Friday, June 16, 2017

Jobs are No Reason to Quit the Paris Climate Agreement

Donald Trump cited “jobs” no fewer than eighteen times in announcing his plans to withdraw from the Paris climate agreement. Nonsense. Jobs are not a good reason—in fact, they are no reason at all—for that decision.

Let’s start with the fact that the US economy doesn’t really need more jobs. We are already awash in jobs. At the macro level, there is no sign that the Paris accord, in place for over a year now, has hurt the steady growth of employment. Neither has it slowed the decline of unemployment, which reached a 16-year low in May. Take a look at the charts. Do you see a sharp break over the last year, since the agreement was signed? I don’t.

To be sure, the Paris agreement is not yet fully in effect, but markets are forward looking. If employers expected the agreement to put the brakes on growth, they would have been holding off on hiring already. What would be the use of taking on workers you are just going to have to lay off as soon as those onerous regulations come into play? If the charts tell us anything about Paris and the job market, it is not how great the employers expect the effects to be, but how small.

But that’s just the macroeconomic perspective. What about low rates of labor force participation and declining labor mobility? Those are real problems, but they have been around, and growing more serious, since long before the Paris agreement was even in the planning stages. Getting out of Paris will not fix them.

Wednesday, May 31, 2017

Would Hayek Have Supported a Carbon Tax? A Rejoinder to Robert Murphy

 On April 12, I posted "Hayek on Carbon Taxes: Prices Without Markets or Markets Without Prices?" both on this site and that of the Niskanen Center. On May 30, Robert P. Murphy posted a response on the Institute for Energy Research. I submitted a rejoinder as a comment, but some readers of the IER site have not been able to view it, so here is my rejoinder in full.

(1) With regard to “hijacking the legacies of deceased libertarians”: I would have thought that it would be obvious to any reader that to say, “Hayek would have supported a carbon tax,” is simply a rhetorical device that means “Hayek’s works contain arguments that bear directly on this issue.” I said that explicitly in the first sentence of my post. There is no hijacking going on here.

To be sure, beyond the substantive issues, there is the parlor game of finding quotes in the master’s text to illustrate one’s own views. I am happy to engage in that parlor game, as long as we both recognize that is all it is. So, in the spirit of the game, here is a quote I did not use in my original post, but which seems relevant to the discussion, and somewhat at odds with the one you cite:

“Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. . . In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created, does not prove that we should suppress competition where it can be made to function.” (Road to Serfdom, p. 40)

Here Hayek goes even further than I would. I have not suggested resorting to “direct regulation,” as Hayek does, but rather, to the somewhat less intrusive administrative action of imposing a price that, although it does not directly arise from competition, still serves the purpose of notifying market participants that the resource in question (the waste-disposal capacity of the atmosphere) has non-zero value.

IMO, Hayek puts the burden on you to explain how “competition can be made to function” in the absence of prices, or how carbon prices can be made to emerge spontaneously (even better).
(2) I don’t recall mentioning the social cost of carbon in my post, so I don’t see why I should be asked to “admit” anything one way or another about the Obama administration’s SCC estimates. 

However, let’s stipulate, arguendo, that they were ideologically biased. Without going back to check the documents in question, it was my impression, the last time I read them, that the high end of the range of SCC estimates was biased mostly by the assumptions made regarding the discount rate rather than those regarding the ECS. More generally, I have found that the discount rate issue dominates the ECS issue in all discussions of the SCC, not just those of the Obama administration. This seems like a side issue, though.

(3) You write, “So it’s true, Hayek was not in principle opposed to a tax on negative externalities, but as a pragmatic matter he warned that limitations on knowledge should make us very wary of rushing in to “fix” the market outcome when we are operating in a sea of ignorance. This is the exact opposite of Dolan’s conclusions from Hayek’s writings on knowledge.”

Actually, what you write is completely consistent with my views. Yes, let’s be wary of “fixing” every alleged market failure. Amen. However, sometimes we have to face the reality that we are operating in a “sea of ignorance,” as you put it, or, to use the standard language of business and economics, that we are engaging in decision-making under uncertainty. Yes, we do not know the optimal carbon price. Given our uncertainty, we must decide whether to act as if the optimal price is zero (that is, to do nothing) or to set it at some positive value, which we cautiously set at a level near the lower end of the range of plausible values. That is the way that real economic decisionmakers in business or finance go about things when they have to set the price on a new product or submit a bid for an asset the true value of which is “hidden in a sea of ignorance.” 

