Archive for May, 2011

This article originally ran in the Wall Street Journal on May 24th and is reproduced here with permission. Pete duPont was Governor of Delaware from 1977 until 1985

The U.S. Treasury reports that the federal government ran up $870 billion in red ink in the first seven months of this fiscal year. That is $70 billion, or 9%, higher than at the same point in fiscal 2010, which ended up with a record $1.3 trillion deficit.

America’s energy policy is as bad as our fiscal policy. The federal government is focused on producing not more energy but less of it, on making costs higher rather than lower, and on expanding regulation.

Start with nuclear power. It’s pollution-free and an excellent source of energy. We have 104 nuclear plants in America today, but only one more is expected to become operative in the next few years, the first in two decades. As for oil production, our government is limiting it, and over the years domestic drilling has been declining. In 1970 the U.S. produced 3.5 billion barrels; by 2010 that figure was down to two billion. The federal government has prohibited oil and natural gas drilling on 83% of federally owned land and increased the importation of foreign oil. In 1970 only 500 million barrels were imported; last year it was 3.3 billion barrels. That means that in 1970 U.S. oil production was 88% of consumption, and today it is only 37%.

Drilling for oil in the Gulf of Mexico has been restricted, especially since the explosion of the Deepwater Horizon rig last year. The Obama administration first put in place a drilling ban, then a virtual moratorium on issuing new Gulf permits. Then with the uproar over high gas prices, President Obama announced last week a desire to open up the process to more exploration and drilling. But the basic belief of our current administration and the environmental left has been to restrict our exploration and extraction of the 163 billion barrels of crude oil that the Congressional Research Service says are off our coasts and on our land.

Take the case of the oil in Alaska: the amount of oil we produce there now has decreased from 2.0 billion barrels a day in the mid-1980s to about 600 million today. There is more oil off the coast of Alaska, but for the last five years the federal government has not given approval for drilling in the Beaufort and Chukchi seas. What Mr. Obama said last week may now permit such
drilling—a bright spot if so. Meanwhile, House Republicans have proposed a bill hopefully called the Reverse President Obama’s Offshore Moratorium Act.

As for other energy technology, the National Center for Policy Analysis’s Sterling Burnett this month published an excellent analysis of America’s energy needs and costs (available here). Today solar power is close to our fastest-growing renewable energy source. Its production grew 15.5% in 2009, but it still accounts for less then 0.5% of global electric power output. And it isn’t cheap: subsidized solar energy costs between $220 and $300 a megawatt hour, compared with $110 for electricity nationwide.

That breaks down to $63.10 a megawatt hour for natural gas, $113.90 for nuclear power, $136.20 for modern coal-fired plants, and $210.70 for solar photovoltaic power. According to the Heritage Foundation the subsidies we pay are $23 per megawatt hour for solar and wind, compared with $1.59 for nuclear power, 44 cents for conventional coal, and 25 cents for natural gas. We must start becoming competitive, without large subsidies, to reduce the current distortion in our energy markets.

The good news is that it is estimated that there are 50 trillion cubic feet of natural gas recoverable from fracking just in the Marcellus shale region of Ohio, West Virginia, Pennsylvania and New York. There are concerns about the impact on the environment and drinking water, and they need to be addressed, but the natural gas access is important to our energy needs.

We should also end the 45-cent-a-gallon subsidy of ethanol, which yields one-third less energy per gallon than gasoline. The cost of ethanol subsidies total about $6 billion per year. Sens. Tom Coburn of Oklahoma and Dianne Feinstein of California have introduced a recent bill to do away with the subsidies, along with a 2.5% tariff and 54-cent duty on imported ethanol.

To put it all in the perspective of the environmentalists and the current administration, consider the statement of Energy Secretary Steven Chu in The Wall Street Journal: “Somehow we have to figure out how to boost the prices of gasoline to the levels in Europe.” The current gasoline price is about $8.50 a gallon in England and $8.80 in France and Germany.

