Sustainable Economy Stimulus & Jobs Package

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Sustainability National Economic Recovery & Reinvestment Plan Lyle A. Brecht January 14, 2009, revised - Draft 2.1 - Saturday, January 2, 2010 DRAFT FOR DISCUSSION PURPOSES ONLY

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It all looks beautifully obvious – in the rear mirror. But there are situations where [one] needs great imaginative power, combined with disrespect for the traditional current of thought, to discover the obvious. – Arthur Koestler, The Sleepwalkers, 1959 We are at a perilous crossroads and tinkering at the margins will not do. President-elect Barak Obama, January 6, 2009

S u s t a i n a b i l i t y : National Economic Recovery & Reinvestment Economic Recovery Defined The objective of government stimulus is not only jobs creation, but in the words of Franklin Delano Roosevelt’s March 4, 1933 inaugural address: to dispel “fear itself - nameless, unreasoning, unjustified terror.” Today, people believe the markets are uncertain, unfair and unsustainable. To eliminate fear will require: (1) timely regulatory reform that restores trust in markets; (2) timely investments in technological innovation to remain competitive; and (3) timely reallocation of labor and capital that achieves sustainable growth. Speedy regulatory reform, directed investments in innovation, and massive reallocation of labor and capital to sustainable growth. This is what will dispel fear and produce millions of new jobs. This may be the essential and primary function of government today: to rapidly provide the laws and funding that move this economy toward sustainable growth. Sustainable growth involves responding quickly to today’s economic emergency by reengineering interconnected systems that are transitioning from high EROEI (Energy Return On Energy Invested) energy inputs to low EROEI sources.1

Economic systems are complex.

Interconnected systems make life possible.

Economic systems are dynamical.

In 1930, EROEI of oil, natural gas and coal was 100:1; today EROEI of oil, gas, wind is 15:1; large hydropower 11:1; conventional coal 10:1 (when add cost of CO2 emissions); newly found oil, photovoltaic solar 8:1; “clean” coal 5:1 (better emissions control but coal ash and heavy metals pollution); fuel cell, geothermal, nuclear 4:1; oil shale and Alberta tar sands 3:1; LNG 2:1; ethanol (from corn) 1.3:1; hydrogen 0.8:1; nuclear fusion (unknown). See, Charlie Hall, “Balloon Graph;” The Oil Drum (www.theoildrum.com); Thomas Homer-Dixon, The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization (Washington, DC, Island Press, 2006). 1

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Sustainability results from the timely process of transforming these economic systems undergoing change to systems that are resilient (less susceptible to collapse) when shifting to lower thermodynamic states. Economic systems are sustainable when thermodynamic state shifts do not cause rapid disruptive nonlinearities - abrupt changes of the system to an unanticipated, less-complex state. 2

Recovery & Reinvestment for Sustainable Economy The U.S. economy is composed of interconnected systems: the global flows of markets for products and services; the global flows from financial markets; and the global flows of ecosystem services (e.g. clean water, air, soil, functioning ecosystems, biologic diversity, etc., upon which all other economic flows depend). The present economic crisis may be due to the economy reaching a tipping point from an unsustainable state - a point of no return.3 Today, the nation faces a crossroads. We can choose policies that establish a framework for technological innovation and for allocating labor and capital to build a sustainable economy or we can choose policies that, instead, lead to lower economic output, resource wars, more terrorism, and abrupt climate change hostile to the continuance of life on earth.4 The economy has two primary tasks; (1) to efficiently reallocate capital and labor to

For example, instead of global GDP going from $60 to $240 trillion (in $2005 purchasing power parity) by 2050, it declines to $6 trillion. 2

All economic systems have a tipping point, a set of stresses (an overload beyond a threshold rate of change of inputs) beyond which they breakdown (loose complexity and cease to function within normal ranges) and sometimes collapse (recovery is uncertain) or suffer deep collapse (multiple systems experience synchronous failure when systems are tightly coupled). As failure proceeds, timely moments of contingency arise. Sometimes economic systems contain amplifiers, positive feedback loops, that can make these systems highly sensitive to small forcings. Thus, even small forcings can end up producing large changes in thermodynamic flows. 3