In short, the burden of proof is on opponents of carbon pricing to show that zero is the true optimal value. The awkward thing about that is that there are no purely economic arguments that arrive at that result. That is why the opponents of carbon taxes always fall back on arguing the science of climate change, not the economics of climate policy. They never dare to answer the central economic question, which is, “If it were the case that the social cost of carbon had a nonzero and positive value, then what would be the correct policy response?”

Monday, May 22, 2017

Economic vs. Personal Feedom in Singapore

Today’s New York Times carries an op-ed by Singaporean novelist Balli Kaur Jaswal on censorship in her home country. It begins by describing the deletion of scenes from American TV shows that feature taboo subjects like vibrators and nonbinary gender identification. It continues with a tongue-in-cheek account of her efforts, together with high-school friends, to figure out just what “sex” was by raiding their mothers’ stashes of contraband women’s magazines. But the real point of the op-ed is a serious one: In Singapore, freedom of information is spotty, at best.

The story sent me running to one of my favorite data troves: The rich collection of statistics on economic and personal freedom put out by the Cato Institute’s Freedom of the World project. Singapore is famous for its economic freedom. On the Cato economic freedom scale, it earns a score of 8.71 out of a possible 10, second only to Hong Kong’s 9.03. The high rating is helped along by sound money, free trade, and a small government, along with perfect 10s in areas like freedom to dismiss workers, freedom from minimum wage requirements, and freedom to practice your chosen profession without a license. These economic freedoms pay off in terms of prosperity. Singapore’s GDP per capita is third in the world, after Qatar and Luxembourg.

When it comes to personal freedom, though, it’s another story. On Cato’s personal freedom index, Singapore ranks seventy-seventh out of 159 countries, a little better than Cambodia or India, but not as free as Turkey or Papua New Guinea. What’s the problem?

Friday, April 21, 2017

How Big Government Affects Freedom and Prosperity

Economists, libertarian economists included, love to measure things. The Human Freedom Index (HFI) from the Cato Institute is a case in point. Its authors have assembled dozens of indicators of personal and economic freedom. They invite interested researchers to use them to explore “the complex ways in which freedom influences, and can be influenced by, political regimes, economic development, and the whole range of indicators of human well-being.”

I am happy to accept the invitation. This post, the first of a series, will take a first look at what we can learn from the data about the relationships among freedom, prosperity, and government. The relationships turn out to be not quite as simple as many libertarians might think. 

The Data

The Human Freedom Index consists of two parts. One is the Economic Freedom Index (EFI) from the Fraser Institute, which includes measures of the size of government, protection of property rights, sound money, freedom of international trade, and regulation. The other is Cato’s own Personal Freedom Index (PFI), which includes measures of rule of law, freedom of movement and assembly, personal safety and security, freedom of information, and freedom of personal relationships. The Cato and Fraser links provide detailed descriptions of the two indexes.

In order to explore the way freedom influences other aspects of human well-being, I will draw on a third data set, the Legatum Prosperity Index (LPI) from the Legatum Institute. The LPI includes data on nine “pillars” of prosperity, including the economy, business environment, governance, personal freedom, health, safety and security, education, social capital, and environmental quality.
The EFI and PFI cover 160 countries and the LPI 149 countries. In this post I will use the set of 143 countries for which data are available in all three indexes. The Cato, Fraser, and Legatum links above provide detailed methodological information.

Thursday, April 13, 2017

Hayek on Carbon Taxes: Markets without Prices or Prices without Markets?

As far as I know, Friedrich Hayek never wrote a word about climate change, but two of his most famous works contain arguments that bear directly on this key issue of environmental policy. Judging from what he wrote about the role of science in public policy and the use of knowledge in society, I think that if he had lived on into the twenty-first century, he might have supported a carbon tax.

