Why the U.S. Should Adopt a (Revenue Neutral) Carbon Tax

 

As I have discussed previously, the evidence for global warming is overwhelming.  I had hoped that President Trump would publicly recognize this scientific reality and decide to stay in the Paris Climate Agreement.  Nevertheless, it will take more than three years for the U.S. to completely withdraw.
But in or out of the Paris Agreement, the best way for the U.S. to show leadership on this critical issue is to adopt a (revenue neutral) carbon tax.  The American Enterprise Institute has just issued a comprehensive report  on the desirability and feasibility of doing this.


Here is the gist of the AEI argument:

  • $40 per ton is often taken to be the social cost of carbon in the atmosphere. A carbon tax at this level would raise the cost of gasoline by 36 cents per gallon.
  • A carbon tax is a consumption tax. Taxing consumption rather than income promotes economic growth. The revenue neutral offset would likely be an income tax such as the payroll tax or corporate income tax.
  • A carbon tax need not disadvantage the U.S. globally since a border adjustment tax could be imposed on imports from countries without a carbon price regime.
  • Replacing arbitrary regulations. The primary carbon-reduction regulations currently in effect are the 1) Corporate Average Fuel Economy (CAFE) standards for vehicles and 2) Clean Power Plan which limits power-sector carbon emissions at the state level. Leaving carbon abatement decisions to carbon producers is far more efficient than leaving it up to regulators.
  • Growing public acceptance. 84% of registered voters, including 72% of Republicans, support actions to accelerate the development and use of clean energy. Even 49% of conservative Republicans say that “Americans will make major changes to their way of life to address climate change.”

Conclusion. For the U.S. to adopt a carbon tax would be an even stronger statement of world leadership than participating in the Paris Agreement.

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The GOP Needs to Get Healthcare Right This Time

 

The Affordable Care Act expands healthcare access in the U.S. but does nothing to control its costs. With its current majorities in Congress as well as holding the presidency, the GOP now owns the healthcare insurance crisis.  If the GOP doesn’t get it fixed right, it is almost inevitable that we’ll eventually end up with a single-payer system such as universal Medicare.


I have previously discussed one good way to fix the bill recently passed by the Republican House of Representatives.  But today I will take a more general approach proposed by Thomas Miller from the American Enterprise Institute.  Mr. Miller says that a replacement for the ACA should emphasize:

  • Private markets rather than a bureaucratic system.
  • Positive incentives to obtain and maintain affordable coverage instead of mandates and ever-growing regulations to buy what you don’t want.
  • Decentralized decision making by patients, their representatives and state and local officials.
  • Lower taxes, higher value choices and clearer rewards for performing better, working harder and acting more responsibly.
  • Better targeted subsidies that will ensure generous protection of our most vulnerable Americans.

General principles such as these will end both the individual and employer mandates and allow average Americans a greater choice in how they want to spend their resources to protect and enhance their health.

Conclusion. The ACA has taken us closer to the goal of universal healthcare for all Americans and there can be no retreat from this standard. But much better cost control can be achieved and this is what fixing the ACA should focus on.  A free market system for healthcare will work if it is set up in a fair and responsible manner.

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Is 3% Economic Growth Possible?

 

Donald Trump was elected President because of strong support from blue-collar workers in the battleground states such as Wisconsin, Michigan, Pennsylvania and Ohio. The American Enterprise Institute scholar, Nicholas Eberstadt, has explained clearly why this happened.  It is largely a result of a slowdown in economic growth in recent years which has hit blue-collar workers especially hard.

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Can this recent slow growth trend be reversed?  The economist, Edward Lazear, has a positive answer to this question in today’s Wall Street Journal.  According to Mr. Lazear:

