Friday, December 11, 2020

Why Libertarian Environmentalists Should Take Locke Seriously


In an well-argued essay, Jonathan Adler argues that libertarian environmentalists ought to take property rights seriously. No writer has had a greater impact on classical liberal and libertarian thinking about property than John Locke. It follows that any would-be free market environmentalist must take Locke seriously. And not just Locke’s theory of property. His theory of government, as laid out in his 1690 Second Treatise, is equally important. In what follows, I will argue that considering Locke’s ideas on both property and government leads to conclusions that justify even stronger policy actions that Adler advocates.

Locke on property

Locke states the essence of his theory of property in this famous passage:

Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others.” (Chap. 5, sec. 27)

A few pages later, Locke makes it clear that the principle for acquiring property applies not just to acorns gathered in the woods, but to the land itself: 

As much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property. He by his labour does, as it were, inclose it from the common. (Chap. 5, sec. 32)

Thursday, November 12, 2020

What's Wrong with Libertarian Environmentalism

In an essay in Critical Review a few years back, Jeffrey Friedman had a go at explaining what’s wrong with libertarianism. His sixty-page argument can be summed up in a single sentence: “Philosophical libertarianism,” he wrote, “founders on internal contradictions that render it unfit to make libertarians out of anyone who does not have strong consequentialist reasons for libertarian belief.”

The conflict between the philosophical and consequentialist sides of libertarianism is nowhere more sharply on display than when applied to environmental issues. This commentary explores the dilemma of libertarian environmentalism and the ways–none of them entirely successful–in which its practitioners try to escape it.

Tuesday, November 10, 2020

Bipartisan Rules to Meet the Coming Fiscal Policy Challenge

President-elect Joe Biden will face serious fiscal policy challenges as soon as he takes office. A hoped-for V-shaped recovery from the Covid-19 pandemic has turned into a something that looks more like a long-tailed Nike swoosh. Business closings, mostly classed as temporary back in March and April, are, increasingly, proving to be permanent. Short-term unemployment is falling, but long-term unemployment and involuntary part-time work are increasing. Evictions and foreclosures loom over cash-poor working-classfamilies, who are estimated to have accumulated as much as $70 billion in back rent owed. Meanwhile, state and local governments, whose spending is constrained by balanced-budget rules, are laying off teachers and fire fighters. The trade deficit remains high and the Fed has no room left to cut rates to stimulate investment.

In a normal world, such a situation would cry out for fiscal stimulus. Ominously, however, the deficit hawks of the Republican party, who slept through the badly timed and budget-busting Tax Cuts and Jobs Act of 2017, are starting to stir. They said “No” to any last-minute stimulus before the 2020 election, and their appetite for austerity will be ravenous once they are fully awake. If Republicans hold their majority in Congress, they will have a major role in determining policy in 2021, so little is going to get done without at least a scintilla of bipartisanship.

“But,” you say … “Aren’t the budget hawks right this time? Just look at the numbers!”

Yes, they are right to point out that under current policies, as measured by the Congressional Budget Office, the federal debt is rising fast. It is about to exceed its previous record as a percentage of GDP and it is projected to go on rising for the next 30 years. But those raw numbers tell us little of use for fiscal policy. A rational set of budget rules neither automatically precludes nor condones large budget deficits or a debt ratio that rises over time. To understand what a rational set of budget rules would actually look like, read on.

Thursday, November 5, 2020

A CBO Roadmap to Near-Universal Healthcare


On October 1, the Congressional Budget Office released a detailed report, Policies to Achieve Near-Universal Health Insurance Coverage. The report outlines four broad approaches to the long-sought goal of universal, affordable access to healthcare for all Americans. The CBO cautiously aims only for near-universal coverage, which it defines as coverage for at least 99 percent of the population. The report argues that 100 percent coverage is unattainable, since some people would inevitably decline to participate–even if they were eligible at no cost–on religious grounds or because they did not want to bring themselves to the attention of authorities, among other reasons.

Each of the four approaches offers potential improvements over what we now have under the ACA, and ways out of the unthinkable chaos of a court-ordered end to the ACA, with no viable replacement. The alternatives range from a Sanders-like single-payer plan bold enough to appeal to the most progressive Democrats, to others that are sufficiently market-oriented to pass judgement with any but the most curmudgeonly Republicans. One of the CBO’s alternatives squarely hits the sweet spot of radical moderation– the Niskanen Center’s hallmark.

Here is a brief outline of the four approaches, with some pros and cons of each. 