Sound and significant energy resources are vitally important to our economy and our people. Energy should be reasonably priced, plentiful and be managed by its producing industries. Market prices are better than government subsidies and regulation. The government (and the green lobby) should get out of the way so that we can develop the new technologies we will need over the long term.

Pete duPont

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The latest data from the U.S. Bureau of Economic Analysis shows that the south is rising again in Delaware. Due to more restrictive land use regulations in New Castle County (NCC) and the migration of retirees into Sussex County, the past 20 years has seen NCC’s share of the state’s population fall from 67% to 60% as Sussex’s share rose from 17% to 22%. These population changes have shifted the locus of economic action in the state.

There are important qualifications to the economic revival in Sussex. Most of the Sussex job gains are in lower paying industries such as retail and personal services, so the average wage in NCC ($59,218 in 2009) is still well above that in Sussex ($35,208). Sussex is on a peninsula with one limited access highway and Sussex does not have the agglomeration economies, including economies of scale, available in urban NCC.

Nevertheless, important shifts are occurring. For example, while overall construction activity in Delaware is down more than two-thirds from the recession, more than half the residential construction by number of permits and value of permits is now in Sussex County. Due to the stable poultry industry, Sussex now accounts for 45% of all of Delaware’s manufacturing jobs. Also, because of its beaches, Sussex has a disproportionate share of the state’s total retail trade and leisure and hospitality activity.

Northern Delaware still dominates Delaware’s economy, but southern Delaware is becoming a player.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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Over the past 10 fiscal years the Delaware Economic Development Office’s Delaware Strategic Fund has awarded over $201 million to firms and organizations in Delaware. Over $126 million of the awards have been outright grants, while $38 million has been in the form of loans, almost $34 million in convertible loans, and the remainder in preventure and equity funding. Has there been a logic to this largess?

The answer is mixed.

Are the disbursements used to offset the business cycle? The awards did not increase substantially in and following the 2001 recession, but did soar during the recent recession.

Are the awards simply bribes? Delaware is in competition with other states to retain and attract jobs, and that frequently requires the state to ante up. Nevertheless, it is striking to see the grants that have been given to large corporations over the years, including: Playtex Products ($7.3 million), Chrysler ($5.3 million), P&G ($1.8 million), GM ($1.5 million), Kraft Foods ($1.2 million), Wal-Mart ($1.2 million), ICI Americas ($1.0 million), Scott Paper ($1.0 million), Bank of America ($400 thousand) and Comcast ($267 thousand).

Is the ROI reasonable? The grant dollars per job saved or created have averaged $3.1 thousand over the decade, not an unreasonable amount. And, logically, the loan dollars per job have been higher at $7.8 thousand. The job data maintained by DEDO, however, is what is promised at the time of the deal and is not subsequently adjusted. Repayment of loans is tracked, but jobs tied to grant awards are not tracked. Chrysler and GM have, of course, shut down. The half million dollar grant to keep Volkswagen at the Port of Wilmington was a bust. There are no guidelines in the enabling legislation with regard to acceptable risk.

There is no evidence that either DEDO or any other state agency follows up after grants are rewarded to see of the terms of the original agreement are complied with (e.g., the promised number of jobs either created or retained). Nor is there evidence that the pattern of the grants corresponds with industries that have become sources of growth in Delaware’s economy.

Are there unusual awards? Of course, politics is in play. There were grants to Winterthur, the Ezion Fair Baptist Church, the YWCA, and the Sunday Breakfast Mission. Grants were given to retailers such as Wal-Mart and the Greenhill Car Wash. The University of Delaware’s Small Business Development Center has received $3.7 million in grants over 14 years and has requested $521,000 for FY-12, and the University’s Center for Composite Materials has received numerous grants. Invista, a
subsidiary of the privately held Koch industries has been a major winner with $15.7 million in grants. Kaolin Mushroom Farms received a grant and a convertible loan.

Has DEDO benefited? Over the decade DEDO has awarded itself nearly $4 million in grants, much of which is for operating expenses. Nearly $746,000 has been awarded in FY-11. It is interesting that the state agency that prepares and presents the proposal to Delaware’s Strategic Fund has done so well and has been able to circumvent the annual budget process.

