One of Texas’ most prominent left-leaning economists knows exactly why its power grid failed

Power lines are seen on February 19, 2021 in Texas City, Texas
Power lines in Texas City, Texas.

  • Economist James K. Galbraith said policymakers failed Texas during the state’s recent power outage.
  • Texas’ deregulated electrical system incentivized the cheapest production without accounting for resilient machinery.
  • Galbraith says the only way to fix the system is to turn it into a public utility.
  • Visit the Business section of Insider for more stories.

Millions of Texans lost power last week and were stuck living in freezing conditions as their electrical bills skyrocketed. The crisis was totally preventable, according to a left-leaning economist who teaches at the University of Texas at Austin, and the reason why has to do with the state’s deregulated electricity system.

James Kenneth Galbraith, a government professor at the University of Texas at Austin, wrote in a Project Syndicate commentary that these failures were baked into Texas’ power grid as soon it embraced deregulation under former Gov. Rick Perry in 2002. 

The Texas system had three vulnerabilities, according to his commentary:

  1. Competition to provide power in the cheapest way possible meant that machinery was not well-enough insulated against extreme cold;
  2. Wholesale prices could fluctuate while retail prices depended on consumer contracts;
  3. And prices would rise when demand for power was the greatest.

Rather than working to overcome the vulnerabilities, Galbraith wrote, policymakers did nothing. And he has a unique perspective on the matter of government regulation. His father was famed 20th-century economist John Kenneth Galbraith, a former Harvard professor and advisor to several Democratic administrations, who long advocated thoughtful government intervention – and regulation.

John Galbraith’s views came back into vogue after the Great Recession of 2008, and James’ work in Texas has long swum against the state’s deregulatory tide, a fact brought into vivid relief by the current power crisis. In his own right, James has formerly served as executive director for the Joint Economic Committee of the US Congress and directs the University of Texas Inequality Project.

James Galbraith took Insider inside how Texas fell apart and left its residents freezing amid a polar vortex amid a pandemic.

The problems with Texas’ deregulated system

Galbraith told Insider that while Texas created an incentive for energy producers to produce in the cheapest way possible, it didn’t provide another to build resilience into the system for extreme events. This caused demand to go up while supply for electrical sources went down, causing major losses of power.

“The facilities that are fed by natural gas ran into a freezing up of their meters, pumps and fuel lines. In some cases, the power plants went offline and they had to cut power to the wells,” Galbraith said. “So that was kind of a death spiral. At the same time, the consumer demand was going up very quickly, and in an electrical system, supply and demand have to be balanced at all times.”

When Texas moved to a deregulatory electrical system in 2002,  it handed over the reigns to the nonprofit Electrical Reliability Council of Texas, which has around 70 providers. These companies competed with each other to keep prices low for consumers, but they also created a market where a surge in demand could overpower supply, as happened in early 2021.

Galbraith said the fossil fuel industry made “enormous contributions” to political leaders like Gov. Perry, who continued to support the fossil fuel industry as Sec. of Energy under former President Donald Trump.

Perry’s views seem unchanged: he wrote in a blog post on February 17 that Texans would rather continue dealing with blackouts than having a regulated electricity system.

How the crisis could have been prevented

When Texas previously experienced extreme cold weather in 2011, Galbraith said that should have made clear to policymakers that the state’s deregulated system was unstable, but they didn’t take action then.

“They should have kept the system under a full-fledged regulatory regime, which other states have,” Galbraith said. “And that meant that they should have been supervising the generating companies to ensure that they were doing a proper job of being prepared for worst-case scenarios. It’s not hard to work out what they should have done.”

If the state’s leaders took action in 2011, the 2021 freeze could have gone over much differently. But since it didn’t, Galbraith said he’s not sure if there’s a way forward that doesn’t involve taking over the whole system and making it a public utility that decides on distributions and investments.

“There’s so many weak links in the system right now that it’s hard to believe that there’s any fix available that’s short of a really comprehensive reformation of the system. I’m certainly prepared to advocate that.”

Moving forward

Lawmakers have responded to Texas’ crisis in varying ways. Texas Sen. Ted Cruz came under fire for going to Cancun during the power outage, and current Gov. Greg Abbott blamed solar and wind as causes for the blackouts and said on Fox News on February 16 that the outages show “how the Green New Deal would be a deadly deal for the United States of America.” 

Rep. Alexandria Ocasio-Cortez of New York, who first introduced the Green New Deal legislation, responded by raising nearly $5 million for Texans confronted with costly electrical bills. Similar efforts were spearheaded by former Rep. Beto O’Rourke, who lost to Cruz in the 2018 midterms.

 

 

Galbraith pointed to the electrical company Griddy, which supplied thousands of Texans with electricity at the wholesale price during a given time, and under a deregulated market, the prices spiked during the freeze, causing customers to face $5,000 electric bills for just five days, the Dallas Morning News reported

Some Texans owed Griddy over $15,000, according to The New York Times, while the Wall Street Journal reported that Texas electric bills were $28 billion higher under the deregulated system.

However, Galbraith said that while the skyrocketing of electrical bills is a significant problem, the biggest issue is the failure of the system as a whole to provide power to millions of people.

