Detailed Analysis of PV Solar from an EROI Perspective

Introduction

This post is based on a book titled "Spain’s Photovoltaic Revolution - The Energy Return on Investment" by Pedro Preito & Charles Hall. For those who’ve not heard of Charles Hall, he is something of an icon in the field of biology and energy research after formalizing the concept of Energy Return on Investment (EROI) or sometimes EROEI “energy invested”. His work started with the study of fish and determined that they gained 4 calories for each one expended by swimming upstream to areas that had more lucrative food sources. This book looks at the investment in PV solar by Spain from the same perspective. While the solar power plants produce a lot of energy, the question is what the net gain is from the system.

I think we’ve all heard that it take 3 or 4 miles of jogging to burn off one chocolate chip cookie, so this is a similar concept. It asks how much energy we’re willing to expend in order to receive a net benefit. Clearly, running 1 mile and being rewarded with a cookie is worth it, while most would pass up running a half marathon only to be rewarded with a cookie at the end.

As the world looks and its future energy needs, the question is whether we’re making the right choices and pursuing energy sources that have sufficient EROI to support the standard of living we’ve become accustomed to. As Hall and others look at the problem, it’s not clear we’re making the right choices, and this study of Spain’s massive investment in solar power is a deep and detailed look at whether or not that investment made sense.

As he says in the introduction to the book:

“An important question is whether renewable sources of energy, when they are not being subsidized*, can deliver enough surplus energy to society for them to be competitive with "depletable" an and perhaps dangerous fossil fuels. But what if the EROI of these alternative energy sources are small compared to the fuels they are replacing? And what would too low mean to society?"

*Subsidized has many different meanings depending on whether there are direct cash payments, tax incentives, guaranteed rates, or other incentives involved. Regardless of that, what is very clear is the interdependence between renewables and fossil fuels as the rest of this post will try to make clear. There aren’t any solar powered concrete mixers or bull dozers and there never will be.

Society's Hierarchy of Energetic Needs

Hall has a pyramid showing what levels of EROI are returned by various energy sources and what level of society is supported. For example, if EROI is 1:1, you can pump oil out of the ground and look at it. It takes a much higher return on investment to cover the associated costs of the supply chain related to the oil industry including costs of all the personnel, equipment, and other infrastructure that is embedded in that gallon of gas you pump into your car.



 
Spain’s solar program represents a unique system in which it is relatively isolated from cross border power, had a very large buildup in a short period, and had very good data collection by the government that allowed a detailed analysis. If you take the time to read the book, you’ll find out at least 20 factors affecting the total energy output of Spain’s solar energy system ranging from factors absorbing 0.22% of the power produced like washing the solar panels or 5.6% of the power loss due to the power inverters. There are many economic analyses of renewable energy, but this one is perhaps the most comprehensive in terms of identifying inputs and outputs of the system. The net result is:

“The sum of all energy used on a yearly basis to generate Spain’s PV electricity, calculated using our broad boundaries and with the assumption that wherever money is spent energy must flow, is a total of 2,065.3 GWe of net useful energy to society. This equals 40.8% of all the yearly energy generated by the solar PV plants of Spain."

And we’ll dive into more of the details below, but in short, they identify a long list of that reduce the output of the solar PV systems to 76.5% of the rated power. Some of the factors will be discussed below, but they include: mismatch of modules, dust, loss due to temperature, AC/DC conversion, wiring within the plant and shadowing. However, among these factors, the analysis is very conservative and rates some of the factors at zero loss due to not having a good way to measure the losses or enough data on future reliability of key components like power inverters that can only be observed over a longer time period. Or, for example, the impact of dust was estimated at 1% loss while some manufacturers calculate the factor at 4 - 12% on average and up to 25% in severe conditions. 
 


Beyond these factors that affect the output side of the equation, there are a significant number of energy requirements that go into building a solar PV system that have to be accounted for in the EROI calculation. The construction of the site, shipping of the components, connection to the electrical grid, insurance, administration, and ongoing maintenance are also factors that must be “paid back” over time or during operation for the investment to pay off.

Samples of Factors Included in Estimating EROI

Accesses, foundations, canals, fences and other infrastructure

Building a solar PV plant requires a significant amount of conventional construction of roads, access ways, foundations for the panel, canals and drainage, and fences around the facilities. Of course, this is built up front, but the annual impact of this construction amortized over the planned 25 year lifecycle is 1.1% of total energy output. Note that this figure does not include estimates for repair or upkeep of the roads or other elements that may require future investment.
Transportation costs incurred building the PV plants

Spain’s solar PV efforts were very concentrated over a short 3 - 4 year time period and there were various incentives to build plants to meet deadlines to receive subsidies or meet other objectives. As a result, beyond all the ships, trucks, cranes, tractors, and other transportation involved, there was a significant amount of air shipment of solar PV cells. That added significantly to the energy cost of building the system, the ships that delivered many of the panels from China are estimated to have used 95GWh of energy, but the 5% of panels delivered via air freight used approximately 756 GWh.

Adding together all the transportation costs, the overall amount is equal to 1.9% of annual energy output if amortized over the 25 year life of the system.

 “The important thing, here, is … to show that this type of energy is still absolutely dependent on a very complex, interlinked fossil fuel society, for which, nobody has seen a reasonable, functional replacement with modern renewable energies.”

Water - washing the solar panels

One thing that is required is to wash the solar panels so that they do not lose efficiency due to dust buildup. The water used in this effort must be specially processed so that it does not leave behind mineral deposits, which increases the energy consumed. Also, there is the Murphy’s law aspect of washing the panels only to have a dust storm come up just days after the planned cleaning cycle. Estimating 4 washings per year, the energy cost of the water, trucks, and other components necessary is equal to 0.22% of annual energy output.


Degradation of modules over time

The contracts from the manufacturers typically assume a 1% degradation per year up to a 20% maximum over the theoretical 25 year life cycle. In some cases, a 3% degradation was seen in the first year along with a certain amount of “infant mortality” of new panels that had to be replaced due to failure. Whether or not this level of reliability will be obtained is unclear. In addition, because there was a boom and bust cycle in the solar industry, many companies that might have otherwise serviced these panels have gone out of business. The industry went from 41,700 full-time job in 2008 to 11,300 jobs in 2009, and even if companies remained viable during this phase, they could be challenged if modules degrade too quickly and need to be replaced under service contracts.

Other infrastructure - gas turbine backups

The business plans for combined cycle gas power plants are usually designed with the assumption to amortize their cost over their lifecycle (25- 40 years) due to their complexity, while requiring a smooth and efficient operation of a minimum of 5,500 nominal hours in a year. Although initially they reached some 4,000 nominal hours a year, suddenly things started to change, when renewables, led by wind, with a lot of intermittencies, passed 10% of the demand in 2008. [Note: some sites fell to as low as 2,500 hours in 2010.]

"These investments … are working less than half of the time as drafted in the business plan. This is in part because the combined cycle gas plants are now forced many hours in a year to work in “complementary intermittent regime” to compensate for the steep variations of wind and solar: switching them off when there is oversupply if the wind blows and/or the sun shines and switching them on again if there is a calm wind and or clouds in the sky. … In fact, a night/day cycle, sometimes obliges these plants to switch off in the night and switch on in standby mode several hours before dawn when consumption ramps up. The natural gas used to keep up this “spinning reserve” is simply wasted, and it is obvious that these regimes of continuous and frequent switch on/offs shortens the expected lifecycle of these complex dual gas cycle plants …."

