Paying French Workers more for less Work is putting France on the Path towards Greece

Posted by PITHOCRATES - December 9th, 2012

Week in Review

France is where President Obama is trying to take the United States.  While the French are trying to figure out a way to save the French from the French (see Insight: Making France work again by Mark John posted 12/9/12012 on Reuters).

Yet the overtime episode is a telling insight into a France struggling with itself: the France whose appetite for work sits uneasily with the France whose priority is to sustain one of highest standards of living in the world…

Its welfare system is among the most generous in the world. A road and rail transport network means its companies are within hours of tens of millions of potential customers. It is a leader in luxury goods and is the world’s top tourist destination.

But somehow that Gallic vigour is being lost.

Unemployment is at 14-year highs as plant closures mount, France’s share of export markets is declining, and the fact that no government in three decades has managed a budget surplus has created a public debt pile almost as big as national output…

And it was the cost of that generous welfare state that has raised the cost of doing business in France so much that less business is done in France.  Less business means fewer jobs, less private income to tax and less corporate income to tax.  Forcing the French to turn to borrowing to sustain that generous welfare state.

By 1980, French economic growth had shrunk to two percent compared to its pre-oil crisis rate of above six percent – a rate which France and most rich states have not seen since.

In the years that followed, governments around the world reacted in their fashion: Britain’s Margaret Thatcher faced down Britain’s unions in a drive to free up labor markets, while Scandinavian leaders sought to free their economies of debt.

In France, governments of left and right chose entrenchment: strong rises in public spending which helped ease the social and employment shocks but which sent national debt soaring from 20 percent of output in 1980 to its current record of 91 percent…

The high productivity of its workers might have compensated for their rising cost. But decisions such as the 1997 cut in the working week from 39 to 35 hours meant many French were also starting to work less.

A 2008 paper on “the Liberation of French growth” by Jacques Attali, ex-adviser to Socialist President Francois Mitterand, calculated that while the French lived 20 years longer than they did in 1936, they worked 15 years less over their lifespan – a shortfall he labeled “35 years of extra inactivity”.

“Even given that each French worker produces five percent more per hour than an American, he produces 35 percent less over his working life,” he found in the 245-page report.

You need two things to generate tax revenue.  A tax rate.  And income to tax.  In other words, you need businesses to grow and hire more people.  But when they reduced the work week down to 35 hours that’s fewer hours worked.  And less income to tax.

One of the ideas behind the reduced work week was to force employers to hire more workers.  For example, if a company had 15 employees working 39 hours per week that’s a total of 585 hours a week to complete the necessary work each week.  When they reduced the work week to 35 hours it now took 16.7 workers (585/35) to complete the 585 hours of required work per week.  As you can’t hire 0.7 of a worker that rounds up to two new workers the state believed owners would hire.  The government believed they’ve reduced the unemployment rate.  But they’ve actually increased the unemployment rate.

The existing workers may be working 4 hours less a week but their employers are still paying them the same.  Which makes workers more costly to employers.  For they’re getting paid the same but are working fewer hours.  Forcing the owner to raise his or her selling price to cover these higher costs.  Or laying off a worker or two so their current revenue can pay for their higher labor costs.

So all of the government’s policies intended to increase the number of high-paying jobs actually decreases the number of high paying jobs.  Encouraging employers to hire part-time workers or temporary workers in lieu of full time workers to escape these higher labor costs.  Reducing the gross amount of income in the economy to tax.  Forcing the government to borrow more to support that generous welfare state.  And it gets worse.

France has an aging population.  So not only are French employees working fewer hours there are fewer workers entering the workforce than leaving it.  And those who are leaving the workforce are collecting pensions.  And consuming health care resources.  With these growing expenditures being paid by fewer workers entering the workforce who are working fewer hours each week.  Forcing the government to borrow even more to support that generous welfare state.  Which is why their total debt now is 91% of GDP.

And it will only get worse if France doesn’t make the country more business friendly.  While at the same time cutting their spending.  As French students took to the streets to protest a proposed increase in the retirement age a year or so ago don’t expect either to happen anytime soon.

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Wind Power is both Costly to Build and to Maintain

Posted by PITHOCRATES - December 9th, 2012

Week in Review

Green energy enthusiasts love wind power.  For they think it’s free and as good and reliable a source of electric power as is coal.  Because you don’t have to buy wind.  It’s just there for the taking.  As long as the wind is blowing.  But wind power isn’t free power.  For one you have to build a lot of wind turbines to get close to what a coal-fired power plant can generate.  Covering acres of land (or water).  That’s a lot of moving parts that someone has to maintain.  And a lot of gearboxes to wear out (see Deval-ued Wind Power by Kevin D. Williamson posted 12/3/2012 on National Review Online).

Last September in the tiny town of Princeton, Mass., the general manager of the local utility authority sent out an extraordinary little memo that is one part standard bureaucratic posterior-covering and one part cry for help, noting that a modest wind-energy project already has lost nearly $2 million — a whopping number for a community of only 3,413…

“As best I can look into the future,” general manager Brian Allen wrote, “I would expect the wind turbine losses to continue at the rate of around $600,000 a year. This assumes current wholesale electricity rates, no need for extraordinary repairs, and that both turbines continue operating. If any major repairs are required, this will be an additional expense for the PMLD. The original warranties on the turbines have expired, and extended warranty options are not available.”

