Why We Need a Carbon Tax IV. The Economic Risks of Climate Change

Posted on June 22, 2014 by jackheidel

I have now posted more than 200 entries on my blog. I have discussed a wide variety of fiscal and economic issues in the last year and one-half. But there are really, in my opinion, just a fairly small number of basic themes in my posts, such as:

Eliminating deficit spending so that we can shrink our national debt over time to a substantially lower level than the current 73% of GDP.
Boosting our economy in order to put more people back to work as well as bringing in more tax revenue.
Maintaining an activist foreign policy including a sufficiently strong military force to protect our free and democratic way of life.
Maintaining high citizen morale by addressing other critical domestic issues such as economic mobility and increasing income inequality.
Addressing natural threats to our way of life such as global warming.

Today’s New York Times has an excellent article on global warming “The Coming Climate Crash” from a surprising source, former Secretary of the Treasury, Henry Paulson. He was in office when the credit bubble burst in 2008 and is therefore an expert on crisis management. His argument is that global warming presents a strong economic threat as well as an environmental threat. It therefore should be addressed by an effective economic policy, such as a carbon tax. He points out that:

Global warming is a far more intractable problem than a credit bubble, not at all amenable to a relatively quick fix by government action.

A threat from nature like global warming is not an ideological issue because it affects all of us in the same way, conservatives and liberals alike.
A future with more severe storms, deeper droughts, longer fire seasons and rising sea levels creates huge economic risks which we ignore at our great peril.
A carbon tax doesn’t outlaw the use of fossil fuels but rather creates a huge economic incentive for developing carbon sequestration when fossil fuels are burned.

Government regulation of fossil fuels by the Environmental Protection Agency represents a timid and arbitrary half measure that won’t have nearly the impact of a sound economic incentive like a carbon tax. Let’s get serious and do things the right way!

Crony Capitalism and Economic Growth

Posted on June 19, 2014 by jackheidel

“If there is one thing that populists on the left and right can agree upon, it is disdain for crony capitalism. It is a distaste for the cesspool of Washington influence in which big-business lobbyists canoodle with lawmakers to get their way. It is anger at corporate welfare enriching America’s biggest companies at the expense of the little guy.” So says the economics journalist Neil Irwin in today’s New York Times, “Why we’re All Crony Capitalists, Like It or Not”.
Specifically he is talking about the current debate in Congress over whether or not the Export-Import Bank of the United States should be continued. It mostly helps big corporations like Boeing and General Electric finance sales to other countries. But there’s a trade off. If it shuts down, then American corporations will be at a disadvantage compared with international competitors who get help from their own governments.
In fact, crony capitalism has a much wider scope than this. Each year deductions and loopholes in the U.S. tax code, referred to euphemistically as tax expenditures, total $1.2 trillion in lost tax revenue. As the above chart from the Congressional Budget Office shows, 50% of these tax reductions are enjoyed by the highest earning 20% of all U.S. households, with 30% of the benefits going to just the top 5%.
Many experts say that our stagnant economy is caused by a lack of consumer demand, in turn caused by the huge loss of wealth during the Great Recession. If lower and middle income people had more money, they would surely spend it and our economy would grow faster. This line of reasoning suggests a way forward!
We should enact fundamental, broad-based tax reform, whereby individual tax rates are lowered across the board, in a revenue neutral way, paid for by greatly shrinking the deductions and loopholes enjoyed by the top 5% of wage earners. The two-thirds of taxpayers who do not itemize their deductions will receive a correspondingly significant increase in income which they are most likely to spend.
A plan like this would not only boost the economy but also boost public morale by lessening inequality. A win, win plan!