Timely technological innovation and reallocation of capital to more productive purposes are the two pillars for fostering economic growth. What government regulations provide is the trust to make long-term investment commitments necessary to increase the wealth of the society; a primary and essential function of government. See Daron Acemoglu, “The Crisis of 2008: Structural; Lessons for and from Economics’ (January 6, 2009), 8 and Martin Wolf, Fixing Global Finance (Baltimore: The Johns Hopkins University Press, 2008), 12-20. 4

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projects that provide the technological innovation the economy requires for growth, and (2) to protect and maintain ecosystem services so that growth can continue over the long run. When the domestic economy successfully accomplishes these two primary tasks, it is adequately managing risk: maturity, liquidity, market, credit, currency, technological obsolescence, and wider economic, ecologic, and political risks. Today’s economic financial markets distress is the result of a massive failure to effectively manage risk.5 Market risk consists of the danger of mispricing assets; credit risk covers the potential of financial promises not being honored; currency risk describes a mismatch between the value of liabilities’ and assets’ respective currencies; technological obsolescence describes the technological progress in achieving more output with less input of labor, capital, and time; larger economic, ecologic, and political risks refer to black swans, those highly improbable events such as global crisis, war, political upheaval, and ecological collapse that produce massive impacts on markets. These risks are global, interrelated, emergent (the outcome cannot be fully predicted by antecedent causes) and need to be addressed in a timely fashion. The quality of governmental regulatory institutions may be the single most important forcing function for markets to accurately assess risk and respond to new risks that emerge. Governmental regulations form the foundation on which the financial markets’ pyramid of promises rest. Governmental regulations and enforcement must be capable of rapidly adapting and evolving for changing market conditions. Assessment: Present government regulations are excessively tactically focused, piecemeal, limited in their purview, slow to respond to changes in market conditions, and often ineffective in their response to these market changes. The U.S. needs a strategic regulatory apparatus that gathers, analyzes, and makes recommendations concerning information of the many corrosive, equally catastrophic, risks to the national and global economy. A CENTRAL capability that coordinates regulatory oversight among all markets that comprise the U.S. economy is needed for economic recovery, reinvestment and for continued national economic security. Today, fundamental and structural inadequacies in government regulations enable domestic (and global) markets to misprice inputs and outputs of the economy by: (1) deferring known economic costs to the future or (2) failing to account for known economic costs and pushing these costs to public taxpayers. Requiring taxpayer-funded debt, guarantees, and tax relief of $17, 589 billion to cover the value of collateralized debt obligations (CDOs) that had become toxic assets when the real estate market values declined precipitously during 2007-09 period. 5

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These inefficiencies result in an unstable economic system that is prone to massive corrections. This results in an economy that lurches from crisis to crisis with ever-spiraling costs to taxpayers and that shatters the lives of its victims. Unstable economies may not only be a source for waves of financial crises, but also a source for local resource wars and terrorism as preferred methods for sorting out temporary winners and losers. This often leaves American taxpayers exposed as the lender and borrower of last resort. Fixing government regulatory shortcomings that improve market, credit, currency, technological obsolescence, and wider economic, ecologic, and political risk management, as well as the speed of engaging in timely response to changes in market conditions may require, in tandem, legislation that: •

Restores the people’s trust in government through more thorough oversight of markets, the imposition of regulations that encourages trust in market institutions and improves the ability of regulatory agencies for timely response to changing market conditions;

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Restructures tax policy to encourage efficient allocation of labor and capital to productive projects by imposing surcharges on some economic inputs and outputs as a means to correct market mispricing;

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Provides stimulus funding for reinvestment in national strategic infrastructure. The objective of which is to encourage technological innovation and reallocation of labor and capital that produces sustainable economic recovery.