Saturday, September 19, 2020

Quality of Government: A Statistical Portrait

In a recent three-part essay, the Niskanen Center’s Brink Lindsey acknowledges all that the modern market system has done to incentivize innovation and coordinate the production and distribution of goods and services. He is concerned, though, that the economists who have assumed leadership of the free-market intellectual movement sometimes take the existence of markets themselves for granted. He adds a vital qualification: 

A well-functioning market system is neither self-executing nor self-sustaining. To achieve what they are capable of, markets need to be embedded in and supplemented by supportive legal, political, and social institutions. 

The idea that institutions are important to the proper functioning of a market economy is hardly new. Harold Demsetz’s work on property rights and Douglass North’s writings on institutions and transaction costs are well-known landmarks in the literature. The question of quality of government (QoG) is a somewhat narrower, but still broad question within the study of economic institutions. Bo Rothstein’s 2011 book on QoG provides an excellent overview of the literature and many original contributions. 

The scope of this commentary is much less ambitious than any of these classic works. As a “statistical portrait,” it is more descriptive and exploratory than a rigorous exercise in hypothesis testing. Still, by highlighting some key relationships, I hope to point the way to potentially fruitful topics for further research. And even with these disclaimers, the findings reported here shed light on important questions regarding the relationship of QoG to democracy, personal freedom, and the satisfaction of basic human needs.

Monday, July 13, 2020

New Research Boosts Our Understanding of the Effective Marginal Tax Rates for the Poor

Does the American welfare system adequately encourage the poor to achieve self-sufficiency, or is it a “poverty trap” that locks welfare beneficiaries into a lifetime of dependency? The question has been debated endlessly with no clear win for either side. 

In large part, the dispute turns on a concept known as the effective marginal tax rate (EMTR) faced by poor and near-poor households. The EMTR is the percentage of any additional earned income that a household pays in taxes or loses in government benefits. Critics argue that high EMTRs leave little incentive to work, and even for those who do work, they mean that their efforts do little to help them to lift their disposable incomes above the poverty level. What is the point of getting a job if taxes and benefit reductions are going to eat up 75 percent or more of your earnings, even without figuring in expenses like child care, commuting, or work clothes? Supporters of the existing welfare system argue that punitively high EMTRs are rare. They emphasize that the current welfare system, despite its flaws, does raise millions of families out of poverty.

Recent research revives the longstanding debate over EMTRs. This commentary reviews studies that suggest that despite some changes for the better, critical segments of the low-income population, especially those with incomes close to and just above the poverty line, continue to face weak work incentives. Simply expanding eligibility for existing welfare programs will not fix the problem. As explained in the conclusion, a more effective approach to mitigating the poverty trap would be to cash out and consolidate current welfare programs, replacing them with a combination of universal income supports, universal child benefits, and wage subsidies for the lowest-paid workers.

Monday, June 15, 2020

It's Time to End the Preference and Tax Capital Gains as Ordinary Income

The United States entered the COVID-19 crisis with an unusually large budget deficit for an economy at or close to full employment. Even if employment, output, and growth were to recover quickly to where they were at the end of 2019 (something that is far from certain), the deficit, under current law, will remain large.

The good news is that interest rates are likely to remain well below the rate of GDP growth for the foreseeable future, as they have since the beginning of the century. As long as that remains the case, there is no danger of an “exploding debt” scenario in which a large but constant federal deficit causes debt to grow without limit as a share of GDP. At this point, the greatest danger to the recovery is premature austerity. Still, as the recovery proceeds, we are sure to hear it argued on both economic and political grounds that the deficit should be reduced.

At that point, the search will be on for ways to close the budget gap. Although everyone will roll out their favorite spending cuts, much of the heavy lifting is going to have to come on the revenue side of the budget. As former Trump adviser Gary Cohn put it recently, talking to CNN’s Fareed Zakaria,
Our next Congress, the Congress that sits down in 2021, almost has to sit down and look at our spending and our revenue side. … How we spend money? There are a lot of places where we could cut back. In addition to that, I think they have to look at our tax system and think of ways that we raise revenue.
No area of the tax code is more ripe for reform than the preferential treatment given to capital gains. While incomes from wages and salaries face a maximum tax rate of 37 percent, capital gains on assets held for more than a year, in most cases, are taxed at a maximum rate of just 20 percent.

The benefits of the capital gains tax preference flow predominantly to the rich. Some 70 percent of the benefits go to taxpayers with annual incomes of $1 million or more, who enjoy annual benefits of $145,000 each. Benefits for households with incomes of $50,000 or less average about $10. For years, backers have tried to find broader justifications for this tax break, contending that benefits to the few somehow trickle down to the rest, but their efforts are less than convincing.

