From a Federal Reserve press release:
"In March 2012, Chairman Ben S. Bernanke will deliver a four-part lecture series about the Federal Reserve and the financial crisis that emerged in 2007. The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve."
The first lecture is today at 12:45 EST. Here's the schedule for all four lectures. Of course, you don't need to watch live. You can watch later, or wait until a transcript is available. For details, go to the link above.These lectures are being delivered to an undergraduate course at the George Washington University School of Business, so I expect that they will be pedagogical in tone and focus on giving a lot of background information--not on breaking news about imminent changes in monetary policy. But for teachers and students, inside academia and out, it's a chance to hear it all from the horse's mouth.
Lecture 1: Origins and Mission of the Federal Reserve
Watch live on March 20, 2012 12:45 p.m. ET
Lecture 2: The Federal Reserve after World War II
Watch live on March 22, 2012 12:45 p.m. ET
Lecture 3: The Financial Crisis and the Great Recession
Watch live on March 27, 2012 12:45 p.m. ET
Lecture 4: The Aftermath of the Crisis
Watch live on March 29, 2012 12:45 p.m. ET
Tuesday, March 20, 2012
Public Higher Education Gets Less State and Local Support
The association of State Higher Education Executive Officers has published their report on "State Higher Education Finance FY 2011." The basic story is rising enrollments in public institutions of higher education, but falling per-student support.
The blue bars in the figure show educational appropriations for public higher education [per full-time equivalent student, adjusted for inflation. The support starts relatively high at $8,156 per student in 1987), sags in the early 1990s to $7,054 in 1993, rises again in the late 1990s and early 2000s as high as $8,316 in 2001, drops off in to $6,875 in 2005, rises to $7,488 in 2008, and now has dropped off to $6,290 in 2011.
Meanwhile, tuition revenue per full-time student is gradually rising. Overall, it rises from $2,422 in 1986 to $4,774 in 2011.
And over these 25 years, the number of full-time equivalent students in public higher education has risen from about 7 million back in 1986 to almost 12 million in 2011.
Put these together, and here's tuition as a share of public education total revenue, rising from 23.2% back in 1986 to 43.3% at present.
This pattern may be here to stay. As the report states: "In the past decade these two recessions and the larger macro-economic challenges facing the United States have created what some are calling the “new normal” for state funding for public higher education and other public services. In the “new normal” retirement and health care costs simultaneously drive up the cost of higher education, and compete with education for limited public resources. The “new normal” no longer expects to see a recovery of state support for higher education such as occurred repeatedly in the last half of the 20th century. The “new normal” expects students and their families to continue to make increasingly greater financial sacrifices in order to complete a postsecondary education. The “new normal” expects schools and colleges to find ways of increasing productivity and absorb ever-larger budget cuts, while increasing degree production without, we hope, compromising quality."
I would add only a couple of thoughts:
1) Almost everyone believes, or claims to believe, that the economic future of the United States is intertwined with building greater human capital. But that isn't reflected in our spending choices. I'd be the first to say that spending isn't everything--but it's something! Here's a post from July 19, 2011, on "How the U.S. Has Come Back to the Pack in Higher Education." The U.S. used to be the world leader in share of population going to higher education, but no longer.
2) The main budgetary mechanism for encouraging additional higher education is using student loans. This avoids adding to direct spending for higher education, but places a greater share of the risk of not completing a degree, or not having the degree lead to a well-paid job, on the student. Also, public higher education isn't expanding fast enough to absorb those who want to try college, so many of those who receive these loans are headed to the for-profit educational system. Here's a February 23, 2012, post on "For-Profit Higher Education."
The blue bars in the figure show educational appropriations for public higher education [per full-time equivalent student, adjusted for inflation. The support starts relatively high at $8,156 per student in 1987), sags in the early 1990s to $7,054 in 1993, rises again in the late 1990s and early 2000s as high as $8,316 in 2001, drops off in to $6,875 in 2005, rises to $7,488 in 2008, and now has dropped off to $6,290 in 2011.
Meanwhile, tuition revenue per full-time student is gradually rising. Overall, it rises from $2,422 in 1986 to $4,774 in 2011.
And over these 25 years, the number of full-time equivalent students in public higher education has risen from about 7 million back in 1986 to almost 12 million in 2011.
Put these together, and here's tuition as a share of public education total revenue, rising from 23.2% back in 1986 to 43.3% at present.
