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.

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.

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. 

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.

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.

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.

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.