And this is no small consideration. If investments are made with a planned lifecycle and that period is truncated or the expected utilization does not match the plan, then the cost factors must all be recalculated to reflect the true cost (which can increase dramatically). If these resources are not used efficiently, one obvious outcome would be higher utility bills, but another factor would be whether the companies operating the gas plants are economically viable under the rate regimes allowed by the government.

Dealing with intermittency

Intermittency, or the lack of consistent power output that matches demand is a key concern in adding renewables to the power grid. Solar has the "night problem" and wind has calm days. In addition, some of the peak power generated by solar is not matched well with the time of day of the demand (morning and evening are high demand, while solar peaks power during midday). As such, if these technologies are going to be the solution, then energy storage is going to be crucial in managing the peaks and valleys of energy demand. A few quotes:

"If PV solar systems are supposed to be the long-term replacement of fossil fuels in the future … we must consider backup or storage systems."

"In Spain there are presently [2009] some 2,750 MW of installed power to pump up water from a lower to an upper reservoir, which can then be released during the periods of maximum need. Some 30% less energy is generated than is used to elevate the water …."

"The installed capacity consumed 1.34% of the total energy generated in Spain and in so doing the losses were 1,111GWh/year or about 20% of the solar electricity generated."

The stored hydro were originally built to take advantage of the excess power that the nuclear plants generate overnight and then the hydro power is used to cover peaks during the day when demand exceeds the "base load" provided by nuclear, coal, or gas power plants. Solar doesn’t fit this demand curve as the peak demand and production coincide and there is no solar based power to pump water at night. As such, it is a concern whether this type of storage is viable. Nevertheless, the REE (regulator) calculated that the hydro power backups need to increase to 6,577 MW to cover planned renewable developments through 2020. The cost of building this infrastructure is itself significant and it remains to be seen whether there are sufficient sites where this type of hydro storage can be built.

In the analysis, they calculated the addition of storage as zero cost “for now, but it could be large”. Indeed, the cost of building a pumped hydro storage system would be significant, and the 30% energy loss incurred when using the system is significant meaning that significant overcapacity needs to exist in order to cover this loss than if the power could be used directly by the grid. Finding a way to manage these systems with intermittent inputs rather than the stable power produced by nuclear, coal, or gas plants would also be a significant challenge.

Electrical Grid

Using the basis that solar provided 2.25% of the total power to the grid in 2009, they calculate that 3.5% of energy output is being absorbed by the grid and its maintenance. Since the solar PV penetration was planned to increase, the amount of energy associated with the grid would also increase. Whether this is a linear cost curve depends on factors like managing intermittency and the geographic dispersion of the solar plants. They further they are from population centers, the higher the cost.

Other Economic Activity

As noted by the authors, the economic analysis is very broad and considers that if money is flowing, then so is energy. Therefore, other factors supporting the solar PV systems include financial transfers or the employment of people who perform services associated with the industry. Examples include:

• Insurance 0.4%
• Promotions and conferences 0.5%
• Administration expense 0.7%

While some of these factors may be no more or less energy intensive that other energy sources, they do factor into the overall EROI calculation. The more human energy required to service or maintain the solar PV systems, the more of a cost to society. In other words, all the people employed by activities above own homes, drive cars, work in offices, and otherwise consume energy. The larger the footprint, the lower the EROI, which runs somewhat counter to the argument about "green jobs". In many cases renewable energy has a much lower EROI and as such increasing the number of jobs in the sector makes it less viable as an alternative.

Miscellaneous - Ground vs Rooftop

While Spain built much of its solar PV with dedicated facilities, Germany took a rooftop approach for most of its installations. Beyond the fact that Germany has ~30% less irradiance that Spain due to both climate and geography, the rooftop installations themselves were less efficient due to improper tilting and shadowing effects.

 “In many cases, the installations are using all the the available roof sites while supply relatively little power."

Based on the calculation of an EROI for Spain of 2.45 and its superior form of solar energy along with better geographic factors, there are some that suggest the EROI for Germany could be negative.

Summary

As long as this post is, I've left out far many more details than I've put in.  The book is definitely a 5 Star pick if you're interested in the topic of energy, EROI, and detailed econometric analysis.  And, you'll learn a lot about the solar industry and associated technology.

Whether Spain (or Germany) made the right investment in terms of scale, timing and other factors remains to be seen.   Lazard has released the 10th version of their report, on the Levelized Cost of Energy Analysis, which shows much lower costs of solar today than was available in the period covered by Hall and Preito's study.  (Note that while the Lazard studies are consistent year to year, they do not use the same broad framework of Hall's work.  Other analyses of EROI of solar come out in the range of 6 - 8 vs this calculation of 2.45, however many of them are not based on actual measured power or performance of the solar plants).  Also, as noted above in the discussion of gas turbines, it is not as though the massive infrastructure can be replaced with the newer technology without essentially absorbing all the costs that were planned to be amortized over 25 years into a much shorter time period.  Doing so would make any idea of replacement cost prohibitive, and as such this study's conclusion of an EROI of 2.45 raises questions of whether this huge investment by Spain at this time and at this scale was a good decision.  Perhaps, if the cost of utility scale implementations was dropping as fast as the Lazard study suggests - from $350/MWh in 2009 to $50/MWh in 2016 - then Spain is paying a huge first mover cost and could have made much better investments had they been spread out over time to take advantage of advances in technology.

A different look at the energy pyramid is the following, which raises the question whether our current replacements for fossil fuels are adequate to support the standard of living we're expecting for the future, which is why this type of analysis needs to be part of the decision framework when discussing renewables.  Being trapped with a energy production system that has the EROI of a hunter gatherer society is probably not the best. 

Hippocrates Shadow and More...

Hippocrates Shadow

This post is mostly about the book Hippocrates Shadow by David Newman, M.D.

http://www.amazon.com/Hippocrates-Shadow-David-Newman-M-D/dp/1416551549

The book is a few years old but a great read, especially for anyone interested in their own personal health or the healthcare system in general.  Newman is an Emergency Medicine doctor who intersperses his personal experience along with plenty of technical detail.  Part of what makes it a page turner is reading the short case descriptions that put context around the more scientific or technical topics. There are also solid references to the over 130 research papers published in top journals like the Annals of Internal Medicine, Lancet, JAMA, NEJM, and WHO that back up his assertions.  He also has a great TED Talk here.

My Post

My post will also tie in a few other concepts and ideas from other areas of science and medicine that relate to the topics covered in the book.  One thing to cover at the start is that this, like many other of my posts, challenges the status quo.  In Newman's book, he quotes a famous doctor who tells a medical school class to remember that in 10 years half of what they learned in medical school would be disproven.

That is good advice and yet extremely hard for doctors and the general public to accept.  Many people find comfort in the old ideas no matter how much science advances.  For example, the recent changes in the dietary guidelines to not treat dietary cholesterol as a health concern will likely not convince many people and practicing physicians and they will persist in eating egg whites for another decade or more.

Newman's book has many good examples, so we'll start with one about strep throat.  Many people have probably tested positive for strep throat or had a child who tested positive, and then they were given a prescription of antibiotics and went happily on their way.  Newman shows that treatment is based on flawed science and that the NNT (number needed to treat) of that protocol is close to 1 million... and has nothing to do with strep throat itself.  It is actually given to prevent rheumatic fever that might occur a month later, but that was based on events at an Air Force base in the 1940s and 1950s that has virtually nothing to do with what happens in the general population.  And yet... 60 years later we're still following the same treatment protocol. More here.

