6/21/09 – Father’s Day and the Summer Solstice
As a father and a grandfather I guess I should have some fatherly advice. So as not to spoil anyone’s summer, that advice would be to ponder the value of some issues that are really important to you and take my ramblings with a grain of salt.
In these ponderings I want to look into just how mobile capital of any kind; monetary, physical, intellectual and human, really is. Only when the economy is totally governmentally controlled can we say that capital is not mobile.
So what is the tipping point that makes capital finally decide to pick up and leave? There are no hard and fast rules here in that the tipping point is a personal emotional decision made by the owner of that capital.
So let’s look at Joe the Plumber’s cousin BTU Bubba from the energy industry.
Bubba produces and markets BTUs in the global market. He provides a critical component that fuels the global economy. (There goes that pun again. But it is a good one.) Bubba’s business is not unique. He produces all forms of BTU’s. However only 5% could be considered to be the politically correct tint of green. Bubba’s business is primarily fossil based with 40% in E&P and another 40% in refining and in utilities. He has 5% in a hydro facility on a prime salmon spawning river. There is 10% in Uranium.
He does not have a monopoly position. However, Bubba also is only capital constrained in that the global economy needs every BTU he can produce. On average over the years he has been about as profitable as most successful firms in the economy. He is based in the “People’s Republic of Taxachusettes”, because he likes the funny brownies at Alice’s Restaurant.
Now he faces the same dilemmas that cousin Joe is facing. His refining operations could be upgraded to increase capacity. Yet why should he risk monetary capital when his product is being discouraged to the consumers through governmental policy? Why should he put that capital to work in Taxachusettes that is threatening an even higher tax regime in that he has an opportunity to invest in refining in a tropical paradise supplying many markets? (Note: All of his staff at his refinery are avid scuba divers.) The potential sale price for is current refining operation, which the purchaser intends to convert into brewpub is a loss and would have about the same negative cash impact from the increased costs of doing business.
Bubba decides to leave. What is the impact on Bubba? He still has the hydro dam to worry about. His consumers will still get their BTUs, albeit they may now be imported from that same tropical paradise. His utility business had a guaranteed rate base return where any carbon costs are passed on the consumer. Such income will not go into an offshore tax shelter but his new legitimate foreign business, Bubba International, (unless there is additional confiscation of earnings.) If Bubba sells, his utility customer will need to get his electrons from another source. His other E&P and uranium businesses can just as easily be pursued outside of the US.
What is the impact on the government? Unless some “bigger fool” (and there are always such fools) buys his E&P operations, the government’s income from royalties and taxes will be reduced. The carbon tax income from the brewpub is much less than from the utility, (even though the methane contribution has a much larger green house impact.) Such funds will no longer be available to fund “green” jobs. (The net job gain or loss is the sum of the new green jobs, the change in traditional energy jobs (probably negative) and the change in total societal jobs due to the change in the economy from such actions.)
Good luck Bubba. And good luck to governmental planners. Capital in all its forms is mobile, and Nancy Sinatra was right. There is always a patch of grass that is greener just on the other side of the fence. The boots of capital are made for walking, and policy makers need to realize, that’s just what they’ll do. The grand plans to be funded by an out of favor industry will find that capital’s escape will walk all over you.
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