Here are some of the many issues raised by the capital gains tax preference, and the many reasons why its elimination should be at the top of the list in the search for additional sources of federal revenue.

Monday, June 8, 2020

How Household Debt Threatens the Recovery

The COVID-19 pandemic is having a disproportionate impact on the health of low-income Americans, but even those low-wage workers who avoid the disease itself are likely to suffer grave economic distress

In part, that is because workers with lower incomes have been more likely to lose their jobs than those who are better paid. The Pew Research Center reports that 32 percent of upper-income adults say that someone in their family has lost a job or taken a pay cut due to the outbreak. That compares with 42 percent of middle-income households who report lost jobs or pay cuts, and 52 percent of low-income households.

But pay is only part of the story. To fully understand the disparate economic impact of the pandemic, we need to look also at household wealth, or more exactly, net worth. The margin by which assets exceed household liabilities is crucial to a household’s ability to weather a job loss or a pay cut without catastrophic effects. And household net worth is not only less equally distributed than income — it is also frighteningly fragile for those in the bottom half of the population. That fragility is a major threat to hopes for a speedy economic recovery, as we will see.

Thursday, May 21, 2020

COVID Pandemic Highlights Need for Reform of US Healthcare

The COVID-19 pandemic has highlighted longstanding weaknesses of the U.S. healthcare system. In a May 20 webinar sponsored by the Niskanen Center, I examined three key issues:

  • Where has our healthcare system failed?
  • What can be done to make it work better?
  • Is healthcare reform as we know it even relevant any more?
By "healthcare reform as we know it," I mean the kinds of reforms discussed endlessly during 2019 Democratic primary campaign and before that, during Republican efforts to "repeal and replace" the Affordable Care Act. I highlight three reform models:
I explain how each of these can at least partially address problems raised by the pandemic, including loss of employer-sponsored coverage by tens of millions of job-losers and inadequate provision for testing, treatment, and supported isolation. I also discuss some problems that existing reforms do not adequately address.

My slideshow from the webinar is available here. A link to the complete video, including comments by Jeff Flier and additional Q&A by participants, will be available soon. 


Friday, May 15, 2020

A Social Safety Net for the Pandemic and Beyond

America's social safety net has been severely strained by the COVID-19 pandemic. Although the virus has affected people in all walks of life, the burden of illness and lost jobs has fallen most heavily on people in the lower half of the income distribution.

As the chart shows, those in the bottom half are the households whose financial condition is most fragile. They suffered the greatest economic harm in the 2008 financial crisis. Unlike their wealthier peers, they have not yet recovered, and they will experience even greater financial stress this time.

To cope with the economic effects of the pandemic, we need a social safety net that is fast, fair, and work-friendly. Federal efforts to provide income support in this crisis are commendable, but they have not reached everyone in timely fashion, and they have often been poorly targeted.

The safety net needs top-to-bottom reform. A reformed system would place more emphasis on cash assistance, with less in-kind and means-tested welfare. It would be "always on" in the sense that everyone would be automatically pre-enrolled for the minimum level of support needed in good times, so that aid could be quickly ramped up when a crisis strikes. It would provide adequate pay for essential workers and encourage others to return to work when the crisis has passed.

All of this and more was discussed in a webinar presented jointly by the Niskanen Center and the Center for Ethics, Economics, and Public Policy at the University of San Diego on May 14, 2020. You can view a slideshow presented during the webinar at this link or watch a complete video of the webinar, including Q&A, here.

Saturday, May 9, 2020

Ozzie Zehner is at it again: Green Illusions, and Planet of the Humans

Are solar, wind, and other alternatives the magic bullets that will solve the world’s environmental and energy problems? Take a closer look, wrote Ozzie Zehner in his 2012 book,  Green Illusions. He is still saying much the same thing, in a new movie, Planet of the Humans, despite the great strides renewables have made in the past eight years.

My Niskanen Center colleague Nader Sobhani has reviewed the movie, and finds it wanting. I'll let you read his movie review. Here is a repost my own 2012 review of the book:

Zehner not only argues that green energy has technological, environmental and economic limits, but also that without an appropriate policy context, some forms of alternative energy could do more harm than good.