Those warranties are an acute concern: After becoming operational in 2010, one of Princeton’s two wind turbines broke down in August 2011 and was not back online until nearly a year later. Princeton had a warranty from the turbine’s manufacturer, the German firm Fuhrländer, but the usual political cluster of agents and subcontractors meant that the whole mess still is in litigation. If Princeton does not prevail in its lawsuit, it will suffer hundreds of thousands of dollars in additional expenses. The cost of replacing a gearbox on one of the Fuhrländer turbines is estimated at $600,000.

Those breakdowns are real concerns. According to the trade publication, Wind Energy Update, the typical wind turbine is out of commission more than 20 percent of the time — and regularly scheduled maintenance accounts for only 0.5 percent of that downtime. The group also estimates that some $40 billion worth of wind turbines will go out of warranty by the end of 2012, leaving the Princetons of the world looking at a heap of expensive repair bills. In Europe, the largest wind-energy market, operations-and-maintenance expenses already are running into billions of dollars a year.

So, if you have a wind farm with let’s say 600 wind turbines that would be approximately $360 million to replace all of those gearboxes.  But if they’re lucky enough to only have to replace 20% each year that’s only $72 million a year.  That’s a lot of money for ‘free’ electricity from the wind.  Especially when you consider routine maintenance comes in at around $600,000 a year.  And even that number is a lot higher than anyone dreamed it would be for free electricity.

The truth is this.  Wind power isn’t free.  It’s very, very expensive.  And this for generating equipment that is offline 20% of the time.  Worse, for those that are online their capacity factor is only about 30%.  Meaning that over a period of time a wind farm will provide only about 30% of their nameplate capacity.  So not only is this power costly but it is intermittent.  Which is why no one builds wind farms without massive government subsidies.  As they are about the worst energy investment anyone can make.  With the only way of funding these projects is by bleeding the taxpayers dry.

It’s different with coal.  Green governments have to impose costly regulations to try and shut down coal-fired power plants.  Because they are such a good energy investment the only way they can stop the free market from building and operating them is reducing the return on investment through costly regulation.  Which increases our electric bills.  So with coal money flows from the power producers to the government.  And we get less expensive electricity.  For wind power money flows from the government to the power producers.  And we get more costly electricity.  Which makes no sense whatsoever for the taxpayer.  But it makes a lot of sense if you’re getting campaign contributions from your friends in green energy.

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Wind Power cannot work in the Free Market without Massive State Subsidies

Posted by PITHOCRATES - December 9th, 2012

Week in Review

A typical size of a wind turbine is around 3 megawatts.  Whereas a typical steam turbine (the kind spun by a coal-fired power plant) can be as big as 500 megawatts.  So you would need about 167 wind turbines to produce the output of one steam turbine.  But even then they won’t produce the same amount of useable power.  Because the wind doesn’t blow all of the time.  Making wind power a very expensive, intermittent power.  So expensive that no free market solution exists.  Which is why the government heavily subsidizes wind power (see 7 Myths About the Wind Production Tax Credit by David Kreutzer, Ph.D., posted 12/4/2012 on The Foundry).

The wind production tax credit (PTC) has created an industry that produces overpriced, intermittent power, and it will continue to produce overpriced, intermittent power so as long as there is a PTC to pay for it…

… if wind were already cheaper, then it could compete right now. If it is on the verge, then wind-power producers could enter into long-term contracts (which they already do) that would allow them to recoup their investments in the near future when wind will supposedly be so cheap. Neither case argues for subsidies…

The legislation in force has been very clear ever since it was written: Wind turbines put in place by December 31, 2012, qualify for 10 years of production tax credits. Windmills placed in service this year will continue to receive credits—which are worth 40 percent or more of the wholesale value of electricity—for every kilowatt-hour generated until 2022…

Subsidies may well provide jobs and income for those receiving the subsidies, but, as the Spanish experience illustrates, whatever job-creating mechanism the subsidies put in play is offset by running this same mechanism in reverse elsewhere: Financing the subsidies requires taxing other parts of the economy.

A 40 percent or more subsidy?  Anyone that needs a 40% subsidy to stay in business shouldn’t be in business.  That’s a lot of money pulled out of the private sector to produce substandard electric power.  If we went with reliable electric power from coal-fired power plants we wouldn’t need to pull a 40% subsidy from the private sector.  And the power would be first-rate.  Whether the wind blows or not.  Which is why coal-fired power plants work in a free market economy.  And wind power does not.

