Coal and the Free Market

According to a news report in the Lexington Herald-Leader, demand for coal is down considerably in the United States. (“Coal rebounding—in Asia, November 4, 2009) The article was primarily about increase demand for metalurgical coal, which is used in steelmaking. The increase demand is primarily in China, which apparently has recovered from the recession and is starting to build again, and since construction requires steel, and certain types of coal are used in steel-making, the demand for that coal has increased.

Demand, however, is much lower in the United States. According to the article, electric companies, which are the main consumers of coal in this country, have stockpiles of coal that are 40% larger than last year. The reason for this is that there is less demand for electricity due to a relatively cool summer and the impact of the recession. Also cited is the low price of natural gas. As a result, “producers have now idled enough U.S. mines to trim about 100 million tons of coal – roughly 9 percent – from production this year.”   U.S. coal producers say that they don’t see much potential for a rebound in demand this year.

So, apparently, the demand for coal is set by the free market. And coal production is a product of demand. As demand goes down, production goes down as well. This is an important piece of information in the debate over coal and the mining of coal here in Kentucky. My impression from the general debate, and from the “friends of coal” was that all the problems in the coal fields are due to environmentalists. Clearly that is not the case. I don’t know the numbers (the article did not provide that level of detail), but it would be interesting to know if more coal jobs have been lost due to the free market, or due to environmental restrictions.  

How about some history with your Tea?

In discussing the Tea Party movement, David Adams, campaign manager for Rand Paul, said that the guiding principles of the Tea Party movement are “distinctly Kentuckian: balanced budgets and getting government out of the business of picking economic winners and losers.”

If Adams and the Tea Party want to suggest as a matter of economics or of political philosophy that government should not be in the business of picking economic winners and losers they are free to do so. But it is simply wrong to suggest that this is the historical norm or historical reality. The government has been in the business of picking economic winners and losers since George Washington sided with Alexander Hamilton and chartered the First Bank of the United States.  The government picked economic winners and losers in when it granted the charter to provide steam ship service on the Hudson River to Robert Fulton rather than John Fitch, James Rumsey, or John Stevens. 

The Government picked economic winners and losers when it funded canals to open up the interior. The government program to fund canals, by the way, was one of the main programs of Henry Clay, the powerful Whig Speaker of the House from Lexington, Kentucky.

The government picked economic winners and losers when it built the Transcontinental Railroad. It picked winners and losers when it granted Edison the first contract to build electric service in New Jersey. It picked winners and losers when it bought planes for the Army and the Postal Service at the dawn of aviation. It picked winners and losers when it let the contracts to build ENIAC, the first digital computer. It picked economic winners and losers when it decided where to build the interstate highway system. It picked winners and losers when it selected IBM to build computers for the space program. These are just a sampling, but the point is that government involvement in picking economic winners and losers is pervasive through our economy and our history.

Whether this is right or wrong as a matter of political philosophy is an interesting question. Perhaps it is wrong for government to become as involved as it is. This is an issue that certainly should be discussed.

But whether it is right or wrong as a matter of economics is another matter. Perhaps government should have no role in the economy, but is has since the dawn of government. (Recall Joseph’s involvement in Egyptian agriculture, see Genesis 41:37 – 57.) Government and the economy are so intertwined that it is difficult to know where one starts and the other ends.

To suggest, as Mr. Adams does, that government should have no role in “picking economic winners and losers” is an interesting philosophical theory. But it is little more than a theory.

There is a term in political philosophy for people who suggest that government should be run based on untested theories, and it is not “conservative.” The soul of conservativism is the idea that human affairs should be governed by time tested and practical methods. Conservatives have long opposed “liberals” whom they castigate for trying to reform society based on untested social theories. But now some want to restructure society based on untested economic theories. The term for someone who wants to try to reshape society based on untested theories is not liberal or conservative, but radical. The reality is that the theory of the totally unconstrained free market is neither liberal or conservative but radical.

Changing Economics and Changing Politics

In an article in National Affairs, Jim Manzi, a senior fellow at the conservative Manhattan Institute says that the world’s economy has changed dramatically in the last twenty years or so, and neither American political party knows how to deal with the new economic reality. He says that basically Republicans have become free market fundamentalists, but fail to appreciate that the free market can create a variety of unfavorable conditions that have a negative impact on society. He says that Democrats, in contrast, are far too focused on maintaining social cohesion, often at the expense of a vibrant economy. It is a fascinating article that I recommend to anyone interested in understanding the changes and problems of the modern world. It is currently available on-line at:

I want to address one of the issues that Manzi discusses. He notes that modern businesses need to be flexible to compete in the world economy. If a business is not flexible it will lose out to more flexible competition from other countries. Flexibility means that a company must be able to quickly shift production, merge with other companies or spin off certain production lines, close unprofitable lines of business and nimbly open others. It also needs to be able to find and hire the best people, and on the flip side, let unproductive people go. This flexibility is fundamental to competition and vital to success.

But this flexibility for business equates to lack of stability of workers. The papers are full of stories of companies cutting workers, many due to the recession, but others in order to compete with foreign competition. Downsizing and outsourcing were common throughout the last decade. Some studies indicate that the average worker today will change jobs ten times in his or her career. Companies must be flexible, and so too must be workers. But this flexibility equates to a lack of stability. Polls indicate widespread anxiety among workers as they contemplate company bankruptcies, mergers, layoffs, and outsourcing.

