Tuesday, June 30, 2015

A Crude Awakening: Why Lift the Crude Oil Exports Ban

Oil production in American has been on the rise since the end of the Great Recession, all in spite of the fact that the American government likes to metaphorically shoot itself in the foot with bad policy. No, I'm not talking about implementing wind and ethanol subsidies, cap-and-trade regulation, the gasoline tax, or the inability to finish the Keystone pipeline. I'm referring to the crude oil exports ban.

During the Nixon administration, the United States government enacted a crude oil exports ban to deal with the oil crisis. Essentially, the government's thinking was that if it kept American oil here in America, we wouldn't run out of oil at home. The basic economics of free trade show that when a country exports, five things take place in an exporting country's economy: prices increase, consumer surplus decreases, producer surplus increases, net economic welfare increases, and supply consumed increases (see below).

Keep in mind that the inverse is true for the importing country, and that consumers in a foreign country are deriving net economic welfare as a result of the export. When looking at this on a global level, there is net economic benefit, which means that free trade makes the world a better place than an export ban does. Free trade improving the global economy is one of those few concepts that has general consensus amongst economists. Also, let's consider if we replaced crude oil with any other product, such as wheat or automobiles. Wouldn't it sound silly to stop trading with other countries simply because you think prices might rise?

However, that sort of thinking doesn't even apply in this case: the crude oil market operates differently because it is a global market. Normally, lifting the export ban would not do much to shift prices. However, as the think-tank Resources for the Future (RFF) points out, better allocation of refinery activity would improve refinery productivity, thereby lowering prices. So let's get beyond economic theory: would lifting the export ban help?

In short, the crude oil exports ban is a self-punishing policy that is a populist relic of the 1970s, and should have remained in the 1970s. This viewpoint was affirmed when I read the Independent Institute's "The Economic Case for Lifting the Crude Oil Exports Ban." It wasn't just this libertarian think-tank that thought it was a bad idea. There are studies and reports from the Aspen Institute, Baker InstituteBrookings Institution, Columbia University Center on Global Economic PolicyCouncil on Foreign Relations, Dallas Federal Reserve BankGovernment Accountability Office, Heritage Foundation, ICF InternationalIHS Inc., and the Manhattan Institute that affirm the same thing: lifting the export ban would create net benefits. What sort of benefits would derive from lifting this exports ban?

GDP Growth and oil production: While not perfect, the GDP is still the best measurement of economic progress and health we have. Removing this ban would allow for up to 1.2 million barrels of crude oil per diem between now and 2025 (Columbia University, p. 44). Allowing for further production means greater economic output. ICF estimates that it will generate up to $14.8B per annum for the next 20 years, which would amount to $296B. Brookings Institution estimates that it will yield anywhere between $550B and $1.8T in present discount value from the years 2015-2039. While increasing the GDP by 0.4 percent in 2015 seems small, "there are very few actions the government can take that as a long-term instrument of economic policy would make as measurable of a difference in the economy (Brookings, p. 33).

More jobs: Lifting the ban would allow for more jobs in manufacturing, construction, and refinery services. Estimates put the job growth between 300,000 (ICF) and 4.2 million (IHS) jobs by the end of the decade.

Decreased gasoline prices: As previously mentioned, both crude oil and gasoline prices are very closely tied to the global market since crude oil is a globally traded commodity. Since oil is truly a global product, we have to view supply and demand in terms of one big, global market. That means that the export model shown above does not apply here. Instead, it is basic, global supply and demand: supply increases as a result of increased production, and assuming demand remains the same, prices drop. This is all the more the case once the refinery mismatch mentioned above gets resolved, not to mention a steadier supply of crude oil in the global market will decrease odds of supply shocks and major price fluctuations. As a result, gasoline prices [in today's dollars] would drop anywhere between 2¢ (RFF) and 12¢ (Brookings).

Higher disposable income: Due to increased investment, additional jobs, and lower gasoline prices, consumers would have additional disposable income of anywhere from $158 to $285 per annum (IHS). In 2025, this figure might be as high as $3,000 (Aspen).

Improved foreign policy: The United States was a nation built on the idea of freedom. Having isolationism in the energy sector is merely repeating the same bad mistakes we made with Smoot-Hawley back in the 1930s. Removing these trade barriers not only solidifies current trade arrangements, but also provides the opportunity to create new ones (Columbia University).

I know that good politics  usually come at the expense of policy being poor, but given the positive effects of lifting this ban, couldn't we set politics aside this one time?

9-10-2015 Addendum: In addition to the aforementioned studies, the U.S. Energy Information Administration just came out with a study showing, amongst other conclusions, that oil prices would not increase as a result of lifting the oil exports ban.

Friday, June 26, 2015

Guilty Until Proven Innocent: Why Seizing Property Under Civil Asset Forfeiture Laws Is Uncivil

This week seems to be one in which I think about the importance of property rights in a free society. Earlier this week, I wrote about eminent domain abuse and how it causes issues with the world of property-owning. Apparently, that isn't the only instance in which the government takes liberty to infringe on property rights. If I told you that the government could seize your assets under the pretext that the property was used in criminal activity, you might feel somewhat uncomfortable. Let me increase the discomfort. What if the government could seize your assets without even charging you with a crime because the government is charging the property, not you? And on top of that mess, what if I told you that government is not obligated to return the property once your innocence has been proven? That sounds like a hallmark of a totalitarian country that has no regard for property rights. However, that is how civil asset forfeiture works in the United States (see Congressional Research Service report here).