The dirty secrets of clean energy

The first part of Zehner’s book—by far the best—is devoted to explaining why neither photovoltaic, nor wind, nor biomass, nor any of the other alternatives to fossil fuels will be able to deliver a future of abundant, cheap, clean energy. Chapter by chapter, he brings out the environmental and economic limitations of each technology. Among the highlights—

Sunday, May 3, 2020

COVID-Related Spending Must Not Become an Excuse for a Post-Crisis Fiscal Straitjacket

Writing for the Brookings Up Front blog, Stuart Butler and Timothy Higashi urge fiscal policymakers to look beyond the current crisis. Extraordinary short-term spending is justified, they agree, but, they urge that “we also need to put in place – ideally as part of ongoing stimulus measures – procedures that will help policymakers and the public to prepare for the less urgent but equally important task of managing the future fiscal and economic threats from today’s emergency actions.”

They are right that we need better long-term fiscal rules to avoid long-term budget chaos. Even more importantly, we need good rules to avoid premature austerity that could slow the recovery, as happened half-way through the rebound from the 2008 financial crisis. But just what should the rules look like?

Above all, in my view, any such rules must not become a fiscal straitjacket that would impair our prosperity for years to come. The once-popular notion of a balanced budget amendment is a classic example of what we do not need. A rule requiring annual budget balance would be profoundly procyclical. It would require cutting expenditures when tax revenues fell during a slump, and in boom times, it would put no real constraint on tax giveaways like the 2017 Tax Cuts and Jobs Act.

No one seems to be pushing a balanced budget amendment now, but some ideas that are floating around would not be much better. One example is the Enzi-Whitehouse plan (S.2765), which Butler and Higashi are a good deal warmer toward than I am. As I read it, the central pillar of the Enzi-Whitehouse plan is a hard cap on the debt-to-GDP ratio that could be overcome only by a supermajority. Unless the bill were very carefully crafted, it would become a de-facto balanced budget requirement as soon as the debt ceiling were reached, which it inevitably would be. If the current draft of the bill contains safeguards to keep that from happening, I can’t spot them in the text.

Thursday, April 23, 2020

Tired of the COVID-19 Lockdown? Here is a Responsible Reopening Plan

People are getting tired of the COVID-19 lockdown. Surveys show that a majority still put a greater priority on protecting public health than on reopening the economy, but either way, we would all prefer to do both. A plan released yesterday from the Harvard-based Safra Center for Ethics shows that is possible, if we are willing to take the necessary steps.

The Roadmap for Pandemic Resilience (“The Roadmap,” in what follows) is not the first try at finding a way to safely reopen the economy, but it outclasses all previous attempts with its a realistic timetable, fact-based quantitative benchmarks, and a detailed institutional structure. By comparison, the vague guidelines offered by the White House are little more than slogans and aspirations. Here are the key features that distinguish The Roadmap from other reopening plans:

Testing. The White House talks of expanding testing from its current rate of 150,000 or so a day to 300,000. That is barely enough to test people who have severe symptoms, let alone enough to test nonsymptomatic essential workers to make sure they do not spread the virus or to conduct the random surveillance testing we need to know exactly where the virus is (and is not) in our communities. The Roadmap calls for 2 million tests a day, quickly rising to 5 million. Sound like a lot? Those numbers fall only in the middle of a range of credible testing estimates reviewed by the Kaiser Family Foundation, but they are enough if the right people are tested at the right times.

Tuesday, April 21, 2020

The Shaky Logic Behind Hopes for a Quick Recovery

President Donald Trump promises that the economy will soar "like a rocket ship" as soon as the COVID-19 pandemic ends. Writing for the Independent Institute, R. David Ranson, like many who fear the government more than they fear the virus, agrees.

“We ought to be thankful that the economic system is resilient in a way that the human body is not,” Ranson says. As the figure shows, he foresees a short, notch-shaped “interruption,” preceded by an anticipatory stocking-up surge and followed by a similar post-pandemic boomlet as shelves are restocked.

Ranson bases his hopes for such a growth trajectory on the notion that the interruption to production will destroy no physical capital.
[A]fter the production shutdowns end, GDP will shift back above pre-crisis trend as businesses and consumers make up for lost time. Events do not as yet add up to a significantly weaker full-year performance for the US economy. Economic activity will go into hiatus, but it can be made up quickly once the crisis is over.
As I explained in this earlier post, Ranson is right to say that pandemics, which hit the economy from the supply side, disrupt things in a very different way from ordinary recessions, which hit from the the side of demand. He is also right that clumsy, improvised public health interventions like universal stay-at-home orders do more damage than would more nuanced interventions based on the test-trace-isolate principle. Everyone knows that by now. We all hope that we will be better prepared for the next pandemic than we were for this one, so that the tradeoff between saving lives and saving the economy will not be so stark.

