Peak Oil production and where are we going with the issue of energy sufficiency for the world.  The remaining issue was the role of alternative energy.  These three issues combine to form a necessary understanding of where the global economy can go and what standard of living the human race can expect to enjoy over the foreseeable future.

So this will be the first of three blogs.  I intend to cover Peak Oil in this one, global warming in the second, and where energy is going to be in the future in the last one.  Any facts and quotes are from the book and attributable to Mr. Yergin.

The concept of Peak Oil Theory is that the world is running out of oil and there will be an economic crash when it occurs.   However, energy is a critical component of economic activity.  Oil, natural gas, coal, and other ways of creating energy form the supply of energy in any year.  The demand for each form of energy establishes how much of each is used in any one year.

Knowledgeable people have been predicting that oil production will decline for over 100 years.  While it is inevitable that this will eventually occur, it has not occurred because developments in technology have expanded our ability to access supply and improve efficiency in the use of energy to extend the life of that supply.

Yergin believes (and it is his profession to study this issue in detail) that “The world has decades of further production growth (in oil) before flattening out into a plateau – perhaps sometime around midcentury – at which time a more gradual decline will begin.”

This forecast is not without risk, but the peak concept “assumes limited technological innovation and that economics does not matter.”  In other words, this oil may only be available if the price rises sufficiently.  The same issue pervades the development of all the other forms of energy.  The pricing needs to be sufficient if it is to be developed.  This is why oil wells routinely flare natural gas that comes up with the oil.  The price of natural gas does not support the cost of capture and transmission.  Environmental issues may prevent development but even they can usually be overcome at some level of pricing.  Of course, high prices will affect economies differently.

How can Yergin be so sure that Peak Oil is so far off?  In a traditional field only a bit more than 1/3 of the oil is pulled out with traditional methods.  New technology has been developed over the last 20 or 30 years that significantly increases that percentage.  It can be used on fields that were no longer producing as well as ones currently producing.  Yergin estimates that this increases the known supply by 125 billion barrels.  Oil Sands and hydraulic fracking are increasing North American supplies with the potential to be used elsewhere in the world.  Then there are the underwater supplies to be found through the use of modern imaging techniques as has been done in Brazil.

In total, Yergin’s data shows that about 1 trillion barrels of oil have been produced since the start of the industry.  Current economically accessible reserves total 1.4 trillion barrels with another 3.6 trillion potentially available depending on pricing, technology and environmental reasonableness.

The world uses about 93 million barrels of oil a day and is projected to use 110 million barrels a day in 2030.  At that rate, the proved and probable reserves will last 33 years or 2045.  Then the 3.6 trillion will start to be used.

That is the supply side.  On the demand side, there are two overriding issues.  The issue that will increase energy demand is the growth in automobile utilization as the emerging markets populations use their increased wealth to buy more cars and transport goods.  Counterbalancing that, the developed world has already doubled fuel efficiency and can probably double it again before you even begin to consider the use of electricity in cars or the use of alternative fuels and that technology will move to the developing world rapidly.

So, the world is not going to run out of oil in the next 50 years and probably not in the next 100 years.

But the economics of energy will not be stagnant nor can the ecological issues be ignored.  I will cover this in the next two blogs.

Private Equity & Job Creation

Never in my memory have we had a political issue that so distorts reality in favor of emotion in an effort to gain office on an issue that has nothing to do with economic policy in this country.

I want President Obama to win reelection because I fear what the Republican Party has come to stand for:  cutting the social safety net to pay for the War on Terror; repealing the Affordable Health Care Act; eliminating regulation that protects the population from pollution, bad banking practices, shoddy production of food & drugs and who knows what else; treating non-hetersexual people as 2nd class citizens; eliminating a woman's right to choice; and last but not least; committed to policies that treat hard working undocumented immigrants as if they were terrorists.  I admit that my grandfather walked across the border from Canada and that makes me very sympathetic to these people who are brave enough to risk death to get here and work.

However, I am glad that the populist wing of the Republican Party is using up Governor Romney's Private Equity experience as an issue because I don't think that was President Obama's best issue to hammer Governor Romney on.  Fairness and a belief that Government does good is the best issue to hammer any Republican on.