Recovery and Reinvestment Stimulus Plan Recommendations Regulatory Reform (1) Establish a fusion center within the Office of Information & Regulatory Affairs, the Regulatory Intelligence Center, whose mission is to: (a) analyze technology innovation and labor and capital reallocation needs for various markets; and (b) recommend proactive changes to regulatory policy, oversight, and enforcement. These recommendations would then be forwarded to the regulatory agencies and to Congress for action. (2) Implement a Market Assurance System at the Securities & Exchange Commission.6 This system would automatically sort through public companies’ financial data and enable the SEC to identify public companies who are misleading investors before 6

A description of the system is at http://www.pdfcoke.com/doc/9790231/.

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such companies go bankrupt or their shares loose value when malfeasance becomes known as a means to restore public confidence in the markets. (3) Implement Cost Adjustment Surcharge for certain inputs and outputs of the economy. The objective is to correct mispricing in markets where this mispricing discourages timely technological innovation, slows down technology adoption cycles, and inhibits the reallocation of labor and capital to those sectors putting U.S. businesses at a competitive disadvantage.7 Suggestions for Cost Adjustment Surcharges to correct market mispricing include: •

Carbon tax of $35/ton for atmospheric releases of carbon as an alternative to or adjunct to cap and trade; 8

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Fossil fuels end-user surcharge that progressively raises the equivalent price of gasoline to $9.00/gallon over a 10 year period to stabilize energy markets;9

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Freshwater withdrawal surcharge from surface waters and ground water adding a $0.10/kgal (per 1,000 gallons) surcharge for withdrawals and offering a refund of this surcharge for each kgal of water returned to the source in substantively the same or better quality of water than what was withdrawn.

(4) Implement Waste Stream Escrow Fees for waste stream producers as an alternative to after-the-fact fines and penalties. This avoids lengthy court battles and costly legal fees that attempt to recover externalized costs borne by public Wide swings in energy prices, due as much to government policy in the Middle East and other oil exporting nations as to classical supply and demand pressures, send inappropriate market signals as to the real cost of energy in terms of EROI. This forestalls the allocation of capital to developing and employing technological innovations that reduce dependance on high EROI energy sources. This also delays making investments in end-use efficiency and renewable energy sources. 7

For each quantity of fossil fuel derived production, a per ton CO2 surcharge could be added to the economic costs of production and paid by the producers of fossil fuels. “If the economy could replace inefficient taxes on goods like food and leisure with efficient taxes on bads like carbon emissions, there would be significant improvements in economic efficiency.” See William Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies (New Haven & London: Yale University Press, 2008), 26. 8

In Venezuela and Saudi Arabia, gasoline use is subsidized and costs twelve cents and forty-five cents a gallon; in Europe a gallon of gasoline costs $9.00 because it is heavily taxed, with revenues going to support single-payer national health care and public transportation. The U.S. has the lowest cost for gasoline among industrialized countries. Thus, between 1980 and 2008, oil use in the U.S. is up 21% whereas in the United Kingdom oil use has remained flat from 1980 to now, while in France it's dropped 17% (according to the Energy Information Administration). 9

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taxpayers.10 Offer return of this escrow fee when waste stream producers eliminate the volume of and toxicity of their waste stream and/or storage. Tax Policy (1) Repeal present tax policy: •

Institute a graduated flat tax on individual gross incomes that the IRS can bill to individual taxpayers;11

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Institute a flat tax of three percent (3%) on all corporate gross revenues from products and services sold in the United States.12

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Consider VAT (value-added tax) on goods and services as alternative to individual payroll taxes.

(2) Recovery & Reinvestment Economic Stimulus Plan temporary provisions. This temporary tax relief is revenue neutral due to new surcharge taxes on carbon emissions, fossil fuel usage, freshwater withdrawals from the nation’s waters and waste stream escrow fees: •

Suspend income tax for individual taxpayers earning gross incomes less than $200,000 annually. Recover revenue loses through Cost Adjustment Surcharges and Waste Stream Escrow Fees (see above).