Is the loan default rate acceptable? From the data available, the total loan defaults to date are $2.7 million. This is roughly a 7% default rate on the total of $38 million of loans issued during the decade.

Recent data shows that last year across the U.S. state and local governments gave $70 billion to private firms and organizations in the form of grants, loans, and subsidies. While there are anecdotes about successful state coups landing large firms, there is no professional research literature evidence that these give always benefit state and local economies over time.

At the very least, there should be a coherent logic behind Delaware’s Strategic Fund largess and there should be due diligence regarding subsequent compliance.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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Powerful supporters of the Sustainable Energy Utility (SEU) are fighting legislation to repeal the Regional Greenhouse Gas Initiative (RGGI) because 65% of the revenue generated from CO2 auction permits would continue to enrich the SEU for eight more years. These supporters appear ready to ignore the fact the emission reductions goals of RGGI were met weeks after the first quarterly auction in 2008 and RGGI auction revenues have been wasted. They will try to convince us the SEU will go broke without this income. Meanwhile, in two years the SEU has amassed $26 million in assets (three years operating funds) and will shortly raise $60 Million more using s state authorized bond issue on top of already spending about $10 Million.
The state of Delaware set up the non-profit agency in 2007 to run various energy efficiency programs. The problem is the core programs of the SEU are off to a very slow start and appear to have fatal flaws that will ensure wasted funding for years to come.
The biggest flaw is the starting premise that government financed and controlled energy efficiency programs can “bend” the curve of what the free market economy already does. The U.S. Energy Information Agency has tracked the improvement in the Energy Intensity of our economy since 1949. Annual energy use is divided by Gross Domestic Product (in constant dollars). Our economy consistently improves 1.8% a year and Delaware statistics show the same trend. This improvement dwarfs the impact of RGGI funded projects by 100 times.
United States Cold Storage, Inc. in Milford spent $1.6 Million for electricity in 2010. Michael Lynch, Vice President of Engineering says, “USCS works hard to make our facility in Milford as energy efficient as possible and would prefer to keep the money we spend on RGGI to continue to do our own energy efficiency projects”. In the same way individuals can decide the best way to spend their own money.
The low income Weatherization Assistance Program (WAP) has been shut down for a year because of poor workmanship, shoddy materials, and work that was billed but not completed. The Attorney General’s office is looking into possible criminal charges. The programs spent millions of federal stimulus and state regional cap and trade taxes to fund the program.
The SEU programs have similar flaws to the WAP program. Grants of up to 50% of the cost of a project are available on a sliding scale that becomes more generous as the percent of energy savings increase. This leads to a built in bias to report high savings. In most cases energy auditors and contractors are the same company leaving them to self police. The SEU only does spot checks to see if the work was done correctly and expected energy savings were achieved and does not guarantee the work. We have already seen one example where a homeowner audit was based on higher than actual initial electricity usage and actual kilowatt hour pricing. We have also heard a complaint from an experienced auditor who refused to participate in the SEU program because of reporting problems with the required software that force misrepresentation of the work to be done and the results to be expected.
Other SEU programs offering various financing schemes have found no takers because of prevailing wage requirements and lack of need for capital by banks who have adequate capital. Two stimulus funded programs for appliance rebates and lighting rebates were one time programs with no long term need to exist. Programs using energy savings to pay initial project are already served by private companies. It seems like most programs conceived by the SEU fill no real long term need and implementation is ponderous at best. Typical advice is to donate only to charities using at least 80% of revenue for programs. After two years of operation, the SEU is still barely spending 50% of revenue on programs.
A task force has been formed by the SEU to take the organization private after the federal stimulus money runs out which would leave them exempt from Freedom of Information Act (FOIA) requests. Much of the information presented above regarding the SEU came from a FOIA request.

David T. Stevenson
Director, Center for Energy Competitiveness
Caesar Rodney Institute

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Producing business climate rankings of states has become a cottage industry. There are now at least 11 such rankings published by credible organizations. Delaware ranks between 2 and 42 across the various rankings. So, do these rankings provide any useful information to encourage economic growth in Delaware?

