Capitalism and its markets are unquestionably the world’s best systems for producing wealth.  Let’s agree to that.

The problems are that despite all of this production power, there’s nothing in Capitalism that guarantees that real incomes and real social advances will rise  alongside the increases in overall wealth.  That’s one problem.  There’s also nothing in Capitalism that guarantees that the negative real costs of production are included in the cost of production.   Instead, our current version of Capitalism ignores these real costs and most often pushes them off onto the taxpayer.

Currently the only proven effective technique that guarantees widely raising real incomes is the crude imposition of progressive taxation of income and, by inference, wealth after the fact.  But it needs addressing in some fashion, otherwise Capitalism funnels productivity gains upwards, not downwards.  It naturally concentrates incomes and wealth instead of distributing it widely.  Many of the ills in our present circumstances can be laid at the doorstep of failing to have the majority of the public gain real income advances for more than the past 30 years: Leverage,  speculation, deficits, debt, crumbling infrastructures, high unemployment–even the housing bubble.  And this isn’t the first time this has happened.  Wide income inequality preceded the Great Depression too.

It’s not just a problem in the US either.  Consider China’s situation.  China’s overall economic growth has been export driven.  China depends upon sales to economies who’s populations are dwarfed by China’s 1.3 billion citizens.  With the single largest market in its front yard why would China need to export it’s production at all?  China needs to do this because it has not figured out a way to raise the real incomes of its own population widely and quickly.  If it did this it’s economy could expand smartly without relying so much on exports.  China, all by itself, could generate the world’s largest domestic boom in durable goods without exporting anything!

While China has raised real incomes in much of the economy, it suffers from even wider income inequalities than those in the US.  Like the US, China has been producing billionaires instead while millions of its workers toil a minimum of 60 hours per week, live in cramped dormitories near the factory but distant from their homes and families, and get paid a pittance in real incomes.   China has discovered the power of Capitalism and markets, but struggles to spread the benefits widely amongst its population.

Most of the other ill effects from Capitalism come from it’s second failure.  Capitalism isn’t at all efficient in pricing the negative consequences of production into the cost of production.  The truth is Capitalism simply ignores these very real costs of production.   Instead Capitalism leaves it up to governments and taxpayers to fund these costs of production.

The list of these real costs are many, most of them a direct result of damage to the environment and public health caused by production.   The overuse of pesticides and fertilizers in farming, for just two examples, endanger public health and create huge ‘dead seas’ in the Gulf of Mexico and accelerate losses of precious topsoil.  As for animal farming, the overuse of hormones and antibiotics creates very real health problems within the public at large, and very large costs in health care treating chronic diseases like diabetes and fighting new, lethal ‘super bugs’ that evolved in response to hormones and heavy antibiotic use.

Air pollution is another cost of production.  As with the other costs, air pollution costs are large, showing up in the public health care system as treatment for asthma caused or aggravated by the pollution, or in treatment of other ill health such as that caused by mercury, a particularly problematic and sometimes lethal pollutant from coal fired electric generation.    Energy production can, and too frequently does, foul water aquifers and salt water seas too–damage that can cause hundreds of billions of taxpayer dollars being spent to restore environmental health.

The important concept to keep in mind with all of this is that mitigating these negative aspects of Capitalism reduces the cost of production and strengthens real incomes widely among the population.   Just as it’s much less expensive to avoid diabetes instead of treating it forever as a chronic disease later, so too preventing the negative environmental and health costs of production is cheaper than addressing them afterwards.   Addressing upfront the problem of inefficient income distribution also reduces the cost of solving the problems that wide income inequality creates afterwards.

This doesn’t mean you get rid of income inequality entirely or pollution from production.  A certain amount of inequality is necessary–it’s one of the ways (although not the only one) Capitalism rewards it’s most productive workers, inventors and entrepreneurs.   Almost all production creates some disruption to the environment, much of it not readily understood.  But any environmental damage that’s avoided is always much less expensive than the damage that isn’t avoided.

In brief, there’s no need to throw out the baby with the bathwater.   There’s almost no chance, with our current level of understanding and science, that we can entirely avoid the negative consequences of human behavior.  But if the will and determination to decrease our real costs is applied, we can create a Capitalist society that is more healthy and efficient than the one we now have.

Ed Yardeni, former chief economist for EF Hutton and Prudential Securities who now has his own investment research firm, Yardeni Research, has an interesting post about the ‘Old World’ declining oil consumption, compared to that of the ‘New World.’   The fact is the US and mostly Europe, where developed countries are concentrated the most, are improving the efficiency of their use of petroleum.  That’s good news.  In contrast the developing world, mostly in the Far East, is increasing its consumption of petroleum.  That could pose some problems if it continues.  We’re not drawing any conclusion other than that efficiency in energy use is a laudable goal and those economies which are most efficient will prosper best in the long run.

For anyone who’s interested, the original blogsite for the chart is energyintel.com.

