Capital Formation Newsletter
May-June 2005, Vol. 30, N0. 3

Increased Energy Supplies Critical for U.S. Economic Future, New Study Shows

Congress Poised to Enact ACCF Tax Agenda

ACCF in the News...

134th ACCF Policy Evening Hosts Top Policymakers and Media

ACCF Executive Roundtable Meets for Second Policy Evening

135th ACCF Economic Policy Evening Focuses on US Retirement Policy, US Energy Policy, and US Tax Policy

(PDF Version)

Increased Energy Supplies Critical for US Economic Future, New Study Shows

According to a study released at a briefing on June 13 on Capitol Hill, breaking the logjam in US energy supplies to increase the availability of natural gas, coal and nuclear power and avoiding regulatory extremes could yield steady economic growth rates of 3% or more and produce 18 million new jobs over the 2010-2020 period. The study was sponsored by the National Association of Manufacturers, The Manufacturing Institute and the American Council for Capital Formation.

Senator Chuck Hagel (R-NE) addresses participants at the June 13 NAM/ACCF briefing on Capitol Hill.

Senator Chuck Hagel (R-NE), a leading voice on energy policy, keynoted the briefing. Senator Hagel thanked the ACCF for its focus on what the Senator thinks is the “right course of action to improve America’s competitive advantage.” He added that dealing with the great challenges of the new century requires focusing on economic fundamentals, including adequate supplies of energy, that affect growth and national security. Governor John Engler, NAM’s president and chief executive officer and an ACCF director, moderated the session. Governor Engler stressed that the lack of an adequate US energy policy had led to the loss of thousands of manufacturing jobs. “US manufacturers face the highest natural gas prices in the world,” he said. He added that Congress needs to pass an effective energy bill to promote jobs and growth.

Dr. Margo Thorning, ACCF senior vice president and chief economist, praised the study for its focus on “the key role of energy prices and regulatory policies in preserving well-paid US jobs in the manufacturing and other sectors.” In contrast, restricting energy use through mandatory reductions in carbon emissions such as the McCain/Lieberman legislation and extreme requirements for NOX, SOX and mercury reductions would reduce GDP by 2.3% and manufacturing employment by 5.3% by 2020, according to the study. (See chart below.)

The study, The Impact of Energy and Environmental Policy Choices on US Manufacturing, US Economic Growth and Energy Markets, was prepared by Mary H. Novak, managing director, Energy Services, Global Insight, Inc., an international forecasting and energy modeling firm. The study, which assessed the impacts on US manufacturing and the overall economy of two scenarios that are defined by key energy and environmental policy options, concludes that if the US does not move forward on implementing policies to increase supplies of affordable energy:

Dr. Margo Thorning, ACCF senior vice president and chief economist, puts US efforts to reduce carbon emissions in a global perspective at the NAM/ACCF briefing.

* Manufacturers will pay 57% more for natural gas and 39% more for electricity in 2010, rising to 148% more for gas and 115% more for electricity in 2020;

* Households will also face sharply higher prices for natural gas and electricity and gasoline prices will be 61% percent higher in 2020;

* Personal consumption expenditures will decline by almost 1% in 2010 and by 2.2% by 2020.

Dr. Thorning put US efforts to reduce carbon emissions in a global perspective by noting that “Europe is not on track to meet their Kyoto Protocol CO2 targets and China and India have said they will not accept targets. Gradually reducing emissions intensity and new technologies is the best way forward.”
Also addressing the briefing were the heads of three small manufacturing firms. Ron Bullock, president of Bison Gear and Engineering Corp., of St. Charles Illinois, Ann Brown, president of New Vista Image of Golden, Colorado, and J. Rex Greer, president of Pony Pack, Inc. of Albuquerque, New Mexico, urged legislators to pass an energy bill that would increase the supply of energy and support jobs and manufacturing.

Dr. Thorning, Mary H. Novak, managing director, Energy Services, Global Insight, Inc., and Governor John Engler, NAM president and CEO and an ACCF Director, at the NAM/ACCF briefing.

Economic Impact of Restricting Energy Supply (percent difference from the Promoting Energy Supplies Case)

Source: The Impact of Energy and Environmental Policy Choices on US Manufacturing, US Economic Growth and Energy Markets.

Congress Poised to Enact ACCF Tax Agenda

The American Council for Capital Formation has been a leading and effective advocate of sound economic policies to promote sustained economic growth, job creation and international competitiveness for nearly three decades. As Capital Formation goes to press, Congress is poised to enact into law several of ACCF’s key policy goals – reduction or repeal of taxes on capital gains and dividends and estate taxation.