Sound incredible?  Let's start with a few facts and then apply Byron Katie's Four Questions.  Newman goes into great detail in the book, and

I'll only use part of the story to get at the theme of the chapter titled "We Won't Unlearn".

First, the questions are:

1. Is it true?
2. Can you absolutely know it is true?
3. How do you react - what happens - when you believe that thought?
4. Who would you be without the thought?

Many people believe that a positive strep test indicates a need to take antibiotics.  Not the case!  Less than 10% of people seeing a doctor for symptoms of strep have it,and 10% of the population is walking around positive for strep with no symptoms.  So, for 1 in 10,

Question 1 is No - you don't need to take antibiotics.
Question 2 is also No.
Question 3 might bring in some doubts.  Why would a doctor prescribe antibiotics if they aren't necessary?
Question 4, as you'll learn below, is "I would be a much healthier person and much better informed about the effectiveness of medical treatments."

In other words, somehow we've gotten into a situation, much like a bad relationship where Katie's 4 Questions are usually applied, and we can't find our way out to a better outcome.  Wouldn't you rather avoid taking unnecessary drugs?  Wouldn't you rather not spend the money on medical treatments that can be shown to be no better than placebo or no intervention at all?  Shouldn't you avoid taking antibiotics that can cause allergic reactions, diarrhea, or rashes?  Or what about the long-term use of antibiotics that Martin Blaser's book Missing Microbes suggests are linked to obesity, juvenile diabetes, and asthma?

What Doctors Don't Know, Don't Tell You

Okay, let's get to the content of Newman's book and then give some examples.  He takes aim at much more than ineffective use of antibiotics.  On the list are:

• Antibiotics for strep and other infections that most likely viral
• CPR
• Breast cancer mammography screening
• High blood pressure medicine
• Migraine treatments
• X-ray interpretation
• and even the G Spot (sorry... believe if you must)

All of these treatments and tests have been proven to be ineffective unless applied to a specific subset of high risk patients or simply they are not worth the cost and side effects of the treatment.  Let's look at the numbers related to antibiotics and strep:

"... today we would likely have to treat more than a million in order to prevent one case of rheumatic fever.  ...  But 1 million prescriptions for antibiotics will cause more than 2400 potentially allergic reactions... 100,000 cases of diarrhea and 100,000 rashes. (Pg 115)"  

Hmmm, that is not sounding like a good tradeoff for society or for the average person walking into the doctors office and yet the practice of prescribing antibiotics is widespread.  Very few doctors ever say "well, I'll give you these antibiotics to prevent a 1 in 1 million chance of something you'll likely survive with no consequences for the 1 in 400 chance you'll have a severe reaction to the antibiotic itself."  Most patients are actually happy the doctor gives them something and never ask any questions about effectiveness or consequences of the treatment itself.

While I don't have children, I do have dogs, and I look at antibiotics and other treatments much more skeptically these days as a result of learning about things like this.  If you do have children and you're constantly battling ear infections, sore throats, and other maladies of youth, you should seriously consider the cost / benefit.

Alternative Treatments

One part of the book discusses the treatment of migraines (Pgs 62 69), which are seen differently by ER doctors who treat patients with active migraines and neurologists who typically see patients at some point later.  Migraines often come with nausea, and for that antiemetics are given first so that the migraine drugs can be administered.  The interesting thing is that antiemetics happen to be very effective at stopping migraines and the migraine drugs are often not needed.  This section of the book also illuminates some of the issues with the FDA and the drug approval process in which a class of migraine drugs were compared within their class (triptans), but not against the antiemetics.  These
costly drugs ($60 per dose) were approved despite not showing effectiveness over much cheaper antiemetics ($4 per dose).

Number Needed to Treat

The NNT is a interesting concept that looks at how effective drugs are in the context of real patients.  If you break your leg and end up in the ER, then the NNT is 1.  One person with a broken leg is treated with a cast and one person is better off.  With drugs and other surgical interventions (see the TED Talk on stents), the NNT can be 3, 10, 1,000, 1,000,000 or infinite.  Where the NNT is high, we should be questioning whether the cost of the treatment

Here's an NNT graph of the use of aspirin in high risk patients.  These are people who have had a high risk event or have other underlying conditions that predispose them to another heart attack or stroke.  For them the NNT is about 100.

But what about the average 54 year old with no risk factors?  The NNT is 1176 (Pg 171).  While aspirin is cheap, why are we prescribing it when such a tiny fraction of people are going to benefit from the treatment?

Note:  The FDA recently stated that evidence does not support the general use of aspirin for the primary prevention of heart attacks and strokes, so that would tend to rule out the recommendation for anyone not in a high risk group.  More studies here and here.

Like many of the cases explained in the book, if we used NNT to decide whether treatments were necessary or effective, we'd come up with a vastly different and less costly healthcare system.

What To Do?

The book ends with a great section on how to be a better informed user of the healthcare system.  There are 8 basic concepts:

• On Knowing - doctors are not perfect and often disagree.  This is normal and patients should push to understand.
• On What Works - Take nothing for granted.  Some frequently prescribed measures don't work and could cause harm.
• On Communicating - Doctors and patients must both work on establishing rapore based on open and honest discussion.
• On Tests - there is a over-reliance on testing and they should only be done when there is a clear relationship between what the test might show and a plan to move forward.  
• On Unlearning - "It is an ominous sign when doctors are set in their ways and will not learn."
• On Placebos and Meaning - "Communication and a sense of being cared for are important components of the healing and health processes."
• On the NNT - The NNT is a clear way to understand potential benefits and make an informed decision.  
• On a New Paradigm - "If you choose to believe in health care that is honest about its strengths and weaknesses, ... then your doctor will,too.

Newman is still out there with his message.  Here's a recent post from March 2015 talking about the ongoing controversy of NNT and, more importantly, the need or better communication between doctors and patients.

There is hope... but only if we are better informed.  If you find this shocking, I recommend you read Hippocrates Shadow and, as necessary, use the 4 Questions to turn around your thinking about health and medicine.

How to Read a Govt Report - on Social Security (or any other topic)

This post will examine the recent publication of the Trustees Report on OASDI (Social Security) and how the fundamental economic factors used in this report differ from 1) reality and 2) other projections.

Always Read the Footnotes First

If you open the Trustees Report here

The first page to turn to is page 256 (which is actually after the index of the report - could it be buried further?) so that you can read the statement of the Actuary who signed off on the report.  Actuaries have ethics, unlike political appointees or other politicians, so they are bound to tell the truth, the best the can ascertain it.  A few quotes from that part:

"Medicare Trustees Report, which states, “The trust fund perspective does not encompass the interrelationship between the Medicare and Social Security trust funds and the overall federal budget.” The reader of this report should consider this “overall” federal unified budget perspective with care because the assumptions underlying unified budget accounting are inconsistent with the assumptions of trust fund accounting.  In particular, trust fund accounting accurately reflects the law, under which benefits cannot be paid in full on a timely basis after reserve depletion. In contrast, unified budget accounting assumes that full scheduled benefits will continue to be paid through transfers from the General Fund of the Treasury, thus representing “a draw on other Federal resources for which there is no earmarked source of revenue from the public.” Not only are such “draws” not permissible under the law, no precedent exists for a change in the Social Security Act to finance unfunded trust fund obligations with such draws on other Federal resources."