Beezer here.  This is a classic internet find.  First we went to Economist’s View which highlighted an article about President Obama’s State of the Union speech last night.  The comment thread to that post wandered along and at one point touched upon energy uses, which led to a link to the Business Insider blogsite in one of the comments, which in turn linked to Ed Yardeni’s post, which in turn linked to energyintel.com. 

Not that this comes as a surprise here, but some people might be surprised to learn the two top GOP contenders for President both have tax proposals that increase our deficits and debt.  From James Kwak, co-author of the blogsite Baseline Scenario.

The Times has a story out today: Surprise, all the Republican candidates’ tax plans increase the national deficit! The numbers (reduction in 2015 tax revenues, from the Tax Policy Center):

• Romney: $600 billion
• Gingrich: $1.3 trillion
• (Late lamented) Perry: $1.0 trillion
• Santorum: $1.3 trillion

I guess that makes Romney the “fiscally responsible” choice, at least among the Republicans. But President Obama’s tax proposals would only reduce 2015 tax revenues by $222 billion. (That’s $385 billion in Table S-4 less $163 billion in Table S-3.)

Second surprise: The big winners in all of these tax plans are the rich! (That’s not just in dollars, but in percentage increase in after-tax income.)

I don’t mean to be hard on the Times reporters. This is exactly the kind of story they should be writing. Someone has to point out that the same people who are complaining about deficits are proposing to vastly increase those deficits. Especially when their fantastic claims are essentially going unchallenged on the campaign trail.

Beezer here.  We’ve known all along that Republicans are anything but fiscally responsible.  They’re the ones who did away with paygo in 2002, a built in brake on runaway spending implemented under President Clinton (and House Speaker Newt Gingrich, for full disclosure).  They’re the ones who went into two wars without raising taxes to cover the increased spending.  And they’re the ones refusing even now to let those unwise tax breaks lapse.  In fact both Romney and Gingrich want to further lower taxes on income mostly enjoyed only by the wealthy.   To pay for all this they want to defund Social Security and Medicare, benefits that labor and much of the middle class depend upon in their retirement years.  And all the while they complain about deficits and debt.  One can only be amazed that no one calls them on this obvious and continuing fraud.

A new report paid for by the Department of Defense asserts that solar installations on 9 military bases in the Mojave and Colorado deserts would produce  energy equivalent to seven average sized nuclear power plants.  Not only that, the installations could generate $100 million in annual revenue for the military.

From a New York Times green blogsite post.

A consultant for the Defense Department reports that introducing solar installations on nine military bases in the Mojave and Colorado Desert could generate 7,000 megawatts of power.

Depending on which yardstick you prefer, that amounts to the output of seven average nuclear plants or six large coal-fired plants. It would also amount to 25 percent of the renewable energy that California will require its utilities to produce by 2015, according to the 13 authors of the report, prepared by the consultancy ICF International.

The report says that electricity generated annually from such solar installations would be equivalent to two-thirds of what the Department of Defense consumes nationwide each year.

Perhaps as much to the point, the report also notes that the military could earn as much as $100 million annually from such solar installations, from rental payments to discounts on power. “Private developers can tap the solar potential with no capital investment required from the D.O.D.,” it adds.

What is more, full development of this solar capability would mean avoiding emissions of millions of tons of greenhouse gases and other pollutants, the report said.

One of the bases mentioned in the report, Nellis Air Force Base in Las Vegas, already boasts the largest photovoltaic array in the nation, a five-year-old 14-megawatt project.

But beyond that, the consultants found, another 30,873 acres of military land is suitable for similar solar arrays on land belonging to California bases, like Fort Irwin, an Army base that has already hosted an experiment in “cool roofs” for new base housing; Edwards Air Force Base (whose history was excerpted in Tom Wolfe’s “The Right Stuff”); the Marine Corps Air Ground Combat Center in Twentynine Palms; and the Naval Air Facility in El Centro, where Prince Harry trained last year.J. Emilio Flores for The New York Times At Fort Irwin in the Mojave Desert, houses with “cool” reflective roofs reduce energy consumption.

Another 101,000 acres were deemed “likely suitable” or “questionably suitable.”

At least 96 percent of the land on the bases was ruled unsuitable because solar development would interfere with military activities, because the land provides essential habitat to species like the desert tortoise, because of topography like steep slopes, or because construction could harm a cultural resource like a rich archaeological site or an area important to a Native American group.

Even so, the remaining lands, rooftops, parking lots and the like offer rich solar potential for photovoltaic and perhaps concentrated solar facilities if hurdles like transmission capacity could be overcome, the study indicated.

“There are a range of technical, policy and programmatic barriers that can slow or, in some cases, stop solar development,” the report cautions. “Transmission capacity and the management of withdrawn lands are the two most important issues.”

The study’s economic analysis, calculating a 20-year investment return, assumes that all construction would take place in 2015 (allowing for lead-in planning and procurement time) and that the price of photovoltaic arrays will drop 20 percent or so from last year’s levels.