This law sounds awful, so why would this ever become law in the first place? Supporters argue that it can be a powerful law enforcement tool by reducing profitability of crimes and removing assets used in criminal activity. These funds can also be used to protect the public interest and compensate victims of crimes. While this law might sound like it has noble intentions, it's amazing as to the havoc it can cause. Freedom Works actually released in June 2015 a grading of states based on their civil asset forfeiture laws (see map below), and it was hardly flattering.

For one, it's a nice way for law enforcement to generate profit (Williams et al., 2010). In a Februrary 2015 report, the Institute of Justice published findings about the IRS and civil asset forfeiture (Carpenter and Salzman, 2015). From 2005 to 2012, the IRS seized more than $242 million for structuring violations in more than 2,500 cases.  Keep in mind that out of this money, the IRS kept $123 million from 1,745 cases (Carpenter and Salzman, p. 10). Structuring violations don't even take into account the Department of Justice's two coffers for civil asset forfeiture funds, which amounts to over $3B (ibid., p. 11).

Presumption of guilt is insanely high in these cases. Why is it that the owner has to prove whether the property is "innocent?" Doesn't living in a free society mean having due process and that innocence is presumed until being proven guilty beyond all reasonable doubt? The Heritage Foundation, ACLU, Institute for Justice, and others recently released a multi-partisan pamphlet on the abuses of civil asset forfeiture. In the pamphlet includes a highly convoluted flow chart illustrating what an individual would have to do in order to reacquire their assets (see below).

Unlike in other cases, there is no right of "having a lawyer if you cannot afford one of your own" here. Most people couldn't navigate this sort of leviathan, which is why most of the funds seized remain in government possession.

Although the amount of money seized and the fact that the payouts of these seizures have increased by 250 percent in the past twelve years catch my eye, what is even more noteworthy is that civil asset forfeiture laws are a loophole around some of the most cherished aspects of our legal system: due process, innocent until proven guilty, ability to acquire legal representation. The deck is stacked against property owners and the abuse is ripe, as the Washington Post revealed in its scathing six-part exposé last year. When civil asset forfeiture is one of the very social issues upon which people across the political spectrum can agree, you know something must be done to help secure property rights in this country.

One reform that could be enacted is to charge the individual with a crime before going after their property. Here's something even better: shift the burden of proof to the government, like Montana recently did. For instance, let's raise the burden of proof from "preponderance of evidence" to "clear and convincing evidence" by amending the Civil Asset Forfeiture Reform Act. Also, let's return the presumption of innocence back to these cases. Why should the property owner have to fight tooth and nail to keep their property? Instead of wasting countless hours on cases in which the defendants are predominantly innocent, let's make sure that they're actually guilty of a crime. Another thought: instead of dumping the seized assets into police funds, we can dump them into a general state fund so the police aren't incentivized to increase their own coffers.  We also shouldn't allow for state and local law enforcement to use the Department of Justice's equitable sharing program to bypass reform initiatives. Given the complex nature of these cases, the government should fund counsel for defendants since they are currently not afforded that right. These are just some of the reforms that could be enacted to help bring integrity to our criminal justice system and make this country a beacon for ensuring property rights once more.

Tuesday, June 23, 2015

Kelo v. New London: A Decade of Eminent Domain Abuse

Imagine that you purchased a nice, little house on the waterside because you always wanted a nice view of the river. Now imagine that after purchasing this house, the government comes in and tells you that you have to sell your house to a developer in order to make way for a large pharmaceutical company because "government knows best." That's what happened to Susan Kelo in the 1990s, and that was the very case, Kelo v. New London, that was brought before the Supreme Court. Ten years ago today, they ruled in favor of the defendant. This case subsequently caused an uproar, but why?

Eminent domain is when the government has the power to come in and take private property from a citizen. While compensating the owner for the troubles of uprooting from their home would be a nice thing to do, the government still can exercise this power when the owner is unwilling to sell. Traditionally, eminent domain has been exercised for reasons of "public use," such as a public road or public building. In an American context, this power exists under the Fifth Amendment's Takings Clause:

...nor shall private property be taken for public use, without just compensation.

Not only did the land have to be used for public use, but the owner also needed to be justly compensated. This was the Founders' way of limiting the government from power grabs. However, the Supreme Court managed to undermine the Fifth Amendment, along with using the Fourteenth Amendment, by ruling that the government's "public use" merely means "public purpose." I remember this case infuriating me a decade ago because the government now has the power to forcibly take someone's land for the purpose of private development, as long as the government believes that it can create more tax revenue. Although this had been taking place prior to Kelo v. New London, private companies now have a legal, albeit immoral, justification for taking someone's property.