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For corporations that pay their executives collectively more than two percent (2%) of annual free cash flow, add a tax penalty of five percent (5%) on

Example: the December 22, 2008 spill of 5.4 billion cubic yards of coal ash from the TVA Kingston coal electricity plant into the Emory River and across 300 acres in Roane County, Tennessee. One means of paying for such spills would be to impose a $0.05/gallon ($10.09/cubic yard) escrow fee on all coal ash storage and ongoing waste streams, as a fee for remediation, restitution, and waste stream reduction. The intent of the Fee is to encourage waste stream producers to reduce or eliminate waste streams and to provide safe storage. 10

Individual income tax is highly regressive with high-income individuals typically paying a smaller percentage of their gross income than lower income taxpayers. The objective of setting a flat (but, progressive) tax on gross income is to eliminate the one billion hours of annual tax preparation. At minimum wage of $6.55/hr., that’s $6 billion a year spent filling out tax forms or a PV of $200 billion at 3% discount rate. 11

The objective of a flat tax on revenues is to get away from multiple sets of books and accounting trickery to achieve dubious profits that are reported to the financial markets (unrealistically high) or to the IRS (unrealistically low). 12

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corporate gross revenues from products and services sold in the United States.13 •

Recover through claw back and disgorgement provisions compensation exceeding $5,000,000 over a five-year period for executives, traders, and interested parties working for corporations that have declared bankruptcy, received Federal bailouts, loans, or special tax subsidies during the past five years and going forward.

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For not-for-profit, tax-exempt organizations, require these organizations to spend an amount annually equal to two percent (2%) of the sum of their endowment and income from that endowment for purposes within the scope of their charters.14

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Relieve U.S. incorporated businesses from providing health care premium payments for workers employed by these businesses. Implement single payer health care payments for preventive and crisis medical care through a national trust funded by a per gallon tax on fossil fuel production (diesel, gasoline, aviation). This provision should immediately produce savings over present health care costs and enable U.S. based businesses competitive parity with companies from other industrialized countries who operate under national single payer health care systems.15

Strategic Infrastructure Reinvestments - $1,549 billion economic stimulus plan (1) Provide financial stimulus reinvestment to national, strategic infrastructure projects that can be accomplished within the next 7-10 years. The following strategic infrastructure reinvestments were chosen for their ability to produce economic growth by speeding-up technology adoption cycles from 15-30 years to 7-10 years and returning $2.00-$2.80 to the economy for every $1.00 invested:

The objective of such a tax differential for companies paying their executives a larger percentage of free cash flow is to get away from executives managing the company and adopting accounting policies for short term executive pay gains rather than the longer-term benefit for all shareholders. 13

For example, these were the conditions placed on the recent multibillion dollar gifts from Warren Buffett to the Gates Foundation. 14

“Streamlining payment through a single nonprofit payer would save more than $350 billion per year, enough to provide comprehensive, high-quality coverage for all Americans.” See Physicians for a National Health Program at http://www.pnhp.org/ (accessed 01/04/09) 15

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Allocate $400 billion in stimulus funds to implement the National Unified Smart Grid Initiative. This will bring the U.S. electricity grid up to standards necessary to withstand powerful solar storms and EMP (electromagnetic pulse) attack disruption or shutdown, to reduce transmission losses, and to enable lower EROI energy sources that reduce GHG (greenhouse gas) emissions to be connected to the national grid;16

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Allocate $300 billion in stimulus funds to provide Energy Conservation Rebate Incentives to electric utilities of one billion dollars per new 1,000 MW (megawatt) of energy produced through residential, commercial, institutional, and industrial conservation measures and electric generation by renewables (e.g. wind, solar, geothermal, algal and nonfood biomass), prorated based on proportionate results. This could reduce CO2 emissions growth by 20-30% in 5-7 years.17

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Allocate $200 billion in stimulus funds for meeting deferred maintenance on aging water distribution systems and water treatment plants, for supply augmentation, demand management (plugging distribution leaks, metering water use), implementing conservation pricing (increasing block rates based on full cost pricing), and conservation programs.18

