The $9B Path to the $0.99 Economy

Virtually everybody has the means to buy something for less than a dollar. Whether it's a soda or an iPhone app, most people can manage to buy something small that makes their life more pleasurable or more efficient. That's the key to repairing our economy.

Through the past fifteen years or so the economy has been bolstered by a combination of large purchases (homes) and consumer spending on the part of the middle class. The credit crisis had the capacity hamstring growth because the ability of the middle class to spend was directly connected to two things: 1) the willingness of the banks to accept risk, and 2) the willingness of the middle class to pay interest for instant gratification. The market's collective realization that this culture of absurd excess and instant gratification was based on a fantasy led to the current crisis.

The bailout package that is presently on the table is both good and bad. It has the classic hallmarks of Congressional incongruity. It's loaded with provisions that don't seem to have a lot of direct bearing on anything. It ignores the reality that government spending creates inflation. It spends money on things that sound nice, but probably don't incur a lot of economic return in the near term. It's lavish government spending at its finest.

The bailout package, however, isn't that bad. It contains some wonderful provisions to build infrastructure, including electrical infrastructure. Expanding our nation's capacity to engage in commerce and eliminating inefficiencies in transport could generate untold billions. Improving the electricity transport infrastructure while wind power generation overtakes coal in job creation could ensure more jobs in the Midwest and reduce our dependency on unsustainable power sources.

The big winner, however, is the $9B for broadband expansion and some bold moves on the tax credit front for the same purpose. The package includes $9B for broadband expansion, a %10 tax credit for any company building out rural broadband, and a 20% credit for any company building next-gen broadband in an existing market. This recognizes two fundamental truths of market economics. 1) Lots of consumer spending is good. 2) Diversification is great.

No one knows better than Obama that lots of people spending small sums of money can accomplish amazing things. More people on faster internet connections means both more consumers and more products making connections. Harnessing the power of more people to create and purchase more goods and services will revolutionize the American economy.

The perfect example of the capacity of braodband to change the economy is the iPhone app. Masses of users and developers come together to create a semi-open economy that is primarily rooted in the $0.99 product. Everyone can participate, and there is something for almost everyone to want. What isn't there, is a golden opportunity for a developer to make money. Every dollar put into broadband infrastructure ensures that many, many more dollars will flow through that infrastructure.

That's the bailout.

Why Kyoto is the Problem

A few weeks ago I was one more voice in the chorus begging for American participation in Kyoto. After undertaking a bit of research on the subject I have made a complete about face. Kyoto, among numerous other problems, has created an entirely new problem with regard to climate change. Specifically, Article 12 of Kyoto stipulates that developed nations may provide clean development aid to non-Annex B nations to aid in meeting their reduction targets. Under Article 12 China can generate UN approved carbon credits to trade with Annex B nations, but is under no obligation to comply with any development standards.

China is more than happy to comply with this system, especially as not all GHGs (greenhouse gasses) are created equal. The potent GHG HFC-23 is roughly 11,700 times more potent than CO2. That means that for every one ton of HFC-23 (used as a refrigerant and for plasma etching in the semiconductor industry) captured, the company receives 11,700 tons of CO2 credits. Chinese companies have profited in to the tune of around $5.9 billion for an investment of less than $200 million while companies in states that have ratified Kyoto have had that many more carbon credits available for purchase. The Chinese government takes a 65% cut of that income, and though the official line is that it will be used for “sustainable development.” The word “sustainable” seems to have a very flexible meaning when translated into Mandarin.

This system essentially doubly empowers China as a polluter giving them both a free pass relative to industrial nations and a source of income for building out new infrastructure. Though I have only anecdotal evidence on which to base this assumption, I firmly believe that stories about Chinese wind farms and clean energy projects are the environmental equivalent of Trerezín (the Third Reich's so-called "model concentration camp" used to fool the Red Cross).

Encouraging this "gold-rush" atmosphere in carbon trading is Kyoto's limited time horizon. By drafting a treaty with such a near-term expiration date (Since when is climate change a short-term problem?) the international community has discouraged the building of large clean energy projects that require massive capital layout and have a long lifespan. From a certain standpoint the treaty actually incentivizes the construction of dirty industry. The feedback loop of revenue generated when the Chinese government taxes income on carbon credits produced cleaning up Chinese infrastructure actually incentivizes the construction of old-style dirty infrastructure. If the goal of the Chinese government is to industrialize rapidly (a safe bet, I think), then building infrastructure which will produce the additional boon of carbon credit income just slathers gravy on the meat and potatoes of industrialization. Again, were it not for the short-sighted time frame of Kyoto investors would be incentivized to build out large-scale projects which would generate these credits ad infinitum, especially if the promise of continued benefits beyond potential adherence to Kyoto by China were laid out. Instead, Kyoto merely creates an attitude of "get while the gettin's good." That hardly seems productive.