This pattern may be here to stay. As the report states: "In the past decade these two recessions and the larger macro-economic challenges facing the United States have created what some are calling the “new normal” for state funding for public higher education and other public services. In the “new normal” retirement and health care costs simultaneously drive up the cost of higher education, and compete with education for limited public resources. The “new normal” no longer expects to see a recovery of state support for higher education such as occurred repeatedly in the last half of the 20th century. The “new normal” expects students and their families to continue to make increasingly greater financial sacrifices in order to complete a postsecondary education. The “new normal” expects schools and colleges to find ways of increasing productivity and absorb ever-larger budget cuts, while increasing degree production without, we hope, compromising quality."
I would add only a couple of thoughts:
1) Almost everyone believes, or claims to believe, that the economic future of the United States is intertwined with building greater human capital. But that isn't reflected in our spending choices. I'd be the first to say that spending isn't everything--but it's something! Here's a post from July 19, 2011, on "How the U.S. Has Come Back to the Pack in Higher Education." The U.S. used to be the world leader in share of population going to higher education, but no longer.
2) The main budgetary mechanism for encouraging additional higher education is using student loans. This avoids adding to direct spending for higher education, but places a greater share of the risk of not completing a degree, or not having the degree lead to a well-paid job, on the student. Also, public higher education isn't expanding fast enough to absorb those who want to try college, so many of those who receive these loans are headed to the for-profit educational system. Here's a February 23, 2012, post on "For-Profit Higher Education."
Monday, March 19, 2012
Minnesota: Paying More Federal Taxes, Receiving Less Federal Spending
Here's an op-ed column of mine that appeared in the (Minneapolis) Star Tribune on Sunday, March 18. I'll put the opening paragraphs here, and all of it below the fold:
"Minnesota taxes: More blessed to give?"
"Minnesota pays its fair share -- and then some -- in federal taxes, while federal spending here is decidedly below average. Why the imbalance?"
The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.
States vary in many ways -- population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.
But still, it's eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That's the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.
"Minnesota taxes: More blessed to give?"
"Minnesota pays its fair share -- and then some -- in federal taxes, while federal spending here is decidedly below average. Why the imbalance?"
The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.
States vary in many ways -- population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.
But still, it's eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That's the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.
The Food Stamp Explosion
For starters, Food Stamps have a new name. The 2008 farm bill changed the name to the Supplemental Nutrition Assistance Program, or SNAP. But whatever the name, enrollment rose from 17.3 million in 2001 to 46.2 million in October 2011. In the March 2012 issue of Amber Waves, published by the U.S. Department of Agriculture, Margaret Andrews and David Smallwood ask: "What’s Behind the Rise in SNAP Participation?"
What's perhaps less expected in the graph is that Food Stamp enrollment was rising steadily from 2001 up through 2006, although unemployment rates were low and falling during much of that time. The authors trace much of this change to changes in federal rules making it easier for people to apply, and easier for states to certify to the federal government that the benefits are being targeted. In addition, SNAP benefit levels were increased both in the 2008 farm bill and in the 2009 "stimulus" legislation, making it more attractive to apply. Here's a graph showing the maximum SNAP benefit for a household of four and the average benefit.
When you look at the numbers, Food Stamps play what may be a surprisingly large role in America's social safety net for the poor. Total spending on Food Stamps in 2011 was about $78 billion. According to the Center on Budget and Policy Priorities, "Roughly 93 percent of SNAP benefits go to households with incomes below the poverty line, and 55 percent go to households with incomes below half of the poverty line ..."
For comparison, federal expenditures through the Earned Income Tax Credit were about $56 billion in 2011. As another comparison, total spending on Temporary Assistance for Needy Families (TANF), what is what most people mean by "welfare," was about $33 billion in combined federal and state spending in 2010. In many states, SNAP far outstrips TANF in the level of support it provides for low-income families.
Here's a graph showing SNAP enrollment, along with the unemployment rate and the poverty rate. The decline in SNAP enrollment after 1996 is part of the aftermath of the welfare reform act that passed that year, which led to much smaller welfare rolls and also tightened rules for receiving Food Stamps. the run-up in SNAP enrollment since the start of the recession is large, but Andrews and Smallwood point out that it's within the historical parameters of what one would expect given the rise in unemployment rates and poverty rates over that time.
When you look at the numbers, Food Stamps play what may be a surprisingly large role in America's social safety net for the poor. Total spending on Food Stamps in 2011 was about $78 billion. According to the Center on Budget and Policy Priorities, "Roughly 93 percent of SNAP benefits go to households with incomes below the poverty line, and 55 percent go to households with incomes below half of the poverty line ..."