“You have to ask: who’s liable? And I think the political leadership in the state of Texas is liable,” Galbraith said. “Because the people didn’t sign up to for the power system that was going to cause the pipes in their homes to break, and that is not the way a responsibly run system would work. They’re the ones who are stuck with those bills. That’s the scandal.”

Read the original article on Business Insider

A Stanford finance professor explains why there’s no such thing as ‘deregulation’ – no matter what politicians claim

Federal Reserve coronavirus
A man wearing a mask walks past the US Federal Reserve building in Washington DC on April 29, 2020.

  • Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the “Pitchfork Economics” podcast with Nick Hanauer and David Goldstein.
  • In this week’s episode of Pitchfork Economics, Hanauer and guest cohost Jessyn Farrell spoke with Anat Admati, a finance professor at Stanford’s Graduate School of Business, on how banking is regulated in the US.
  • Admati says it’s natural for elected leaders to create more safety nets to make banking safe for American consumers.
  • The concept of government ‘deregulation’ won’t result in less regulations, Admati explains, but instead will allow banks to create their own regulations that can be prone to negligence and fraud.
  • Visit Business Insider’s homepage for more stories.

It’s quite possible that the greatest trick that trickle-downers ever pulled was framing the battle over government’s relationship to business as regulation versus deregulation. It sounds simple, a binary choice between all or none: Either you want businesses to be regulated, or you want to deregulate the market. “Deregulation” in this context sounds sleek, minimalist, and freeing, while “regulation” sounds cumbersome and complicated.

But here’s the dirty little secret about deregulation: It doesn’t really exist.

There’s no such thing as “fewer regulations,” only a shell game that shifts ownership of regulations from one authority to another. What we call “deregulation” simply stands for a belief that corporations should act only in ways that suit their preferences – with no consideration for anything beyond shareholder value.

Read more: The newly passed California Privacy Rights Act expands consumer privacy laws. Here are 3 crucial ways businesses should prepare in 2021, according to a veteran cybersecurity expert

In other words, human activity within a society is always regulated – the only question is who’s doing the regulating. 

All that really changes when, say, the Trump administration moves to roll back regulations on oil drilling in the Alaskan Arctic, is that the government cedes control over drilling regulations, handing the reins to the oil industry. While the government’s regulations sought to protect unspoiled public lands, the oil industry’s “regulations” seek to enrich shareholders and executives at the public’s expense by exploiting irreplaceable environmental resources in exchange for a quick buck. 

Back in 2008, we saw what happened when the federal government systematically ceded control of regulations to the banking industry over the span of decades. Left to their own devices, the banks set in motion a mortgage crisis by building up a pyramid scheme that nearly brought down the global economy. The banks’ regulations favored immediate profits over long-term sustainability, and the rest of us paid the price.

That economic collapse is part of the reason why this week’s guest on the Pitchfork Economics podcast, Anat Admati, half-jokingly refers to herself as “a recovering finance professor.” Admati, who still teaches finance at the Stanford Graduate School of Business, says the egregious failures of unfettered capitalism have caused her to look at banking regulations in a new way. 

“I’ve become very interested in why capitalism and democracy are failing us altogether,” Admati told Pitchfork Economics hosts Nick Hanauer and Jessyn Farrell. Admati’s fascination with regulatory collapses led her to her role as director of the Corporations and Society Initiative, which seeks “to promote more accountable capitalism and governance,” and also inspired her to coauthor a book titled “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It.”  

Admati realized that the financial industry was ill-equipped to regulate itself in 2013, when Wells Fargo CEO John Stumpf argued against new Federal Reserve regulations that would require the bank to stop making risky, debt-laden bets like those that caused the financial crisis. Stumpf bragged that “because we have this substantial self-funding with consumer deposits we don’t have a lot of debt.”  

Admati was astonished. “In other words,” she explained, “he forgot that my deposit is basically his debt to me, and he forgot that it’s a liability to him. Why? Because I don’t behave like a creditor.” 

Even though Wells Fargo technically owes its customers the money that they entrust them with, the FDIC insures those deposits and the government has proven that it’s ready and eager to protect giant banks from crises of their own creation. 

Read more: We mapped out the ghost kitchens run by ex-Uber CEO Travis Kalanick’s CloudKitchen and competitor REEF Technology. See where the fight for ghost kitchen dominance is heating up.

It’s only natural that elected leaders create “more and more safety nets to make [banking] safe.” 

“But the safety net has enabled more recklessness because perversely it created ever more complacency and also removed any market forces from this system,” Admati added.

In short, a CEO whose bank was buffered by one comprehensive set of federal regulations that were created to protect consumers from financial negligence was arguing against other industry regulations that would have caused Wells Fargo to behave responsibly. It’s a deeply layered ecosystem of regulations – seen and unseen – that often contradict each other in complicated ways.

To a trickle-downer, this might sound like a story highlighting the importance of deregulation. But remember – that’s just an argument for letting Wells Fargo create its own regulations, which isn’t a terrific idea, given the institution’s extensive history of fraud. The best answer is to regulate smarter – to realistically gauge the purpose of each regulation, ascertain how it can benefit the broadest number of people, and enact it so that it functions as efficiently and successfully in the real world as it does in theory. 

“We have to have a system in which the government works for us,” Admati concluded. “If we don’t understand that we need an effective government – not big or small, just competent and effective – to actually create an economy that functions, then that’s why we’re in the trouble we’re in.”

Read the original article on Business Insider