Wednesday, January 14, 2009

Innovation Comes in Many Forms

At long last: What's for dinner at your house has been updated with four new readers' recipes.My sincere apologies for the long inexcusable delay.

The idea that technological innovation of the sort which revolutionized the 20th century will solve our current energy/financial/demographic woes has as many detractors as believers. Perhaps what needs to change is the expectation that the innovations which can "save" us will be mostly technological in nature.

I receive a lot of reader email expressing appreciation for the generally optimistic stance of this site. Despite its longstanding focus on "doom and gloom" financial realities like the housing bubble, this site also attempts to highlight solutions.

Americans like the material new. Modifying an existing model of vehicle to get 10% greater fuel efficiency does not excite Americans. An entirely new vehicle with a snazzy "cool" look and a "hot" new technology which leapfrogs the ICE (internal combustion engine) entirely would wow the public and spark major trends/sales.

This model of a leapfrogging innovation generating huge benefits has many antecedents: recently the iPod, before that the Apple Macintosh OS, antibiotics produced in bulk, industrial mass production assembly lines, etc.

So rather naturally many expect that the energy shortfall which will result from oil declining (post-Peak Oil) will be resolved with some technological "miracle" which enables civilization to seamlessly move from fossil fuels to X and Y (algae-based fuels, nuclear plants the size of an SUV, fusion, etc.)

Many are skeptical that any such solutions will scale up to the immense size and energy content of fossil fuels. For example, I often note here that the limitless tar sands/shale oil in North America which is supposed to replace the 14 million barrels of oil the U.S. imports daily actually hits numerous physical limits at about 3 million barrels a day: it requires vast quantities of natural gas or other energy source, it uses huge amounts of fresh water, and it tears up square miles of terrain for a very modest return in net energy.

If we separate fact from fantasy, then shale oil/tar sands cannot scale up to produce the 19 million barrels a day of oil the U.S. consumes each day. (Down about 1 MBD or so in the past six months as the recession has cut demand.) As a net energy provider, it simply isn't that great; it takes bulldozers the size of houses to move all the gooey soil/shale/sand, millions of BTUs from burning natural gas, huge refineries and scrubbers, etc. etc.

So maybe it will be 10% of the solution, but it can't be much more than that.

As for algae, many feel that genetically engineering algae to produce oil-equivalent fuels may well be a major advance/innovation which can create millions of gallons of fuel. That is certainly possible, but again, the actual scaling up of lab equipment to industrial plants capable of producing millions of barrels of fuel is a non-trivial undertaking.

What is the feedstock of the algae? What is the energy source? (The sun, but obviously in temperate climes only.) How will the waste products be distributed? (As fertilizer? What will the composition of the waste be?) It turns out no such technology is quite as "easy" as pumping oil from the ground and refining it--and that is only "easy" because there is a century's worth of technical advances and trillions of dollars invested in a vast global network.

Scaling up anything to replace oil/natural gas will be a stupendously costly venture.

Civilization could squeeze a lot more out of the energy we already consume, but various pernicious feedback loops make this difficult. As noted here recently, 5% of the entire electricity of the U.S. is wasted by electronics in standby mode. It would cost about 50 cents in circuitry to greatly improve the efficiency of standby mode, but why spend that when consumers aren't demanding it? And why would consumers care about a few cents worth of electricity wasted in their household?

Should government step in and require such simple, cheap improvements in efficiency for the good of the nation? The air quality issues around burning coal in 140 huge power stations just to waste the output on crappy standby electronics are non-trivial.

Many ideologues spring forth to bash any and all such "impositions" on the market. But why would consumers demand a technology which seemingly delivers such trivial returns? Yet add up 100 million households and offices, and 140 power plants do nothing but keep a nation's gadgets in power-wasting standby mode.

Maybe we need some intellectual innovations as much as we need technical innovations. Perhaps every regulatory system should be required to undergo an energy audit--how much energy and time will this require on an economy-wide basis? Will the proposed benefits actually be worth the energy and effort, which otherwise could be devoted to more pressing problems?

Such an audit would lead to the total repeal of Sarbanes-Oxley. This utterly misguided, if well-intentioned, system of regulation is essentially a 5-10% "tax" on corporate America and thus the nation as a whole. As financial scandals unfold one after the other, it is clear SOX has done virtually nothing to stop fraud and legerdemain, but it has proven horrendously costly and ineffective.

Can we as a nation afford to have tens of thousands of people toiling away on such a stupendous make-work project with virtually no tangible, measurable results?

Can't the same be said of the tens of thousands of people devoted to figuring out who pays what share of an inflated medical bill, inundating the system with paperwork and emails and adding up to 50% to the cost of the actual care? Is the energy and human investment really generating useful returns?

The answer to both questions is obviously no. We as a nation are rather obviously fiddling while Rome burns, expending staggering sums of money (which is merely a placeholder for energy consumed and human capital invested) on gigantic make-work projects which are widely seen as enormous wastes of time and energy like SOX compliance and billing/invoicing etc. the bloated, Kafka-esque "healthcare" system.

While it is easy to say the "market" would clear all this up if only government got out of the regulatory business, the example of the 140 power plants burning millions of tons of coal to keep tens of millions of gadgets in needlessly wasteful standby mode illustrates that there is a limited but real need for government oversight of just such gaping holes in "the market."

But I do not mean to suggest this as an excuse for over-regulation or regulation whose purported benefits are mere shadows compared to the real cost to the nation. As absurd as this sounds, perhaps the "solution" to the "healthcare crisis" in the U.S. is to bill one person and one person only for any and all care: the patient. I know, I know, this couldn't possibly work--even though it once worked, in my lifetime.