For comparison, federal expenditures through the Earned Income Tax Credit were about $56 billion in 2011. As another comparison, total spending on Temporary Assistance for Needy Families (TANF), what is what most people mean by "welfare," was about $33 billion in combined federal and state spending in 2010. In many states, SNAP far outstrips TANF in the level of support it provides for low-income families.
Friday, March 16, 2012
Top Marginal Tax Rates: 1958 vs. 2009
Top marginal income tax rates used to be much higher back in the 1950s and 1960s. How much revenue did those higher tax rates actually collect? Daniel Baneman and Jim Nunns address that question in a short report,"Income Tax Paid at Each Tax Rate, 1958-2009," published by the Tax Policy Center last October.
For starters, take a look at the statutory tax brackets for 1958 and 2009. The The tax brackets are adjusted for inflation, so the horizontal axis is constant 2009 dollars. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. Marginal income tax rates are lower across the income distribution in 2009. In addition, the top marginal tax rate occurs much lower in the income distribution in 2009 than it did in 1958.
How many households actually paid these rates? Here's a figure showing the share of taxpayers facing different marginal tax rates. At the bottom, across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates back 1958. It's interesting to note how the share of taxpayers facing higher marginal rates expanded substantially in the 1970s, probably due in large part to "bracket creep"--that is, tax brackets at that time didn't increase with the rate of inflation, so as wages were driven up by inflation, you were pushed into higher tax brackets even though real income had not increased.
How much revenue was raised by these high marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It's interesting to note that the share of income tax revenue collected by those in the top brackets for 2009--that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.
A few quick thoughts:
1) Perhaps it goes without saying, but there's no reason to think that 1958 was the high point of social wisdom when it comes to tax policy. In addition, the economy has evolved considerably since 1958: talent and tasks are probably more mobile, and methods of categorizing income in ways that affect tax burdens have become more sophisticated. Also, the distribution of income has become much more unequal in recent decades, and so arguments over the appropriate share of taxes to be paid by those in the top income groups have evolved as well.
2) Raising tax rates on those with the highest incomes would raise significant funds, but nowhere near enough to solve America's fiscal woes. Baneman and Nunns offer this rough illustrative estimate: "If taxable income in the top bracket in 2007 had been taxed at an average rate of 49 percent, income tax liabilities (before credits) would have been $78 billion (6.7 percent of total pre-credit liabilities) higher, taking into account likely taxpayer behavioral responses to the rate increase." The behavioral response they assume is that every 10% rise in tax rates causes taxable income to fall by 2.5%.
3) If one wants to use the 1958 example as a precedent, it would be fair to point out that the lowest-bracket income tax rates are a fairly new development, as of the mid-1980s. One could also use the example of 1959 to argue that many more taxpayers in the broad range of lower- and middle-incomes should face marginal federal tax rates in the range of 16-28%.
4) If the goal is to raise more tax revenue from those with high incomes, higher tax rates are not the only method of doing so. For example, one could limit various tax deductions that apply with greatest force to those high up in the income brackets. One could also look at ways in which the tax code lets those with high incomes pay lower rates, like the lower tax rates for capital gains and on tax-free investments like state and local bonds.
For starters, take a look at the statutory tax brackets for 1958 and 2009. The The tax brackets are adjusted for inflation, so the horizontal axis is constant 2009 dollars. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. Marginal income tax rates are lower across the income distribution in 2009. In addition, the top marginal tax rate occurs much lower in the income distribution in 2009 than it did in 1958.
A few quick thoughts:
1) Perhaps it goes without saying, but there's no reason to think that 1958 was the high point of social wisdom when it comes to tax policy. In addition, the economy has evolved considerably since 1958: talent and tasks are probably more mobile, and methods of categorizing income in ways that affect tax burdens have become more sophisticated. Also, the distribution of income has become much more unequal in recent decades, and so arguments over the appropriate share of taxes to be paid by those in the top income groups have evolved as well.
2) Raising tax rates on those with the highest incomes would raise significant funds, but nowhere near enough to solve America's fiscal woes. Baneman and Nunns offer this rough illustrative estimate: "If taxable income in the top bracket in 2007 had been taxed at an average rate of 49 percent, income tax liabilities (before credits) would have been $78 billion (6.7 percent of total pre-credit liabilities) higher, taking into account likely taxpayer behavioral responses to the rate increase." The behavioral response they assume is that every 10% rise in tax rates causes taxable income to fall by 2.5%.