While we think of free speech, freedom of religion, and freedom of press as important freedoms (which they are), people tend to forget that the right to private property is also a freedom that makes for a cornerstone in a free society. Property rights are human rights, provided that those rights are not being used to harm another individual. Property rights helped pave the way for further economic development since their inception. To separate economic rights from civil liberties, as if one is more important than the other, is foolhardy. Property rights help create social cohesion and peace in a world that has scarce resources. Both economic rights and civil liberties are important for us to live freely. Property rights help ensure a workable system of human cooperation and division of labor because individuals are free to pursue different occupations, lifestyles, or consumption with as little infringement on others as humanly possible. There is also the built-in incentive of stewardship of property under a society with property rights. If you don't take care of your property, it loses value, and vice versa. This is why private property, at least under economic theory, tends to be better maintained than government property.

But getting back to eminent domain, it's not simply a matter of it eroding a vital institution of a free society. Even if one were to completely throw the idea of property rights to the wayside (which would be foolish in the first place), I have to wonder just how well eminent domain helps the "common good." Shortly after the Court ruling, the St. Louis Federal Reserve ran an economic model simulating eminent domain. The conclusions? Under eminent domain, the price for which the seller is willing to sell is irrelevant because the seller is only going to be compensated at market value. Since market value is below the reservation price (i.e., a price that would have been satisfactory for the property owner), there is going to be an excess of land assembly under eminent domain. As such, the St. Louis Fed concluded that "economic theory certainly suggests that eminent domain used for private economic development will likely result in a zero-sum gain and may actually hinder economic development in the local areas, as well as the region, rather than help."

I love good economic theory because especially when there's an absence of empirical data, it's a good predictor for how economic theory will take place. However, I enjoy it when you can procure at least some data to back up good economic theory, which is the thing that makes good economic theory good. The main justification under Kelo v. New London is that it will help spur more economic growth via increased tax revenues. The Mercatus Center released a working paper last year showing that there is no positive relation between using eminent domain and tax revenue (Kerekes and Stansel, 2014).

It wouldn't be too difficult to find examples of which eminent domain has been abused since Kelo v. New London.  Combine overreaching powers with Big Business getting into bed with Big Government, and it's hardly a stretch to think that eminent domain is going to be abused. Fortunately, that overreach has been mitigated since 44 states reacted to Kelo v. New London by enacting eminent domain reform to limit the ruling's ill effects. However, the Court has not revisited the issue since 2005. Until the Supreme Court revisits the issue or Congress decides to do something about it, nobody's property is safe. America cannot call itself a free society if its government has the ability to use the law to uproot property owners on a whim in the vacuous claim of the "common good" while it simply lines the pockets of those with money and/or power. In any case in which the government is going to exercise eminent domain, the case for what constitutes as public use and the burden of proof should be on the government, and even then it should be under some strict scrutiny. I would have expected that the ten-year anniversary would have sparked some debate or legislation on the issue, but it looks like the American people would rather remain oblivious to this law of the land.

Friday, June 19, 2015

Why The Anti-Israel BDS Movement Is Simply BS

Boycott, Divestment, and Sanctions. It's a global movement that tries to put economic and political pressure on the state of Israel in order to a) end the so-called occupation that has been going on since 1967 and tear down the Wall, b) recognize the fundamental rights of Arab-Palestinian citizens of Israel to full equality, and c) promote the right of return of Palestinian refugees under U.N. Resolution 194. These three goals are the underpinning of the BDS movement "playing an effective role in the Palestinian struggle for justice." Sounds like a just cause, but let's go through each of the three goals to see if they can withstand scrutiny.

Ending the "occupation": First of all, let's stop calling them occupied territories. This implies that Israel was infringing upon some pre-existing Palestinian sovereignty when it wasn't. Forget that Transjordan, which included the West Bank, was initially part of the Jewish homeland under the Balfour Declaration in the hopes that "land for peace" would work. Jordan was the country illegally occupying the West Bank from 1948 to 1967. There was no Palestinian outcry during that actual occupation because Palestinians did not exist until after the Six Day War in 1967. Israel annexed the West Bank in a defensive war as an act of self-defense because Jordan, Egypt, and Syria were hellbent on destroying Israel. Acquisition of the West Bank was more than justifiable, which is all the more so under the Oslo Peace Accords and U.N. Resolution 242, the latter of which is an underlying component for the former per Article I of the Oslo Peace Accords. Combine U.N Resolution 242 with U.N. Resolution 338, and you'll find that negotiations are the determinant of who owns the land, not some supposed "inherent right." Much like the Western Sahara, Zubarah, or Kashmir, the correct term to describe the West Bank or Gaza is "disputed territory," not "occupied territory." And if any country has a founding well-established in legality, it's Israel (see video below).

Stopping the gross human rights violation: While talking about recognizing fundamental rights of Arab-Israeli citizens, the BDS movement mud-slings and calls Israel an apartheid state. As I have pointed out in the past, Israel is not an apartheid stateIs Israel perfect? No nation-state is. What nation-state has perfect interracial relations? Looking at Ferguson and Baltimore, that doesn't exist in the United States. The supposed enlightened European nations are doing less than a stellar job at handling their Muslim immigrants. It's one thing to rightfully criticize someone for doing something wrong. A healthy dose of criticism is fine. It's when people like those over at the BDS disproportionately demonize Israel while ignoring human rights violations that are significantly worse than anything Israel has ever done.

