Year in Review: Wind Power in Delaware

2008 was the year when Delaware decided, against the odds, to be the first state to approve the development of offshore wind power.
As the year opened, legislative leaders had blocked the regulatory approval of the power purchase agreement between Bluewater Wind and Delmarva Power. Wind power proponents faced the nightmare scenario of trying to get the General Assembly to act, while Harris McDowell prepared a series of hearings designed to kill the proposal.
In the meanwhile, proponents had drafted a resolution, HCR 38, to approve the wind power project. Within a week, 28 representatives and seven senators had signed on a sponsors. Rep. Pete Schwartzkopf deserves credit for the way he fostered a bipartisan alliance on this. He took the draft resolution to Bob Valihura, and told him he could put his name on the top if he wanted.
HCR 38 passed the House in April, while Harris McDowell labored on a committee report intended to kill the project, which was rendered toothless by his colleagues. Meanwhile, Bluewater and Delmarva Power had entered into negotiations under the watchful eye of Lt. Gov. John Carney and Senator Tony DeLuca. I chose not to write about the talks for some weeks in order to not jinx the effort.
I was attending a fund raiser here in Wilmington when I got word that the General Assembly had passed SB 328, approving the revised PPA. I was left breathless and light-headed. After two years of pushing against the door, it had swung open in a unanimous vote.
Even after the General Assembly approved the project, there was more to be said and done. The Public Service Commission and other agencies voted their final approval the revised PPA in July. The country belatedly learned that Delaware was leading the way for offshore wind power when the New York Times Magazine published a 5,000 word piece on the saga. And Charlie Copeland tried but failed to convince voters that he really had been for wind power all along, despite the long public record to the contrary.
My own advocacy was not limited to this blog. I spoke at every hearing I could. I published an op-ed on the economics of wind power in the News Journal. Allan Loudell of WDEL talked with me regularly on the subject. I talked about wind power several times on Progressive Voices with Dana Garrett on WVUD and on the Great Green Home Show on WILM. I wrote and produced a radio spot, funded through Delaware Audubon, to counter Delmarva Power's misinformation campaign. Behind the scenes, I worked with fellow advocates on legislative strategy and the drafting of HCR 38.
The story isn't over. Bluewater Wind still has to build the project. Parent company Babcock & Brown is facing a financial squeeze brought on by its excessive leverage.
Wind power succeeded because of the emergence of a determined, smart and unusually effective environmental movement here in Delaware. I will be working with fellow advocates to apply the lessons learned from the wind power fight to building a more broadly effective environmental movement here in Delaware. Stay tuned.

The Meaning of Christmas

I had a great Christmas weekend, unspoiled by the failure of several retail workers to wish me Merry Christmas. But then, I don't expect others to practice my religion on my behalf. I don't expect others to show up for worship at my church, or gather with my family, or give to others if I can't be bothered. The exercise of my beliefs is up to me.
But those who flog the old war on Christmas every holiday season seem to place a great deal of importance on how they are greeted by those who work in the retail industry. I fail to understand how the practice of my faith is strengthened or weakened by the way perfect strangers speak to me. Retail workers have put in long hours for little pay in a dismal economy, and been forced to listen to endless loops of bad holiday music for weeks on end. They've worked hard enough this season, and shouldn't be expected to shoulder the responsibility of upholding my religious beliefs.

"In the beginning..."

Forty years ago tonight, Apollo 8 astronaut William Anders snapped this famous photograph of the earth rising over the horizon of the moon: Mission commander Frank Borman read from the book of Genesis, "In the beginning, God created the heavens and the earth."

Apollo 8 was the first manned spaceflight to orbit another celestial body.

Jack Markell Taps Tom McGonigle

As the News Journal reports, Jack Markell has tapped attorney and former Carper staffer Tom McGonigle to serve as his chief of staff, saying of him, "He's really smart, and he knows how to get things done."
Clearly Tom has the background, the brains and the temperament to serve well in his new job. But his work with Bluewater Wind demonstrates an extra dimension to his ability. Remember, Bluewater Wind started out as a long shot. Tom represented Bluewater during the regulatory and legislative phases of its improbable march to success. The process had more cliff-hangers than a Spielberg double feature. Tom was in the middle of the complicated negotiations, conducted in the hothouse environment of Leg Hall, that led to a revised agreement between Bluewater and Delmarva Power.
There are plenty of competent people who have come up through the ranks of state government and never found themselves really challenged. As governor, Tom Carper had to do his share of horse trading to get his way, but he rarely had to fight from behind. But Tom's experience with Bluewater shows he knows how to help win in the face of long odds--experience that will serve him well as Jack Markell takes on the state's worst budget crisis in a generation.