Private Equity is a non-issue because capitalism is about generating returns for capital.  If you work outside of government, that is your mission.  I have made a career investing in High Yield companies and countries.  One reason High Yield companies exist is that leverage and running companies more efficiently generated higher returns on capital.  The development of this market created jobs in the financial sector to manage this asset class.  The higher returns on capital flowed to pension plans and insurance companies, which supported workers' pensions and kept insurance costs down.  Yes, companies were seemingly looted with extraordinary fees flowing to the management companies, but those decisions were not made in the name of destroying jobs, they were made because the bond covenants allowed the cash to flow and because people believed that the company could support the debt. There was no desire to specifically create or destroy jobs, only to generate a return on capital.

To decide whether such activity is good or bad policy is beyond the roll of government and the voters.  It is capitalism.  If private equity had not bought any specific company, it might have gone bankrupt anyway because it was underperforming.  Because Private Equity bought an underperforming company, they might have preserved jobs that would otherwise have disappeared.  Underperforming companies need to reduce their workforce to find a level of activity that is profitable.  Then they can seek to grow and add productive employment.

I don't think that Governor Romney was close enough to the nuts and bolts of running any of the companies that Bain invested in to have that experience help him make the government run more efficiently; unless he applied that to the State of Massachusetts and then he should make that his centerpiece of his qualifications.

As for RomneyCare vs the Affordable Heath Care Act, Governor Romney says that RomneyCare was appropriate for Massachusetts because the uninsured were being treated in the emergency room and the taxpayers/insurance companies were paying for that treatment.  Excuse me, that is the same problem that the Affordable Health Care Act is aimed at solving and is almost identical to RomneyCare.

And when Governor Romney wants each individual to be able to fire their insurance company, how can they do that with employer sponsored health insurance and without an insurance exchange that allows individuals to compare and be guaranteed access to health insurance.  Repealing the Affordable Health Care Act makes no sense if you want to empower the individual to hold insurance companies accountable for delivering cost efficient health care which is what the Republicans want to do.

I wish the Republicans had coherent fiscal and health care platforms so we could find middle ground and push this country forward to a more stable platform.

Rent Seeking and Corporate Growth

These two thoughts are not necessarily related and we will see if I manage to do so.

The 1st article that stimulated this impulse to write was David Brooks column on how we have in National Politics a clash between the Democrats wanting to protect the social safety net (rent transfers to those in need) and the Republicans wanting to protect the tax cuts (maintenance of rent by those who have the income) in a time of constrained resource growth.  He goes on to point out that many of those of wealth want to protect the rent transfers that have been granted to them by the tax code and somehow counts 4,428 tweaks to the tax code over the last ten years.

Mr. Brooks goes on to point out that the Democrats need to find a way to frame this debate in a manner that gives voters a reason to believe in government.  Right now they are playing into the doubters of government by allowing the Republicans to create a dysfunctional government.

"Life is unfair. Republican venality unintentionally reinforces the conservative argument that government is corrupt. Democratic venality undermines the Democratic argument that Washington can be trusted to do good."


David B. goes on to write that President Obama needs to embrace policies that fix the government while improving its efficiency at delivering on its core purpose of safety (defense, judicial, regulation, infrastructure, social policy) and raising the revenue to pay for it in a fair efficient manner.  That sounds to me like Simpson-Bowles which I continue to advocate the President embrace and run with.


Separately, the American Banker wrote today about how banks need to worry less about growth and more about rewarding shareholders through efficient management of capital.  In other words, capital can be attracted to steady equity like returns paid out through dividends rather than trying to focus on redeploying capital to support growth and reward capital with higher EPS and a higher multiple.


Historically, companies have believed "grow or become irrelevant".  Well you do not want to be a buggy whip company or a Kodak, so you have to be ever vigilant about your product's continued viability and your ability to generate products that someone will want to buy.  But that does not mean you should try to grow for the sake of growth alone.  Growth needs a solid base that does not create risks that are overlooked or cannot be managed.  Since the developed world is going to be growing slowly for the foreseeable future, companies need to be balanced in what they do.  Spend on RnD, invest in things that will generate growth or at least maintain market share, but do not seek growth that creates a inordinate risk that ROE will not be able to be maintained.


