–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-

Next Thursday, just in time for the July 4 holiday weekend, America’s unemployment rate is forecast to rise from 9.4 percent to 9.6 percent, well above rates in other industrialized countries.

Yet today the House of Representatives is rushing to pass the American Clean Energy and Security Act of 2009, even though the bill was incomplete yesterday and congressmen have not yet had the opportunity to analyze it. The bill would send America’s unemployment rate even higher.

The 1,200-page bill, cosponsored by Henry Waxman, Chairman of the House Energy and Commerce Committee, and Edward Markey, Chairman of the House Energy and Environment Subcommittee, would increase the price of energy by setting allowances for greenhouse gas emissions and mandating new standards for energy production and use.  The bill would raise $846.6 billion over 10 years while adding $821.2 billion to federal spending.

The bill requires that greenhouse gas emissions in 2012 do not exceed 97 percent of 2005 emissions, declining to 17 percent of 2005 emissions by 2050.  Meeting these standards now is technologically impossible without radically reducing our standards of living, but Congress is hoping that technology will magically appear as needed.

The mechanism for this is a “cap-and-trade” program under which allowances to emit greenhouse gases would be issued by the Environmental Protection Agency at a steadily declining rate through 2050.  When emissions exceed a firm’s allowance, or cap, it would have to purchase allowances from the government or other firms, a tax under another name, driving up costs that would be passed on to consumers.

Electric utilities have been given free allowances to encourage them to support the bill.  Oil and gas would be particularly hard hit, because they are responsible for 35 percent of emissions yet are allocated only three percent of the free allowances.

Just as the increases in oil prices in the 1970s brought about an increase in unemployment, the energy provisions in the Waxman-Markey bill could usher in years, perhaps decades, of lower economic growth and higher unemployment than would be the case otherwise.

The effects of the oil price increases between 1972 and 1988 have been extensively analyzed by economists Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland.  Although their research deals with the effects of oil price increases, it is also applicable to increases in the price of energy, which would be the effect of Waxman-Markey.

Davis and Haltiwanger find that oil price increases resulted in more jobs lost than jobs gained in almost every industry sector of the economy.  The largest oil shock, in 1973, caused an estimated eight percent decline in manufacturing employment over the following two years.

Oil price increases have larger effects on economic activity than oil price declines, Davis and Haltiwanger calculate, a finding shared by other economic studies.  In other words, when energy prices increase firms lay off workers, but when prices decline the workers are not hired back as fast.

Davis and Haltiwanger also find that higher energy prices are more likely to suppress employment than monetary shocks. Many politicians fret over the harmful effects of recent American monetary policy, but overlook the even greater danger to employment from the Waxman-Markey bill.

Supporters of the bill claim that the new regulations will create jobs, because people will have to be employed to produce the new technology.  But the funds for the new expenditures have to come from somewhere, and money spent on new products is money that cannot be spent on other activities, such buying clothes or food, or anything else that Americans would otherwise buy.  This would drive down employment in those industries.

In fact, not only does the bill penalize American firms through higher costs, it gives firms a financial incentive to move abroad through “offsets,” activities that supposedly lower carbon emissions elsewhere.  Since Congress knows that firms cannot meet the standards in the bill, legislators are allowing firms to meet 30 percent of their 2012 greenhouse gas reduction obligations, increasing to 60 percent by 2050, by buying offsets. Half of these offsets can take place abroad.

The offset provisions allow firms to shift economic activity abroad to countries with laxer emissions standards, further damaging U.S. job creation. A plant’s emissions might exceed its U.S. allowances, yet its technology might produce lower emissions than the norm in a developing country, allowing the relocation to count as an offset.

The American unemployment rate now exceeds those in France (8.9 percent) and Germany (7.7 percent). With unemployment climbing even without the Waxman-Markey bill, the question for Congress is the following:  how high do you want the rate to go?

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.  The views expressed are her own. —

Chairman Henry Waxman of the House Energy and Commerce Committee announced yesterday that his American Clean Energy and Security Act of 2009 “will create millions of jobs, revive our economy, and secure our energy independence.”

The 648-page bill, co-sponsored by Waxman and fellow Democrat Edward Markey, Chairman of the House Energy and Environment Subcommittee, has been the subject of four days of committee hearings this week.  It would set new limits for greenhouse gas emissions, and prescribe radically new standards for energy production and use.

The most surprising word in the 648-page bill is one that isn’t there, not even once.  That word is “nuclear.” To discuss clean energy and security without mentioning increased development of nuclear energy, now powering 20 percent of America’s electricity with no greenhouse gas emissions, shows that Chairmen Waxman and Markey are not taking the issue seriously. They’re just trying to raise taxes on Americans and enhance the power of Congress and the agencies it oversees.

Over 100 pages in the bill are spent on measures to reduce greenhouse gases.  The bill requires greenhouse gas emissions in 2012 to be no more than 97 percent of 2005 emissions, 58 percent in 2030 and 17 percent in 2050.  This last target, four decades into the future, is incompatible with our present standard of living—and illustrates the arrogance of politicians who think that they can micro-manage the economy far beyond anyone’s capacity to foresee events.

The mechanism for this is a “cap-and-trade” program, proposed by President Obama in his budget, under which allowances—the number and price as yet unspecified—to emit greenhouse gases would be issued by the Environmental Protection Agency.  If a firm’s emissions exceeded its allowance, or cap, it would have to purchase more allowances, either from the government or from other firms.