3) If one wants to use the 1958 example as a precedent, it would be fair to point out that the lowest-bracket income tax rates are a fairly new development, as of the mid-1980s. One could also use the example of 1959 to argue that many more taxpayers in the broad range of lower- and middle-incomes should face marginal federal tax rates in the range of 16-28%.
4) If the goal is to raise more tax revenue from those with high incomes, higher tax rates are not the only method of doing so. For example, one could limit various tax deductions that apply with greatest force to those high up in the income brackets. One could also look at ways in which the tax code lets those with high incomes pay lower rates, like the lower tax rates for capital gains and on tax-free investments like state and local bonds.
Thursday, March 15, 2012
What Should Banks Be Allowed To Do?
Charles Morris offers a nice overview of the course of bank regulation in the last century or so in "What Should Banks Be Allowed To Do?" It appears in the Fourth Quarter 2011 issue of the Economic Review published by the Federal Reserve Bank of Kansas City.
For me, the article serves two useful purposes. First, it's a reminder of why bank deregulation in the 1980s and 1990s wasn't some clever ploy by the financial-sector lobbyists, but was absolutely necessary given the evolution of the industry at that time. To be sure, the deregulation could have been carried out in different ways, posing different risks, but some kind of deregulation was unavoidable. Second, it makes the case for limiting what banks are allowed to so. I'm completely persuaded that the proposed reform would make the banking sector safer and with less risk of needing a bailout, but I'm less sure that the reform would make the financial sector as a whole safer. Let me say a bit more about each of these, drawing heavily on Morris's exposition.
The banking sector as it emerged from the 1930s had five characteristics salient for the discussion here: 1) it was overseen by bank regulators for safety; 2) it had access to a public safety net of emergency loans from the Fed and deposit insurance; 3) it was forbidden to go into other financial areas like investment banking, securities dealing, or insurance; 4) it faced legal limits on the insurance it could pay on deposits; and 5) it faced geographic restrictions on branching across state lines and within states. In short, it was an industry that was shielded from competition, limited in what it could do, and heavily regulated.
In the 1970s, the wheels began to come off this wagon. Those who wished to save money began to seek out investment options like mutual funds, including money market mutual funds, and insurance companies. Banks were limited in the interest rate they could pay, and inflation was high. Banks began to hemorrage deposits. Those who wished to borrow money found other options, too. They borrowed through commercial paper, through high-yield bonds, and through securitized markets including mortgage-backed securities and asset-backed securities. Separate finance companies made car loans and loans for retail purchases. Other companies financed trade receivables.
In short, both the savers and the borrowers were migrating outside the banking industry. Instead, the process of financial intermediation between savers and borrowers was happening outside the banking industry, in what came to be called the "shadow banking" sector. If the banks had not been deregulated and allowed to compete in this new financial sector--at least in some ways--the banks themselves would have shrunk dramatically and a very large part of the U.S. saving and borrowing would have passed completely outside the purview of the bank regulators.
As banks were allowed to compete across the financial sector more broadly, starting in the 1980s, the industry began to consolidate. This made some sense: when banks were allowed to open branches across states and across state lines, for example, not as many small banks were needed. But the top banks not only became very large, but an ever-growing share of their assets were outside the traditional business of banking. Here's how Morris summarizes how the industry evolved (footnote omitted):
Morris's diagnosis and proposed solution are straightforward. Bank holding companies have gotten into too many risky financial activities, and so should be restrained. But Morris is also clearly and sensibly aware that just trying to turn back the clock to 1930s-style regulated banking isn't possible. That toothpaste is out of the tube. He suggests that banks be allowed to pursue three areas of business:
Morris's proposal is certainly sensible enough, but it does leave me with a couple of questions. First, if banks were holding lots of mortgage loans, as they clearly could be under Morris's proposal, then they would have been vulnerable to a meltdown of housing prices like the one that has occurred. Thus, it's not clear to me that anything in this proposal would have limited the very aggressive home lending that occurred or the price meltdown afterward. Indeed, the sort of limited banks Morris advocates might in some ways have been relatively even more exposed to losses in the housing market.