The solar energy installations could also make the military bases less vulnerable to disruptions of the public electricity grid, the report added. Currently the Defense Department relies on individual diesel generators to insure power in the event of a grid interruption, it noted.

As the military bases rely more on secure microgrids to meet energy needs, the authors predict,  solar power can play an ever more important role.

Beezer here.  One of the nation’s more important infrastructure needs is to revamp the electric grid so that these types of renewable, sustainable energy sources can efficiently power distant locations.  Winds along the eastern seaboard and in the Dakotas is a 365 day per year phenomenon.  What’s needed to bring this constant power source online isn’t better storage technology, but installation of modern electric distribution systems.  Status quo energy suppliers like coal will do everything they can to keep this powerful competitor off line, of course.    Republicans are upset the Obama administration hasn’t already approved the Canadian owned Keystone oil pipeline through the nation’s heartland, but not a peep about spending some money bringing non polluting, renewable solar and wind power online.  They claim we need this imported fuel while ignoring what we could be doing on our own soil.  Hypocrites.

There are many ways individual countries can compete for export markets:  Currency manipulation, labor income differentials, regulatory laxity and tax policy including subsidies are just a few.

Subsidies are already part of ongoing trade relations and they are frowned upon.  But what’s keeping two countries from coordinating tax policies aimed at balancing tax incomes based upon export sales in their respective countries?  Right now in the US there’s a debate over whether or not the US should give US multinationals a ‘tax break’ aimed at encouraging these multi-nationals to repatriate back to the US profits made from export sales.  The amount of money involved is not trivial, it’s in the trillions of dollars.

Coordinated tax policies based upon sales, say between China and the US, would allow both countries to share proportionately in profits and remove tax barriers keeping multi nationals from freely shifting assets between countries.   Take Apple as one example.  This Cupertino, California based multi national makes all of its products outside the US.  While the US may still be Apple’s largest market, the Chinese market potential is huge and inevitably will become Apple’s largest market.

If the two countries coordinated their tax policies based upon sales in each country of Apple products, they could both reap higher revenues without distorting Apple’s business model or inhibiting Apple’s sales in either country.  And because Apple’s tax rate would be ‘equalized’ in both countries, again based on sales, the company would have zero incentive to retain profits in either country.   Apple would be free to shift assets between the two without the constraint of tax differences.

The so-called ‘tax gap’ from taxes owed but not paid is much larger than the average taxpayer might think.  In it’s first ‘tax gap’ report in six years, the IRS estimates that in 2006 $385 billion in owed taxes were never paid.   That year the total cost of Medicare was $325 billion.  The Center on Budget and Policy Priorities reported it this way:

The IRS’s new estimate of the “tax gap,” its first in six years, shows that taxpayers failed to pay $450 billion in federal taxes on time in 2006, $385 billion of which they never paid.  That’s real money (more than Medicare cost that year, as the graph shows), particularly for a country facing wrenching choices on how much to raise taxes on honest taxpayers and to cut Medicare, health and science research, education, and other vital priorities in order to rein in long-term deficits.

What is most frustrating about the new figures is that they restate a simple message that isn’t new but that the current Congress has chosen to ignore.  In the areas of the tax code with substantial information reporting and withholding requirements — most notably workers’ wages, which employers report to the IRS and on which they withhold income and payroll taxes — compliance is extremely high.  But where there is no third-party information reporting or withholding, tax collections are abysmal.  Sole proprietors, a major class of small businesses, report less than half of their income to the IRS.

In fact, under-reported business income is the single largest source of the tax gap, amounting to fully $122 billion in 2006 alone.

Eliminating the tax gap would be impossible.  Nor can any single measure substantially reduce it.  But Congress can — and should — take a number of steps that would boost collection of taxes that are already owed by many billions of dollars.

Not too long ago, there were signs that policymakers of both parties recognized this.  The Bush Administration pushed successfully for new withholding requirements on government contractors on the heels of troubling Government Accountability Office investigations showing widespread tax abuse.  Then, in the 2010 health reform law, the Obama Administration teamed up with congressional Democrats to tighten reporting requirements on certain business transactions.  These were two modest but real steps forward.

The current Congress, however, repealed both measures.  To make matters worse, in last year’s deficit-reduction legislation (the Budget Control Act), House Republicans blocked Senate Majority Leader Reid’s effort to ensure sufficient funding for IRS tax compliance activities, even though the Congressional Budget Office concluded that it would have generated net budget savings of $30 billion over a decade.

Beezer here.  And of course in 2010 the GOP repealed both Bush and Obama legislation aimed at helping to reduce this number via better enforcement.  Much was made about the role a lack of tax law enforcement in Greece played in that country’s debt problems.  Apparently just like Greeks, avoiding taxes is the American national pastime–if your main sources of income are not wages, where tax cheating is very low.   Nonetheless, one can’t help suspect that a simplified tax code would be the most effective and efficient way to decrease cheating.  Thanks to Mark Thoma’s economist’s view blogsite for highlighting the CBPP article.