- You can summarize that part as "this report is based on illegal assumptions"

Next:

"However, budget analysis frequently refers to both trust fund reserve redemptions and trust fund obligations not payable under the law after reserve depletion as factors that increase the federal debt held by the public in the future. This assertion is not consistent with a full assessment of the investment and redemption flows of the trust funds or with the limitations in the law on paying benefits after trust fund reserves are depleted."

- Much the same... but reader beware... things are not as they seem, you just have to read page 260 first to understand the twisted meaning of terms.  :-)

Next, Consider the Assumptions

As David Stockman points out in his analysis, the economic factors underlying the Trustees Report seem divorced from recent reality. They are "goal seeking" in that it seems like the numbers were chosen to produce a more positive outcome than is warranted by current conditions in the economy.  For example, the GDP forecast associated with the recent White House Budget shows a GDP forecast of the next 10 years at 2.3%,

However, the factors used by the Trustees estimate GDP over that same period to be 5.1%.  Wow!!! A 2.8% difference in annual GDP or more than 100% difference in estimates is HUGE.  You'd think we could get the White House and Trustees on the same page, but apparently not.

And, if we stay on the current 2.7% GDP growth rate based on the past 7 years, we get:

"If we stay on the current 2.7% growth track, then GDP will come in at $24 trillion in 2026. Since OASDI payroll taxes amount to about 4.5% of GDP, it doesn’t take a lot of figuring to see that trust fund income would be dramatically lower in a $7 trillion smaller economy. To be exact, the untrustworthies have goal-seeked their report to generate $1.425 trillion of payroll tax revenue 12-years from now. Yet based on a simple continuation of the deeply embedded GDP growth trend of the last seven years, payroll revenue would come in at only $1.1 trillion in 2026 or $325 billion lower in that year alone."

 So, that is a huge gap in funding for Social Security and for SSDI, which is projected to go bankrupt later this year. Of course, there are proposals to let SSDI borrow from the Soc Sec funds... which should be illegal, but Congress will probably find a way to do it rather than taking the risk of raising the tax rate in the upcoming election year despite repeated warning from the Trustees that this day was coming.

The Trustees report also has other dubious assumptions, such as:

"... the 2015 report says that the OASDI funds will earn $1.2 trillion of interest income during the next twelve years. To be sure, the nation’s retirees and savers might well ask how Washington’s bookkeepers could manage to get the assumed 3.5% interest rate on the government’s assets compared to the 0.3% ordinary citizens earn on a bank account or even 2.2% on a 10-year treasury bond."

Bottom Line

Here is the impact even using the dubious projections of GDP growth in this report:

"For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.62 percentage points (from its current level of 12.40 percent to 15.02 percent, a relative increase of 21.1 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 16.4 percent applied to all current and future beneficiaries, or 19.6 percent if the reductions were applied only to those who become initially eligible for benefits in 2015 or later; or (3) some combination of these approaches would have to be adopted."

The net effect of this is expressed in the Stockman article:

"... instead of a cumulative total of $13.2 trillion of payroll tax revenue over the next 12 years, the actual, demonstrated GDP growth path of the present era would generate only $11.2 trillion during that period. That $2 trillion revenue difference not only ionizes most of the so-called trust fund assets, but also reduces the ending balance so rapidly that by the final year interest income computes to only $25 billion, not $100 billion as under the current report."

So, while the Trustees keep saying things like this year after year, the can keeps being kicked down the road...

"The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 60 million beneficiaries and 168 million covered workers and their families in 2015. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations."

So, if you think that Social Security, SSDI, Medicare and Medicaid are going to last until 2034, think again.  If you're under age 45, expect that these programs are not going to exist and that you should take as many private precautions as possible.

I encourage you to read the full report here - footnotes and all.

http://www.ssa.gov/OACT/tr/2015/tr2015.pdf

The Understand the Economics of the Social Cost of Carbon

We're all told that CO2 emissions are bad and that we have to act now to avoid disaster in the future. Here is a primer on the economics or financial calculations behind some of those policy recommendations.

Understanding the Social Cost of Carbon

One key consideration in the Climate Change debate is how much damage will occur, when it will occur, and how to quantify the results. If we could come up with a number, then we would be able to judge cost-benefit of various policies today, such as cap-and-trade or taxes directly on
CO2 emissions. One might think that this is an area where economics can be applied to give us clear answers. Well, let's see how that hypothesis works.

Assumptions:

1. This is an economic discussion. It is based on accepting that the IPCC or "consensus" views of CO2 emissions are reasonably correct.  (a dubious assumption, but a topic for a different day)
2. It looks closely at the "discount rate" and the economic models that try to calculate the cost or benefit of CO2 emissions
3. It considers why the EPA ignores guidance from the OMB when calculating the Social Cost of Carbon (SCC)

Understanding the Discount Rate

The first thing to understand is that the models used by economists to determine the SCC are complex, include many different assumptions - such as population growth, technology growth, GDP growth, future emissions (which depend on GDP growth), etc. and then try to factor in how climate change might affect these trends. If it is 4 degrees hotter 75 years from now and we have more drought or extreme weather, what is the cost of that damage? And since it occurs so far in the future, how can we scale that value back to today and compare it to an investment to avoid that occurrence at some point far in the future. The method used to calculate the "present value" of a future event involves a discounted cash flow calculation using the Discount Rate. If you're not familiar with that concept, click here. Or, basically, this is like the inverse of the interest rate you pay on your house. You know that that if you take out a loan for $200K at 5% for 30 years, your total payments are going to be: $386,640.  So... that's the expected value of your house then... or discounting it to today, we end up with $200K.  Obviously, the interest rate makes a huge difference, and unlike the housing market, the interest rates / discount rates chosen for the SCC are not determined by market forces.  They're set by theory and government bureaucrats.

What Does the Literature Say?

While many claim that there is a "consensus" view of climate change itself, the result in the economic literature are mixed:

In the economics of climate change academic literature, there are disputes over the proper discount rate, with some economists arguing that very low rates should be used in order to place future generations on a nearly equal footing with the present generation in policy analysis.  - Robert Murphy

In the IPCC's AR3 report, Stern used a very low discount rate and came up with a very high estimate for SCC.  This was roundly criticized, and not just by the climate skeptics.  William Nordhaus is a very respected economist on the warmist side, and here Murphy quoting what he said about the Stern report:

William Nordhaus has shown that the Stern Review's extreme penalties on emissions are due to the choice of discount rate. Using Stern's parameters for his model's utility function, Nordhaus explains the following apparent absurdity: 

"Suppose that scientists discover a wrinkle in the climate system that will cause damages equal to 0.1 percent of net consumption starting in 2200 and continuing at that rate forever after. How large a one-time investment would be justified today to remove the wrinkle that starts only after two centuries? Using the methodology of the [Stern] Review, the answer is that we should pay up to 56 percent of one year's world consumption today to remove the wrinkle. In other words, it is worth a one-time consumption hit of approximately $30,000 billion today to fix a tiny problem that begins in 2200."

If we go forward to AR4 things improved somewhat, but we still have many of the same issues as Murphy explains.