Individuals and corporations need to live within their means.  Government's can borrow up to a point but need to be aware of where that point is and be sure the expenditures are maintained within fair levels of tax rates and fair structures of tax incentives.  The political process can only discuss that if the President makes the case to frame the issue.  You can have guns and butter only if you pay for them both.  Bush II did not pay for the guns, and President Obama could not as the housing bubble burst demanded Keynesian Economic Policy.  Since then, the President has not framed the issue correctly as Simpson-Bowles did so well.

Teaching

I will admit that I am not an expert on the process of education nor the best way for any level of government to manage this process.  I do believe that parents are the critical base for any child's education, that the public school system is the key to success for social mobility and that social mobility is a critical component of what makes the U.S. great.  Therefore, I looked at No Child Left Behind and The Race to the Top as well meaning efforts based upon some proven theory about improving the public schools.

A college friend of mine who has worked in education (college level) posted the following blog to his Facebook page.  It has caused me to move my thinking over the edge and believe that maybe Congress should reconsider its mandates in this area.

Here is the link to the blog:

http://realmrfitz.blogspot.com/2011/09/teachers-letter-to-obama-lesson-in.html?spref=fb

The NY Times was a Worthwhile Read Today

Be sure to read "My Life at Guantanamo" (http://www.nytimes.com/2012/01/08/opinion/sunday/my-guantanamo-nightmare.html?ref=todayspaper) to know why we should have confidence in both our judicial system and our jails to hold those guys who deserve to be held forever.

More importantly for this blog is the article in the Business Section written by a Professor of Behavioral Economics at my alma mater.  It discusses how negotiation works to improve the welfare of all (involved in the negotiation) and what happens when negotiation breaks down.  Either the deal collapses and the parties who disengage are left where they were, or a tit for tat develops and the welfare of all involved declines.

Of course, it is the latter where our national politics are today. And where they are likely to go over the rest of this year.  However, national issues do not disappear the way a business deal does.  They have to be dealt with sooner or latter.

Both the President and the Republicans need the other to get something in place to control the budget deficit and the cost of health care. (I think I will become like Susan Collins - who mentions Mitt taking the dog to Canada on the roof of his car every time she discusses him - and I will mention that the Affordable Health Care Act was at its core designed by the Heritage Foundation; a conservative think tank.)

They either deal this year through negotiation or risk the election going who knows what way and then having to deal with it next year.  Do the Republicans think the Democrats will not use a scorched earth policy - as the Republicans have - to ruin a President Romney's presidency as a tit for tat for any Republican intransigence during Obama's Presidency?  Do the Republicans think they will get a better deal from a reelected President Obama?  Can the President afford not to try and cut a deal this year going into the election?  Can the Congressional Democrats afford not to try and be responsible?

As a business person, I would want to cut a deal this year so I could be positive in front of my shareholders (i.e. voters).  Alas, I do not see this happening this year, which means if it comes to pass, all tax rates will go up at the end of the year, the economy will suffer, and any boost to my personal savings from Romney's election will be wiped out by economic softness as political power seems to be more important then good governance.

The national level political discord is hurting all of us and it will not end unless both parties deal in the middle.

Lastly, there is an idea percolating that the Senate should pass a law calling for up and down votes within 90 days of anyone being nominated for a position and no filibuster could go beyond that as a failure to vote would be an automatic approval.  The current position of keeping the President from appointing people to run things is not good governance.  And it is not acceptable for either party to prevent a President from managing the government in an efficient manner.

Why do the Republicans Have to Lie?

John McCain today in his endorsement of Mitt Romney stated that President Obama has destroyed the US military.

I fine this the type of untruthful comment that has driven me from ever considering voting for a Republican despite my desire to keep an open mind. I do not vote for liars.  In fact, I have fired anyone who has ever lied to me.  One lie, fired. No Grace.  As adults, our word is our honor and trust requires honesty.

The military is large, well armed and well paid.  Our newest equipment has helped us win the War on Al Qaeda.  All this on President Obama's watch.