As allowed emissions decline over time, firms would have to buy more allowances, driving up costs that inevitably would be paid to consumers.  The Obama March Budget forecast that revenues of $646 billion over eight years would be collected from cap-and-trade.

Representative Joe Barton of Texas, ranking Republican on the Energy and Commerce Committee, offered his version of candor at yesterday’s hearing.  “Ladies and gentlemen, if you like the idea of reducing your carbon footprint to the size that this legislation proposes, you can test drive these carbon emissions levels by living in Nigeria,” he said.

Cap-and-trade is only one part of the bill that would drive up prices.  Consider energy production.  The bill would require doubling in three years of the share of electric utility output that comes from renewable sources—wind, solar, geothermal, biomass—from three percent now to six percent in 2012.  In a further leap of central-planning arrogance, the bill would raise that standard in stages to 25 percent in 2025.

Sounds good? Maybe, but the technology to do it doesn’t exist. Nor do transmission lines to deliver wind energy from where it is likely to be produced,  in the central states, to the population centers on the coasts, where it would be consumed.

Solar energy might be produced in the southwestern desert and California, yet exporting it to Rhode Island and foggy Washington State is practically impossible.  The bill could address this problem by giving the Federal Energy Regulatory Commission additional authority to site transmission lines, yet it does not do so.

Or, take energy efficiency. If people don’t conserve energy voluntarily, the bill would require them to do so.  Existing federal energy efficiency standards for commercial and residential buildings would rise by 30 percent until 2016 for new buildings, and 50 percent thereafter. EPA would set by next year new emissions standards for cars, trucks, trains, and aircraft. Electricity distributors would be required to achieve energy savings beginning with one percent in 2012 and reaching 15 percent in 2020.

If this bill would create millions of jobs and revive our economy, why not make the standards tougher and create even more jobs?

With the global economy in the depths of the worst recession since the Great Depression, according to the International Monetary Fund, now is not the time to raise the cost of energy and consumer goods.  Chairmen Waxman and Markey should reconsider.

–John Kemp is a Reuters columnist. The views expressed are his own–

By John Kemp

LONDON (Reuters) - The bitter political divisions between middle America and Wall Street on display when the House of Representatives first rejected the Emergency Economic Stabilization Act last month look set to be re-opened in even more dramatic form in the remaining months of the year.

Rep Henry Waxman, chairman of the powerful House Committee on Oversight and Government Reform, on Tuesday sent identical letters to the chief executives of nine major banks receiving $125 billion of capital injections under the Troubled Assets Relief Program (TARP) demanding details of total bonus payments for 2006, 2007 and 2008 (see http://oversight.house.gov/documents/20081028142314.pdf).

The issue of bonuses and dividend payouts from banks that accepted the TARP injection looks set to become highly charged.

It is going to be hard for the banks and Treasury to explain why so much taxpayer funding needs to go in through the front door, only for it to flow out again as staff bonuses and dividend payments to ordinary shareholders. Bonus and dividend payments could quickly absorb all the TARP capital funding.

The issue of responsibility for the credit crisis will intensify during the quarterly dividend and annual bonus payout period in Dec-Feb, just when a new administration will be taking office and Democrats are likely to extend their control over both houses of Congress.

The equation between bonus and dividend payments on the one hand and capitalization and TARP funding is a false one. But it will stoke fury in middle America about the cost of bailing out banks while homeowners continue to be foreclosed.

By heightening the political temperature at a key time, it will make a more radical solution to the crisis more likely. For example, buying off political hostility to the continued bonus and dividend payments will almost certainly force Congress and the incoming administration to consider widespread restructuring, loan guarantees and other financial support to homeowners and troubled companies (eg GM) which in turn will intensify the upward pressure on the budget deficit.

The toxic cocktail of TARP, compensation and dividends will complicate budget planning and makes it almost certain there will be significant slippage on the federal government’s budget deficit. Even before the crisis struck, the Congressional Budget Office (CBO) and White House Office of Management and Budget (OMB) were projecting deficits of around $450 billion in 2009.

TARP will add at least another $250 billion to the deficit — because CBO has already reportedly decided capital injections into banks will be counted as 100 pct spending (and 100% revenue when they are finally cashed in) rather than just counting the subsidy element of the credits and estimates of likely losses (which is what would have happened if the TARP had been utilized only to buy troubled assets, as the Treasury originally proposed).

OMB is likely to take a similar view. There is already speculation the Treasury could use TARP funds to help smooth a merger between General Motors and Chrysler. The more of TARP is used for equity injections rather than troubled asset purchases, the higher the deficit will be.

In addition, the worsening downturn may well cut income tax and corporation tax revenues, while boosting expenditure on unemployment insurance and aid to families with dependent children in the form of food stamps.

This is before Congress considers tax cuts, homeowner bailouts or extra spending to stem the tide of foreclosures and stimulate the economy. Using conservative estimates, the budget deficit for fiscal 2009 could easily hit a record $900 billion — $450 billion originally projected plus $250 billion of TARP equity capitalization plus $100 billion in underlying deterioration from the automatic stabilizers of lower tax receipts and higher welfare spending plus $100 billion of stimulus from extra tax cuts and spending.

The US government will therefore need to borrow about $900 billion to finance new deficits as well as around $2.3 trillion to roll over existing debt maturing within the next twelve months.

The cocktail of TARP, compensation, dividends and record debt issuance promises to be very bitter indeed.

(john.kemp@thomsonreuters.com)