Economics 101: A failure to understand

From The New York Times:

A Failed Experiment

By Nicholas D Kristof | Published: November 21, 2012

In upper-middle-class suburbs on the East Coast, the newest must-have isn’t a $7,500 Sub-Zero refrigerator. It’s a standby generator that automatically flips on backup power to an entire house when the electrical grid goes out.

In part, that’s a legacy of Hurricane Sandy. Such a system can cost well over $10,000, but many families are fed up with losing power again and again.

Mr Kristof and his family felt the effects personally: his home was without power for a dozen days, and this had been his third lengthy power outage in the last four years.

More broadly, the lust for generators is a reflection of our antiquated electrical grid and failure to address climate change. The American Society of Civil Engineers gave our grid, prone to bottlenecks and blackouts, a grade of D+ in 2009.

So Generac, a Wisconsin company that dominates the generator market, says it is running three shifts to meet surging demand. About 3 percent of stand-alone homes worth more than $100,000 in the country now have standby generators installed.

“Demand for generators has been overwhelming, and we are increasing our production levels,” Art Aiello, a spokesman for Generac, told me.

That’s how things often work in America. Half-a-century of tax cuts focused on the wealthiest Americans leave us with third-rate public services, leading the wealthy to develop inefficient private workarounds.

It’s manifestly silly (and highly polluting) for every fine home to have a generator. It would make more sense to invest those resources in the electrical grid so that it wouldn’t fail in the first place.

This is where Mr Kristof veers into the weeds. Yes, it would be nice if our electric power grid was less vulnerable to storms, and the solution is actually very simple: instead of stringing power lines in the air, bury them underground. And if the magic infrastructure genie was here, we could get him to do that for us, magically and free.

Alas! there is no magic infrastructure genie, and employing that very simple solution is not free, but will cost money, lots of money.

Since the 1970s, depending upon where in the country you live, most new subdivisions and housing developments have all of their utilities underground: electric, telephone and cable television lines are buried just like the gas, sewer and water lines. It makes the whole area look better, and those services aren’t vulnerable to high winds.

But retrofitting buried utilities into existing residential and commercial areas is another matter. I wish that the power and cable and telephone lines in my hometown were buried, too, but actually doing that would be very expensive, and cause major inconveniences for the people living in town. Not only would the main lines all have to be buried, but the lines to each individual dwelling would have to be cut through people’s yards and connections for every utility reworked for the changed system.

And somebody would have to pay for all of that. Who would pay? Why, the utilities’ customers would have to pay, naturally. It can be argued that, down the road, this would make electric service less expensive, as fewer outages would have to be dealt with by the utility companies, and I certainly agree with that logic. But down the road is just that, down the road. In the meantime, electric customers — and that means all of us — would have to pay higher electric bills to pay for the construction projects to bury all of those lines, as would the cable customers and telephone customers.1

The problem with our friends on the left is that they just don’t seem to understand this. They cheer when President Obama makes noises about high taxes on coal. Then-Senator Obama said:

Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket. Even regardless of what I say about whether coal is good or bad. So, if somebody wants to build a coal plant, they can — it’s just that it will bankrupt them.

Perhaps for people like Mr Kristof, a liberal with a good income, the effects of electricity prices “skyrocket(ing)” would be a tolerable imposition. I suppose that for our friends on the left who make good money who are wedded to the Chicken Little “climate change” ideas, it doesn’t seem like such a bad idea. But it’s not just Democrats with money who would have to pay those higher costs: wealthy Republicans would have to pay them as well — something which would make the Democrats cheer — as well as middle class voters and poor people, Republican and Democrat alike. Perhaps Maureen Dowd and Paul Krugman can shrug their shoulders at a significantly higher electric bill, but I happen to know a whole bunch of people, working men who are living paycheck to paycheck, for whom such higher electricity expenses would mean not that, perhaps, they couldn’t go to a play on Broadway, but that something else far more necessary would have to be foregone; it’ll be beans and potatoes for dinner tonight, and potatoes and beans tomorrow!

That would be the effect of forcing the electric utilities to bury their lines, just as much as President Obama’s war on coal would be. And while there would be a temporary surge in jobs for the men who had to do the work of burying the utilities, there would be a permanent loss of jobs in the cable television and land-line telephone utilities, as noted in footnote 1.

Someone who actually understood economics — even just slightly — would be able to see that; liberals, who don’t understand economics,2 seem unable to comprehend that everything has a cost, and those costs fall on the poor as well as the rich.

However, that’s just considering the direct expenses. If the costs of electricity would have to increase for residential customers, they would also increase for businesses, and businesses would have to do what businesses always do, which is to pass their costs of production onto their customers. While a poor family might have $50 less a month to spend at WalMart, due to higher electric bills, the things that they bought at WalMart would have to be more expensive, because of the higher electric bills not only for the WalMart store, but for each of their American suppliers throughout the production and distribution chain. While some of our friends on the left would say, “That’s good!” because they despise WalMart for putting such strains on locally-owned businesses, the locally-owned retailers would be facing the same additional costs.

Your Editor has long thought that, for electric companies, the costs of retrofitting their systems with buried service might actually be less expensive than having to repair above-ground systems after storms; while that didn’t seem to be much of an issue when he lived in the Hampton Roads area of Virginia, where there is little snow, it seems more probable now that he lives in the Poconos. However, that’s a matter for the electric companies to quantify, and not for a blogger — or a politician — to decide.

But, what baffles your Editor the most is that conservatives, those evil Republicans who hate the poor, can see that the costs of doing all of these wonderful things that our friends on the left propose will cost everybody, including the poor, more money, while the liberal, who claim to care so much about poor people, are so blithely willing to weight them down with additional expenses.
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  1. The easily anticipated result being that cable customers would become satellite television customers and telephone companies would quickly lose to families who went all cellular, something my family has been for several years. Your Editor does have cable for both television and the internet.
  2. I’ve said it many times before: a liberal who understands economics will become a conservative.

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