The Earth's Carrying Capacity

It turns out Warren Buffett is interested in the earth's capacity to sustain us. On page 642 of the new biography, The Snowball, he holds forth on the subject to author Alice Schroeder:

There is a carrying capacity to the earth. It's far, far, far, far greater than [Thomas] Malthus ever dreamed. On the other hand, there is some carrying capacity, and the thing about carrying capacity is that you want to err on the low side. If you were provisioning a huge rocket ship to the moon and had enough for two hundred people and didn't know how long the journey would take, you probably wouldn't put more than a hundred fifty people on the ship. And we have a spaceship of sorts, and we don't know how much the provisions are good for. It's very hard to argue that the earth would be better off in terms of average happiness or livelihood with twelve billion people instead of six.

Buffett is right that Malthus' original estimates of the maximum human population were way off. But that doesn't mean the limits are meaningless, and Buffett argues that we should plan for a margin of safety in calculating the effect of population growth, just as he does when making investments.
The earth's population is expected to reach 9 billion by the middle of this century, and gradually slow its growth. A country's population tends to grow more slowly and stabilize as education and living standards improve. Earth watchers like Lester Brown expect the earth's population to stabilize eventually, either through social restraints or, as he wrote in Beyond Malthus, "because nature ruthlessly imposes its own restraints."
The earth's capacity to sustain human life depends as much on technology as it does on sheer numbers. It is also worth pointing out that markets and populations start to behave erratically when their limits are reached, whether those limits are fuel, food, land or water.
The fabled Green Revolution greatly improved crop yields. Equally dramatic changes in energy technology will be needed to reduce carbon emissions and maintain our ability to feed our growing numbers. It's hard to cultivate land that's under water. And Brown points out that reliable water sources from mountain ranges like the Rockies or the Himalayas will be affected as snow accumulation is reduced by global warming.

Bailing Out GM and Chrysler

Over at the Guardian, I have posted a quick rundown of Bush's use of the Troubled Asset Relief Programme (to use the British spelling) to provide some short term financing to GM and Chrysler. While we have heard a great deal about the need to exact some concessions from workers, today's announcement includes some pain for creditors:

The deal also pushes the automakers to swap debt for equity, which may be more palatable for shareholders staring down the barrel at bankruptcy, which even if orderly or prepackaged, would have left shareholders with next to nothing. A share of stock, by definition, entitles its holder to what's left after all of the company's other obligations have been satisfied. Faced with the prospect of holding the bag when nothing was left, dilution of their shares doesn't look all that bad after all.
It's another sign that the era of easy debt is over. The binge of easy money has sunk US corporations to their lowest valuations in years. Only when this bad debt is either digested or regurgitated, will companies be in a position to rebuild their inventories and restock their shelves. Cererbus Capital Management, which owns a controlling share of Chrysler, was happy to load the company down with debt, but has been unwilling to pump more of its capital into the automaker. Now it will be forced to see its stake diluted as the price of solvency.

If it makes sense for workers, suppliers and dealerships to take a hit, creditors and shareholders have to absorb some pain as well. I closed the piece by noting that the help came too late for some:

George Bush may feel like he acted in the nick of time - but it comes too late for the workers at Chrysler's plant in Newark, Delaware, my home state. The plant, which produced more than 8.2m vehicles over the last 57 years, is closing for good at the end of today's shift.

"It's the age of the empty suit."

So said a friend at a party in response to the Bernard Madoff scandal, writes Peggy Noonan in the Wall Street Journal.

That's the big thing at the heart of the great collapse, a strong sense of absence. Who was in charge? Who was in authority? The biggest swindle in all financial history if the figure of $50 billion is to be believed, and nobody knew about it, supposedly, but the swindler himself. The government didn't notice, just as it didn't notice the prevalence of bad debts that would bring down America's great investment banks.

Noonan goes on to say that nobody she knows was "truly shocked" by the Blagojevich scandal. She must travel in different circles than you or I. As I wrote just last week, his scheming "left observers short of breath--and of adjectives." The usually chatty talking heads on the television struggled to find words to match Blagojevich's bravura display of greed.
It's not that we're incapable of being shocked, but that one institutional failure has been quickly crowded out by the next. The financial system is failing? Here comes the auto industry. A callow governor puts a Senate seat up for sale? Here comes a Wall Street big shot whose avarice makes Blagojevich look small time.
But here's the clue that Peggy Noonan, who worked for and worships Ronald Reagan, is questioning her once solid world view:

The reigning ethos seems to be every man for himself.