Let's take a look at Israel and compare it to other nations. Freedom House, an independent watchdog organization dedicated to developing freedom worldwide, ranks Israel as a free country. Israel is still the only democracy in the Middle East that has a respect for rule of law, freedom of the press, protects peoples' rights, and has some of the leading innovators in science and technology. Israeli Arabs live more freely than Arabs in any other Muslim country. Where else in the Middle East can Jews, Muslims, and Christians live in as much harmony as humanly possible? Palestine, on the other hand, is ranked by Freedom House as "Not Free." While it's not a Pollyanniash living scenario for Arab citizens in Israel, Palestinians are much freer in Israel than they are in Palestine. By this logic, we should be boycotting Palestine because Palestinians are treated much worse under Palestinian governance than Israeli governance. But who said logic was part of any of this? To think this doesn't even get into how Palestinians are treated in other Arab countries. Furthermore, Maplecroft, a global analytics firm, produces a Human Rights Risk Atlas every year. You want to know who is on their Top 10 List? Hint: It's not Israel. If you want to send a message about human rights abuses, go after the most heinous offenders first. Since there are countries with human rights records that are simply atrocious, why single out Israel when there are far worse offenders? It makes me question BDS' motives when Israel is one of the farthest things of being the world's worst human rights offender.

"Right of return": Why is this still an issue? The Greek-Turkish War of 1923, WWII, and the dispute with Kashmir caused larger refugee issues than the Palestinian refugee issue. Plus, Israel had to deal with taking in Jewish refugees took in a comparable amount of refugees after the Israeli War for Independence in 1948 because Arab nations kicked their Jews out of their countries in retaliation of the creation of a Jewish state. Interesting how this Palestinian refugee issue has been taking place in perpetuity. You would think that their Arab brothers and sisters, who have so much land, would lend a helping hand. With the exception of Jordan, none of the Arab nations have granted these Palestinian refugees citizenship. It's almost as if they wanted the refugee issue to be a wedge in the peace process. And before invoking U.N. Resolution 194, let's not forget that it's a non-binding resolution that a) only recommends that Palestinians be permitted to return, and b) living "at peace with their neighbors" was a prerequisite. None of the Arab countries voted for U.N. Resolution 194 because it would have implicitly recognized Israel's existence. This doesn't even get into the fact that actually allowing for a "'right' of return" would essentially be a demographic abolition of the Jewish state. Making a "right of return" a precondition of peace negotiations is a non-starter because Israel will never enter a zero-sum game by making a concession in which Israel ultimately doesn't exist. Plus, many people throughout history have fled their homeland. Palestinians have no right to return to Israel, much like I don't have a right to return to my ancestral homeland in Europe simply because my ancestors decided to leave Europe for the United States.

Postscript: And that's the real issue for the BDS movement: Israel's existence. You know it's bad when even JStreet can't even condone the BDS movement or if anti-Israel activist Norman Finkelstein calls the BDS movement a cult. If this were about merely criticizing Israel and its policies, you know what? Israeli citizens do it all the time. It's practically a national pastime over there. If this were about Palestinian oppression, there are much more egregious cases of oppression than what goes on within the Green Line. If this were about human rights, there are far more heinous crimes against humanity.  As the video by former Harvard professor Alan Dershowitz points out below, BDS is not about peace; it's about coercion. BDS' goal is about economically strangling Israel until it caves in. Israel is not opposed to peace. It has offered peace to its Arab neighbors multiple times, but has been rejected every single time. If you need to browbeat anyone into peace, it's Israel's Arab neighbors.

As I have illustrated in previous paragraphs, the BDS movement is misguided. If you want to target someone for either mistreating Palestinians or humanity, singling out Israel while ignoring all other atrocities within the greater context is just morally wrong and intellectually dishonest. The BDS movement is also nonsensical in what it targets. Not only does BDS target Israeli companies that develop technologies to better mankind, but it also targets Israeli academics. Israeli academics are progressive Israeli citizens that usually are most critical of the Israeli government, and you want to boycott themI also find that boycotts tend to be non-productive because they have very little economic impact. Look at Israel's GDP growth. I don't think there is much impact on the Israeli economy. It might be picking up some more momentum on college campuses, but it's still nowhere close to where it needs to be in order to actually work. Even if it worked, it would be counter-productive. It sends Palestine the wrong message that they can let the "international community" beat Israel into submission while taking no responsibility for its actions or provide no incentive towards peace. And if they marginally succeed, all it does is embolden Israelis opposed to the peace process. If the BDS movement cared about Palestinians, human rights, or peace in the Middle East, it would take a different approach. However, this is about hatred for Israel and exploiting ignorance to slander and malign Israel more than anything else.

It makes me happy that my home state of Illinois has actually passed an anti-BDS law that divests pension funds from any foreign company that boycotts Israel. This is but one fight to counter the BDS movement and its propaganda. Another fight is to win the minds and hearts of those who are undecided about how they feel about the Israeli-Palestinian conflict. It's about showing the good Israel does in the world and how it has contributed. We simply can't counter the BDS movements with facts about Middle East history or politics, but show that Israel is still an overall force of good in this world. May peace in the Middle East come soon!