Now if Senator McCain is thinking of the current budget agreement that requires the military to cut its spending, he need only look at his fellow Republicans who refuse to raise revenues to pay for the current military and the debt that has been incurred paying for the borrowed War on Terror.  In fact, he should just look in the mirror because those were his votes also!

More Evidence that Health Insurance should be Divorced from Employment

From an NYT Blog.

January 3, 2012, 7:00 AM

Further Thoughts on Why Our Health Rates Fell

By PAUL DOWNS

Courtesy of Paul Downs.The employees of Paul Downs Cabinetmakers.

STAYING ALIVE

The struggles of a business trying to survive.

First, thanks to everyone who encouraged me to keep writing (see my last post). The encouragement was, well, encouraging. I’ll do my best to keep it real, with numbers when appropriate.

Which brings me to this week’s post, a response to the comments on my post about my health insurance rates (executive summary: they went down, perhaps because of the departure of an older, sicker worker). The comments fell into several groups. Some people wanted to know more about whether I discriminate in hiring and how I manage information about my employees’ health status. There were a lot of comments about how insurance companies set rates, and as usual, they were contradictory. And there were pleas for me to weigh in on the policy debate regarding our national health system.

Here are a few highlights, starting with questions about how I treat my workers:

From Aimee: “Kids get sick too — so what do you do exclude people with families? Or women in their 20s and 30s may get pregnant and have complications — do you exclude them? Some groups have a higher tendency towards common chronic illnesses — do you exclude them?”

I want to make this clear: I do not discriminate based on family or health status, in hiring or afterward. I hire based on ability to do the job, and the applicant pool is limited to the people who answer my ads. We’re not a big company, so our employee population does not reflect the diversity of this country. Of the 14 employees, 12 are men, with ages ranging from 24 to 50. Both of the women are over 50.

The company will buy health coverage for any employee who asks for it — and the employee decides how many loved ones are covered. The company picks up two-thirds of the cost, the employee pays the rest. Obviously, the employees’ costs vary depending on what type of coverage they choose. In 2012, every employee but one will be covered by my policies; two who used to be covered under their wives’ policies were left without insurance when their wives lost their jobs. This will increase the company’s costs by $14,848. I’m not thrilled about it, but what can I do?

From Coakl: Do you get any discounts for ensuring your workers are nonsmokers and keeping their weight in check?

Not that I know of. We have only one smoker, and the physical nature of the job tends to keep people in shape (that’s a photo of all of us above, standing in front of an almost finished table). I don’t recall being asked to provide any information about this, other than one time in 2005 when we investigated switching health insurers. Then we had to fill out a fairly detailed census form to get a rate quote (turned out, no surprise, that the rates were identical.)

I presume that insurance companies have a pretty detailed picture of everyone’s health status based on the doctor visits and prescriptions. Even if I did run programs about smoking and weight, I would have no control over my employees’ families.

From Chilling: Do your employees have any privacy in regard to their major health issues? How is it that you know who is causing your rates to go higher and lower?

They have all the privacy they want, but in a small company the reason for sick days is going to be discussed with the boss. My employees are a genial and friendly bunch, so I presume that they discuss some things with each other in the course of ordinary conversation. I don’t keep any records about health status or the reason for sick days. We don’t even have sick days per se — we give out personal days, which can be used for any reason. (We offer six in the first year of employment, with one day per additional year of service to a maximum of 16. This is in addition to six federal holidays.) I don’t actually know how our rates are set — it’s a huge mystery. In the previous post, I speculated that our rate drops were related to the departure of a heavy health care user. But I don’t know that for sure.

Which brings us to these comments about how rates are set:

From Art: The cost of your plan is determined more by the state you live in.
In New Jersey, small group plans (less than 50 fulltime employees) do not have medical underwriting. So if you had medical claims they would not affect your rates. On the other hand New Jersey takes the average age of the group and prices the plan on that. So older workers drive the price of the plan higher

This would be great if I were in New Jersey. Or maybe not. My employees stay with me for a long time, and we gain greatly from a stable, experienced, productive work force. But it’s remarkable that our system essentially puts a special tax on my company for offering people long-term employment (by charging more for older workers). If health costs keep going up, it might be cheaper at some point for me to change to younger, lower-skilled people who are replaced on a regular basis. Investing in technology would be one way for me to do this. That’s not a business model I’m eager to implement, but why does our system offer such incentives? And what if I couldn’t make a profit any other way?