How Not to Help Black Americans

Posted on June 17, 2014 by jackheidel

“It is important and right that all privileges of the law be ours, but it is vastly more important that we be prepared for the exercise of these privileges.” Booker T. Washington, 1856 – 1915

How do we lift up the black underclass, the school dropouts, gang members, and drug dealers who become criminals and spend their lives as a drag on society? The Wall Street Journal’s (black) editorial writer, Jason Riley, addresses this question in today’s paper, “How Not to Help Black Americans”. As he says “Upward mobility depends on work and family. Government policies which undermine the work ethic – open-ended welfare benefits, for example – help keep poor people poor. Why study hard in school if you will be held to a lower academic standard? Why change antisocial behavior when people are willing to reward it or make excuses for it?”
A few days ago, Robert Balfanz, the Director of the Everyone Graduates Center at John Hopkins University in Baltimore, wrote in the New York Times, “Stop Holding Us Back”, that even though 80% of Americans now graduate from high school, 33% of the nation’s African-American and Latino young men will not graduate. Half of these non-graduates go to a total of just 660 high schools out of a total of 12,600 high schools in the country. He suggests the following:

Refocus such high-poverty high schools in order to identify by the middle of ninth grade the students most likely to drop out.
Set up early warning systems so that adults can step in at the first sign that a student is in trouble.
Employ additional adults to support students who need daily nagging to succeed, especially during the key transitional years in sixth and ninth grade.

Such a plan has been instituted in the Chicago Public Schools as described in “Preventable Failure”. As the above chart shows, it has led to dramatic improvement in the on-track rate of at-risk ninth graders in CPS.
These two school programs, in Baltimore and Chicago, represent what we should be doing to help all minorities, especially blacks, succeed in life. Resources provided for such programs will do much more to eliminate poverty than expanding conventional welfare.

Escaping the Student Debt Trap

Posted on June 15, 2014 by jackheidel

Student debt in the U.S. now tops $1.2 trillion with 37 million borrows, 5.4 million of whom have already defaulted. President Obama has proposed to expand a program which allows students to repay debt based on what they earn, eventually forgiving the balance. Massachusetts Senator Warren has proposed taxing millionaires to pay for student loan refinancing. Small scale free market proposals abound. What is badly needed is a sensible broad-based public program approved by Congress.
The Brookings Institution has recently proposed just such a model for student loan repayment “Loans for Educational Opportunity: Making Borrowing Work for Today’s Students”. It is based on four observations:

Moderate debt for the typical student borrower. 69% of students have borrowed $10,000 or less.
The high payoff of a college education. Over a lifetime the holder of a bachelor’s degree earns several hundred thousand dollars more than a high school graduate. Even those who attend college but do not graduate will experience an income gain of about $100,000. Postsecondary education should be encouraged as widely as possible.
The highest rates of default are on typical loan balances. The average loan balance in default is $14,000 while the average loan balance in good standing is $22,000.
The highest rates of default are among young borrowers. For borrowers under age 21, 28% have defaulted, for borrowers between ages 30 and 44, 18% have defaulted and it is 12% for borrowers aged 45 and older.

The Brookings’ authors propose that student loan payments be deducted from pay by the employer, in the same way as for income taxes and Social Security. The payment rate would be only 3% of the first $10,000 in annual earnings and would rise with higher earnings topping out at 10%. Loan payments will stop when the loan is repaid or after 25 years, whichever comes first. Various measures can be adopted to protect against deadbeats. See the Brookings report for details.
The fairest system would be for all students, past and present, to be put into a program like this. Nobody would be expected to pay during periods of unemployment. Interest rates could be adjusted from year to year to make the program self-supporting. Something along these lines is badly needed!

A Scarred U.S. Economy

Posted on June 12, 2014 by jackheidel

Today’s New York Times has an article “U.S. Economic Recovery Looks Distant as Growth Stalls”, summarizing the predominant view of economic experts that annual growth of the U.S. economy in the future is now expected to be only 2.1%, about two-thirds of the historical rate of 3%.
This is, of course, disappointing since it means continued stagnation of household incomes as well as high unemployment. Much of the projected decline in GDP growth is attributed to structural factors such as:

The number of Americans receiving disability benefits has increased significantly in recent years. Few of these people will ever return to work.
Fewer immigrants are arriving. There are now two million fewer people over the age of 16 than had been projected in 2007.
The birth rate has declined each year from 2007.
Government spending on public investment has fallen by 8% since the recession started. Corporate investment has been lackluster.
Fewer businesses are being created and existing businesses are spending less on research and development.
Rising income inequality results in “secular stagnation” whereby there is insufficient consumer spending to stimulate economic growth.