The role of science in public policy

Hayek’s 1945 article, “The Use of Knowledge in Society,” draws a distinction between two kinds of knowledge. One is “knowledge of the particular circumstances of time and place,” that is, knowledge that is widely dispersed among individuals, each of whom sees only a small part of the whole picture. The other is scientific knowledge, which, he says, we can reasonably expect to find in the possession of a suitably chosen body of experts.

Most of the article focuses on how best to make use of dispersed knowledge. However, near the beginning, Hayek comments briefly on the role of scientific knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available— although this is of course merely shifting the difficulty to the problem of selecting the experts.

Hayek quickly moves on to his main subject, but he returns to the issue of scientific knowledge several years later.  In a 1960 essay, “Why I am Not a Conservative,” he explains the differences between the conservative worldview and that of “liberals,” a term Hayek uses in the European sense for what Americans would call classical liberals or libertarians. Liberals, he says, are prepared to come to terms with new scientific knowledge, whether they like its immediate effects or not. Conservatives, in contrast, are more wary of science:

Monday, April 10, 2017

High-Risk Pools Pose a Dilemma for Conservatives

High-risk pools have played a prominent role in the debate over U.S. health care policy, especially on the conservative side. In contrast to liberals, who lean toward a single-payer system or public option, conservatives would like to limit the government’s role to the very sick and the very poor. For the poor, they seem ready (grudgingly) to accepted Medicaid, or something like it, as long as coverage is limited to the “truly needy.” What to do about the very sick is a more complicated problem. High-risk pools, which both HHS Secretary Tom Price and House Speaker Paul Ryan have endorsed, offer a possible solution, but one that comes with issues of its own.

High-risk pools in theory

High-risk pools are a response to the inability of private companies to offer insurance at an affordable premium unless their pool of customers has enough healthy individuals to keep average  claims low. If too many sick people join the pool, claims and premiums, begin to rise. Rising premiums cause healthy people to drop out of the pool and take their chances on life without coverage. The dropouts push premiums higher still for those who remain in the pool until, eventually, no one can afford coverage. Economists call this phenomenon adverse selection. It is popularly known as a “death spiral.”

The traditional way of dealing with adverse selection was to practice medical underwriting, which means dividing the population into separate pools according to health status. If medical underwriting is permitted, insurers quote premiums that reflect the actuarial risk of each pool. They may refuse altogether to cover people with pre-existing conditions, cover them only at very high rates, or place caps on annual or lifetime benefits.

Although it keeps premiums affordable for the relatively healthy, medical underwriting inevitably means that some people cannot obtain coverage at an affordable premium, or have exhausted their coverage by reaching their spending caps. Before the Affordable Care Act (ACA or “Obamacare”) limited medical underwriting, many states created high-risk pools to meet their needs. Such pools were not intended to be profitable and were supported by government subsidies.
Described in this way, high-risk pools sound like a good compromise between the comprehensive government health care found in the rest of the developed world, and a purely market-based system that would make health care unaffordable for any but the healthy and the wealthy. What could go wrong? Several things, it turns out.

Saturday, April 1, 2017

Universal Healthare Access is Coming to the US. Stop Fighting It. Make it Work.

Many observers are describing the dramatic failure of the American Health Care Act (AHCA) as a debacle, but perhaps it will prove to be a step forward. As everyone knows by now, the United States is alone among advanced economies in not having universal access to health care, but it is already much closer to such a system than most people realize. The defeat of the ACHA may be a tipping point in which the forces trying to figure out how to make universal access health care work gain the upper hand over those that are fighting it.

The true scope of government in our healthcare system

The term “single payer” is often used to describe the healthcare systems of other high-income countries. Although that is a convenient term, it is not entirely accurate. As the following chart of healthcare spending in OECD countries shows, all countries use a mix of private and public payments. Furthermore, even in many countries where the government share of spending is high, the actual administration of payments is split among several funds, trusts, or regional agencies. There are no countries where all health-related services, including optical and dental services, drugs, and long-term care, are entirely free to patients without co-pays or deductibles.  Healthcare systems of OECD countries also differ widely in such aspects as whether facilities are publically or privately owned, whether doctors are public employees or independent practitioners, and whether private provision of healthcare, in competition with public services, is encouraged or discouraged.