From E.G. Penet: Yes, premiums are down a bit, including mine own BCBS in Michigan. However, deductibles and co-pays are going up, fast. Every good thing costs something somewhere along the line. Just wait until your employees get their bills.

It’s not clear whether you are a boss or employee, but here’s how it works for me. I get offered a variety of plans from our insurer, with different types of coverage and different co-pays. The cost of the policy to the company varies greatly with the size of the co-pay, the amount of prescription drug coverage, and whether it’s an H.M.O. or not. I choose two that I think are the best fit and that I can afford, and that’s what the employees get to choose from. I make a decision, they live with it. I’d prefer not to be involved with this decision at all, but I’m stuck with it.

From Excellency: Next time you write on the subject maybe you could explore the following possibility: You put $5,000 per year into a Health Savings Account for each of your employees insured with you and get a group account with lower premiums and a $5,000 deductible. If your employee does not use the $5,000 for health care it just accrues in his account like an I.R.A. or 401-K. If he uses it he will keep whatever portion he does not use and when he goes over $5,000 per year the insurance kicks in. Would this make sense for you as a businessman and your employees?

We were offered an option for a policy with a $6,000 yearly deductible (per family) which was somewhat less expensive than the H.M.O.: $805 a month versus $971 a month. This may or may not have been intended for us to set up an H.S.A.

Here’s why I didn’t even consider it: plans of this sort put each worker in the position of having to negotiate pricing for medical care with doctors. Those least capable of doing this will get the worst, most expensive health care. I’m an experienced negotiator, and even I don’t want to touch this.

If doctors had easily accessible price lists, it might be different. I checked my doctor’s Web site. The practice is part of the University of Pennsylvania Medical System, which I presume is a well-funded and technologically savvy organization. I searched for “pricing” in the search feature, and turned up no results. I searched “price for doctor visit” and got boilerplate about how to prepare for the first visit. There is no price information, or any indication of how to find it. How are employees supposed to negotiate pricing for an emergency room visit? If you’re filling out paperwork with a bleeding 4-year-old screaming in your arms, you’re going to sign anything put in front of you, which will subject you to whatever the hospital feels like billing you. That’s not a system I want to participate in.

And now for my opinions on current policy. I’ll keep it short. I agree with this, from MHF:

You shouldn’t have to be in the health insurance business at all. That statement has nothing to do whether I support a government backed program or not — it’s just that most business owners don’t have the knowledge/expertise to manage the health care options of a large number of people. Business owners should be running businesses not playing doctor.

Amen to that. And not only would I prefer to shed this responsibility, but think of the wave of creativity and entrepreneurship that would be unleashed if people weren’t tied to crummy jobs just to get insurance. That’s the way forward for us as an economy. Unfortunately, the existing system is too large, with too many stakeholders, for us to change. I think we’re stuck with it.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside of Philadelphia.

When is a NIMBY attitude correct?

Only when there is an issue of above normal public safety.

So a nuclear power plant that cannot store its spent fuel in a permanent safe manner or operate while keeping radiation inside is a NIMBY situation that I support.

The following NIMBY situations do not make sense to me.

You support non-fossil fuel energy but do not want a wind mill, solar panel or waste to energy plant in your vicinity.  You do not want a hydro-electric dam with fish ladders built.  Give me a break.  Do you want everyone to go back to farming with horses; or rice farming like Chinese peasants and bartering the output for other things.  I forgot how to weave wool fibers into cloth and cut them into clothes.  Not to mention forgetting any number of other things involved in being a farmer.