There are lots of head winds slowing down the economy. As the NYT article says, “for more than a century the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock.” Treasury Secretary Jacob Lew says that the government now expects annual growth to be permanently slower.
Should we resign ourselves to this pessimistic attitude or should we consider whether or not there is any practical and feasible alternative?
There is, in fact, an easy way to speed up growth. Broad-based tax reform would do it. By this I mean lowering tax rates across the board paid for by closing loopholes and shrinking the deductions which primarily benefit the wealthy. This would place more income in the hands of the two-thirds of taxpayers who do not itemize deductions. These are typically middle and lower income folks with stagnant incomes. They would spend their tax savings, thereby giving the economy a big boost.
This would also amount to redistribution from the rich to the poor, making us a more equal society in the process. It’s a win-win for our economy and for social harmony. What’s holding us back?

Raising America’s Pay II. How Can We Do It?

Posted on June 10, 2014 by jackheidel

My last post “Raising America’s Pay” addresses a new report from the Economic Policy Institute, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. Its starting point is the now generally accepted view that wages for the typical American worker have been flat ever since the early 1970s even though labor productivity has continued to rise steadily.
The EPI authors recognize that globalization and the growth of technology have contributed to wage stagnation even though they blame malign policy decisions as well. I do agree with them that the resulting increase in economic inequality is detrimental to America. I also agree with them that the way to address inequality is for wages to go up. The best way to accomplish this is to lower unemployment by increasing economic growth. This will happen when large numbers of consumers start spending more money, thereby increasing demand. Does this sound like a vicious circle? It need not be!
The above chart from the Wall Street Journal shows that the net worth of U.S. households has now more than recovered from the Great Recession. The problem is that most of this new wealth has gone to the people with the highest incomes who are more likely to save it. What we need to do is “redistribute” (gasp!) some of this vast sum of new wealth back to middle and lower income people who would be much more likely to spend it.
There is a straightforward way to do this. Broad based tax reform! Lower everyone’s tax rates paid for by closing loopholes and shrinking deductions which primarily benefit the wealthy. This will be a pure gain in income for the two thirds of Americans, about 80 million, who pay income taxes but do not itemize deductions, most of whom are in the lower and middle income brackets. These people are likely to spend most of their new income, thus giving the economy the big boost that it needs!
Our leaders in Washington should be able to figure this out!

Raising America’s Pay

Posted on June 8, 2014 by jackheidel

The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate.
First of all, the authors make reasonable arguments that:

The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
Wage stagnation stalls progress in reducing poverty.
Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.

Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?” Here is where the report becomes controversial!

The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
Falling top tax rates have increased the income share of the top 1 percent.
The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.

The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time. The question, of course, is how to address this problem most effectively. In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished. I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI. We have a lot to look forward to!

Why We Need a Carbon Tax III. Natural Gas Is Not a Real Solution

Posted on June 5, 2014 by jackheidel

Most people agree that global warming is for real and that it is caused by a buildup of greenhouse gases in the atmosphere, mostly from carbon dioxide. We need to respond to this existential threat and the U.S. should lead the way. The Environmental Protection Agency’s new regulations call for a 30% reduction in carbon emissions, from 2005 levels, by 2030. Since fracking has led to a natural gas boom in the U.S. and the burning of natural gas only emits half as much carbon as the burning of coal, it is very likely that the new EPA rules will lead to a major replacement of coal by natural gas in U.S. energy production.
But there is a downside to this approach as pointed out in yesterday’s New York Times, “The Potential Downside of Natural Gas,” as follows:

Natural gas is starting to replace nuclear power which has no carbon footprint. Last year five reactors announced that they would close because of the low cost of natural gas. This will increase CO₂ in the atmosphere.
Fracking for oil produces natural gas as a side product which may not be easily marketable. This excess natural gas is either burned off or escapes unburned releasing methane which causes even more damage than CO₂.
The low cost of natural gas is also slowing down the development of renewable energy sources such as wind and solar power.