Second, Morris's proposal, like all "narrow bank" proposals, would clearly make the banking sector safer. But one of the disturbing facts about the financial troubles of 2008 was that it wasn't just commercial banks that were deemed to be systemically important to the U.S. economy: it was also investment banks like Bear Stearns, money market funds, insurance companies like AIG, brokers that sell Treasury bonds, and others. Focusing on banking is all very well, but the shadow banking sector and the potential risks that it poses aren't going away.
For me, the article serves two useful purposes. First, it's a reminder of why bank deregulation in the 1980s and 1990s wasn't some clever ploy by the financial-sector lobbyists, but was absolutely necessary given the evolution of the industry at that time. To be sure, the deregulation could have been carried out in different ways, posing different risks, but some kind of deregulation was unavoidable. Second, it makes the case for limiting what banks are allowed to so. I'm completely persuaded that the proposed reform would make the banking sector safer and with less risk of needing a bailout, but I'm less sure that the reform would make the financial sector as a whole safer. Let me say a bit more about each of these, drawing heavily on Morris's exposition.
The banking sector as it emerged from the 1930s had five characteristics salient for the discussion here: 1) it was overseen by bank regulators for safety; 2) it had access to a public safety net of emergency loans from the Fed and deposit insurance; 3) it was forbidden to go into other financial areas like investment banking, securities dealing, or insurance; 4) it faced legal limits on the insurance it could pay on deposits; and 5) it faced geographic restrictions on branching across state lines and within states. In short, it was an industry that was shielded from competition, limited in what it could do, and heavily regulated.
In the 1970s, the wheels began to come off this wagon. Those who wished to save money began to seek out investment options like mutual funds, including money market mutual funds, and insurance companies. Banks were limited in the interest rate they could pay, and inflation was high. Banks began to hemorrage deposits. Those who wished to borrow money found other options, too. They borrowed through commercial paper, through high-yield bonds, and through securitized markets including mortgage-backed securities and asset-backed securities. Separate finance companies made car loans and loans for retail purchases. Other companies financed trade receivables.
In short, both the savers and the borrowers were migrating outside the banking industry. Instead, the process of financial intermediation between savers and borrowers was happening outside the banking industry, in what came to be called the "shadow banking" sector. If the banks had not been deregulated and allowed to compete in this new financial sector--at least in some ways--the banks themselves would have shrunk dramatically and a very large part of the U.S. saving and borrowing would have passed completely outside the purview of the bank regulators.
As banks were allowed to compete across the financial sector more broadly, starting in the 1980s, the industry began to consolidate. This made some sense: when banks were allowed to open branches across states and across state lines, for example, not as many small banks were needed. But the top banks not only became very large, but an ever-growing share of their assets were outside the traditional business of banking. Here's how Morris summarizes how the industry evolved (footnote omitted):
"Technological improvements, interstate banking, and the GLB [Graham-Leach-Bliley] Act resulted in fewer banks and a much more concentrated banking industry, with the largest BHCs [bank holding companies] ultimately engaging in more varied and nontraditional activities. For example, the number of banks fell from about 12,500 in 1990 to about 6,400 in 2011. The share of industry assets held by the 10 largest BHCs rose from about 25 percent in 1990 to about 45 percent in 1997 (just before the GLB Act) and to almost 70 percent in 2011. The share of loans and deposits of the top 10 BHCs
also rose sharply (Table 1). In addition, only four of the 10 largest BHCs that existed before the passage of the GLB Act remain today (Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo), with those four BHCs having acquired five of the other top 10 BHCs.
"Table 1 also shows how the activities of the 10 largest BHCs have changed in the past 14 years. In 1997, the share of banking assets relative to total assets at these companies was 87 percent, with only one company having a share less than 80 percent. Today, the share of banking assets is 58 percent, with only two BHCs having a share greater than 80 percent."
Morris's diagnosis and proposed solution are straightforward. Bank holding companies have gotten into too many risky financial activities, and so should be restrained. But Morris is also clearly and sensibly aware that just trying to turn back the clock to 1930s-style regulated banking isn't possible. That toothpaste is out of the tube. He suggests that banks be allowed to pursue three areas of business:
- Commercial banking—deposit taking and lending to individuals and businesses.
- Investment banking—underwriting securities (stocks and bonds) and providing advisory services.
- Asset and wealth management—managing assets for individuals and institutions.
- Dealing and market making—intermediating securities, money market instruments, and over-the-counter derivatives transactions for customers.
- Brokerage services—brokering for retail and institutional investors, including hedge funds (prime brokerage).
- Proprietary trading—trading for an organization’s own account and owning hedge and private equity funds.