In 2003, Congress reduced the tax rate on individual capital gains and dividends. The current 15 percent top rate on individual capital gains and dividends enacted in 2003 is set to expire in 2008. The odds are that there will be a two-year extension of current capital gains and dividend tax rates this year. ACCF supports making the 15 percent rate permanent, but permanency may be out of reach because of revenue considerations. While not “on the table” at this time, a reduction in the corporate capital gains tax rate (now 35 percent) should also be made as part of reform of the US tax code.

The estate tax is also in play, with key Senate GOP proponents of “death tax” repeal and Democrats leaning toward a resolution of the issue engaged in critical negotiations that could lead to a deal on the estate tax before the August Congressional recess. While ACCF strongly supports repeal, this measure is not likely to pass because it does not have the votes in the Senate, either in the immediate future or after 2010, as in the legislation that passed the House earlier this year.

Key Senate negotiators, including Senator Jon Kyl (R-AZ)who is taking the lead for repeal proponents in the Senate, are trying to get the best deal possible short of repeal. It is likely that an approach similar to the ACCF CAPTAX – a top estate tax rate of 15 percent with an increase in the exemption level – will become the compromise approach. However, policymakers must resolve a number of obstacles to reach a compromise. The step-up/carryover basis issue is still in play, as is the effective date of any new tax structure. Passage of any deal on the estate tax in the Senate will require 60 votes; the votes of three-to-five Democrats and two Republicans will make or break the deal.

Democrats are pushing for as large an exemption as possible; ACCF is working with Senator Kyl to ensure that the estate tax rate is as low as possible. And political factors – the budget deficit, the war in Iraq, and political partisanship – are increasingly important issues in the debate.

Through its effective advocacy and economic research and education, ACCF has played a pivotal role in the key tax policy debates in Congress over many years. ACCF’s public policy affiliate, the ACCF Center for Policy Research, has undertaken numerous highly regarded analyses of the economic impact of tax policies to promote saving and investment. Among the Center’s recent studies are: The US Tax Code in the 21st Century: Does the Estate Tax Fit?; Macroeconomic and Revenue Effects of the Elimination of the Estate Tax; Estate Taxes, Labor Supply, and Economic Efficiency; Double Whammy for US Investors: US Federal and State Capital Gains Taxes; Small Saver Incentives: An International Comparison of Interest, Dividends, and Capital Gains; and Capital Gains Taxation and US Economic Growth. For copies of these and other Center studies, see www.accf.org.

ACCF in the News...This week’s news about IBM’s decision to lay off 13,000 workers in the US and Europe and increase its payroll in India by 14,000 workers and the Chinese tender offer for Unocal illustrate two sides of the coin of the new global economy – the globalization of labor with IBM and capital with Unocal. The economic principles of comparative advantage and the efficiencies of a free market suggest that most countries and their citizens are better off with this free flow of capital and labor. After all, Americans are investing in and buying companies in China and foreign multinational companies are employing Americans in their plants and offices throughout the US Preventing this free flow of labor and capital must meet a high hurdle. Perhaps there might be national security concerns in the Unocal case, but until they are demonstrated, the market should be allowed to work its magic for the benefit of the American and Chinese economies, the consumers and the workers in both countries.--Mark Bloomfield, ACCF president and CEO. Mr. Bloomfield is a periodic commentator on the BBC. This is an excerpt from an interview Mr. Bloomfield gave on June 24 for the BBC World Wide Radio program, “UP ALL NIGHT SHOW.

”US jobs will be lost and living standards lower over the next 15 years unless we focus on increasing energy supplies. Equally important, we must avoid adding regulatory burdens, including mandatory carbon caps that are not justified by cost-benefit analysis.--Dr. Margo Thorning, ACCF senior vice president and chief economist, speaking at an Alliance For Energy and Economic Growth briefing for journalists from Western and Intermountain West States on June 20.

Growth Helps Clean Air
The “Climate Action” editorial (Washington Post, 6/11/05) presented a myopic view of the global climate policy debate.
First, the E.U. 15 will be 7 percent above their 2010 target, not 8 percent below as required by the Kyoto Protocol. British Prime Minister Tony Blair is suing European Union officials for more carbon emissions allowances for British industry.
Second, disenchantment with current E.U. climate-change policies is growing. For example, Corrado Clini, the Italian environment minister, has said that Italy will not take on fixed-emission targets in the post-2012 period but instead favors a target based on reducing emissions intensity (the amount of energy used to produce a dollar of output). Further, E.U. environmental officials are discussing the use of emissions-intensity targets, energy efficiency and adaptation to climate change in the post-2012 period.