A far more efficient system of reducing carbon dioxide in the atmosphere would be to tax its emission from any fuel source. The most commonly mentioned amount is $20 per ton which would raise the price of gasoline by about 10 cents per gallon. This way the use of all forms of fuel, including coal, oil and gas, would be taxed equally based on how much carbon they emit. This would create a huge economic incentive for developing carbon capture in fuel combustion, which is the ultimate solution to eliminating CO₂ emissions.
In other words, we have a huge problem on our hands which needs an effective solution. Half measures will not get the job done and will just cause lots of confusion and political controversy in the meantime. It’s time for some real leadership!

A Strong Country Requires a Strong Economy

Posted on June 3, 2014 by jackheidel

“Ukraine is a wake-up call for what a post-American world would look like” declares the foreign affairs expert Walter Russell Mead in an article “Putin Did Americans a Favor” (http://online.wsj.com/articles/walter-russell-mead-putin-did-americans-a-favor-1401662270) in yesterday’s Wall Street Journal.
“For those willing to see, the signs of what a post-American world would look like are easy to discern. We can look at Bashar Assad’s murderous campaign in Syria to see how Iran thinks power should be used. To see what Saudi Arabia thinks about human rights and liberal values, follow events in Egypt and Pakistan. China would become more aggressive in a post American world, and the chances of Sino-Japanese conflict would increase. … In Europe, only power keeps or can keep Russia from rebuilding its old empire.”
“Those who think American decline is inevitable must face a tragic truth: The eclipse of American power will be a disaster for our economic interests, for the values we cherish and, in the end, for our security at home. What stability, peace and legality now exist in the international system are there because the U.S., with important help from allies and partners, made great sacrifices to build and secure them.”
America’s decline is not inevitable but neither is our continued success. As much as anything else, it depends on the strength of our economic system. We need to give much more attention to making our economy grow faster. This will create more jobs and better jobs and thereby boost national morale. It will bring in more tax revenue for paying our bills. In addition, projecting national power is very expensive. We can and should continue to insist that our defense budget be lean and efficient. But there is a limit as to how far we can go in this direction. Ultimately defense spending will have to increase as a percentage of GNP. This can only be accomplished with a robust economy.
As I have repeated many times in my blog posts, the best strategy for making the economy grow faster is to encourage more consumer spending by lowering individual tax rates and to encourage more entrepreneurial activity by reducing tax rates on small business. Such tax changes can easily be paid for by closing loopholes and shrinking tax deductions for the wealthy. But there has to be a political will to do this.
Can this be accomplished? I don’t know but our future as a free and prosperous nation depends on it!

Immigration Reform Will Benefit Nebraska

Posted on June 1, 2014 by jackheidel

Today’s Omaha World Herald has an excellent article, “A Window on Immigration.” It points out that 2.46% of Nebraska residents as of the 2010 census were illegal immigrants. This works out to about 45,000 illegal immigrants in Nebraska today compared to just 3,000 as recently as 1980. This is really a shocking figure. It is roughly the same as the population of Nebraska’s fourth largest city (Grand Island) or Nebraska’s fifth largest county (Buffalo). Nebraska’s unemployment rate of 3.9% is really a labor shortage. It needs these 45,000 illegal immigrant workers!
Why is it so difficult for our national leaders to solve this problem? It’s crazy to think that we are going to round up 11 million illegals throughout the country and dump them into Mexico unless they are willing to “self-deport.” Amnesty and citizenship are bogus side issues. Here is the outline of a simple plan which would solve the problem:

Give all businesses a limited time period, perhaps six months or a year, to present a list of their current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa along with all necessary legal papers. These papers would belong to the individual worker who could use them to change employment from one business to another.
Going forward, businesses would be authorized to hire additional foreign workers as needed who would automatically qualify for guest worker visas. Such visas would be granted in the country of origin thereby avoiding the need for illegal entry into the U.S.
As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll. Penalties for non-compliance would be severe.
Guest workers would be eligible to apply for citizenship after a relatively lengthy period of time, perhaps five years or ten years.

Once an adequate guest worker visa program has been set up and is operating efficiently, allowing all businesses to hire as many foreign workers as they need, security on our southern border with Mexico would be no more of a problem than is security on our northern border with Canada.
In other words, illegal immigration is an economic problem, not a law enforcement problem. The way to solve this problem is to address it correctly!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility