Why We Need a Carbon Tax VI. Because of China!

Posted on July 3, 2014 by jackheidel

Over the past two months I have posted several blogs about the seriousness of global warming and demonstrated that the best way to address it is with a carbon tax of about $20 per ton of CO₂ released into the atmosphere. Here is a summary of my argument:

The reality of global warming can hardly be questioned. For example, the extent of summer ice in the arctic ocean is shrinking rapidly.
Expecting the Environmental Protection Agency to be able to administer an effective program by giving each state a target for CO₂ emissions reductions is cumbersome and arbitrary.
The current EPA program of trying to reduce carbon emissions by 30% over the next 15 years will set up an economic incentive to substitute natural gas for coal and slow down the further development of nuclear energy and renewable energy sources such as wind and solar power. This is because natural gas is plentiful and inexpensive. But the burning of natural gas still releases half as much CO₂ as coal and so will continue to contribute to global warming.

In yesterday’s New York Times, the reporter Eduardo Porter in “China’s Hurdle to Fast Action on Carbon” calculates that even under conservative growth assumptions, China will almost double its carbon emissions between now and 2040. And this doesn’t even consider all of the other developing nations which also will increase their use of inexpensive energy sources in order to increase their standards of living.
In other words, even if the EPA is able to force a big switch from coal to natural gas in the U.S., any such reduction in carbon emissions will be dwarfed by increases from other countries.
A carbon tax on CO₂emissions will not only give a big boost to all non-fossil fuels, it will also unleash American ingenuity to figure out how to accomplish carbon sequestration in the use of fossil fuels. This will enable the U.S. to achieve a much greater reduction than 30% in carbon emissions over the next 15 years and beyond. Furthermore the new technology which we develop to do this will be immediately available for use around the world.
With such a program the U.S. would actually be demonstrating how to effectively attack global warming instead of just advocating for it!

Does Economic Growth Depend on Healthcare Expansion?

Posted on June 30, 2014 by jackheidel

Even though economic growth is much too slow, it has been steadily increasing since the end of the Great Recession at a rate of about 2.2% per year. But our economy actually shrunk at a 2.9% rate in the first quarter of 2014. Healthcare spending decreased by 6.9% in the first quarter and therefore contributed to this overall drop in GNP.
The New York Times’ economic reporter, Neil Irwin, discusses the connection, ”Our Economic Growth Is a Mystery. Obamacare is the Reason.” in yesterday’s paper. Since healthcare makes up one-sixth of the economy, and the implementation of Obamacare is expanding the healthcare sector, it is not surprising that the economy stumbles if Obamacare stumbles.
But he continues “The United States also has the most expensive healthcare system in the world, without producing better health outcomes. If the nation succeeds in reducing health care costs while also getting coverage for more people, it would be a huge win for the country’s long term competitiveness. Overtime the dollars that aren’t being spent on overpriced or unneeded health services can go to other stuff which makes life better: houses, college education, restaurant meals and the like.”
Conclusion: we need to try all the harder to figure out how to grow the economy faster. The best single thing we can do about this is to implement fundamental tax reform whereby individual tax rates are cut across the board, paid for by closing many of the loopholes and deductions which primarily benefit the rich. The two thirds of taxpayers who do not itemize deductions will automatically receive a tax reduction in this way. Since they are middle and lower income wage earners, with largely stagnant incomes, they will tend to spend their tax savings, thereby boosting the economy.
The loopholes enjoyed by the wealthy are example of crony capitalism which both liberals and conservatives complain about. Closing these loopholes and other deductions is a very good way to lessen income inequality. Our leaders should be able to work together in this direction!

The President Plays Small Ball

Posted on June 24, 2014 by jackheidel

As reported in today’s New York Times, ”Personal Tack by Obama in an Effort to Aid Parents”, the President held an all-day conference yesterday for working families, saying that

“Family leave, child care, workplace flexibility, a decent wage – these are not frills – they are basic needs.”
“There is only one developed country in the world that does not offer paid maternity leave. And that is us. And that is not the list you want to be on by your lonesome.”
“We need you to tell Congress, don’t talk about how you support families: actually support families.”

The economic journalist, Robert Samuelson, pointed out in the Washington Post a few days ago, ”The Jobs Mystery”, that even though our unemployment rate has now dropped to 6.3%, there are still 9.8 million officially unemployed people, plus an additional 7 million who would like a job but are not looking. There are also 7.3 million part-time workers who would like longer hours. This gives a really quite shocking total of 24.1 million unemployed or underemployed workers.
Granted we had a bad recession which was not the President’s fault, but it ended in June 2009, a full five years ago. In the meantime his administration has done much to retard economic growth (passing ObamaCare and the Dodd-Frank Act) and little, besides huge deficit spending, to boost it. He and the Democratic Party should be held responsible for this neglect and they probably will be.
One thing which would do a lot to boost economic growth is apparently contrary to liberal ideology and therefore off the discussion table. I am referring to fundamental, broad-based tax reform whereby individual tax rates would be lowered across the board, but in a revenue neutral manner, by closing or greatly shrinking the loopholes and deductions which primarily benefit the wealthy. The two-thirds of Americans who do not itemize their tax deductions would get a big boost in take home pay. Since they are primarily middle and lower income workers whose wages have been stagnant since the recession began, they will tend to spend this extra income, thereby giving the economy a big boost.
If the President were to sincerely ask the House Republican leadership to work with the Democratic Party to boost economic growth, something along this line could be acted upon. This is the way to really aid families. Why doesn’t he do it?

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.

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?

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!

What Is the Best Way to Boost the Economy and Create More Jobs?

Posted on May 20, 2014 by jackheidel

The publication of two new books is causing a reevaluation of the financial rescue and its aftermath, e.g. “The Case Against the Bernanke-Obama Financial Rescue”. The two books are “Stress Test” by Timothy Geithner, former Treasury Secretary, and “House of Debt” by the economists Atif Mian and Amir Sufi.
Mr. Mian and Mr. Sufi maintain that the government’s response to the financial crisis should have focused less on saving the banking system and more on the problem of excessive household debt. They discovered in their research that, during the housing bubble, less affluent people were spending as much as 25 – 30 cents for every dollar of increase in housing equity. When the bubble burst, and housing prices started to fall, these borrowers cut way back on spending which caused many businesses to lay off employees. The authors propose setting up a government program to help borrowers decrease what they owe in underwater mortgages.
Five years after the end of the Great Recession it would still be very helpful to speed up our lagging economy. Here are three different possible ways to do this:

The Keynesians say the best way to stimulate the economy is with more government (deficit) spending. For example, spending several hundred billion dollars a year on infra-structure would create hundreds of thousands, if not millions, of new construction jobs. I think this is a good idea, but only if it’s paid for with a new tax (e.g. a carbon tax or a wealth tax).
The Mian/Sufi plan, as described above, would alleviate mortgage debt problems for millions of middle class homeowners who are still under water, encouraging them to spend more money which would in turn boost the economy. The problem is that the M/S plan creates a moral hazard for mortgage holders unless it’s paid for by mortgage insurance which would raise costs for borrowers.
Broad-based tax reform, with lower tax rates for everyone, paid for by closing loopholes and limiting tax deductions for the wealthy, would automatically put more income in the hands of the two-thirds of tax payers who do not itemize deductions. These middle class wage earners would tend to spend this extra money thereby boosting the economy.

The point is that there very definitely are ways to boost the economy, some better than others, and it should be a top priority of Congress and the President to get this done.

A Rescue That Worked But Left a Troubled Economy

Posted on May 13, 2014 by jackheidel

The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT.
“The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.

Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.

The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?

The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.

With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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