Even if policymakers took the AR4 results as gospel, some of the popular policy recommendations, such as those being proposed by key Congressmen, are difficult to justify. - Robert Murphy

The Impact of the Discount Rate

Why is that?  Well here's Murphy again from his testimony:

My point in this discussion is not to argue for or against a particular discount rate.
Rather, I am demonstrating how crucial this apparently innocuous modeling choice is. 

Or, graphically, we can see

1.  As the discount rate increases, the SCC drops
2.  Why the EPA ignored charting the 7% rate specified by the OMB (it would have been negative)

Again Murphy:

If the choice of discount rate means the difference between a SCC of $50/ton versus zero, this is clearly a matter that should not be left to a handful of regulators to decide. It
underscores my claim that the “social cost of carbon” is not an objective empirical feature of the world, but is rather a very malleable figure dependent on subjective modeling assumptions, and can be made large, small, or even negative depending on parameter choices.

The Consensus?

We hear much about the 97% or other fictions of the climate change debate.  Above, we can clearly see that the debate is wide from an economic standpoint.  But, is that just because Murphy is an Austrian economist?  NO!

Here's a CAGW economist saying much the same thing.  Robert Pindyck of MIT.

CLIMATE CHANGE POLICY: WHAT DO THE MODELS TELL US?

So how large is the SCC? Here there is plenty of disagreement. Some argue that climate change will be moderate, will occur in the distant future, and will have only a small impact on the economies of most countries. This would imply that the SCC is small, perhaps only around $10 per ton of CO2. Others argue that without an immediate and stringent GHG abatement policy, there is a reasonable chance of substantial temperature increases that might have a catastrophic economic impact. If so, it would suggest that the SCC is large, perhaps as high as $200 per ton of CO2.

And (my bold)

What have these IAMs (and related models) told us? I will argue that the answer is very little. As I discuss below, the models are so deeply flawed as to be close to useless as tools for policy analysis. Worse yet, their use suggests a level of knowledge and precision that is simply illusory, and can be highly misleading.

Here he is on Econtalk as well:

Pindyck argues that while there is little doubt about the existence of human-caused global warming via carbon emissions, there is a great deal of doubt about the size of the effects on temperature and the size of the economic impact of warmer climate. This leads to a dilemma for policy-makers over how to proceed.

What is the Cost to the US vs. the Global Cost

One other point that Murphy raises in his Senate testimony is that the EPA has also deviated from guidance in that it used the global cost of carbon ($33/ton) instead of the cost based on the impact to the United States (somewhere between $2 and $8/ton).  Why might the EPA choose the higher cost?  What would the cost be if a higher discount rate was used?  Would the average American care if the cost of carbon was $0.25 per ton?

And, for another interesting discussion on this topic, listen to this Econtalk with Martin Weitzman.  One "cute" point that is made is that the carbon taxes are "internal" to a country, and therefore might displace other taxes.  In other words, if we have an SCC of $8, but charge $33, then there is a differential of taxes on carbon that could be used to take away other sources of taxes.  Both Weitzman and Russ Roberts laugh about the likelihood that the government would try to do that.

Martin Weitzman of Harvard University and co-author of Climate Shock talks with EconTalk host Russ Roberts about the risks of climate change.

Weitzman argues that climate change is a fat-tailed phenomenon--there is a non-trivial risk of a catastrophe.

Summary

The SCC is based on economic models and predictions that vary quite widely.  If the OMB specified discount of 7% was used, we might have a policy of encouraging the use of coal fired power plants to enhance the benefits.  If we use very low discount rates, then the SCC is very high, but is that a realistic value?   If we use Weitzman's model, does that really help?  What sort of fund would the government set up?  Could we use the carbon tax to fund Social Security?

Hope you learned something about the discount rate and SCC....

All About Sleep

Are you the sleep warrior?  Or perhaps anti-sleep warrior?  Do you often say "as long as I get 5 hours, I'm all set."?  Or, are you the type that catches up on sleep on the weekends (that's me)?  What follows is a series of quotes from articles and research that might make you rethink how much sleep you need.  I'll also link to a set of resources or techniques that might work to improve your sleep.

The State of Sleep

From Dan Pardi (see other links below)

"... we’re getting 20% less sleep per night on average than we were 40 years ago, and these are statistics from the National Sleep Foundation, which does sleep polls every few years.  So around in the 1960s, average sleep times were about 8-1/2 hours per night or least times in bed or self-reported sleep times.  And there was an assessment of subjective sleep time in the early 1900s, and it was about the same as it was in 1960, so about 8-1/2 hours.  And there has been a slow and steady decline in sleep times, and now the average is 6-1/2 hours per night for working adults, and then about 7 hours and 20 minutes on the weekends and trying to play catch-up."

My Life in the Navy

I was an officer the Navy and frequently had to stand watch as the ship operated 24x7 while out at sea.  In many cases, I averaged 5 hours a day of sleep, but it was not contiguous, and it also involved trying to sleep as helicopters landed on the steel deck directly above my bed.

I slept near Spot 3 on the USS Guadalcanal - that's the second spot back on the flight deck.

We had a somewhat strange watch rotation due to my CO's own plan, so my day looked like this:

0000 - 0300 - Officer of the Deck
0300 - 0530 - try to sleep
0530 - 0600 - wakeup, shower, breakfast
0600 - 0900 - Officer of the Deck
0900 - 1130 - normal daily duties
1130 - 1145 - lunch
1145 - 1230 - Navy's famous "nooner" nap
1230 - 1700 - normal duties
1700 - 1715 - dinner
1715 - 2000 - try to relax, maybe nap for an hour
2000 - 2030 - Eight O'clock report
2030 - 2330 - sleep (often during flight operations)
2330 - wake up for next watch...

Total sleep: 4.5 - 6.0

Note this ignores any special evolutions like refueling at sea, training, etc.  All of which disrupted the schedule above quite frequently.

When we were in the Med during the first Gulf War, the schedule was simpler... but more demanding.

0000 - 0700 - on watch, Combat information center (CIC)
0700 - 0715 - breakfast
0730 - Quarters (start of the work day)
Try to sneak a 30 minute nap in sometime
1130 - lunch
1200 - 1700 - on watch, Combat information center (CIC)
1715 - dinner
2000 - 2030 Eight O'clock report
2030 - 2330 - sleep (often during flight operations)

Total sleep 3.5 - 4.5 hours

Now, you might wonder what impact this had on my performance and that of anyone else working such a schedule (Note that this applies to many people today like firefighters, policy, nurses, ER doctors, EMTs and other shift workers).  Well, they studied it, and here is the note from the Abstract:

CASE REPORT:

This 6-mo study used actigraphy and the Fatigue Avoidance Scheduling Tool (FAST) to quantify the sleep patterns of a 39-yr-old Commanding

Officer (CO) of an Arleigh Burke class destroyer while the ship was forward-deployed. On average, the CO received 5.2 h of sleep daily and averaged 6 h time in bed each day. The participant received more than 8 h of sleep for only 2% (N = 3) of the study days; for 17% (N = 27) of the days, he received less than 4 h of daily sleep. For 15% of waking time, the CO had a predicted effectiveness of less than 70% on the FAST scale, equating to a blood alcohol equivalent of 0.08%-or legally drunk. The CO's predicted effectiveness was below 65% approximately 10% of waking time.