Tuesday, June 16, 2015

Petter Chamor: Redeeming a Donkey, Redeeming Ourselves

A couple of days ago, I was fortunate to play clarinet at a rare ceremony known as פטר חמור (petter chamor), or the Redemption of the First-Born Donkey. This is a practice in which an owner of a first-born donkey redeems said donkey by giving a Kohen, who is an individual descending from the biblical Aaron, a lamb in exchange. While this mitzvah is a rare one indeed, it does have its basis in the Torah itself (Exodus 13:13, 34:20). The donkey is the only non-kosher animal whose firstborn undergo redemption in Jewish law. Why would G-d choose to sanctify a non-kosher animal in such a way? And out of all animals, why is the donkey selected for such a mitzvah?

The Talmud (Berochot 5b) is a good of a place to start as any. In the Gemara, it is asked why the donkey gets special treatment. Why not redeem the camel or the horse? One of the answers provided is that after receiving the gifts from the Egyptians (Exodus 11:2-3, 12:35-36), they needed a way to transport them. This is where the donkeys enter the scene. Jewish tradition teaches that these creatures did the heavy lifting for forty years without complaining, which is more than I can say for the Israelites at the time. As a result, G-d rewarded the donkey with this mitzvah. What can we learn from this?

Let's get the depressing interpretation out of the way first. The Hebrew word for donkey (חמור) has the same root as the Hebrew word for materialism (חמר). While in Egypt, the Israelites reached a level of spiritual bankruptcy. Even if one has reached a certain low, what we learn from the donkey is that we are not irredeemable. We are able to exert our free will and catapult ourselves to a level even higher than the righteous tzaddik (Bechorot 34). Even if we don't find that interpretation to be palatable, we can still realize that throughout the Torah, the donkey symbolizes the archetypical work-animal. The donkey represents all hard work, and not receiving any of the fame and glory. We can learn that something as mundane as shlepping for a divine purpose is still divine service, and that we can find holiness in unexpected places (R. Hirsch's commentary on Exodus 13:13). We should never scoff at serving G-d, even if it's something like setting up tables or shlepping. Even more generally, we can use this mitzvah to remind ourselves that even materialism can be used to serve the Divine.

I like that the Talmud (Bechorot 5b) concludes that we are supposed to be grateful, but I think it's more than just symbolic gratitude on a general level. I think it could be a sense of gratitude for redemption. As my rabbi, R. Shmuel Herzfeld, points out, this is supposed to inspire us to further redemption. Redemption is something we're supposed to work towards, something we're supposed to work hard for. Whether we talk about personal redemption, redemption of the Jewish people, or of humanity as a whole, it's not a cake walk. We are to be grateful for the fact that G-d gave us free will, the very thing that gives us the opportunity to improve upon ourselves and that which is around us. Redeeming the donkey reminds us that by putting in hard work ourselves, we too can experience redemption within our lifetimes.

Friday, June 12, 2015

Is There a Case for the Carbon Tax for Those Who Believe in Limited Government?

The libertarian blogosphere had a field day a few weeks ago when libertarian Jerry Taylor, who is heading up the newly-founded Niskanen Center, made a conservative argument for a carbon tax (see the full report here). Taylor essentially argues that because climate change is an issue, we need to reduce carbon emissions so that we can avert the cataclysmic events that can happen. His solution? A revenue-neutral carbon tax to replace command-and-control regulation of carbon emissions. Given the current reality, is Taylor's solution the least worst option that conservatives and libertarians could ask for? Let's take a look at Taylor's argument piece by piece:

I. Carbon Tax or Command-and Control? 

Taylor spends this section of the report arguing that given the public opinion in favor of limiting greenhouse gas (GHG) emissions and political support for such action, the options on the table are not "carbon tax or no government intervention" (Taylor, p. 5-7). As such, Taylor does not view it as whether the government should regulate GHG emissions, but rather how the government should regulate them (p. 8). I can't help but find it amusing how Taylor chides conservatives for providing a false dichotomy of "carbon tax or nothing" (p. 3) while providing a false dichotomy himself.

Taylor's proposal only occurs if those on the Left agree to scale back or dismantle the EPA's command-and-control regulation. Taylor essentially blames the Republicans for being stubborn mules, but it wouldn't matter because it would be exceptionally difficult to dismantle even if the Republicans didn't "treat it as the third rail." Why? As Taylor admits, the EPA is well-entrenched in GHG regulation and "has more than enough resources and manpower to write regulations directly" (p. 7). And who is to say that both command-and-control regulation and the carbon tax don't end up being implemented? The fact that both could become policy should make any conservative or libertarian shudder at the thought.

Taylor also argues that the proposed carbon tax should be revenue-neutral. While this idea is palatable and sounds nice in theory, the reality is that it would be hard to implement in practice. This country has an increasing amount of debt, and in order to pay that off, the temptation is to raise taxes, not maintain them at current levels. What's funny is that less than two months after publishing his report, Taylor changes his argument about the carbon tax being revenue-neutral. He essentially is saying that because tax hikes are going to be part of reducing debt, conservatives might as well accept that fact. Passively accepting higher rates of taxation is not conservative, and it's disappointing to see Taylor throw out that vital part of his argument.