The national grid, 164,000 miles of high-voltage transmission lines and 5,000 local distribution networks is outdated, highly vulnerable, inefficient, and unsuitable for fluctuating renewable power sources. A smart-grid could reduce electricity consumption by 6 percent and peak demand by 27 percent and enable renewables to comprise 20% of electricity production, as in other countries, in a few years. The PV of annual transmission losses is $150 billion (at 3% discount rate). Opportunity costs for not upgrading the national electricity grid would be much higher if the economy was disrupted by an EMP attack or solar storms of magnitude to the 1859 solar event. See Dr. William R. Graham, et. al., “Report of the Commission to Assess the Threat to the United States from Electromagnetic Pulse (EMP) Attack, Volume 1: Executive Report (2004).” 16

If the point of no return is 350 ppm rather than 450 ppm as some scientists believe, then the cost to achieve this new target could be $20 trillion rather than the $9 trillion amount to achieve as 450 ppm CO2 limit. Note: A common misperception is that nuclear generated electricity should (must) play a role in reducing CO2 emissions to the atmosphere from electricity production. If CO2 contributions from the nuclear fuel cycle, decommissioning, long-term storage of spent fuel rods and their transport to secure storage, and remediation of watersheds from uranium tailings, nuclear electricity contributes only marginally less CO2 to the atmosphere than clean coal and 4x-5x more than other renewable energy options. 17

‘2003 Drinking Water Infrastructure Needs Survey and Assessment,” USEPA, released in 2005, is based on data collected from utilities in 2003. EPA found that the nation's 53,000 community water systems and 21,400 not-for-profit non-community water systems will need to invest an estimated $276.8 billion between 2003 and 2023. 18

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Allocate $200 billion in stimulus funds for meeting deferred maintenance on aging wastewater treatment plants. This investment is necessary for meeting water quality standards and reducing the cost of new freshwater supply as many of the of the nation’s rivers, streams, and lakes remain polluted from industrial wastes, runoff from urban areas, and the dumping of raw sewage into these freshwater sources.19

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Allocate $200 billion in stimulus funds for meeting deferred maintenance on aging public interstate and state highways, bridges, dams, and passenger rail infrastructure.20

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Allocate $100 billion in stimulus funds for the Nuclear Nonproliferation Assurance Facility to fund gold-standard security containment for fissile materials and tamperproof trigger locks for weapons, along with a phasing out of all first-use nuclear weaponry.21

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Allocate $45 billion in stimulus funds for a Manhattan Project type initiative to develop algal biomass carbon extraction and conversion of this carbon to biofuels from thermal coal electricity plant emissions and the 1,300 coal ash ponds collecting fly ash from coal electricity plant scrubbers.

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Provide $44 billion in stimulus funds to expand broadband Internet II connectivity as the national standard for internet connectivity;

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Implement feebates program for stimulating demand and retooling national transportation fleet to double CAFÉ total fleet mileage within 7-10 years.22 This

Testimony from the Senate Environment and Pubic Works Committee, Subcommittee on Transportation Safety, Infrastructure Security, and Water Quality hearing September 19, 2007 estimates deferred maintenance needs at $200-$500 billion over the next 20 years. 19

The American Society of Civil Engineers (ASCE) estimates deferred maintenance on the nation’s infrastructure is $1,600 billion as of 2008. 20

Descriptive document at http://www.pdfcoke.com/doc/9744333/. Despite extensive funding for the war on terrorism ($2.4 trillion from September 2001 through FY2008) and an $805 billion defense budget (fully allocated) for FY2009, nuclear threats from privatized terrorist organizations or rogue states today are highly probable, more likely than at any time in the past, and the number one threat to global economic security. 21

A “feebate program is a self-financing system of fees and rebates that are used to shift the costs of externalities produced by the private expropriation, fraudulent abstraction, or outright destruction of public goods onto those market actors responsible for the taking of the public goods in question” (Wikipedia). 22