A recent analysis of business climate rankings from the Public Policy Institute of California is a big step forward. Using relatively sophisticated statistics, the analysis attempted to identify which components of the business climate indexes were most important as predictors of economic growth.

The interesting, but not so surprising finding, is that business climate indexes that focus on productivity-quality of life variables (e.g., crime rates, poverty, college attainment, infrastructure, patents, and air quality) have little or no predictive power for state economic growth. Whereas business climate indexes that focused on taxes and costs were consistent predictors of growth in employment, wages, and output.

It seems that the costs of doing business, such as union membership, electric rates, and business tax rates, are the drivers of economic growth, especially with “footloose” industries, and that the quality of life is an effect. That is, for example, a growing economy attracts human capital, lowers demand on social services, and allows tax rates to remain unchanged (or even fall!).

So, when only the five business climate rankings that focus on taxes and costs are considered, how does Delaware fare with regard to the drivers of economic growth?

• Electricity costs – The most recent data from the U.S. Department of Energy shows Delaware with the 8th highest industrial electric prices among the states.

• Union membership rate – Delaware ranks 24th among the states, well below leaders such as New York, Michigan, and New Jersey.

• Taxes – With no sales tax, modest property taxes, moderate unemployment taxes, no tax business property (e.g., equipment), and a large portion of taxes exported, Delaware ranks well with regard to the overall tax burden on business. The recent increase of the top marginal income tax rate to 6.95 bumped Delaware up to the 14th highest among the states and Delaware’s top corporate capital gains tax rate is 8th highest. Delaware’s workers compensation benefits per $100 of wages are average.

• Size of government – Delaware also ranks well on the relative size of state and local government, especially with regard to the volume of social service spending. With the growth in its Medicaid outlay, however, this is starting to change.

Overall, except for electricity costs and some recent tax rate hikes, Delaware fares well in the business climate race.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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The 2010 ranking of 610 four year degree granting institutions of higher education from Forbes and the Center for College Affordability and Productivity is out. How did the University of Delaware fare?

The Forbes rankings of “America’s Best Colleges” are based upon output measures such as post-graduate success, competitive awards, and the four-year graduation rate. The University of Delaware ranks 218. It is necessary to put this ranking in context.

As with other large public universities, Delaware is a land grant institution with a broader mission than most private institutions. Not surprisingly, the highest ranked institutions in Delaware’s region are private, including: Princeton (#2), Swarthmore (#7), Haverford (#14), University of Pennsylvania (#36), Bryn Mawr (#38), and Johns Hopkins (#88).

More relevant is how the U of D compares to the major public institutions in surrounding states: University of Maryland, College Park (#249); Penn State, University Park (#192), and Rutgers University, New Brunswick (#366). The variations in the U of D ranking relative to these institutions across the five general categories of performance applied is interesting.

POST-GRAD SUCCESS: Post graduate success is measured by the salaries of alumni, the listing of alumni in Who’s Who in America, and the alumni listed as corporate officers by Forbes. The U of D finishes last among the four schools on this measure.

COMPETITIVE AWARDS: This includes the number of nationally competitive awards received by students such as the Rhodes Scholarship, the British Marshall Scholarship, the Harry S. Truman Scholarship, and National Science Foundation Fellowships. Here the U of D ranks an impressive first.

STUDENT SATISFACTION: This performance category is based upon student evaluations from RateMyProfessor.com and from MyPlan.com, and freshman to sophomore retention rates. Delaware finishes a close second here.

Finally, the U of D performs the best on STUDENT DEBT, including loan default rates, and ranks second on the FOUR YEAR GRADUATION RATE.

So, while a ranking of 218 does not appear stellar, the U of D performs quite well when compared to similar land grant institutions in the region.

Rankings are very qualitative and vary substantially depending upon the measures chosen and the weights given to those measures. For example, the difference between the U of D’s composite score

(49.9) and the score of the 100th ranked institution (58.3) is modest. Nevertheless, the U of D can take some satisfaction from the Forbes analysis.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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