DISCUSSION:

Results from this study are aligned with earlier research showing that crewmembers on U.S. Navy ships suffer from chronic sleep restriction. During a typical deployment, personnel accrue a considerable sleep debt even during normal operations. Should critical events with additional sleep restriction occur, the ship has limited reserve capacity, potentially placing her crew and their mission in grave jeopardy.

http://www.ncbi.nlm.nih.gov/pubmed/25945667

So, let that sink in...  15% of the time you're making critical decisions while legally drunk!  Add in some actual alcohol and things get worse dramatically.

Other Consequences

Beyond walking around legally drunk for part of the day, what else is affected by lack of sleep? Well, there's a long list:

• Impaired immune system
• Overweight and obesity
• Cognitive decline
• Mood and mental health
• Systemic inflammation
• Increased risk of death

And, disrupted hormonal cycles, too.

You may have to do some of your own research to understand this graphic, or listen to the podcasts listed below.  The net of it is that too little sleep disrupts your hormonal balance, and that has a cascading effect into your metabolism, immune system, etc.

The Research

Note this is just a small sampling, and the studies involving children are similar to other studies done with results.

Shift work and its association with metabolic disorders
http://www.ncbi.nlm.nih.gov/pubmed/25991926

Short Sleep Duration is Related to Emerging Cardiovascular Risk Factors in Obese Children
http://www.ncbi.nlm.nih.gov/pubmed/25988561

Short sleep duration and large variability in sleep duration are independently associated with dietary risk factors for obesity in Danish school children
http://www.ncbi.nlm.nih.gov/pubmed/23924757

Changes in children's sleep duration on food intake, weight, and leptin
http://www.ncbi.nlm.nih.gov/pubmed/24190680

Improving Sleep

Bright light, dark and melatonin can promote circadian adaptation in night shift workers
http://www.ncbi.nlm.nih.gov/pubmed/12531129

Chris Kresser Podcast with Dan Pardi
http://chriskresser.com/why-most-people-are-sleep-deprived-and-what-to-do-about-it/

Other Resources

Doc Kirk Parsley's TED Talk
https://www.youtube.com/watch?v=7s9C_8-OoxI

Kirk Parsley on Robb Wolf's Podcast
http://robbwolf.com/2015/05/19/episode-270-dr-kirk-parsley-sleep-cocktail/

Chris Kresser
9 Steps to Perfect Health - Get More Sleep
http://chriskresser.com/9-steps-to-perfect-health-8-sleep-more-deeply/

Dan's Plan - this is both a diet and lifestyle plan.  Dan is a researcher at the Department of Neurology and Endocrinology at Leiden University in the Netherlands
http://blog.dansplan.com/

Dan's Plan Sleep Hygiene
https://www.dansplan.com/assets/Good_Sleep_Hygiene.pdf

Surviving on a Low Food Budget

It Costs Too Much to Eat Healthy?

It often comes up that a celebrity or Congressman raises an issue that the poor can't afford food.  Globally, this is true and this latest announcement by Bridget Moynahan is an example.  Living on $1.50 a day using US prices is not something that you can do for more than a week without suffering nutritional consequences.  That's $10.50 a week, so it is less than 1/3 of what the rest this post considers.

If we look at the US and SNAP benefits, the question is whether that is sufficient money for a person or family?  Snap benefits start out at about $45 for a single person and then start sliding downward somewhat as the number of people in the household rise.  Presumably they are recognizing it is easier to buy things in bulk as a family, and that generally reduces the price of food.  For a family of 4, SNAP benefits are about $40.

For this post, I wanted to look at whether you can have a healthy diet on $40 dollars a week.  I originally started with $30 a week, and I think my conclusion is that most people would be in calorie deficit or nutritional deficiency at that level.

Caveats:   I am accepting of the fact that Food Deserts exist and that you could have people without access to the food that you'll see later in this post.   At the same time, in a city like Atlanta, there are places like DeKalb Farmers Market or Buford Highway market where the food is cheaper than what I'll be listing, and also it is easier to buy in bulk at those places.  I'm also not trying to exhaustively illustrate the point with the numerical part of this post.  If you don't like Kale, then substitute with some other healthy vegetable.

Basic rules:  No processed food.  No empty calories.  No "prepared" meals.  You have to cook it all yourself.  Get a slow cooker!

The Numbers / Diet Model

Most of these number for cost and types of food came from my shopping at Trader Joe's and Whole Foods today.  These are places not known for super low prices, and if I shopped at the places listed above, I could have easily saved 10 - 20% on the overall total.

The diet / model isn't intended to list every possible food item that you might want to eat.  It does show that if you buy certain items in bulk one week, you'll have leftovers or unused food that makes it cheaper the next week.  Week 1 costs $31.59 and Week 2 costs $27.20.  That means if you're planning ahead, you can easily keep your food costs per person under $40 per week.  For example, you could buy a 5 lb bag of potatoes with the excess $12.80 in week 2, and then eat them over the next 3 weeks (the highlighted rows show the 'carryover' items).  The same would apply to things like spices, garlic, butter, etc.  Anything that you use a small amount per day or week could easily fit within the budget allocation.

The initial calorie count appears a bit low, although 1800 calories might be fine for some people.  Note, however that this is based on not spending the entire $40.

For more details on the exact calorie counts and nutrition data that you'll see below, please see this link.  Nutrition Data is a great resource for analyzing your own diet.

http://nutritiondata.self.com/facts/recipe/3590259/2

Calories vs Cost

Since I quit before spending the full $40, this table shows that you can actually get to calorie counts of between 2300 and 2700 if you continue buying things using the same basic principles.  Of course, if you're full, then don't eat more than you want!

What Can I Eat?

The basic rules are that you only eat fresh foods, canned foods, or frozen foods.  Like Michael Pollan says, shop the perimeter of the grocery store.  "If it comes in a bag or a box, don't eat it" (e.g.  potato chips).  Also avoid any processed foods.  They are generally much more expensive and don't have the nutrition.  For example, Trader Joe's has 2 breakfast burritos for $2.99.  I guarantee that is a waste of money for someone on a low budget and also not something that is nutritionally dense.

Don't Do It!!!

Meat

I put a simple set of grass fed beef, ground turkey, and albacore tuna into the mix.  I also added eggs.  Eggs are a nutritional powerhouse and would be a key staple in a low budget diet.  There's a lot of rotational options here.   Also, it would be possible to buy larger, lower cost cuts of meat like a beef shoulder roast that you could put in a slow cooker and eat all week - like this one:

http://connectitecture.blogspot.com/2013/01/massive-pot-roast.html

Vegetables

Sorry about the pictures coming out sideways, but for some reason Blogspot is "too smart" about the pictures I took with my cell phone and refuses to render them in the proper orientation.

Here are a couple of rules for buying vegetables.  In general, we're looking at buying canned or frozen (see next part) foods because they are much cheaper.  Another important factor to consider is that both canned and frozen foods are much more nutritious that what you buy "fresh" in most grocery stores.  For more on this topic, I highly recommend Jo Robinson's book Eat Wild that breaks down the often multi-week journey that food takes on the way from the farm to the grocery store - losing nutrients all the way.  In contrast, canned foods and frozen are picked at the peak of ripeness and retain 3 - 5 times more of the key nutrients like anti-oxidants.

As noted above, frozen foods are often more nutritious than fresh and are also cheaper.  You can get 1 lb of numerous types of vegetables for $1.99 or less.  Load up!