II. The Case for Risk Management

After reading this section, I think this is where Taylor actually makes the strongest case. I have my skepticism about anthropogenic global warming. After all, there are so many unknowns: the levels of carbon released in the upcoming years, climate sensitivity, how that will affect the climate system, technological progress, and economic growth. Conversely, risk aversion is part of risk management. We don't know the parameters, but the presence of risk is there because we know that higher concentrations of GHGs influence climate. What does one do in a non-diversifiable, low-probability, high-risk scenario in the private sector? Hedge against the risk. If investors didn't have any risk aversion, they would never invest in bonds. They would always put their money in high-risk equities. However, that's not the way of finance or risk management. We should be willing to apply the same concepts here.

Conceptually speaking, I am on board with managing risk. In this context, however, it is the implementation that becomes tricky. This was something I had discussed last year with regards to the social cost of carbon, specifically with being able to choose a discount rate for the cost. A higher discount rate allows for higher tolerance of risk, whereas a lower discount rate would make us more risk-adverse since the cost of carbon would increase. Willingness to pay and risk preferences are subjective (p. 15). If the current administration views the threat in an alarmist fashion, then we pay more than we should have. If another administration underestimates the gravitas of the situation, then we'll pay for it in the long-run. Regardless of the discount rate that is chosen, whoever is in charge should look at the situation with all standard discount rates in mind before making a decision.

III. The Anatomy of a Carbon Tax

Taylor argues that command-and-control regulation is the most costly way of achieving emission reduction since they "allow relatively little flexibility in the means of achieving goals" and "force firms to take on similar shares of the pollution-control burden, regardless of the cost (p. 8)." Offsetting the carbon tax with reductions in other places in the wonderful world of taxation because things like the corporate tax or the estate tax are that ridiculous. A revenue-neutral carbon tax can provide tax cuts, whereas a command-and-control regulatory system and its implicit taxes [via regulation] cannot (p. 16). That much I will agree: a carbon tax is preferable to command-and-control. However, as I will point out in the Conclusion, this assumes that these are the only two policy options on the table, and that is not the case.

IV. Conservative Objections to Carbon Taxes

In this section, Taylor addresses five conservative objections to carbon taxes. I highlight two of them I found worth addressing.

Unilateral Action is Pointless: The common argument is that without global action, the United States acting unilaterally is pointless. To address emissions leakage (i.e., if they don't emit GHGs here, they'll do it elsewhere), Taylor calls for add charges on imports that benefit from GHG emission, or rebating those impacted by the leakage (p. 19-20). Last time I checked, that was protectionism, plain and simple, so more points are lost on making a "conservative argument" here, and none of that goes to enforceability or feasibility of Taylor's suggestion. Since he cannot refute the fact that unilateral action will bring down global emissions to an "acceptable level," Taylor implicitly concedes the point that a unilateral carbon tax won't help (which is what the Congressional Budget Office [CBO] has to say) because his focus is on non-climate benefits of the tax. Interesting how we go from arguing that this will be helpful for climate change to now using non-climate benefits as the underpinning for unilateral action.

Growing Government: Taylor first brings up that the tax would be revenue-neutral, although we already have seen Taylor retract that condition. He then argues that a carbon tax would decrease relative to the status quo of command-and-control, but again, this assumes that the government doesn't enact both command-and-control and a carbon tax. He concludes this sub-section with the idea if government exists to protect private property from harm (i.e., negative externalities), then it doesn't matter if the government "grows" (p. 21). If he cared about the least costly and most efficient approach, he would take the Bjørn Lomborg route and find the policy that would create the largest social benefit instead of sticking with the carbon tax, which doesn't have the same, desirable cost-benefit ratio.

My Concluding Thoughts

For conservatives and libertarians, there is the tension between pollutants being an assault/negative externality on humanity and the fact that most (if not all) disputes can best be and should be handled by the private sector, which is accompanied by a desire for limited government. Although it is difficult to pin down just how much damage the increasing temperatures will do in the future, there is enough of a preponderance of evidence that suggests that something should be done. For someone who is for less government, there should be the least intrusive and most economically efficient form of government intrusion.

After looking at the alternatives (especially cap-and-trade and carbon tax), I am one who believes that research and development subsidies are the way to go, as is illustrated by this study from American Enterprise Institute, the Brookings Institution, and the Breakthrough Institute. However, those subsidies still need a funding source. This is where I could see myself supporting a carbon tax.

As Hudson Institute Scholar Irwin Stelzer points out, even a climate skeptic can get behind a carbon tax because it would provide an opportunity to use the carbon tax to replace it with a more inefficient tax. This leads into my first criterion for carbon tax implementation: it has to replace a more inefficient tax. Second, this needs to be as revenue-neutral as humanly possible. Adding on more revenue while continuing more inefficient taxes is not productive. Third, this tax needs to be modest. I listed off seven concerns a couple of years ago, the most pressing one was deadweight loss (although not knowing the optimal tax level is also high on my list). Since the carbon tax will heavily affect energy prices, we need to find a way to make sure the regressive nature of the tax doesn't harm too many Americans in the process. Fourth, command-and-control would have to go away. I am most skeptical about this criterion since it is difficult to remove a bureaucracy once it is entrenched in something like carbon reduction. Finally, the funding needs to go to geo-engineering so that we can fund research and development of green technology. I have enough reasons to have doubts about implementing the carbon tax, but if these conditions could be met, it would be the least worst of viable options on the table.