Wednesday, March 15, 2017

To Succeed, Healthcare Reform Must Include Action on Prices

 Republican reformers have repeatedly promised affordable healthcare for all Americans — doubly affordable, in fact. They promise to put premiums and out-of-pocket costs within reach of low- and middle-income consumers, and at the same time, that the plan will be affordable to the federal budget, even given the constraints their most conservative members would like to impose on federal revenues.

Unfortunately, the American Health Care Act (AHCA) now before Congress will make healthcare affordable in the budgetary sense only while making it less affordable in the individual sense. According to analysis by the Congressional Budget Office, the AHCA will reduce the budget deficit by $337 billion over a ten-year period, but only at the expense of reducing the number of insured by 14 million in the near term and by 24 million after the full effects of the bill come into force. As the CBO points out, even many people who retain coverage will find it more expensive because the ACHA tax credits will be less than the subsidies available through exchanges under the current Affordable Care Act (ACA or "Obamacare"). For others, the only option that will become more “affordable” is that of going without insurance, due to the ACHA’s elimination of the ACA’s individual mandate.

Under the ACHA or ACA, one uncomfortable fact remains unavoidable: There is no way to make healthcare affordable for either the budget or individuals without strong action to control prices for drugs, medical devices, hospitals, and doctors’ fees that are higher than in any other country. The current draft of the ACHA does nothing to deal with that critical problem.

Monday, March 13, 2017

Why California's Push for a 100 Percent Carbon Free Grid is the Wrong Way Forward

Although there is a clear lack of will to do much about climate change at the federal level, California is another story.  In a recent poll, 69 percent of California voters backed policies to cut emissions. The latest sign of enthusiasm is a bill introduced by State Senate leader Kevin De León that would completely decarbonize the state's electric grid by 2045. Currently, California state law calls for half of all retail electricity to be produced from renewable sources by 2030, with an intermediate goal of 25 percent by 2016, reached slightly ahead of schedule.

Is 100 percent decarbonization feasible? Anne C. Mulkern, writing for E&E News, reports that several experts she talked to said it was. Utility executives were somewhat more skeptical, but Pedro Pizarro, CEO of Edison International, agreed that 100 percent renewable power was technically possible, while expessing concerns about reliability, and timing.

Even if the goal is technically it possible, though, does it make sense to mandate a goal of 100 percent renewable electric power by a certain date? In my view, it does not. Carbon pricing remains a better tool for reducing California's carbon footprint.

Carbon pricing California style

But, you might say, hasn't California already tried carbon pricing with its flagship cap-and-trade scheme? Yes, and it isn't working very well. However, if we look carefully, we will see that the problems arise from circumstances particular to the state, rather than from any inherent flaw in carbon pricing as a concept.

The economic reasoning behind cap-and-trade is to give companies an incentive to reduce emissions by requiring them to buy a permit for each ton of carbon dioxide they emit. The higher the price of permits, the greater the incentive. Prices are set by monthly auctions supplemented by a secondary market, in which permits can change hands privately.

Wednesday, March 8, 2017

How "Ryancare" Would Inrease the Risk of a Healthcare Death Spiral

 On March 6, the Republican House leadership finally released a draft plan for repealing and replacing the Affordable Care Act (ACA). Although only a draft, it has already earned the name of "Ryancare." As this is written, with the ink not yet dry, it already is running into political trouble. Influential Republicans are dismissing it as a “framework for reform” or a “work in progress.”

Still, it is not too early to address one question that will demand an answer no matter what happens to this early draft: will it, or any replacement for the replacement, stop the impending death spiral in the individual insurance market that is at the heart of the ACA’s problems?

From what we know of Ryancare so far, the answer is “No.” Here is why.

What is the “death spiral”?

Just how does this notorious “death spiral” work? Start with a basic truth: A private insurer can profitably offer healthcare coverage to a pool of customers only if it can find a premium that is low enough to be affordable, yet high enough to cover expected claims and administrative costs, with enough left over to keep shareholders happy. In order for that to happen, the pool of customers must contain enough healthy people to keep claims and premiums low.