Grains and Legumes

Rice, lentils, and beans make up a large part of this model diet.  I used "raw" versions of rice and lentils in the Nutrition Data section, so that makes a big difference in the calorie count.  (A cup of dry rice is much different than a cup of cooked rice).  I'm not sure the model diet is realistic in terms of the amount of rice that you'd be eating, but you can add rice to almost any meal, so it might work out.  I'd probably lean more toward the beans and lentils just because they are more nutritionally dense than rice - more vitamins and minerals than rice.

Fruit

Hey, who doesn't love a banana?  Well, if you don't then I'd try to get used to eating them anyway.  They are probably the cheapest fruit on the market, much cheaper than apples, for example.  (there's probably a trade subsidy lurking in the banana market).  I also added some strawberries in the model diet - again frozen because they're usually much cheaper than fresh.  But, if you find things on sale, by all means go with fresh for better texture and taste.

Fats

I am a huge fan of TJ's Olive Oil.  This one is probably one of the best tasting oils that you'll find and it is "unfiltered".  Without going into a lot of details, unfiltered is the way to go.  If you want to know why, buy Paul Pitchford's book Healing with Whole Foods and dig into Chapter 10.

Another fat that is key coconut oil.  You could either buy coconut milk or cream in a can like this, or else buy coconut oil in a 16 oz jar once in a while.   You can add this to a stew or something you put in a slow cooker and it is a great source of MCT's (medium chain triglycerides).  And, don't worry, if you add a can of this to a beef stew or other recipe, the other flavors and spices will overcome this and it won't taste "coconutty" at all.  (It does taste really good in a smoothy that you might make with the frozen strawberries).

A Treat

Yes, look!  Chocolate.  Don't go crazy on sweets, but you could break this bar into 1/4ths and then enjoy it once a week.  (Okay, I know most women would eat the whole thing at once - that's your choice).

Is It Nutritionally Balanced?

The bottom line on this model diet is that it is possible to eat a nutritious diet on a budget of between 30 and 40 dollars per week.  There are a few areas where it could be a challenge, so a bottle of multivitamins might be in order just to make sure.

Overall, the nutrient balance works out to a "high carb" diet - 59 Carbs / 23 Fats / 18 Protein.   I'm a Paleo Diet type of person, so this would not be something that I think is healthy, but it is broadly in line with official guidance such as from the USDA or AHA.  If I had to adjust to this level of spending, I would lean towards more fatty types of meats, less rice/more beans or lentils, and get the carbs below 50% of the mix.

Let's look at a few more factors (On all of these, for any percentage figures, you need to divide by 7 to get the daily numbers.  On the Nutritiondata.com page, I added the entire week's food together in one "recipe")

Nutrient Balance

Looking pretty good on vitamin coverage, but maybe maybe a few adjustments are in order to rotate more foods into the mix than my model diet.  We're doing very good on protein, getting close to 100g a day as well, which is plenty for almost anyone.

Vitamins Detail

On vitamins we get most of what we need.  For vitamin D, get out in the sun for 15 minutes a day and you're all set.

Minerals

Even dividing all these number by 7, you can see this does very well with the exception of Calcium.  Adding more leafy greens would help.

Fats

Note here that the Omega 6 to Omega 3 ratio is actually pretty good - only 7 to 1.  Most Americans are in the range of 12 or 15 to 1, and that is considered a pro-inflammatory diet.  Look up Chris Kresser on this topic if you're interested in understanding why the ratio matters.  Adding more fish and less poultry would help considerably.

Conclusions

It is possible to eat a healthy diet on $30 to $40 a week if you focus on the right kinds of foods.  Avoiding empty calories and processed foods is key to a successful diet.  Even if you aren't trying to stretch your food dollar, this diet is probably more healthy than most of what most Americans are eating today.

Cancel All Student Loans?

Well, this didn't take long...  Once Elizabeth Warren and Bernie Sanders and President Obama get together on an issue, the populist troika is guaranteed to result in something that hits the Taxpayers.

But, before you sign up, how about a little review of history (and economics)?

How Did We Get Here?

Here's a brief history of the student loan program, courtesy of the Treasury.

Key elements of the Federal student loan financing in the last 25 years:

• 1990: IHEs were given restrictions on eligibility for federal student loan financing, based on Cohort Default Rates (CDRs). Today, an institution loses its eligibility for the FFELP and Direct Loan programs if the most recent 3-year CDR is greater than 40% and / or if the three most recent 3-year CDRs are each 30% or greater.  
• 1998: Federal student loan debt cannot be discharged in personal bankruptcy. Private sector student loans cannot be discharged in bankruptcy after 2005.  
• 2008: Federal student loans could be discharged for permanently disabled people who have “no substantial gainful activity” (similar to the Social Security definition for disability) 
• 2010: The Student Aid and Fiscal Responsibility Act (SAFRA) of 2010 ceased the origination of federal student loans by private lenders, and as of July 1, 2010, all federal student loans are made directly by the Department of Education and funded by the U.S. Treasury Department. Newly originated federal student loans since July 1, 2006 are fixed rate loans.
• 2013: Introduction of Income-Based Repayment (IBR) alternative repayment schemes

As a result of the changes in 2010, 86% of all student loans are now backed by the taxpayer.  Further, more than 75% of these loans are made with no credit underwriting.   This is just as bad as the "no doc" or liar loans made during the housing crisis.  It is incredibly difficult to judge who will be a good credit risk, and the only way to manage the risk is by charging an appropriate interest rate.

Interest Rates and Risk

Do we charge an effective rate?  Let's see, according to this Internet meme, we're charging too much interest.

Using 6.8% as the rate, we'd have to have a very low default rate on the loans in order for the system to be solvent.   What kind of default rate do we have?  Let's ask the Treasury/Department of Education.  We're only charging 6.8% interest while we have a 9% default rate and another 23% at risk of default.  

Of course, you have to be careful about which headline you read to understand how much this will cost us.  Often, Congress passes laws that require novel or convoluted financial calculations to obscure the cost of programs.  That's what leads to a statement like:

CBO estimates that the program as currently designed yields budget savings of $135Bn from FY15 to FY24 (1) 

• Based on the current accounting methodology as prescribed by the Federal Credit Reporting Act of 1990 (FCRA). 

However, under fair-value accounting, the program results in an $88Bn cost to taxpayers 

• FCRA discounts expected future cash flows of the loan program using current UST rates, without accounting for market risk. 

• In contrast, under the alternative fair-value accounting approach analyzed by the CBO, “estimates are based on market values…which more fully account for the cost of the risk the government takes on.” 

 Given that you have seen the current 9% default rate and the 23% of at risk loans, what do you think?  Are we going to see that $135B savings, or are we going to drastically exceed the $88B cost once we "more fully account for the risk the government takes on?"

We actually have an estimate of that risk, courtesy of the Treasury as well:

Take the stock of FFELP loan balances ($402.5 bn as of FY Q3:2014) and multiply by the delinquency and default rate (37.5%). Then the contingent liability is $150.7 billion, if the Federal government is assumed to be the ultimate backstop for indirect loans.

Did Anyone Predict This?