But Ranson misses some critical parts of the story. Although it is true that the virus does not destroy industrial equipment or commercial structures, it will destroy some very important intangibles if it goes on for long.

For one thing, it will destroy critical business relationships. Employer-employee relationships, supply-chain relationships, and lender-borrower relationships cannot necessarily be turned on and off without harm. It will take time to re-establish them, leading to slower recovery. Policies like payroll protection loans will help a little, but they are not a panacea.

A second problem is that even a temporary downturn will lead to widespread bankruptcies among the many firms and households who were over-leveraged going into the crisis. Fixed-payment obligations like bonds, mortgages, and leases cannot easily be suspended during the Ransom’s "interruption." Bankrupt business entities cannot instantly or painlessly be brought to life after the crisis is over, even if they were viable concerns to begin with, which not all were. Bankrupt consumers will have to limit their consumption for months or years as they rebuild their credit. State and local governments, whose revenues are falling, but whose fixed bond and pensions obligations remain, will have to undertake painful layoffs or tax increases. Either will be a further drag on the recovery.

Finally, Ranson completely misses, or is indifferent to, how unevenly the costs of the “interruption” will be distributed. People who work in restaurants and airports will be hammered, while those who staff grocery stores and Amazon warehouses may even see their paychecks swell with overtime. Investors who foolishly put their money in airlines or cruise ships will suffer badly, while those who invested in on-line service providers or makers of medical supplies will do well. Losses to the former will exceed gains to the latter. Inevitably, some whole communities will have more losers than winners. They will recover slowly.

In Ranson’s view, the greatest dangers we face from the pandemic come from “over-zealous efforts to quarantine and delay the spread of disease” and “a larger and more authoritarian central government unlikely to be scaled back afterwards.” In my view, the greater danger comes from those who tell us everything will be fine if we just stay calm and carry on.

Previously posted at

Wednesday, April 15, 2020

A Social Safety Net For an Age of Uncertainty

The COVID-19 pandemic is turning out to be a wake-up call, not just for public health, but for economic security, as well. We are learning that any one of us can be knocked off the ladder of prosperity at any time, no matter what rung we are on today.

What is more, COVID-19 is by no means the last crisis we are likely to face. Just a few things that may be coming down the pike:
  • A really bad virus, one as contagious as measles and as deadly as Ebola. 
  • Floods, wildfires, droughts, and famines brought on by climate change.
  • A job apocalypse, in which entire middle-class occupations disappear one by one.
Meanwhile, none of the old risks are going away. The risk of being born poor, making even the first step to self-sufficiency precarious. The risk of being born with a disability or congenital illness. The risks of bad choices — dropping out of school; falling into crime; falling into substance abuse.

This crisis has shown everyone, left, right, or center, just how inadequate our fragmented social safety net is for dealing with what the world is throwing at us. Encouragingly, the first response has been a sound one: Send money, and send it fast. To think how radical the idea of universal cash assistance seemed, oh such a short time ago.

The idea that cash is what people need most when adversity strikes is far from new. Decades ago, Milton Friedman argued for programs that give help “in the form most useful to the individual, namely cash.” More recently, Charles Kenny cites examples from around the world in support of a simple policy recipe: “Give poor people cash without conditions attached, and it turns out they use it to buy goods and services that improve their lives and increase their future earnings potential.”

However, the current push for emergency cash assistance is ad hoc and impulsive. So be it. Get the first checks in the mail fast. But meanwhile, we should give some careful attention to designing a more orderly system of cash assistance, custom-tailored for an age of uncertainty. The requirements are clear: The new system should be seamless, work-friendly, and resilient. But what form should it take? A universal basic income? A negative income tax? Wage subsidies? This commentary examines each of these alternatives and concludes by recommending a reform program that including features of each of them.

Monday, March 30, 2020

The Macroeconomic Implications of the CARES Act

In response to the economic crisis caused by the COVID-19 pandemic, Congress has just passed a $2 trillion spending package, the Coronavirus Aid, Relief, and Economic Security Act (CARES). Although it was put together very quickly, the macroeconomic impacts of this fiscally enormous piece of legislation will be felt for years. The following commentary highlights some of its important macroeconomic implications.

Stimulus or lifeline?

Not surprisingly, CARES has been widely compared to stimulus measures enacted at the onset of the Great Recession — the Economic Stimulus Act of February 2008, the Troubled Asset Relief Program (TARP) of October 2008, and the American Recovery and Reinvestment Act of February 2009. Although the total cost of those three laws was comparable to that of CARES, the new law is differently targeted and will affect the economy differently.