Thursday, March 2, 2017

Paradox: Why Do Analysts Say Higher Interest Rates are Driving Bank Stocks Higher, When Earlier They Said Low Rates Were Good for Banks?

As the stock market soars to one record high after another, analysts do not hesitate to tell us why. One popular explanation is that expectations of higher interest rates are pushing up the stocks of banks and other financial companies  (example). Yet not so long ago, the same analysts were telling us that Wall Street in general and banks in particular were getting rich on the “free money” that the Fed was supplying to them at historically low rates (examples here and here). What gives?

To understand how interest rates affect bank profits, we turn to a wonky concept of financial economics known as the duration gap. Setting the precise mathematics to one side (read this if you really care), the duration gap refers to the difference between the maturity of a bank’s assets and its liabilities. If a bank funds itself with from short-term sources like deposits and uses those funds to make fixed rate mortgage loans or buy long-term bonds, then it has a positive duration gap. Interest rates tend to be higher on long-term financial instruments than on those with short maturities, so is the way banks traditionally made a profit.

The downside of the traditional banking model is that a positive duration gap means that profits fall when interest rates rise.  Suppose, for example, that your bank makes 30-year fixed-rate mortgages and funds them with deposits that pay an interest equal to the federal funds rate (the rate on overnight loans that the Fed uses at its primary interest rate target). If the loans earn 4 percent and the fed funds rate is 0.5 percent, you have a nice spread of 3.5 percent  between return on assets and cost of funds, allowing a good profit even after deducting  operating expenses.  However, if short-term rates went up, your bank would be in trouble. If the fed funds rate went up to 2 percent while your old fixed-rate mortgages still brought in just 4 percent your spread would be cut to 1.5 percent and your profits, after operating expenses, might evaporate altogether.

Falling Government Investment Casts Doubt on Pie-in-the-Sky Growth Estimates

  •  The budget proposals being prepared by the Office of Management and Budget incorporate revenue estimates based on GDP growth rates of 3 percent or more.
  • The proposals include across-the-board decreases in nondefense discretionary spending
  • Such cuts will make it difficult to reverse the long decline in government investment, casting doubt on the likelihood of achieving ambitious growth estimates.
Government investment at all levels accounts for only about 15 percent of gross fixed investment in the United States, but its economic significance is greater than that modest share suggests. Government investment affects investors in private industry in several ways through its impacts on growth of the economy as a whole, on suppliers of construction services and materials for government investment projects, and on users of government infrastructure. Negative trends in government investment raise concerns for all of these reasons.

Three charts reveal the extent of these negative trends. The first chart takes a long-term look at gross investment in fixed assets at all levels of government. It shows that total government investment has fallen by about half since the 1960s. Investment at the federal level and at the state and local levels contribute roughly equal shares of the total, but the federal share has fallen more rapidly. Federal gross investment in fixed assets as a share of GDP in 2015 was just a third of its 1961 peak value. >>>

Follow this link to read the full post and view the charts on

Friday, February 24, 2017

Questions Republican Healthcare Reformers Must Answer

Republicans do not yet have a full replacement for the Affordable Care Act (ACA or “Obamacare”), but the outlines of one are emerging. The Policy Brief on Repeal and Replace issued by House Republicans on February 16 points the way toward a three-tier system. It promises to provide  “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.”

Those are lofty aspirations, but reformers will have to address many difficult questions before they can be met. To find realistic answers, they will have to overcome divisions within the party, ideological constraints, outside pressures, and some hard realities of healthcare economics.

Conceptual framework

The new policy brief, and similar plans put forward by Rand Paul, Mark Sanford, Paul Ryan, and others, include many common elements. Together, they point to a three-tier system that, in broad outline, would look like this:

Central tier, for individuals and households with incomes well above the poverty line in which no member suffers from a serious chronic health condition. Such people account for roughly 70 percent of the population and roughly 25 percent of personal healthcare spending. Members of this tier would be served by conventional commercial health insurance. The cost of premiums would be covered by a combination of individual payments, advanceable healthcare tax credits (HCTCs), and employer contributions. Premiums and HCTCs could rise with age, but insurers would not be allowed to charge differential premiums based on pre-existing conditions or to refuse coverage. High-deductible policies would be encouraged by using health savings accounts (HSAs) for covering out-of-pocket costs.