Morris's proposal is certainly sensible enough, but it does leave me with a couple of questions. First, if banks were holding lots of mortgage loans, as they clearly could be under Morris's proposal, then they would have been vulnerable to a meltdown of housing prices like the one that has occurred. Thus, it's not clear to me that anything in this proposal would have limited the very aggressive home lending that occurred or the price meltdown afterward. Indeed, the sort of limited banks Morris advocates might in some ways have been relatively even more exposed to losses in the housing market.
Second, Morris's proposal, like all "narrow bank" proposals, would clearly make the banking sector safer. But one of the disturbing facts about the financial troubles of 2008 was that it wasn't just commercial banks that were deemed to be systemically important to the U.S. economy: it was also investment banks like Bear Stearns, money market funds, insurance companies like AIG, brokers that sell Treasury bonds, and others. Focusing on banking is all very well, but the shadow banking sector and the potential risks that it poses aren't going away.
Wednesday, March 14, 2012
The Mundane Cost Obstacle to Nuclear Power
I've long believed that the main problems with expanding nuclear power related to health and safety concerns: for example, the small chance of a plant malfunctioning, along with issues related to waste disposal and possible links between nuclear power technology and weapons technology. But Lucas Davis argues persuasively in "Prospects for Nuclear Power" in the Winter 2012 issue of my own Journal of Economic Perspectives, which is freely available on-line courtesy of the American Economic Association, that I've been assuming too much. Here's Davis (citations omitted):
"Nuclear power has long been controversial because of concerns about nuclear accidents, storage of spent fuel, and about how the spread of nuclear power might raise risks of the proliferation of nuclear weapons. These concerns are real and important. However, emphasizing these concerns implicitly suggests that unless these issues are taken into account, nuclear power would otherwise be cost effective compared to other forms of electricity generation. This implication is unwarranted. Throughout the history of nuclear power, a key challenge has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear even before incorporating these external factors. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas. The chairman of one of the largest U.S. nuclear companies recently said that
his company would not break ground on a new nuclear plant until the price of natural gas was more than double today’s level and carbon emissions cost $25 per ton. This comment summarizes the current economics of nuclear power pretty well. Yes, there is a certain confluence of factors that could make
nuclear power a viable economic option. Otherwise, a nuclear power renaissance seems unlikely."
The argument from Davis is complemented by some other recent discussions of nuclear power. The
Federation of American Scientists has a report out on The Future of Nuclear Power in the United States, edited by Charles D. Ferguson and Frank A. Settle. The most recent issue of the Economist magazine (March 10) has a 14-page cover story on "Nuclear Power: The Dream that Failed."
Finally, a Report to the Secretary of Energy by the Blue Ribbon Commission on America's Energy Future was released in late January.
Here is some basic background from Davis in his JEP article. The first figure shows nuclear power plants under construction around the world. Notice that the plants under construction in the United States and western Europe dropped off to near-zero in the 1990s. The recent spike in plants under construction is driven by the "other" category, which is largely China, but it remains to be seen how many of these plants will end up being completed.
The next figure shows rising costs of constructing nuclear power plants in the United States. The costs are per kilowatt-hour of capacity, and so adjusted for size. The costs are also adjusted for inflation.
Finally, this figure shows the slowdown in construction times--for example, plants started in the 1960s were completed in 8.6 years while those completed in the 1970s took 14.1 years. Moreover, there was growing uncertainty as to whether a nuclear power plants would be completed: 89% of plants announced in the 1960s were completed, compared with only 25% of those announced in the 1970s being completed.
Of course, it's not possible to separate cleanly the safety concerns over nuclear power from these cost issues: additional safety precautions--and the accompanying paperwork--are part of what drives up costs. But perhaps the more fundamental story here is that technological progress in nuclear power hasn't been increasing fast enough to assuage concerns about safety and to drive down costs. Stephen Maloney digs into this in some detail in Chapter 2 of the FAS report, "A Critical Examination of Nuclear Power's Costs."
Of course, it's possible to sketch business and technological scenarios under which nuclear power plants of the future use simpler, safer designs, which combine with economies of scale in production to drive down costs. But such predictions haven't held true over the history of nuclear power, and they don't seem to be holding true recently, either. Here's one of many examples, from Maloney:
"In June 2006, a consortium of companies announced plans to build two more reactors at the South Texas Project site for an estimated cost of $5.2 billion. NRG, the lead company, made history by becoming the first company to file an application with the NRC. CPS Energy, a municipal utility, was one of its partners. In October 2007, CPS Energy’s board approved $206 million for preliminary design and engineering. In June 2009, NRG revised the estimate to $10 billion for the two reactors, including finance charges. A few weeks later, this estimate rose to $13 billion, including finance charges. Later that year, the estimate reached $18.2 billion ..." Cost overruns of similar magnitude aren't just a U.S. phenomenon; for example, they also have occurred at recent nuclear power projects in France and in Finland.