7-3-2015 Addendum: The Committee for a Responsible Federal Budget just came out with a discussion on a carbon tax proposal.

Monday, June 8, 2015

Why Stadium Subsidies Are Anything But a Slam Dunk

I recently talked to one of my friends about a taxpayer-funded subsidy towards building a new stadium for the Milwaukee Bucks. I might not live in Wisconsin anymore, but geographic location doesn't minimize my aggravation when a government makes poor spending decisions. Apparently, me living in Washington D.C. doesn't make me immune from this sort of absurdity because it's also happening with the D.C. soccer team. Proponents argue that such a capital investment is a great way to market the city. They think that it will generate more revenue, more jobs, and greater economic growth for a city. Sounds plausible. Plus, I enjoy a sporting event as much as your average American, so what's there not to like?

Over the past quarter-century, 101 new stadiums have been constructed, and just about all of them with public funding (Baade and Matheson, 2011). When accounting for initial costs, maintenance costs, and foregone property taxes, the public cost becomes an average of $177 million per stadium [in 2005 dollars]. Adjusting that figure to 2010 dollars would put it at $241 million! Multiply that underestimation by 101 new stadiums, and you have over $24 billion in taxpayer dollars spent in the last decade on sports stadiums. To annoy you even more, about 78 percent of the public-private partnership falls on the city (read: taxpayers), whereas only 22 percent has to be paid by the team itself.

Think of what that money could have been spent on otherwise, or in economic terms, the opportunity cost. That money could have been spent on the poor, improving roads, the fire department, a new community college....you get the idea. The same goes for the land that is used for a stadium. Housing, office space, and retail are all better uses of the land in terms of long-term investment.

There is also the matter of the substitution effect. Most families set aside a certain amount of money for entertainment purposes. If they did not spend it on the basketball game, it would have probably be spent on bowling, the waterpark, or some other place. Given consumption patterns, the money most probably would have been spent on some other entertainment venue, so we're not seeing an increase in entertainment consumption spending so much as we are seeing a consumer spending shift.

Although the reports are dated, the St. Louis Federal Reserve Bank found that taxpayer funding of stadiums was bad policy, and the Kansas City Federal Reserve Bank found that back in 2000, taxpayers spent $188M per annum while only receiving $44M in return, which puts the ROI (return on investment) at a measly 0.23. If I were a mayor or governor, I personally would want my community to receive more benefits than that, but the allure of lifetime box seat tickets and political favors does have that uncanny ability to blindsight.

Some have found no connection between stadium construction and economic growth (Siegfried and Zimbalist, 2000), and there can actually be a negative impact on economic growth (Baade and Dye, 2006Moylan, 2007). The reason why sports stadiums do not generate the economic growth to a community or state, also known as the multiplier effect, is because the money is not being spent in a way in which the community who footed the bill experiences a rate of return (Johnson, 2011).

It also isn't the job creator that it seems like because sports venues are seasonal, and only open a few hours a year. Owners, administrators, and players are the ones receiving the bulk of the funds, and they typically do not spend in the team's city. Since the stadium is spent on stadium parking, concessions, restaurants, and box seats, the overall economic impact that taxpayers feels, directly or indirectly, is minimal since the spending is very localized. Although there is the theoretical possibility that stadium subsidies are at best a cost-shifting mechanism to fund Big Business, the cited studies make it more probable that the economic benefit is truly small in comparison to other forms of spending.

Stadium subsidies are merely a form of redistribution to line the pockets of already-rich, billionaire stadium owners while perpetuating the lavish incomes of overpaid athletes. Although the taxpayer is footing the bill, the impact on the taxpayer isn't quite large enough where they would lobby against such nonsense, whereas stadium owners have the incentive and money to do so. Proponents like to argue that these subsidies help with the economy. Not only does the economic literature show otherwise, but all the subsidies show is that the economy is developed enough where heads of government think they can lavishly spend money on stadiums. Economists generally agree that stadium subsidies are a bad idea, and what's more is that these subsidies are unnecessary because the stadiums can successfully be funded privately (Chodosh, 2011). Instead of striking out with giving more money to Big Business, how about we enact laws that prohibit such subsidies?

4-6-2017 Addendum: I recently came across a 2016 Brookings Institution study that shows that since 2000, taxpayers have paid $3.2 billion for 36 stadiums, as well as a nice description of how stadiums are not economically efficient investments.

7-6-2017 Addendum: I found this University of Chicago survey of expert economists, and the consensus is that the costs greatly exceed the benefits of stadium subsidies.

Friday, June 5, 2015

Liberalize Traffic Lanes by Allowing Motorcyclists to Ride Between Lanes

When you think of your stereotypical motorcyclist, what runs through your mind? Perhaps it's the rebellious nature of the biker or the fearlessness. That could explain why they like weaving in and out of lanes. This ability of a two-wheeled vehicle to weave in and out of lanes, also known as lane-splitting, has become outlawed in 49 out of 50 states. It's not simply a matter of annoying automobile drivers. The argument made for banning lane-splitting is that it makes it less safe for bikers to ride. Not only do I wonder if that is a reason to make it illegal, but I have to wonder if that is even true.