I am all in favor of limiting hydraulic fracking for shale gas until you have a sound disposal plan for the waste water which can contaminate drinking water for who knows how long and drinking water is essential for living in any one specific location.  However, disposing of it deeply underground makes sense to me as long as you understand what will happen to dangerous components over time.  I do not think that 4.0 earthquakes constitute a reason to stop deep underground disposal unless that means bad things are migrating up (and the issue is how far up can then come).  People all over the world live with earthquakes bigger than 4.0 so living with them at 4.0 and under seems like an acceptable situation to me to get all this domestic natural gas.  So people of Ohio and Oklahoma, study the issue like NY is doing, but make sure to differentiate between true danger and a NIMBY perception of danger.

I am not a big fan of NIMBY's as they are usually being selfish about their specific location and would support the same thing somewhere else.  If it is good somewhere else, it is good near you.

More on MItt

A Bloomberg article points out the skills one obtains in Private Equity and say they do qualify Mitt for the Presidency.  That is why I wanted to think he would be an OK president.  But he is not the person who governed Massachusetts if he governs the way he is campaigning for the nomination.

You cannot balance the budget and keep the social contract with nation if you do not raise revenues.  We borrowed the War on Terror and need revenue to pay for it.  And we need some type of Universal Health Care if we are going to control the cost of health care.

He managed Massachusetts in a manner that would encourage me to believe he would try to mange the US in a manner that I would approve.  But I don't see it in his campaign for the Republican nomination.

Let Us Recap a Few Things to Start 2012

I should be organizing piles that got created over the holiday, but I always put that off as long as possible.

This blog has become consistently partisan and I am truly a man of the middle so I thought I would recount the evidence that I am a man of the middle.  My voting Record:

Presidents:  McGovern, Carter, Reagan, Reagan, Bush I, Clinton, Clinton, Gore, Kerry, Obama.

Governors:  Rockefeller, Carey, moved to Illinois  Jim Thompson (R) a couple of times moved back to NY Cuomo, Pataki, Pataki  (I regret the 2nd one) moved to VT Jim Douglas (R) (every two years) Shumlin

Senators:  Javits (R), I don't recall Illinois but I think there was one D and one R, back to NY I never voted for D'Amato but I like my senators to be in the middle, VT Jeffords, Levy and sadly Bernie because by then I couldn't trust any republican to vote their conscience.

So, you see I grew up in the era when the middle supported balanced budgets, providing services to people that were paid for and a strong sense of law & order and national defense.  Add to that the belief that the individual has primary responsibility for their own well being but the government has a role to play in keeping the playing field fair.

So the partisanship that comes through here is because the Republicans are no longer willing to pay for a balanced budget and a fair playing field with sufficient revenues.  We have to pay for the War on Terror which we have borrowed over the last decade.  The only way to do that without reducing the fairness of the playing field is to raise revenues either through closing loopholes & deductions or increasing tax rates.  But you can only raise revenues so far and the Bowles-Simpson Commission demonstrated that you can only get about 1/3 of the deficit from revenues and 2/3 has to come from costs.  We also need sound regulation so you don't get flim flam artists ruining the economy with products that create an economic bust.

Health care costs are in the critical path to controlling costs.  But the market forces that have generated out of control health care costs are at the center of Republican Health Care Policy (individuals getting whatever services they want because employer paid health insurance pays for it and the insurance companies are in control of the rules).  The market forces are also a key part of the fairness issue.  Tying your access to Group Insurance to your employer creates an unfairness to anyone who for whatever reason loses or leaves their job.  Unless you are lucky enough to live in a state that promotes all non-group people as a group, your health care insurance will cost you roughly twice what it would cost a member of any employment group.  That is not fair and that is one thing the Affordable Health Care Act is trying to fix.  It is also trying to control the cost of health care delivery but that is a long term process.  I believe Health Care is a right (32 of 33 developed countries have universal health care as do Russia, China, Brazil, Argentina, Chile, Uruguay, Costa Rica and Cuba).  Not having to pay for health care insurance is one of the big reasons US Companies move jobs off shore and we need to separate this if we are to restore our economic competitiveness as soon as possible.  If the Republicans really believed in government helping the private sector create jobs by getting something out of the way, they would figure out how to separate employment and health insurance.

I am a man of the middle and hope you will continue to follow my thoughts as we move through the campaign this year.