To be sure, there are promising new nuclear technologies out there. One hot topic is small modular reactors, discussed both in the Economist article and by Daniel Ingersoll in Chapter 10 of the FAS report. But at some point, a degree of skepticism seems appropriate. The Economist has a wonderful quotation from Admiral Hyman Rickover, who drove the process that created America's nuclear submarines, and commented back in the 1950s:
Finally, arguments over appropriate disposal of nuclear waste will surely continue. For an overview of these issues, a useful starting point is the Report to the Secretary of Energy by the Blue Ribbon Commission on America's Energy Future that was released in late January. Personally, I didn't find the Commission report to be especially encouraging about resolving these issues. For example, the first recommendation is to start a process of encouraging communities to volunteer for being nuclear waste disposal sites, which they think might take 15-20 years. Having just watched the argument over a possible repository at Yucca Mountain in Nevada run for 25 years, before the decision of the Obama administration to halt that process, this time frame seems optimistic. Of course, there are alternatives: consolidated storage facilities, and technologies for processing nuclear waste. But the alternatives aren't cost-free, either.
Nuclear power isn't going away. Plants that have been working well still have several decades to run, and the marginal costs of running them are now low. Additional nuclear power plants will be built in countries where the government makes it a priority, or perhaps in some settings where other sources of power are extremely high cost. But as the U.S. enters what seems to be a time of cheap and plentiful natural gas, building a substantial number of new nuclear power plants in this country seems highly unlikely.
"Nuclear power has long been controversial because of concerns about nuclear accidents, storage of spent fuel, and about how the spread of nuclear power might raise risks of the proliferation of nuclear weapons. These concerns are real and important. However, emphasizing these concerns implicitly suggests that unless these issues are taken into account, nuclear power would otherwise be cost effective compared to other forms of electricity generation. This implication is unwarranted. Throughout the history of nuclear power, a key challenge has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear even before incorporating these external factors. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas. The chairman of one of the largest U.S. nuclear companies recently said that
his company would not break ground on a new nuclear plant until the price of natural gas was more than double today’s level and carbon emissions cost $25 per ton. This comment summarizes the current economics of nuclear power pretty well. Yes, there is a certain confluence of factors that could make
nuclear power a viable economic option. Otherwise, a nuclear power renaissance seems unlikely."
The argument from Davis is complemented by some other recent discussions of nuclear power. The
Federation of American Scientists has a report out on The Future of Nuclear Power in the United States, edited by Charles D. Ferguson and Frank A. Settle. The most recent issue of the Economist magazine (March 10) has a 14-page cover story on "Nuclear Power: The Dream that Failed."
Finally, a Report to the Secretary of Energy by the Blue Ribbon Commission on America's Energy Future was released in late January.
Here is some basic background from Davis in his JEP article. The first figure shows nuclear power plants under construction around the world. Notice that the plants under construction in the United States and western Europe dropped off to near-zero in the 1990s. The recent spike in plants under construction is driven by the "other" category, which is largely China, but it remains to be seen how many of these plants will end up being completed.
The next figure shows rising costs of constructing nuclear power plants in the United States. The costs are per kilowatt-hour of capacity, and so adjusted for size. The costs are also adjusted for inflation.
Finally, this figure shows the slowdown in construction times--for example, plants started in the 1960s were completed in 8.6 years while those completed in the 1970s took 14.1 years. Moreover, there was growing uncertainty as to whether a nuclear power plants would be completed: 89% of plants announced in the 1960s were completed, compared with only 25% of those announced in the 1970s being completed.
Of course, it's not possible to separate cleanly the safety concerns over nuclear power from these cost issues: additional safety precautions--and the accompanying paperwork--are part of what drives up costs. But perhaps the more fundamental story here is that technological progress in nuclear power hasn't been increasing fast enough to assuage concerns about safety and to drive down costs. Stephen Maloney digs into this in some detail in Chapter 2 of the FAS report, "A Critical Examination of Nuclear Power's Costs."
