Cap and Trade = Cripple and Rob

Written By Brian Hicks

Posted June 25, 2009



History doesn’t repeat itself, but it does rhyme.”-Mark Twain

Staring down the barrel of the worst economy since the 1930’s, the events of the Great Depression have taken on a new found significance.

And as every school kid knows, the Smoot-Hawley Tariff Act of 1930 is one of the ways that the government made the economic situation of the time tragically much worse.

In fact, the bill was so bad that Henry Ford urged President Hoover to veto it calling it “an economic stupidity”.

Even still, despite the objections of over 1,000 economists who agreed with Ford, U.S. tariffs on over 20,000 imported goods rose to record levels.  And in an instant, an economic war began as everyone else in world decided to lay down the same card.

Go figure.  

Soon after, an economy that was merely teetering on the edge went completely over the cliff.  A recession quickly turned into a depression.

In the bill’s wake, unemployment rose dramatically for years jumping to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933. Meanwhile, before the bill unemployment was only 7.8%.

All of which brings us back to the present and an abyss of our own.

However, some 90 years later, it’s not new tariffs that will put us over the edge, but a 1,201 page boondoggle called cap and trade. Its purpose is save us from a warm winter’s day while simultaneously picking our pockets clean.  

Why we put up with the BS, I’m not sure.

And in the insanity of the times it’s headed for a vote in the House as early as tomorrow since the folks on Capitol Hill desperately need to find new ways to soak us all.

However, just like Smoot-Hawley it may be the straw that breaks the camel’s back.

From the Wall Street Journal entitled: The Cap and Tax Fiction

“House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill’s restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Even as Democrats have promised that this cap-and-trade legislation won’t pinch wallets, behind the scenes they’ve acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain’s Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can’t repeal that reality.”

By the way, if you enjoyed the tech bubble and the housing bubble, be aware that cap and trade may eventually kick off an even bigger bubble in time-sort of like Enron but on much larger scale.

That’s because a cap-and-trade law would create a market – including derivatives- for carbon emissions and would multiply the trading opportunities for emitters, traders, brokers and investors.

As such, you will be happy to know that among those who want to buy these credits are a collection of investors that aren’t major emitters at all. They include the trading units of Barclay’s Plc (BCS), Goldman Sachs (GS) , JP Morgan Chase & Co (JPM), Merrill Lynch, now a unit of Bank of America (BAC) , and Morgan Stanley (MS).

Gee I wonder why those guys want in on this one?

I guess we haven’t learned our lesson after all.

Related Articles:

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Roubini Sees Significant Risk of a “Double-Dip” Recession

Prechter: U.S. to Lose AAA Rating

The Plunge Protection Team: How the Invisible Hand Moves the Markets

Green Shoots? Not According to Richard Russell  

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