One important difference is that the 2007-09 recession was largely the result of a massive shock to aggregate demand triggered by the contraction of lending and the collapse of housing prices. In this case, the initial shocks have come from the supply side, first in the form of interrupted supply chains, then as sick and frightened workers became unable to report to their jobs, and finally, the policy-induced shock of shelter-in-place orders. (See here for a detailed discussion of the difference between supply shocks and demand shocks.)

As a result, restoration of aggregate demand will not be enough to restart the economy. At least in the short run, the checks being sent out to individuals under CARES will be more important as social policy than as macroeconomic stimulus. In fact, if we go by the results of similar payments in 2008, it is likely that a substantial part of this round will go into precautionary savings, as a hedge against worsening of the crisis, or into debt repayment, which, in economic terms, is another form of saving. For many people, these payments will make the difference between moderate and extreme hardship, but they will do relatively little to induce an immediate rebound of GDP.

A further difference is that the 2008 crisis was triggered primarily by a meltdown of the financial sector. On the whole, banks have come into this crisis with much better capitalization than they had in 2007. Consequently, there is nothing in the CARES Act that is comparable to TARP, which was aimed at recapitalizing banks and other financial institutions. If trouble does again develop in the banking system (which we cannot rule out if the present crisis goes on long enough), then resolving it will require new legislation.

Tuesday, March 24, 2020

Quantitative Easing Alone will Not Cure COVID-19

The Federal Reserve is the nation’s first line of defense against recession. Unlike the Congress, which controls taxes and government spending, the Fed can make changes in interest rates on a moment’s notice — even late on a Sunday afternoon, as it did on March 15.

The Fed’s policy instrument of first resort is its control over short-term interest rates. The specific rate it normally targets is called the federal funds rate — the rate that banks charge to one another for overnight loans of funds held in their reserve accounts at the Fed. The price of borrowing reserves, in turn, strongly influences the rates at which banks are willing to make loans to businesses and consumers.

Despite the Fed’s close oversight, the effective federal funds rate is actually a market rate that varies from day to day according to changes in supply and demand. However, the Fed does not let the rate wander just anywhere. Instead, it sets policy targets in the form of upper and lower limits for the rate, usually a quarter of a percentage point apart. If a surge in demand for reserves threatens to push the effective rate through the upper end of the target range, the Fed supplies new reserves to the banking system by buying short-term securities. If demand weakens and the rate falls, the Fed withdraws reserves to limit the supply and keep the rate from falling through the floor.

Saturday, March 14, 2020

The Coronavirus and the Economy: A Tutorial

The novel coronavirus that causes the disease COVID-19 will harm the U.S. economy. That we know, even though, as of this writing, the effects have barely begun to show up in statistics on employment, inflation, and real output. But just how bad will the impacts be, and what, if anything, can be done about them?

Although the economic effects of the virus will be complex, and we are sure to see some surprises, we can learn a lot from a simple model of the macroeconomy used in Econ 101 courses everywhere. This new slideshow presents a brief tutorial.

The model used in the tutorial is based on the concepts of aggregate demand and aggregate supply.
  • Aggregate demand means the amount of real output – the inflation-adjusted quantity of goods and services – that consumers and firms want to purchase at any given time. Other things being equal, the quantity demanded is greater when the price level is lower.
  • Aggregate supply means the quantity of real output that firms are willing to supply in response to the prevailing aggregate demand. Other things being equal, when demand increases, firms tend to react partly by increasing prices and partly by increasing the quantity of output.
When the economy is operating smoothly, as it was, for the most part, early in 2020, the rate of inflation is low and real output is close to potential GDP, which is the quantity of goods and services that can be produced in the long run without causing the economy to overheat.

Saturday, March 7, 2020

A Safety Net for the Job Apocalypse

Even if it's not this bad, we need to prepare

Automation and artificial intelligence are increasingly disrupting the labor market. Some see a coming “job apocalypse.” Others simply see a continuation of existing trends toward growing inequality as more and more people fall out of the middle class into less stable, lower-income employment. In either case, we are not prepared.

One of the many things that need attention is our social safety net, especially those parts of it that deliver health care and income support to those in need. This post suggests two major safety net reforms that would mitigate the impact of coming shocks to the labor market.