"Since the nuclear industry’s inception more than 50 years ago, its forecasts for costs have been consistently unreliable. The “first generation” plants, comprising both prototype reactors and the standard designs of the 1950s-1960s, failed to live up to promised economics. This trend continued with the construction of Generation II plants completed in the 1970s, which make up the present nuclear fleet.
"First, the total costs were far higher than for coal-generated electricity. In particular, the capital cost of nuclear plants built through 1980 were, on average, 50 percent higher than comparably-sized coal-fired plants, adjusting for inflation and including backfits to meet Clean Air Act standards. Second, there were extraordinary cost escalations over the original low cost promises. Nuclear plant construction costs escalated approximately 24 percent per calendar year compared to 6 percent annual escalation for coal plants. Third, the economies of scale expected were not achieved in the Generation II designs. The scale-up of nuclear plants brought less than half the economic efficiencies projected.
"In addition, over 120 nuclear units, approximately half the reactors ordered, were never started or cancelled. The total write-offs were more than $15 billion in nominal dollars. ... In the late 1970s, the Atomic Industrial Forum (AIF), predecessor to the Nuclear Energy Institute, identified the main drivers of unmet expectations as growing understanding of nuclear accident hazards, failure of regulatory standardization policies, and increased documentation standards to ensure as-built plants actually met
safety standards. The combined effects doubled the quantities of materials, equipment, and labor needed, and tripled the magnitude of the engineering effort for building a nuclear power plant."
Of course, it's possible to sketch business and technological scenarios under which nuclear power plants of the future use simpler, safer designs, which combine with economies of scale in production to drive down costs. But such predictions haven't held true over the history of nuclear power, and they don't seem to be holding true recently, either. Here's one of many examples, from Maloney:
"In June 2006, a consortium of companies announced plans to build two more reactors at the South Texas Project site for an estimated cost of $5.2 billion. NRG, the lead company, made history by becoming the first company to file an application with the NRC. CPS Energy, a municipal utility, was one of its partners. In October 2007, CPS Energy’s board approved $206 million for preliminary design and engineering. In June 2009, NRG revised the estimate to $10 billion for the two reactors, including finance charges. A few weeks later, this estimate rose to $13 billion, including finance charges. Later that year, the estimate reached $18.2 billion ..." Cost overruns of similar magnitude aren't just a U.S. phenomenon; for example, they also have occurred at recent nuclear power projects in France and in Finland.
To be sure, there are promising new nuclear technologies out there. One hot topic is small modular reactors, discussed both in the Economist article and by Daniel Ingersoll in Chapter 10 of the FAS report. But at some point, a degree of skepticism seems appropriate. The Economist has a wonderful quotation from Admiral Hyman Rickover, who drove the process that created America's nuclear submarines, and commented back in the 1950s:
"An academic reactor or reactor plant almost always has the following basic characteristics: (1) It is simple. (2) It is small. (3) It is cheap. (4) It is light. (5) It can be built very quickly. (6) It is very flexible in purpose. (7) Very little development will be required. It will use off-the-shelf components. (8) The reactor is in the study phase. It is not being built now. On the other hand a practical reactor can be distinguished by the following characteristics: (1) It is being built now. (2) It is behind schedule. (3) It requires an immense amount of development on apparently trivial items. (4) It is very expensive. (5) It takes a long time to build because of its engineering development problems. (6) It is large. (7) It is heavy. (8) It is complicated."
Finally, arguments over appropriate disposal of nuclear waste will surely continue. For an overview of these issues, a useful starting point is the Report to the Secretary of Energy by the Blue Ribbon Commission on America's Energy Future that was released in late January. Personally, I didn't find the Commission report to be especially encouraging about resolving these issues. For example, the first recommendation is to start a process of encouraging communities to volunteer for being nuclear waste disposal sites, which they think might take 15-20 years. Having just watched the argument over a possible repository at Yucca Mountain in Nevada run for 25 years, before the decision of the Obama administration to halt that process, this time frame seems optimistic. Of course, there are alternatives: consolidated storage facilities, and technologies for processing nuclear waste. But the alternatives aren't cost-free, either.
Nuclear power isn't going away. Plants that have been working well still have several decades to run, and the marginal costs of running them are now low. Additional nuclear power plants will be built in countries where the government makes it a priority, or perhaps in some settings where other sources of power are extremely high cost. But as the U.S. enters what seems to be a time of cheap and plentiful natural gas, building a substantial number of new nuclear power plants in this country seems highly unlikely.
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