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Hugo Chávez leaves Socialist Venezuela for Cancer Surgery in Communist Cuba

Posted by PITHOCRATES - December 9th, 2012

Week in Review

Hugo Chávez’s cancer is back.  He must return to communist Cuba for the quality health care he cannot get in socialist Venezuela.  Despite his hard work of turning Venezuela into a socialist utopia.  And you know it has to be bad there as this is Chávez’s 4th trip to Cuba.  So he is fully aware of the quality there.  Which may be good.  But those who can afford it go to the United States.  They don’t go to Cuba.  As Chávez would probably too had he not spent his life attacking American capitalism (see Hugo Chávez names successor after confirming need for cancer surgery by Virginia Lopez posted 12/9/2012 on the guardian).

The Venezuelan president, Hugo Chávez, has for the first time designated a successor, after admitting he needs to undergo another operation for cancer and may be unable to return to power.

Chávez is to return to Havana to undergo surgery for a fourth time and said in a broadcast late on Saturday night that he wished his vice-president, Nicolás Maduro, to be his successor.

The announcement comes two months after the charismatic leader, who had declared himself free of cancer in July, was re-elected for a fourth term in October by a comfortable margin.

Hugo Chávez has been president of Venezuela for about 13 years.  While in office he’s attacked capitalism and championed socialism.  He insulted President George W. Bush.  And praised President Barack Obama.  Because President Obama is making America more like Venezuela than George W. Bush did.  And how great is Venezuela after some 13 years of Hugo Chávez making it better with socialism?  You have to go to Cuba for surgery.  If you’re important enough to get that kind of special treatment.

If you have to go to Cuba for surgery perhaps socialism is not the direction you want to take the country.  Perhaps capitalism is the better economic system.  And national health care (i.e., Obamacare) is something we should avoid.  For if Hugo Chávez could not staff at least one hospital with a Western-quality surgical suite imagine the quality of their national health care.  And their medical schools.  Which is not a commentary on the Venezuelan people.  Who probably would excel in Europe, Britain, Australia, Canada, the United States or any other Western economy.  But whose human capital is left to wither on the vine in Venezuela.  As socialism is one of the worst economic systems to encourage people to do great things.

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Britain trying to Spread the Risk and Cost of Floods to those who Don’t Live in Floodplains

Posted by PITHOCRATES - December 9th, 2012

Week in Review

Insurance manages financial risk.  One of the earliest forms of insurance was marine insurance.  For it was very risky shipping things across the ocean.  Sometimes storms damaged ships.  Requiring the crew to jettison some cargo to make the damaged ship seaworthy.  So all shippers paid a little extra to provide something we called ‘general average’.  So when the ship reached its destination those who still had cargo aboard could sell it.  While those whose cargo went overboard to make the ship safe for everyone else got this insurance money.

Those who were taking a risk bought insurance to manage their risk.  So that in the event of a loss they mitigated their financial losses.  This is a very important fundamental of insurance.  Those who take a risk pay the costs of managing that risk.  A blacksmith working in an inland community didn’t contribute to the general average.  Because he had no risk exposure on that ship.  So to reiterate, risk takers pay the cost of insurance to mitigate their potential financial losses.  Which the free market does brilliantly.  Except when an activity is so risky that everyone exposed to a risk will suffer a loss.  As in flood insurance (see Flood insurance warning by MP Jonathan Evans posted 12/9/2012 on BBC News Wales).

The existing deal, reached in 2008, obliges insurers to provide cover for high-risk properties while the UK government continues to fund improved flood defences…

The Association of British Insurers (ABI) is calling on the government to share the financial risk for the areas with the most homes at significant flood risk…

“The reason for that is that people who are at risk of flood, lots of those people being in Wales, a quarter of a million houses across the UK, those people are probably paying about a half of what the real risk of flood is,” he said…

“No country in the world has a free market for flood insurance with high levels of affordable cover without some form of government involvement.”

“We could have a complex system in which we could potentially see a charge of £20 or £30 across the board for everybody – whether affected by flood or not – with everybody doing their bit.

“But that could be viewed as being unfair on the poor.”

The problem with flood insurance is that everyone engaging in risky behavior by living in a floodplain will suffer a loss.  If a flood washes away every home they will have to rebuild every home.  Instead of everyone paying a little bit to pay for one or two lost homes everyone will have to pay a lot.  To cover the replacement value of their own home.  Because there is no way to spread the risk when everyone suffers a loss.

When your insurance premium is the value of the home your insurance is not insurance.  You’re just putting some money aside so you can buy your house again in another 10 years or so.  Or however often a floodplain floods.  Which is the risk people take by living in floodplains.  Or should be.  But governments step in and have the responsible living outside of floodplains subsidize the risky behavior of those living in floodplains.  By subsidizing the cost of their irresponsible behavior with taxpayer money.

Yes, it is heart-wrenching to see the devastation of a massive flood.  Like in New Jersey and New York following Hurricane Sandy.  And seeing those homeowners lose everything.  Especially those who did not renew their federally provided flood insurance (it is a federal requirement to buy flood insurance when buying a house in a floodplain.  But there is no federal requirement to renew that coverage once the initial term of that policy expires).  Because it was too costly.

Coastal areas have beautiful vistas.  Which is why people take risks and move into floodplains.  But if they do they should bear the financial costs.  Not those living responsibly.  With far less beautiful vistas.

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