Why yes, warnings have been sounded since right after the housing crisis as economists saw the preconditions for a bubble.  (This is the kind that neither Bernanke nor Krugman can spot until after it bursts).  For example:

While everyone is focused on housing right now, financial history tells us that another bubble lurks beneath the surface. Indeed, it was only eight years ago that we stood panicked at the prospect of dot.com companies going out of business and the chance to buy a house through innovative loan products seemed like a prudent decision. Predicting exactly where the next bubble lies is difficult, if not impossible. But given our research, we believe that a persuasive case can be made that higher education and the student loan industry are inflating a massive bubble. Trying to reform this bubble before it explodes should become a priority for lawmakers.  -  Richard Vedder, 2008

Of course, almost anyone could look at this chart and see that something strange was happening.
  

How Did College Get So Expensive?

Tuition increased dramatically, much faster than the rate of inflation.

The 61 percent increase in inflation-adjusted federal loans over the last decade leaves virtually all their students capable of paying more in tuition. The schools can either raise tuition, using the additional money to help build a better (more prestigious) college , or could leave tuition unchanged in an inflation-adjusted sense. The decision they made is obvious from U.S. Department of Education data. Over the last 10 years, after adjusting for inflation, tuition is up 48% at public schools and 24% at private schools.

Oh my god.  You mean if you pump money into a system that a bubble might form?  Just like the housing crisis, with the interest rates are too low, we find that people are enticed into making bad investments only later to find that there are no jobs for social science majors who would have been better off starting off working at Starbucks in the first place, rather than incurring $40K in debt and then starting their barista career. 

Defaults and Forgiveness

People might think that defaulting on the loan is an option.  Unfortunately, the laws were changed to make that a less palatable option.  For example:

• Tax Refund Offsets: IRS can offset the borrower’s income tax refund until the defaulted loan is paid in full. A number of states also have laws that authorize state guaranty agencies to take state income tax refunds.  

• Federal Benefits Offsets: The government can offset certain Social Security benefits to collect government student loans. Just as with other types of student loan collection, there is no time limit on Social Security offsets, according to a 2005 Supreme Court Case.  

• Wage Garnishments: The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education or a Student Loan Guarantor can garnish 15% of disposable pay(1) per pay period without a court order.  

• Effect on Credit History: Adversely affects credit for many years. If borrower defaults, loan will be listed as a current debt that is in default. The default will also be listed in the historical section of borrower’s credit report, specifying the length of the default.  

• License Revocations: A number of states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend or revoke a member’s professional or vocational license and, in some cases, impose a fine, when a member defaults on student loans

The Politics of Democracy

Of course, most of these issues simply add more motive for people to ask the government to step in and forgive them for their mistakes.  Politicians, who bear none of the consequences of the financial aspects of these decisions are glad to jump on the bandwagon and make promises that win votes and popularity contests.

What is missing from this graphic is the amount of money that the taxpayer will contribute to this loan forgiveness.  If, for example, you cap the monthly payment, that delays the recovery of the loan, and someone has to pay for that.  Further, if you then grant forgiveness after 10 or 20 years, then we have to write off the principle of the loan as well.  Who takes that loss?   Well, we'll know in 10 or 20 years, which is light years in election cycles.  And how many votes could be at stake?  How about we look at the number of possible voters by state, keeping in mind their families are also influenced by these policies.  Can you spot any Election 2016 "swing" states in this list?

At the same time, those poor students who took out these loans will have to learn about the consequences of compound interest, and it might as well be young in life.

The benefit for this poor soul is that she may also realize that saving and investing has the same compound effect, and if she saves just $59.47 a month and earn a decent return, she could have quite a bit of money set aside after 20 years.  (At 6% interest, that small savings amount would turn into over $28,000)

Is It About Improving Education?

I am a big fan of a good night's sleep and enjoy living in comfortable surroundings.  However, as the quote above shows, when the universities are showered in money, they don't direct it to research and education.  Instead, it results in the misallocation of capital due to the hand of the government in directing the economy.  

Today’s universities are congested with vast bureaucracies that stifle innovation and waste resources. Princeton University recently constructed a fancy dorm that cost $70,000 more per bed than the median home price. 

Some universities have taken and extra step and issued Century bonds to fund similar largesse.  100 years!   Imagine the compound interest calculations on that.

• President Barry Mills of Bowdoin College showed chutzpah last year in announcing that the school would borrow $128 million by issuing century bonds (at an average interest cost of more than $6 million a year, or about $3,400 for every student)
• Ohio State University borrowed $500 million for 100 years, mostly to build new dormitories. 
• The University of California issued $860 million in century bonds last year and, as an encore, an additional $2.39 billion in conventional debt recently. (If that sounds like a huge amount, consider that Harvard University, which has about 22,000 students compared with the UC system’s more than 225,000, is more than $6 billion in debt — about $300,000 for every student.)

So, cheap credit is fueling more wasteful investment that will eventually lead to the failure of the institution, or even higher tuition as they struggle under the debt burden because they made such short sighted decisions today.  Don't any of these universities have a decent Finance professor?

Consequences

Don't forget the human toll that this crushing debt is going to have on millions of people and their families.  

Nobody likes unpleasant surprises, but when Allison Brooke Eastman’s fiancé found out four months ago just how high her student loan debt was, he had a particularly strong reaction: he broke off the engagement within three days.
Ms. Eastman said she had told him early on in their relationship that she had over $100,000 of debt. But, she said, even she didn’t know what the true balance was; like a car buyer who focuses on only the monthly payment, she wrote 12 checks a year for about $1,100 each, the minimum possible. She didn’t focus on the bottom line, she said, because it was so profoundly depressing.

And

Student loan debt doesn’t only hurt the young. More seniors are carrying their college debt into retirement.
The total outstanding debt load held by seniors grew to $18.2 billion in 2013, up from $2.8 billion in 2005, according to a report released by the Government Accountability OfficeStudent loan debt doesn’t only hurt the young. More seniors are carrying their college debt into retirement.
The total outstanding debt load held by seniors grew to $18.2 billion in 2013, up from $2.8 billion in 2005, according to a report released by the Government Accountability Office....
As a result, more seniors are seeing a portion of their Social Security benefits garnished to pay back the debt. The number of people whose benefits were cut to pay for student loan debt grew to 155,000 in 2013 from 31,000 in 2002. Among those age 65 and older, the number grew by 500 percent over that time period, to 36,000 from about 6,000.

So as you sign that petition for loan forgiveness, just try to learn something from this fiasco and remember that even if you benefit from something in the short-term, it is hurting all of us in the long-term, often in ways you might not see.

References:

http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/November%202014%20QRCombined%20Charges%20for%20Archives.pdf

http://www.zerohedge.com/news/2015-03-14/cancel-all-student-debt-petitions-begin

http://www.zerohedge.com/news/2015-03-10/next-mega-bailout-deck-white-house-studying-new-bankruptcy-options-student-loan-borr

http://www.aei.org/publication/student-loan-changes-worthwhile-but-little-more-than-rearranging-the-deck-chairs/

http://www.aei.org/publication/whos-struggling-to-pay-back-their-student-loans-hint-it-may-not-be-who-you-think/

http://www.aei.org/publication/thomas-sargent-incentives-and-student-loan-forgiveness/

http://www.aei.org/publication/why-student-loans-might-be-the-next-recipient-of-a-taxpayer-bailout/

http://www.aei.org/publication/170000-student-loan-debt-ends-engagement/

http://www.aei.org/publication/the-next-market-bubble-student-loans/

http://www.washingtonpost.com/news/get-there/wp/2014/09/11/more-seniors-are-carrying-student-loan-debt-into-retirement/