  • 3% growth is the long term norm. The annual growth rate in the 30 years preceding the 2007 recession was 3.1%. It has averaged just 2% annually since the end of the recession in June 2009.
  • GDP growth is the sum of two components: growth in productivity and in labor hours. Historically productivity has grown at a rate of about 2% per year and labor at about 1%.
  • Nonfarm labor productivity rose by a total of 7% between 2009 and 2016 which amounts to only 1% per year. It rose 18% between 2001 and 2008 or 2.3% per year.
  • Both President Trump and the House Republicans advocate business expensing (immediate tax write-offs for new investment) as an important part of tax reform. It has been estimated that just this one change in policy will induce an increase in GDP of from 5% to 9% over ten years. This would raise GDP from the current 2% annual growth to between 2.5% and 2.9% annually.
  • The Social Security Administration predicts no increase in the U.S. population age 20 to age 64 between 2020 and 2030.
  • But note that the labor participation rate fell during the recession by 2% among Americans between ages 25 and 54, the prime working age. Two drivers of this loss of workers are: 1) a large increase of the disability rolls and 2) the fact that the ACA will likely reduce the number of hours worked by about 2% between 2017 and 2024.
  • Eliminating burdensome business regulations will also help significantly.

Conclusion. There is clearly much that can be done to speed up both labor productivity and the number of hours worked by Americans. President Trump and the Republican Congress have a good shot at increasing economic growth to 3% annually.

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The Origins of Trumpism II. A National Crisis for Working Men

 

The American Enterprise Institute’s Nicholas Eberstadt has performed a valuable national service with two recent publications: “Men without Work” and “Our Miserable 21st Century”  These works lay out in great detail what has gone wrong in our country in the past 16 years:

  • Overall household wealth has doubled as a result of a surging stock market fed by the Federal Reserve policy of quantitative easing.
  • The recovery from the crash of 2008 has been singularly slow and weak compared to the 1947 – 2007 trend line.
  • The work rate for Americans aged 20 and older has declined by 4% from 66% to 62%.
  • Half of all prime working age male labor-force dropouts take opioid medication on a daily basis paid for by Medicaid. 57% of this population class is collecting disability benefits.
  • 17 million male ex-prisoners and convicted felons are now in our midst and largely unable to find the employment which would lead to productive lives.

Here is Mr. Eberstadt’s initial prescription for addressing this very serious social problem:

  • Revitalize American business and its job-generating capacities. According to the Brooking Institution’s Ian Hathaway and Robert Litan, “business deaths now exceed business births for the first time in the thirty-plus-year history of our data.”capture63
  • Reducing the immense and perverse disincentives against male work embedded in our social welfare programs. For example, U.S. disability programs are subject to widespread abuse and gaming. Social welfare programs should emphasize a “work first” principle emphasizing training and education, job placement, and tax credits, etc.
  • Drawing men with a criminal record back into productive work life. Note that the huge increase in America’s ex-prisoner and ex-felon population in recent years coincides with a dramatic drop in rates for both violent crime and property crime. This suggests that former criminals do not pose a continuing danger to society.

Conclusion. For the future prosperity and social cohesion of our country addressing this problem should be a very high priority. Let’s hope that President Trump gets the message.

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The Origins of Trumpism

 

Everyone is trying to figure out what Donald Trump is all about and I am no exception. My last two posts, here and here, compare his positives and negatives and what he is doing well so far and also not so well.
The American Enterprise Institute’s political economist, Nicholas Eberstadt, has an article in the current issue of Commentary, “Our Miserable 21st Century,” describing very cogently the economic and social conditions which have led to the election of Donald Trump as President of the United States. Says Mr. Eberstadt:

  • The year 2000 marks a grim historical milestone for our nation. The warning lights have been flashing for 15 years and now these signals are impossible to ignore.
  • First of all, the estimated net worth of American households has more than doubled between 2000 and 2016, from $44 trillion to $88 trillion (see below).capture103
  • At the same time the recovery from the crash of 2008 has been singularly slow and weak. By late 2016 per capita output was just 4% higher than in late 2007. In effect the American economy has suffered something close to a lost decade (see below).capture104
  • Then there is the employment situation. Between 2000 and 2016 the work rate for Americans aged 20 and older declined by 4% from 66% to 62%. To put this in different words: if our nation’s work rate today were back up to its start-of-the-century highs, 10 million more Americans would currently have paying jobs (see below).capture105
  • Half of all prime working-age male labor-force dropouts (totaling 7 million men) take opioid medication on a daily basis, typically paid for by Medicaid. In fact, 53% of prime-age males not in the labor force are enrolled in Medicaid.
  • Of the entire un-working prime-age male Anglo population in 2013, 57% were collecting disability benefits.
  • Currently 17 million men in America have a felony conviction somewhere in there past. This amounts to one of every eight adult males in the country. It is difficult for felons to find work and therefore to become productive members of society.