Economic Darwinism once seemed a virtue under Reagan: the engine that brought us our prosperity. But morning in America was a long time ago, and Reagan's rugged individualism, which had degraded into the sullen entitlement of Bush, Cheney and their chums, has now collapsed so thoroughly that Noonan's party crowd is left shell shocked. The denizens of Noonan's cocktail party circuit are so demoralized that they have nothing left than to get behind the president-elect:

People are angry but don't have a plan, and they'll give the incoming president unprecedented latitude and sympathy, cheering him on. I told a friend it feels like a necessary patriotic act to be supportive of him, and she said, "Oh hell, it's a necessary selfish act—I want him to do well so I survive. We all do!"

So it is that the rugged individualists are rediscovering the notion of the common good. Noonan writes that Barack Obama is taking on a task like the one that FDR faced 76 years ago:

In January, in his inaugural, he may find himself addressing something bigger, and that is: Belief we can believe in. The return of confidence. The end of absence. The return of the suit inhabited by a person. The return of the person who will take responsibility, and lead.

The last election was not so much a loss for the Republicans, but an abdication. When the crisis hit, voters turned to the candidate who didn't seem to be floundering about for what to do next.
The turning point came when voters could see that John McCain had nothing to offer in response to the financial meltdown but dramatic gestures signifying nothing. Good riddance to the empty suits.

Explaining the Unexplainable

I really struggled with my piece on Bernard Madoff in yesterday's Guardian. It's hard to explain events that don't make sense. In response, one commenter, Auric, offered up some good snark, quoting me:

'The biggest mystery is why Madoff, who was already a big success, risked it all on such a scheme. Here, we can only speculate. Money may have been a motivation.'
Insightful, inconoclastic comment at its best.

Nicely done, Auric. I did go on to add this blinding insight:

It may have been ego.

It may have been money, or ego perhaps. In my defense, I did elaborate on the ego point:

In a city where waiters want to be actors and actors want to direct, Madoff may have aspired to be more than the guy who executed trades for the Masters of the Universe.

After a week, I think there's a lot to learn about this one. Stay tuned for more insightful commentary on world events.

History's Biggest Ponzi Scheme

The Bernard Madoff fraud is deeply puzzling on many levels. One of the most troubling questions is how he got away with it.
SEC Chairman Christopher Cox has issued an extraordinary statement on how the Commission could have missed the biggest Ponzi scheme in history:

Since Commissioners were first informed of the Madoff investigation last week, the Commission has met multiple times on an emergency basis to seek answers to the question of how Mr. Madoff's vast scheme remained undetected by regulators and law enforcement for so long. Our initial findings have been deeply troubling. The Commission has learned that credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action. I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them. Moreover, a consequence of the failure to seek a formal order of investigation from the Commission is that subpoena power was not used to obtain information, but rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm.

The failure to detect one of the biggest frauds in history demanded attention, even before the announcement that the SEC had missed specific warnings about Madoff's machinations.
Update: I've got more on the unfolding Madoff scandal over at the Guardian.

More on Calvin Trillin

Prompted by the publication of his new book of political verse, the New York Times yesterday republished a 2006 op-ed by Calvin Trillin on the poetic challenges presented by the prosaic names of some of our presidential candidates. He admits to a narrow view of the subject:

Rhyme is not my only one; I am also intensely interested in meter.

From the poet's perspective, Al Gore is not the most exciting candidate:

Reading about the renewed interest lately in Al Gore, whom I once referred to in a poem as "a man-like object," I have to admit that his name rhymes with more than "bore" and "snore."

Of course that was before Gore went to Hollywood and won an Oscar for An Inconvenient Truth.
Trillin bemoans the difficulties of his chosen profession:

It's not as if a deadline poet has an easy lot to begin with. Obviously there are those constant deadlines. Without wanting to knock the competition, I might just point out that, say, the romantic poets — Wordsworth and that crowd — could mosey along the countryside for days without feeling any pressure at all to come up with a sunset they considered worth writing about.

As if versifying on Barack Obama isn't tough enough, Trillin describes learning the name of another Chicago politician, Rod Blagojevich. As I described the other day, Trillin proved superior to the challenge last week.