A scenario

A specific scenario will help focus the discussion — one based on a job category that is likely to grow in the coming years even as many routine and repetitive jobs disappear. That category comprises home health aidespersonal care aides, and other occupations that can be loosely referred to as “eldercare.” These jobs are resistant to automation because they are neither repetitive nor routine. Moreover, they are jobs where people value the human touch.

Sunday, March 1, 2020

Can Health Insurance Be Both Universal and Voluntary?

A tracking poll from the Kaiser Family Foundation finds that 56 percent of Americans favor a fully government-run Medicare for All insurance plan, but that an even larger 68 percent favor a mixed public-private approach with a public option. The most common reason given by those who support a public option but oppose Medicare for All is a desire for choice. They do not oppose the idea of public health insurance, but they do not want to be forced onto it.

Given those public attitudes, it is not surprising that many Democratic presidential aspirants have shied away from Medicare for All in favor of plans based on a public option. Pete Buttigieg emphasizes the element of choice in the very name of his plan, which he calls Medicare for All Who Want It. Other candidates backing one or another form of public option include Joe Biden, Amy Klobuchar, and Michael Bloomberg.

There is a dilemma at the heart of the public option approach, however. Is it possible to offer choice in health care coverage and still achieve universal coverage, another cherished goal of reformers? Or does the attempt to achieve universality inevitably require making enrollment compulsory?

In my view, it should be possible to preserve meaningful choice in health care while ensuring universal access to coverage. But doing so will require attention to some details of program design that the candidates’ plans have not fully addressed.

The issue

Although the universal-vs.-voluntary dilemma is inherent in all public option plans, the version advanced by the Buttigieg campaign has drawn the most attention to the issue. At least part of the reason is that the Buttigieg plan comes closest to addressing the dilemma directly. Writers for The Washington Post, The New Republic, the Wall Street Journal, and Slate have all argued that his public option is designed in such a way that it would inevitably become compulsory.

The central question in all of this is how to ensure that the risk pool covered by the public option includes an adequate number of healthy subscribers along with those who are ill. If people can easily buy into coverage only after they become sick and drop out at will when they recover, the average cost of claims made by those left in the pool rises and premiums become unaffordable. The result is the notorious “death spiral,” known to economists as adverse selection.

Sunday, February 23, 2020

More on How To Make a Carbon Tax a Generational Win-Win

Last April, Laurence Kotlikoff, together with three distinguished colleagues, published a long, highly mathematical working paper on how to make a carbon tax a “generational win-win,” that is, something that can benefit those of us who are alive to day as well as our great-grandchildren. Both Kotlikoff and I think the answer is “Yes,” but for different reasons.

Earlier, I published a commentary on Kotlikoff’s working paper here on Medium. In the meantime, he has written a shorter, much more readable version of his “win-win” thesis for the Milken Institute Review. The editor of MIR asked me for a comment on the new version, which has now been published. Here is what I said:

In his Milken Institute Review article, “Leaping the Divide,” Larry Kotlikoff identifies a key problem of political economy that complicates efforts to slow climate change: a large part of the costs of the transition to a low-emission economy must be paid upfront as the economy retools, while the greatest benefits will become apparent only decades, even centuries, down the road. That makes costly policies like taxing emissions to spur green investment a hard sell.

Kotlikoff would like to fix that. Somehow, he says, we need to make a carbon tax a “generational win-win” that would “give all generations an equal stake in the policy.” If so, we would not have to rely on the weak reed of intergenerational altruism to build a successful political coalition behind a climate action plan.

Can it be done? I agree with Kotlikoff that it can, but I have serious reservations about the way he proposes to do it. Let me explain.

Wednesday, February 5, 2020

Starve-The-Beast Libertarians Should Beware the Rule of the Clan

Tyler Cowen thinks that libertarians are waking up to the idea that the problem we face is not that the state is too big, but rather, that it lacks the capacity to do what needs to be done. That, in his view, is to “maintain and extend capitalism and markets.” He coins the term “State Capacity Libertarianism” (SCL) to refer to this post-anarcho-capitalist perspective.

Writing for this site, Sam Hammond offers three motivations for the transformation of old-fashioned libertarianism into the new kind. I would like to suggest an additional motivation, drawn from Mark S. Weiner's 2013 book, The Rule of the Clan.

The “starve the beast” doctrine embraced by many traditional libertarians holds that depriving the government of the resources it needs to go about its business will increase personal freedom and strengthen markets. That would make sense if the default alternative to state capacity were a free-market utopia like those portrayed in the Galt’s Gulch chapters of Atlas Shrugged or in Robert Heinlein’s The Moon is a Harsh Mistress. Unfortunately, as Weiner explains, the default alternative is something less attractive to lovers of freedom and individualism.