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is a self-funding program that requires $20 billion in stimulus funds for seed capital to initiate the program.23 •

Implement feebates program for funding multiyear soil conservation efforts. This is a self-funding program that requires $20 billion in stimulus funds for seed capital to initiate the program.24

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Allocate $20 billion in stimulus funds to revamp the nation’s public health system.25

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Allocate $150 million in stimulus funds for implementing the Market Assurance System at the Securities & Exchange Commission.26

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Reallocate $200 billion of the already $805 billion (fully allocated) budgeted for hard military power to use on human development projects around the world to bring clean water, wastewater treatment, and adequate nutrition as means to defer potential resource wars and transnational, privatized terrorism directed towards the United States, and reduce the specter of nuclear proliferation and the prospects for nuclear terrorism.27

Transportation vehicles rated less than 40 mpg/combined mileage would pay a prorated annual fee. Transportation vehicles with greater than 40 mpg/combined mileage would receive a prorated annual rebate. 23

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Land owners would pay a fee for each acre-foot of soil eroded and a rebate for each new acrefoot of soil produced. An inch of new soil can be added in less than 40 years with conservation techniques, but can be lost in a single growing season with poor soil management. 25

Some public health experts predict pandemics associated with abrupt climate change. As climate changes, known and previously unknown organisms may invade new geography and infect populations. Some candidates include: HIV/AIDS, hantavirus pulmonary syndrome, severe acute respiratory syndrome (SARS), H5N1 avian influenza virus, dengue fever, West Nile virus, etc. One estimate of the potential cost of a pandemic to the U.S. economy by The Center for Disease Control (CDC) is $71.3 billion to $166.5 billion. The total economic impact including the cost of disruptions to commerce might exceed $200 billion. 26

A description of the system is at http://www.pdfcoke.com/doc/9790231/.

Recent research links climate change and resource wars and terrorism. Climate change could be to blame for many of 899 wars occurring in eastern China between A.D. 1000 and 1911. Warfare correlated strongly with temperature oscillations that stressed food production or access to adequate freshwater. See David D. Zhang, “Climate Change and War Frequency in Eastern China over the Last Millennium,” in Human Ecology, Volume 35, Number 4 (August, 2007), 403-414 available at http://www.springerlink.com/content/25397734x6n1m 038 (accessed 01/04/09). 27

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Funding the Strategic Infrastructure Reinvestment Economic Stimulus Plan Issue Climate Change Preparedness Bonds to fund reinvestment in national infrastructure projects that decarbonize the economy and that produce a $2.00-$2.80 return on each $1.00 invested while producing 4-6 million new jobs. Half of money comes from the Federal government, half the money from pension funds and other longer-term investors: •

Criteria for infrastructure project funding includes: (a) is this project strategic; (b) will it produce new longer-lasting jobs; (c) is there a sufficient business case to expect that these project funds will be paid back to the Treasury over a reasonable time?28

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Issue $1,549 billion of non-callable bonds at a 3.45% nominal interest rate in 10, 20, 30, and 40-year tranches; principle and interest guaranteed; triple taxfree; with a one percent (1%) guarantied real return over the term of the bond.

Author Lyle Brecht: My expertise is sustainable business development and environmental systems dynamics, as applied to capital decision making. I developed and published AmericaReport in 1994, a business-style annual report of the Federal budget. Report users: Executive Branch offices of federal government (e.g. Treasury, GAO, etc.); House and Senate Budget Committees; economic think tanks; multinational corporations; Financial Executives Institute (14,000 chief financial officers, treasurers, controllers). I have advanced graduate degrees in applied ecology (applied systems analysis) from the University of Minnesota and in business from Harvard University.

The moral hazard of free money from the Feds is large as it sometimes discourages accountability and proper vetting of potential projects and their costs. Federal stimulus funds should not drive out sound financial planning or enable projects that should not have been undertaken other than for the moral hazard of a federal stimulus package. This has occurred with past stimulus programs. 28

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