Calvin Trillin and Rod Blagojevich

Calvin Trillin, who just published his latest volume of political verse, Deciding the Next Decider, is revealed to be not entirely impartial on the jacket flap:

His political beliefs are so colored by rhyme and meter that he once criticized Hillary Clinton for being “insufficiently iambic” and publicly advised against a presidential run by the governor of Illinois, Rod Blagojevich.

Of course, most of us did not know that Blagojevich was even considering higher office until recently.
Despite the obvious challenges presented by his name, Trillin did manage a few lines on the scandal in the Nation:

It seemed to Rod Blagojevich
A powerful appointment which
Was his to make should make him rich.
His plan turned out to have a glitch.
Perhaps the Feds had flipped a snitch.
So much for Rod Blagojevich.

Chu Is Chosen

U.S. energy policy will no longer be made by lobbyists meeting in secret. Barack Obama's picks to lead the government on energy and the environment have the brains and experience to develop policy without relying on position papers presented by oil companies. The New York Times has the names:

The officials said Mr. Obama would name Steven Chu, the director of the Lawrence Berkeley National Laboratory, as his energy secretary, and Nancy Sutley, deputy mayor of Los Angeles for energy and environment, as head of the White House Council on Environmental Quality. Mr. Obama also appears ready to name Carol M. Browner, the E.P.A. administrator under President Bill Clinton, as the top White House official on climate and energy policy and Lisa P. Jackson, who until recently was New Jersey’s commissioner of environmental protection, as the head of the E.P.A.

Chu was awarded the Nobel Prize for physics in 1997 for using laser light to capture and cool atoms to within a fraction of a degree of absolute zero. According to his official bio, he has "reinvigorated Berkeley Lab’s existing programs for energy-efficient buildings, more powerful batteries, and monitoring greenhouse gases."
Carol Browner would be the third former cabinet level official to accept a policy position in Obama's White House, the first two being Lawrence Summers, who served as Treasury Secretary, and former Federal Reserve chairman Paul Volcker.
Gene Karpinski, the president of the League of Conservation Voters, today called the group "a green dream team." The picks are expected to be formally presented next week.

"I want to make money."

So said Illinois governor Rod Blagojevich, according to the 78 page criminal complaint filed today. The complaint portrays Blagojevich as seeking to sell a U.S. Senate seat like a highway construction contract, quoting him as wanting to "monetize" his power to appoint Barack Obama's successor.
As I write in the Guardian today, Blagojevich's conduct, as described in the complaint, "has left observers short of breath - and of adjectives."
I also note that two other Senate seats, in Delaware and New York, are being vacated as well. While there has been considerable intrigue surrounding these selections, nothing approaches the audacity of Blagojevich's scheming. I draw a clear distinction between politics here and in Illinios:

Politics in Delaware may be cosy, but political intimacy takes on a darker meaning when money is put on the table.

By the way, one Chicago politician comes off looking pretty good in the complaint:

Later in the conversation, ROD BLAGOJEVICH said he knows that the President-elect wants Senate Candidate 1 for the Senate seat but "they’re not willing to give me anything except appreciation. [Expletive] them."

Modern Art Can Be Fun

If you feel like you have to drag your kids to the art museum, try this:
Present an enormous, enigmatic video installation by Pipolotti Rist in the atrium of the Museum of Modern Art. Place a large circular cushion in the center. Give the kids digital cameras and let them loose. Watch them cavort, snapping pictures in every direction. Parents, lie back and rest your feet.
As the art scholars discussed the meaning of Miro's experiments with Surrealism or the technique of Sol LeWitt's giant geometric scribblings, families were relaxing and kids were giggling with delight.
The video installation "Pour Your Body Out" is on display through February 2.

The Fringe Lawsuits against Barack Obama

Normally I try to ignore the bizarro fringes of American political life. But sometimes their antics are just too much fun to turn away. Slate has the rundown on the legal challenges to Barack Obama's eligibility to serve as president:

If you want to stop Barack Obama from becoming president, there's still time. But you have to act right now. Go to RallyCongress.com, and you can be the 126,000^th-odd American to demand "proof of citizenship" from the president-elect. Follow the instructions at WeMustBeHeard.com, and you can join a sit-in outside the Supreme Court of the United States, starting at 8 a.m. Friday, as the justices decide whether to consider a suit filed by a professional poker player that challenges the presidential eligibility of Obama, John McCain, and Socialist Workers candidate Roger Calero.