Monday, February 3, 2020

The EPA's SAFE Vehicle Rule is a Triple Play of Regulatory Ineptitude

In 2018, the EPA released a proposal called the SAFE Vehicle Rule, with SAFE standing for "Safer, Affordable, and Fuel Efficient." The rule featured an aggressive rollback of Obama-era fuel economy rules for motor vehicles. The original version would have frozen corporate average fuel economy (CAFE) standards at 37 miles per gallon, rather than allowing them to rise to 54 MPG, as would happen with no new action.

Since that time, the agency has been working on a revised version. Although the revision has not yet been made public, the Washington Post has published a description of it, in the form of a letter written by Senator Thomas Carper (D-Del). If the details given in the letter and the Post article are accurate, the new rule is both weaker and even less defensible than the original version.

For those who like CAFE standards, the new rule might look like a step in the right direction. Rather than freezing fleet mileage standards at 37 mpg, it would allow them to increase by 1.5 percent per year until they reached 40.5 mpg by 2030. But, as I pointed out in an earlier commentary, a policy that supplemented CAFE standards with a carbon tax, or even replaced them entirely with such a tax, would do even more to cut greenhouse gas emissions.

Tuesday, January 28, 2020

The Scissors of Supply and Demand are Cutting Carbon Emissions, but Not Fast Enough

Since the time of Alfred Marshall, more than a century ago, economics professors have taught their students that markets are like scissors: They have a supply blade and a demand blade that work together to determine prices and quantities. 

An example of the scissors at work can be found in a new report on greenhouse gas emissions from the Rhodium Group.

The report is a classic case of good news and bad news. The good news is that overall U.S. GHG emissions fell by 2.1 percent in 2019. The evidence makes clear that both blades of the scissors are doing some cutting.

Looking first at the demand side, we see that the decrease in total emissions comes despite an estimated 2.3 percent increase in U.S. real GDP last year. Together, the 2.1 percent drop in emissions and the 2.3 percent growth of GDP mean that emissions per dollar of GDP fell by a far-from-trivial 4.4 percent. American industries and consumers are finding that they don’t need to pump out the same amount of pollution they used to in order to maintain equivalent levels of production and consumption.

Thursday, January 23, 2020

How Can We Ensure That a Carbon Tax is a Generational Win-Win?

Photo courtesy of

A recent NBER working paper by a distinguished team of economists argues that a properly designed carbon tax can be a generational win-win. The team, led by Laurence Kotlikoff of Boston University, also includes Felix Kubler of the University of Zurich, Andrey Polbin of the Russian Presidential Academy of National Economy and Public Administration, Jeffrey D. Sachs of Columbia University, and Simon Scheidegger of the University of Lausanne.

By a generational win-win, Kotlikoff et al. mean a policy that would benefit not only future generations, who would reap the benefits of reduced warming, but also those of us who would begin paying the costs of mitigation now but would live to see only small, initial, climate improvements. The perception of a long lag between investments in climate mitigation and their full benefits has been a serious impediment to effective climate action. That is true both for democratic governments and for more authoritarian regimes, to the extent they are sensitive to public opinion. Although the paper discusses only carbon taxes, similar issues are raised by cap-and-trade, public investment, direct regulation, and other mitigation strategies.

The first section of this commentary outlines the Kotlikoff plan. The second section compares it to alternative strategies for dealing with the objection that climate action would pay off only in the distant future. The next section discusses whether the plan can properly be understood as an intergenerational “redistribution” in which the future “subsidizes” the present, as the authors contend. The concluding section examines the political realism of the plan.

Wednesday, January 22, 2020

Can We Put Everyone to Work? Four Ideas Compared.

Can we put everyone to work? In a way, it seems like an odd time to be asking the question. After all, the official unemployment rate is at a 50-year low and the U.S. economy has added jobs for a record 110 consecutive months.

Still, broader indexes show much greater labor market slack. Those indexes include some 4.4 million people who are working part time but would like to work full time, and an additional 4.4 million who say they want a job, but are neither working nor looking. What is more, the labor force participation rate, even for prime-age workers, is not yet back to its prerecession level and is even farther below the rates of the 1990s.

But how to do it? How to get more people to work – and better yet, at a living wage? In what follows I will discuss four proposals. The first two – guaranteed jobs, from the left, and work requirements, from the right – I view skeptically.  The other two are wage subsidies and basic income.  I see those as more promising, and more promising still if combined.