Thursday, February 23, 2017

Multiple Job Holders Represent a Still-Untapped Labor Reserve

The Office of Management and Budget is due to release tax and spending plans for the 2018 fiscal year soon. As reported recently by the Wall Street Journal, the plans are expected to be based on relatively optimistic growth forecasts of 3 to 3.5 percent per year, well above consensus estimates. The debate over the realism of the budget plan will turn, to a significant degree, on whether there are a sufficient reserves of untapped labor to support higher growth rates.

Although the headline unemployment rate is approaching levels that the Fed and many other observers equate with "full employment," other indicators, not so well known, suggest that there are still significant untapped labor reserves. This post looks at one such neglected indicator, multiple job holders. (In a post earlier this month, I looked at another neglected indicator, nonemployment index, which also suggests the existence of hidden labor reserves.) >>> 

Follow this link to read the full post at

Wednesday, February 22, 2017

Repeal Fuel Economy Standards and Replace Them with a Tax

The Wall Street Journal reports that automakers are asking the EPA to repeal automobile fuel economy standards, known as Corporate Average Fleet Economy (CAFE) standards, which are set to rise to 56 miles per gallon by 2025. Repealing the standards would be a good idea, provided they were replaced by tax designed to achieve an equivalent saving in fuel. A carbon tax would do the job nicely, but an increase in the existing tax on motor fuels would also work.

What, exactly, is wrong with the CAFE standards? The fundamental problem is that they attack the third-party effects, or negative externalities, of motor fuel use, such as pollution, highway congestion, and accidents, only partially and indirectly. As a result, the cost of achieving a given reduction in fuel use via CAFE standards is higher than it would be if the same result were achieved more directly through a carbon tax or an increase in the federal gasoline tax.

Sunday, February 19, 2017

What Happened to the OMB Data? Mystery Solved (Partially)

Yesterday I wanted to retrieve some data from the OMB archives, so I went to the usual spot, There was almost nothing there. All I found were links to “budgetary analysis” of the new administration’s executive orders. The “analysis” pages themselves contain nothing but short paragraphs signed by Acting Budget Director Mark Sandy, which say that the executive orders will not have any significant budgetary impacts. 

I had read of the efforts of paranoid climate scientists to download data from NASA, NOAA, and other sites, fearing that the Trump administration would scrub them all clean, so I got a little paranoid myself. Could it be that the new gang doesn’t want us to have any background data that might be used to put their budget efforts in a bad light?

It turns out that the situation is a little less sinister than it first looked. Turns out that the Obama administration had a “digital transition plan” that archived all the old data. The OMB archives are here, for example. There are no permalinks, though. Any old links you have saved to Obama-era materials take you to a broken link page on the Trump White House site that has a link to the Obama digital transition page. Down at the bottom of that page there is a long list of agency archives, including the one for the OMB. Eventually you can find what you are looking for.

On Thursday, the Senate finally got around to confirming Mick Mulvaney as the new budget director. We can hope he will assign someone to get to work on the amateurish OMB web page that is still there as of today. We can hope that Mulvaney’s people will give us links to the Obama archives. When a new, professional-looking, user-friendly, OMB website appears, we will know that the chaos has settled down in at least one branch of the Trump White House.

Thursday, February 16, 2017

Crop Insurance Targeted By Budget Cutters As Deficit Debate Looms

Congress will soon start debating the federal budget for the 2018 fiscal year. As the following figure shows, the Congressional Budget Office projects that after shrinking for several years, the budget gap will soon begin to widen if there are no changes in current policy. Crop insurance is one of several farm programs in the crosshairs of Congressional budget hawks who hope to keep that from happening.

Crop insurance may seem like small change compared to massive programs like health insurance subsidies under the Affordable Care Act, but critics have long targeted it as wasteful. The Heritage Foundation, a consistent ally of budget cutters, characterizes crop insurance, along with other farm subsidy programs, as “a massive transfer of wealth from taxpayers to mostly large agribusinesses that are (or should be) fully capable of managing their business operations without this special treatment.”