None of the nutcases are nuttier than Alan Keyes, whose superheated prose and leaps of logic leave one breathless. He warns of the end of our system of government if Obama is allowed to take office without answering some of the most arcane legal challenges ever seen in electoral politics:

If Barack Obama is allowed to assume the office of president without positively establishing his eligibility under the Constitution, it will set a precedent for exempting the allocation of executive power from constitutional restrictions on the pretext that majority support overrules constitutional authority, popularity supersedes the fundamental law. Obviously, this is a recipe for the establishment of democratic dictatorship, like that which characterized the revolutionary first republic in France and licensed its murderous excesses. It is the counterpart of the "democratic people's republics" in whose name countless millions were imprisoned and killed by oppressive party dictatorships in the Soviet Union, Communist China, North Korea, etc.

Well, we can't say Keyes didn't warn us.
When I worked in the mayor's office here in Wilmington, I maintained a file titled "esoteric political theories" for the fringe letters that came in the mail. One memorable treatise argued that the original constitutional conventions were improperly constituted, and the U.S. government had no legal authority.
That fellow exercised his right to petition his municipal government, though we felt no obligation to act on rantings. But, thanks to Clarence Thomas, one of these wacko suits is actually being discussed today by the members of the Supreme Court. Almost no one imagines that they would actually want to hear such a suit, which means the nutcases will have four years to argue that the executive branch of government is operating outside of any constitutional authority.
While we can smile indulgently at the antics of those who have raised this kind of legal comedy to the level of performance art, we should remember that there is a small fringe that refuses to accept the election of our president as legitimate.

Financial Troubles at Babcock & Brown

What effect might Babcock & Brown's financial troubles have on Bluewater Wind's plans to build an offshore wind farm here in Delaware? Babcock & Brown, which you might call the grandparent company of Bluewater Wind, got a two month reprieve from its creditors today. Trading on its shares, which had been suspended pending an agreement, resumed. The firm climbed all the way up to 39 cents on the Australian Stock Exchange or ASX.
Bloomberg reports that new short term financing has been tendered in anticipation of restructuring:

Babcock has been negotiating for months with its main bankers over some of the covenants attached to about A$3 billion ($1.94 billion) in debt maturing by 2011, but the situation became critical last month when a smaller creditor demanded repayment. Thursday's agreement included the suspension of all financial covenants under Babcock's two existing corporate facilities. It also included a A$150 million facility to meet Babcock's immediate funding needs, due for repayment on Dec. 31 next year. It will suspend dividends until the new facility is paid off. Babcock said it would work with its banks towards a long-term capital restructure, including a possible debt-for-equity swap.

By the way, I can't help but notice that B&B managed to secure this short term financing without a government bailout. But I digress.
Tuesday, I incorrectly said to Allan Loudell on WDEL that Bluewater Wind is owned by B&B Wind Partners, which is separately listed on the ASX, and is doing better that its corporate parent. I subsequently learned that B&B Wind is not expected to take possession of the Bluewater project until it becomes operational. The construction of the Delaware wind farm is being handled by B&B Infrastructure, which is also separately listed on the ASX. Once the project is built, it would be transferred to B&B Wind, providing the corporate structure remains as it now stands, which is questionable.
B&B Infrastructure is not as strong as B&B Wind, and closed today at 9.8 cents on the ASX. But the company is still financing and building projects despite its own credit squeeze and a recent downgrade from Moody's to B1/B2, which is still investment grade:

BBI has cash requirements in the next 3 months, without committed available facilities. These include $100 million debt due in February 2009 at the BBI corporate level. In addition, Moody's understands that an additional amount of $157 million BBI is payable in relation to the remaining minority interest in WestNet Rail ($66 million mezzanine debt at Babcock & Brown WA Rail Trust and $91 million in equity at BBI Rail Holdings Pty Ltd). These $157 million payments are not obligations at the BBI parent Corporate level.
The ratings are on review with direction uncertain. Moody's considers that BBI's fundamental financial profile - absent the current liquidity pressure - continues to perform, with ample interest service coverage, and the key driver for the current low ratings is the very challenging liquidity position. Accordingly, to the extent that BBI resolves these liquidity challenges, and establishes a sustainable liquidity platform, the ratings could be raised to mid/high Ba range.