This type of thinking can be applied to many endeavors, including national defense. We now have a bizarre system of weapons procurement with spec sheets eight feet tall, and as a result we get fighter aircraft which cost $300 million each.

The story of the F-16 is easily romanticised, but it does illustrate an "innovation" which was not technological. In essence what happened is this: some "fighter jocks," i.e. former pilots and their "skunkworks" buddies got frustrated by the lengthy, bloated, politicized and horrendously costly procurement system for military aircraft, so they designed their own fighter--lean, mean, fast, capable, nothing too fancy and not designed to do everything for everyone (land on aircraft carriers, etc.)

By some miracle, the plane--the F-16--was eventually accepted by the Pentagon and entered production. It was much, much cheaper than the "standard-procured" F-15, and though it was less capable in certain areas (night bombing, etc.) it was superior in other ways--and much, much cheaper, and much, much faster to take from initial design to production.

We as a nation seem to have completely lost the "innovative ability" to assess the true cost in energy and human capital of vast projects like Homeland Security, healthcare, Sarbanes-Oxley, and on and on--the ability to weigh the benefits against these staggering costs and decide it isn't worth it.

We as a nation are enamored of the technological fix--but maybe a lack of new technology isn't our problem at all. In one field after another, the insane cost structure is supposed to come down in price via some new technology, and in the vast majority of cases, the supposed savings/efficiencies end up as mere chimera.

We as a nation have avoided any hard choices or audits by borrowing trillions of dollars. Once we are unable to do so, then perhaps we'll make a more concerted effort to invest our energy and human capital in projects with measurably efficient and important payoffs.

We would do well to keep ESSA in mind: eliminate, simplify, standardize and automate.

RE: public pensions and Introducing Denial Journal: Here is a link sent in by correspondents Dan K. and Craig M. from Bloomberg: State Pensions’ $865 Billion Loss Affects New Workers:

State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.

Attempts to reduce benefits also face opposition.

A survey of state funds found they owed $2.35 trillion to pension payments over 30 years, a December 2007 report by the Pew Center on the States found.

For state plans, which weren’t covered by that mandate, the funding issue is complicated by 12 percent growth in membership since 2002, with 23.1 million now participating, according to census data.

Excluding Social Security, public employers’ pension costs are three times the retirement costs of their private counterparts, according to a June 2008 report by the Washington- based Employee Benefit Research Institute.

There are only two outcomes to this disparity between 110 million private-sector workers and 23 million government workers: a national taxpayer rebellion or insolvency of all government on all levels. How is it possible that a nation with a population which grew two percent manage to expand its public employees by 12% in a mere six years? That is the very acme of unsustainable growth. Did taxes rise by 12% in those six years? And if so, based on what? The housing/assets bubbles, which boosted property taxes and capital gains taxes.

Supposedly states can't go bankrupt; OK, so they will just be unable to pay their bills and obligations. If there is no Federal bankruptcy laws for states yet, perhaps there will be when the money runs out and the screaming starts. The operant phrase will be "you can't get blood from a turnip," i.e. you can't tax businesses which have closed and citizens who have lost their jobs. The end-game for governments which added 12% more employees in a bubbly bogus "prosperity" is already in sight: the more they try to raise taxes, the more businesses and jobs will vanish into thin air.

Here are three frontline reports from readers:


I just want to thank you again for yesterday’s blog…as a small business owner with 5 employees and former federal govt. employee, I have seen both sides…I am struggling, but I have my honor, something I did not always feel as a federal employee (and a high level one too)…we need to demand the same sacrifice from federal govt. employees…I am telling you I am a direct witness, you would not believe the double dipping, and complete ripoff being done at taxpayers’ expense by the federal workforce…boggling pay levels, $350K, $450K in retirement with double dipping, perqs, health plan, etc. etc….thousands and thousands of people are doing this…I am not exaggerating…

Brad G.

California is not the only place where this exists. Here in Martin County, Florida, we have ~ 850 county employees and ~140k residents. There are 140 employees making over $100k per year........140 employees. That's almost 17% of the workforce. The % in the private sector is more along the lines of 3%. It is getting out of, make that --- it is already out of control. I'm sure your readers have more horror stories.
big salaries on county payrolls rub some wrong.

Joe H.

I had a conversation with a fire fighter who is on the force's pension board. In round numbers, their outflow is $20M per month and the current funding can support $8M-$10M. Like everybody else, all their assets got pounded over the last year.

One of the areas the board is targeting is "disability pensions". Disability pensions have been a tool used by management and union to address the failures of human resources. Or, once hired, never fired...give him a disability pension/leave if he cannot cut-it or if he cannot get along with the other guys at the station. These pensions/leaves are funded out of the pension fund.

The force plans to hire private investigators (big business opportunity) to determine if the physical health issues are a pretext or are for real. Most of the pretenders are incredibly dumb or naive. The are active members of bowling leagues, golf leagues, play soft ball, etc. These leagues leave paper trails. These leagues are public venues where a person with a camera can easily verify that the Bob Smith on the Smedley Smelting bowling team is the Force's Bob Smith.

Bob Smith thinks he is bullet proof. The union steward suggested the disability leave as a graceful exit (wink, wink).

Management did not want to do the least pleasant part of their jobs and put the malfeasant on an improvement plan, and then perform all the follow-up. Finally, the bone-head who does not fit is also the likeliest guy to engage in workplace violence. The disability leave looks like a win-win for all the decision makers. So management/human resources goes with the flow and approves the disability leave.

And it appears to work great until the pension fund is paying out 250% of what it can afford. And now the Empire Strikes Back.

Thank you, readers, for these unvarnished reports.

Thank you, William T. ($45) for your stupendously generous donation to this site. I am greatly honored by your support and readership.

Thank you, Peter M. ($20) for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

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