Concludes Mr. Eberstadt, “The abstraction of inequality doesn’t matter a lot to ordinary Americans. The reality of economic insecurity does.  The Great American Escalator is broken – and it badly needs to be fixed.  With the election of 2016, Americans within the bubble (of affluence) finally learned that the 21st century has gotten off to a very bad start in America.  Welcome to the reality.  We have a lot of work to do together to turn this around.”

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How to Confront Vladimir Putin

 

My last post expressed my biggest worry about Donald Trump: that he won’t be sufficiently firm with Vladimir Putin to persuade him to stop his aggression in Eastern Europe. The American Enterprise Institute’s Leon Aron has an excellent analysis of the Putin problem, “Changing Putin’s Mind.”  Says Mr. Aron:

  • Vladimir Putin has called the demise of the Soviet Union “the greatest geopolitical tragedy of the 20th century.” The overarching objective of Putin’s policies, both domestic and external, is to recover and repossess the political, economic and geostrategic assets lost by the Soviet state when it fell apart in the 1990s.
  • In Putin’s first two terms as Russian President, from 2000 – 2008, he focused on restoring the economy. But by 2012, when Putin returned to power, the domestic investment climate had slowed to a crawl with low oil prices causing a severe recession. Putin shifted the foundation of his regime’s legitimacy from economic expansion to patriotic mobilization.

    capture91

  • The reason for the annexation of Crimea, war on Ukraine and intervention in Syria is that restoring Russia’s superpower pride is essential to his regime’s legitimacy. This is the point of a classic Soviet poster (attached) with a Russian soldier admonishing Uncle Sam, “Don’t you fool around!”
  • In Syria, Putin’s goal is to help Bashar al Assad, not defeat ISIS, and so Assad must not be restored. This could be accomplished by grounding the Syrian air force, enforcing no-fly zones, etc. and forcing Putin to distance himself from Damascus.
  • In Ukraine, Putin will not stop unless battlefield dynamics begin to change by, for example, sending Ukraine defensive anti-tank and anti-aircraft weapons, radars to pinpoint Russian positions, etc. Putin must be forced to make a choice between increasing Russian deployment and thus casualties or seeking a genuine peace agreement.

Conclusion.  The choice is between two admittedly risky and unpleasant options: confronting Putin now or see him emboldened to the point where he attempts to destabilize a member state on NATO’s eastern flank.

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Getting American Health Care Straightened Out II. Medicare

 

One of the major problems facing the United States today is the high cost of healthcare. We spend almost 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country.  A big reason for the high cost is the low out-of-pocket consumer spending on health services in the U.S. 
My last post discusses a general plan, involving catastrophic health insurance and health savings accounts, for getting the overall cost of healthcare under control.

capture82Once we have a handle on the overall problem, we then need to focus on the cost of the Medicare entitlement program for retirees.  The problem here is easy to understand.  In just 15 years enrollment in Medicare will increase to over 80 million beneficiaries from 57 million today.  Likewise there are 3.1 workers per beneficiary today and there will be only 2.4 in 2030 (see above chart).

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The second chart demonstrates that Medicare will be the major component of increases in federal spending in the coming years (with the other entitlements of Social Security and Medicaid following right behind).
So the question is: how do we control Medicare spending within the context of overall health-care reform?  Here is a proposal from James Capretta of the American Enterprise Institute:

  • Medicare recipients would receive fixed payments toward the coverage option of their choice, based on their age, income and health status. The traditional Medicare program would be one of the choices. Enrollees choosing less costly coverage options would see a reduction in their premiums.
  • Premium payments would be comparable to subsidies and tax credits received from the reformed Affordable Care Act.
  • Privately run managed care plans provide benefits at far less cost than traditional Medicare. Beneficiaries would share in the savings.

Conclusion. It needs to be emphasized as strongly as possible that the point of Medicare reform is to lower costs to both individuals and the government, sa that Medicare can be preserved indefinitely into the future.

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