As a construction company, B&B Infrastructure depends on credit to stay in business. The company has just completed a project in South Dakota and is building a 3,000 MW wind farm in Manitoba, Canada. B&B Wind Partners is in the process of untangling itself from B&B's complex set of relationships. B&B owns controlling shares in twelve separately listed funds. The parent provides financing and management services, for which it assesses management fees. B&B Wind has just executed a new agreement with B&B which substantially alters its governance and financing:

On 21 November 2008, agreement was reached with Babcock & Brown on a number of issues. The changes agreed specifically relate to:
• the composition of the BBW Boards, so that the Boards include an independent chairman, three independent Directors, one senior B&B executive and the CEO of BBW.
• The dedicated BBW staff are now employed by the Management Company
• A reduction in the base fee with additional performance hurdles required for the payment of any incentive fee
• Furthermore, BBW is no longer under the obligation to use Babcock & Brown’s financial advisory services for related party matters.

A further proposal would effectively sever the relationship and possibly lead to a name change:

The proposal seeks to terminate the Management Agreements and fully internalise the management function; as well as to acquire certain assets from Babcock & Brown.

B&B Wind’s actions could signal further changes in the B&B empire. The business model of high leverage, financial engineering and stiff management fees back to the parent company seems outdated in today's financial environment.
In the midst of these financial troubles, there is one asset that is not impaired: the power purchase agreement (PPA) between Bluewater and Delmarva Power. The PPA has an asset value independent of the holder of the contract. With a guaranteed revenue stream, someone will want to build the wind farm if B&B is unable to raise the capital.
I have not seen any sign that B&B’s financial woes have slowed down Bluewater Wind. Right now, Bluewater is working on the logistics of the project, which are formidable. Large components will need to be brought to Delaware, assembled and delivered to the site eleven miles from Delaware’s beaches. Bluewater has not yet reached the point at which it will need the heavy capital required to build the project.
The troubles with B&B are inherent in its own business model, and do not reflect the economic value of the wind power project here in Delaware. As for whether B&B’s financial problems affect Bluewater’s ability to build the wind farm, stay tuned.

More on Why Aid to the States Makes Sense

The News Journal reports that Jack Markell had a prominent seat at the governors' meeting with Barack Obama yesterday in Philadelphia, and describes the stimulus options on the table:

Quick-turnaround capital projects, renewable energy, extension of unemployment benefits and $40 billion in health care assistance were among the topics covered in the 105-minute meeting with the National Governors Association.

In my piece posted yesterday in the Guardian, I reviewed the impact of the current crisis on Delaware:

Nearly a third (32.5%) of Delaware's economy depends on the finance and insurance industries, far more than any of the other 49 states, including New York.

Supply side proponents take note: As I noted here on Monday, state aid of any sort would have a greater economic impact than tax cuts of any sort. But don't take my word for it. Take it from an economist, Mark Zandi, who who worked for the Republican candidate in the last presidential election:

Zandi, who served as an adviser to John McCain's presidential campaign, judges that extending George Bush's tax cuts would return just 30 cents in economic impact for every dollar of cuts. So much for the belief that tax cuts pay for themselves.

Without federal aid, states would be forced to either cut services or raise taxes; both options would suck money from the economy. But a federal assistance package for the states would provide the greater "bang for the buck" as Zandi noted in his testimony before Congress last month.

Getting the Biggest Bang for the Buck

Which kind of fiscal stimulus provides the biggest bang for the buck?
Last month, Mark Zandi, chief economist at Moody's Economy.com, gave the Senate Budget Committee detailed testimony on the comparative impact, or multiplier effect, of spending increase and tax cuts. New York Times economics writer Louis Uchitelle has the rundown on Zandi's testimony:

Mr. Zandi, who advised the Republican presidential candidate, John McCain, said in testimony last month before the Senate Budget Committee that nearly every dollar spent in this fashion generates $1.50 or more in economic activity. Repairing a road, for example, means hiring workers who spend their new salaries at supermarkets, which in turn hire more store clerks and stock more groceries to handle the extra spending.

He advised McCain? So what does he have to say about tax cuts?

This “multiplier effect” is missing, however, when the stimulus comes as a tax break. A $750 billion stimulus package devoted entirely to spending could achieve, through the multiplier effect, more than the $1 trillion rise in output that the Obama administration apparently seeks to generate the 2.5 million new jobs.

Zandi defines the "bang for the buck" as the "one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending."
Zandi make a succinct case for federal assistance for strained state budgets:

Because most state governments are required by their constitutions to quickly eliminate their deficits, most have drawn down their reserve funds and have already begun to cut programs ranging from healthcare to education. Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010. Additional federal aid to state governments will fund existing payrolls and programs, providing a relatively quick economic boost. States that receive checks from the federal government will quickly pass the money on to workers, vendors and program beneficiaries.

Governors and governors-elect meeting with Barack Obama tomorrow are hoping that the new president will take Zandi's recommendations to heart.