Third, the United States has done a better job of reducing the amount of energy used to produce a dollar of output than the European Union has. In the past decade, the United States, with its voluntary incentives approach, has reduced energy intensity by almost 17 percent, nearly double the 9 percent in the European Union, which has mandatory controls. The difference lies in the fact that the US economy is growing at an average of about 3 percent annually while Western Europe’s expands by only 1 percent. Faster economic growth allows a country to invest in more energy-efficient equipment and production processes.

If economic freedom and economic growth could be accelerated in developing countries, emissions intensity would decline as countries get richer and are able to adopt cleaner energy technologies.--Letter to the Editor by Margo Thorning, Ph.D., senior vice president and chief economist, American Council for Capital Formation, published in The Washington Post, June 24, 2005.

134th ACCF Policy Evening Hosts Top Policymakers and Media

On May 24, the ACCF sponsored its 134th ACCF Economic Policy Evening. The evening’s discussion focused on The Economic Policy Challenges for the 109th Congress and the President. Guests at the session included key economic policymakers from Congress and the Bush Administration, top journalists and private sector leaders. For more information on these evenings, please see www.accf.org.

Senator Norm Coleman (R-MN) and Dr. Harvey S. Rosen, immediate past chairman of the President’s Council of Economic Advisers		Holly Yeager, political correspondent, Financial Times, and Dr. Margo Thorning, ACCF senior vice president and chief economist
Senator David Vitter (R-LA), Robert R. Zoglman, vice president, Government and International Affairs, Westinghouse Electric Company, Thomas E. Reilly, Jr., president & CEO, American Chemistry Council, and Senator Coleman		Rep. Chris Chocola (R-IN)
		Mark Bloomfield, ACCF president and CEO, Ms. Yeager, Rep. Dennis Moore (D-KS), and Rep. Allyson Y. Schwartz (D-PA).

ACCF Executive Roundtable Meets for Second Policy Evening

On May 10, founding members of the ACCF Executive Roundtable and their guests gathered for their second ACCF Executive Roundtable. The topic for the evening was Sarbanes-Oxley – Impact on Small and Emerging Businesses. Membership in the Executive Roundtable is limited to young business leaders, primarily CEOs or their equivalent (age 50 and under.)

Honorable Bill Gradison, member, Public Company Accounting Oversight Board, and Rep. Patrick T. McHenry (R-NC)		Senator John E. Sununu (R-NH), Joan M. Sweeney, chief operating officer, Allied Capital, and Dr. Margo Thorning, ACCF senior vice president and chief economist
Mark Bloomfield, ACCF president and CEO, Kimberley A. Strassel, senior editorial page editor, The Wall Street Journal, and M. Eileen Kennedy, senior vice president and chief financial officer, Nationwide Financial		Carrie Johnson, staff writer, Financial Section, The Washington Post, and Collins Roth, director, Emerging Markets Partnership
		Mr. Bloomfield, Dr. Thorning and the Honorable Cynthia A. Glassman, commissioner, U.S. Securities and Exchange Commission.

135th ACCF Economic Policy Evening Focuses on U.S. Retirement Policy, U.S. Energy Policy, and U.S. Tax Policy

On June 28, the American Council for Capital Formation sponsored its 135th ACCF Economic Policy Evening. The evening’s discussion centered on three important issues on the Congressional agenda – U.S Retirement Policy, U.S. Energy Policy, and U.S. Tax Policy. Guests at the session included key economic policymakers from Congress and the Bush Administration, top journalists and private sector leaders. For more information on these evenings, please see www.accf.org.

Dr. Margo Thorning, ACCF senior vice president and chief economist, Nick L. Laird, Alcan Inc., and J. Stephen Larkin, president, The Aluminum Association		Reps. Paul D. Ryan (R-WI) and Ralph M. Hall (R-TX)
Edward Alden, Washington Bureau Chief, The Financial Times, and Joan M. Sweeney, chief operating officer, Allied Capital		Heidi Biggs Brock, vice president, Federal and International Affairs, Weyerhaeuser Company; Jeffrey D. Rouch, vice president, Government Relations, Nationwide Insurance and Financial Services, and Mark Bloomfield, ACCF president and CEO
		Dr. Mark J. Warshawsky, assistant secretary, Tax Policy, U.S. Department of the Treasury, and James A. Klein, president, American Benefits Council.