Workers are citizens and voters. And polls indicate widespread concern among the voting public. One recent poll I saw indicated that 60% of the respondents felt that their children would not enjoy the same quality of life and lifestyle that they did. This economic uncertainly leads to political uncertainty. I personally believe that the recent interest in new and untested politicians (including both Barack Obama and Sarah Palin) is due in no small measure to the believe that the old politicians did not do well by the economy and the public.

That is one issue, but the more fundamental issue is that what is good for business is, in this case at least, not good for politics. A modern economy needs – truly and fundamentally needs – flexibility. But that flexibility leads to social and political anxiety.

People entering the workforce in America today know and understand that they will not work for a single company their entire career. They will not work forty years of GM, or Sears, or IBM, or AT & T, and retire with a gold watch and a nice pension. They will change jobs frequently, and as a result they are largely responsible for planning and saving for their retirement. They have no sense that loyalty to a company will result in the company protecting them, not because the company is venal, but because the company is fighting for its own survival in the uncertain seas of the world economy. That is the new economic reality. It is unsettling for workers, and since workers are voters, it is creating political uncertainty as well. And that is the new political reality.     

China as the New Clean Energy Superpower

It’s common knowledge that China is building more coal fired power plants than the rest of the world combined. But what is less reported is that China is now the leading producer of both solar panels and wind turbines. China needs energy to feed growing demand, but it also understands that renewable energy will be a vital part of the energy supply of the future. While it is certainly good for the world that China has embraced clean technology, it could potentially be a problem for the United States. It is quite possible that if the United States does not aggressively pursue renewable technology now, which will result in developing new and improved solar panels and new and improved wind turbines, we will end up buying those products from China.

Currently renewable supply only a small percent of China’s needs, but China intends to produce 8 percent of its energy needs from renewable, including wind, solar and biomass, by 2020. Renewable also produce jobs. According to a recent New York Times article, China employs over 1 million people in its renewable energy sector, and is adding over 100,000 jobs a year.


This growth in renewable energy in China is the direct result of government intervention in the economy, and China recently created a National Energy Commission to oversee all energy needs and to push for increased use of renewable.

The New York Times article notes that China has an advantage in developing renewable energy: it is starting from scratch. It has an increased need, and it is just as easy (actually easier) to build a renewable facility as a coal fired power plant. And since everything is starting from scratch, the cost of installing clean versus coal is roughly competitive. In the United States, and other developed markets, the issue is replacement of existing power generation, and so renewables are competing with an existing market.

Renewable energy does cost more than coal energy in China. Wind is as much as 40 percent more expensive than coal, and solar is about twice as expensive. But increased production drives down costs, and eventually the cost for energy from renewables will come down. And, as coal use goes up worldwide the price will go up as well, and perhaps the two cost models will meet and the cost per kilowatt will be the same.

But Chinese renewable energy companies are also interested in dominating the world market for solar panels and wind turbines. This will allow them to recoup some of their development costs by selling equipment overseas. It will also result in their domination of the supply of these products. So, there is the distinct possibility that we will trade reliance on Middle Eastern oil for our energy needs for reliance on Chinese technology for our energy needs.

So we have a couple of choice. One is to ignore renewable energy, and then when we do need alternate sources of energy we will be forced to go to China to buy the equipment. The other option is to begin developing sources of renewable here at home. I like the second choice.

Simple Solutions and Complex Problems

[Orignally Posted on Campaign Blog on April 25]

The financial problems of the Commonwealth, and of the nation, are serious and significant. They arise from a complex set of issues, from tax policy and the changing nature of manufacturing, to competition from China and globalization. Yet some people see the solution is simplistic terms.          

Representative Stan Lee said “You can’t spend your way out of a recession. You can’t tax yourself to prosperity. You can’t borrow your way out of debt.”

With one simple sentence, Lee rejects one hundred years of evidence that Keynesian economics works. This nation only recovered from the Great Depression because of World War Two. The Great Depression ended because of government spending. Since the Second World War there have been recessions around the world, and nations have tried many possible solutions. Japan and Argentina tried cuts to government to end their major recessions, and those nations are still weekend. In Japan the 1990’s are known as the lost decade. Sweden spent its way out of a financial collapse in the late 1990’s, and the recession lasted less than a year. History teaches that done right, a nation can spend its way out of a recession.

With another simple sentence, Lee shows that he has never even contemplated the world beyond this nation’s borders. Why, for example, do Scandinavian countries have high standards of living (read a rich population) when they have high taxes, while South American countries have low standards of living when they have low tax rates? Until the 1960’s, the standard of living in Argentina, Venezuela, Chile, and Brazil was comparable to the standard of living of most of Europe.     

I know that many conservatives will say that they don’t want to be like Europe. That’s fine. But I don’t want to be like Brazil. And when I hear them talk about their ideal tax and regulatory schemes I think of Brazil: vastly rich and lightly taxed small upper class and teaming slums of the poor.

Finally, Mr. Lee says you can’t borrow your way out of debt. That is probably news to many businesses that routinely borrow money to invest in new technology or facilities all in an attempt to increase their revenue. I often hear conservatives say we should operate government more like a business, but then I hear things like Mr. Lee’s statement, and I wonder if they have any concept of what business really does.

We are faced with many complex problems. We will have a hard time solving these problems if we are so constrained by clichés and sound bites that we can’t think.