Why should I doubt it? It seems intuitive enough. Crazy bikers or cyclists who aimlessly ride can get hurt by the big, bad automobile, or to be less sarcastic, perhaps they're not paying attention or don't notice an automobile suddenly switching lanes. The sort of paternalistic thinking that inflates the costs without even remotely considering the benefits is what drives such laws into existence.

For one, size matters, but not in the way that cliché is normally used. Because of a motorcycle's petit size, it is able to squeeze in between lanes more easily than an automobile. Not only can the motorcyclist get through traffic more quickly, but it helps reduce both overall congestion and carbon emissions (Transport and Mobility Leuven, 2011).

Let's consider the safety factors. Again, I know it seems intuitive that allowing for lane-splitting makes its unsafe for bikers to ride. However, a study that was released only a few days ago (Rice and Troszak, 2015) stated that lane-splitting actually increases rider safety because it's harder to hit a motorcycle that is riding between automobiles than in front of them. This is by far the most comprehensive study done on the subject. The study did come with some caveats, however, such as that it's safe as long as the motorcycle is going 50 MPH and is not exceeding the speed limit by 15 MPH. Those who were doing the lane-splitting were less likely to be inebriated, more likely to lane-split during the daytime, and more likely to wear a helmet, all of which suggest that lane-splitting bikers are more safety-conscientious bikers. It shouldn't take multiple studies for someone to realize that zipping by slow-moving vehicles is a bad idea, but you'll still have the occasional imbecile doing it. That imbecile shouldn't make it illegal for others, especially since the latest study echoes what other studies (e.g., Guderian, 2011; Ouelett, 2011) have been saying all along: lane-splitting is safer than banning it.

I can list off other benefits of lane-splitting, such as reducing cyclists' exposure to heat and car exhaust, reduction in engine damage from constant idling, but the point is that lane-splitting should not be illegal. As the American Motorcyclists Association points out, lane-splitting should not be required, which is to say that the motorcyclist should have the right to choose whether to lane-split or not. Much like other practices, doing lane-splitting in a responsible manner comes with many benefits. Highly urbanized areas in Europe and Asia have already reaped the benefits of liberalizing traffic laws for motorcyclists, so there's no reason why the United States shouldn't join the fast lane.

Tuesday, June 2, 2015

Cracking Down on Mexico's Drug Cartel

Since the end of 2006, Mexico has been ravaged by violence induced by the government's war on drug cartels (see Congressional Research Service background on the issue here). In spite of the Mexican government's War on Drugs (la guerra contra el narcotráfico en México), the violence really hasn't abated. As much as 120,000 have died from the carnage. There are those who have used this as an excuse to harp on "illegal immigrants," even though the Mexican unauthorized immigrant population has been on the decline since 2007. Whether we accept the narrative that these drug wars are causing "a crisis on the U.S.-Mexico border," we should want to see an end to these wars. The economic efficiency is but one aspect of it. Thousands of pesos that were spent on fighting drug lords could have been spent bettering the lives of the Mexican people. There is also the humanitarian cost to consider: 100,000 homicides and 25,000 individuals missing. Increased poverty, corruption, the list goes on. While there has been some improvement over the years, drug cartels are still an issue. Whatever the Mexican government has been doing so far, its security strategy hasn't worked. How can these drug cartels be stopped?

Before answering that question, let's start by asking a basic question: what enables drug lords to have power in the first place? To repeat an oft-used cliché, money is power. The reason they can literally get away with murder is because they have a constant stream of drug money coming in, most notably from the United States. We can talk about addressing judicial reformpolice reform, the ability to enforce laws (I think fighting a war against impunity would be a good idea, but tough to implement), providing Mexico with foreign aid to fight the War on Drugs, anti-laundering restrictions (which don't help as much as one would think), or the ever-amorphous anti-corruption reform to no avail. Mexico's democratic institutions are most probably too weak to handle the cartels on their own. Until you cut off the cartels' life support, i.e., money, they will continue to be supported by the demand in the underground market.

The Cato Institute, Instituto Mexicano para la Competividad, and the Center for Strategic and International Studies (p. 42) came up with a bright idea: legalize marijuana, which would be an important step in ending the War on Drugs. Even with the three states that have legalized it in the United States, it seems to have some effect already. According to the U.S. Department of Health and Human Services survey data, the vast majority of illicit drug usage in this country is marijuana-based. Legalizing marijuana would, amongst other things, close the gateway that exposes many to the harder, illicit substances.

Last year, five Nobel Prize-winning economists published a report through the London School of Economics (LSE), and they found that the War on Drugs has been a waste of time and money. Why?

In economic terms, implementing a supply-reduction intervention like the War on Drugs backfires. Normally, a supply reduction would cause a price increase, which would deter would-be offenders. However, with illicit drugs, the price increase incentivizes new supply by shifting commodity supply chains (LSE, p. 10). This returns us to a point [E2] similar to the market equilibrium prior to the War on Drugs. The elasticity of demand for the illicit drugs causes the price increase to be much larger than the quantity decrease (see Figure above). The black-market premium is what keeps the drug lords rolling in money. Decriminalization, or even better, legalization, would hit the drug lords where it hurts: their wallets. This clearly won't happen overnight. The federalist system in the United States, in which each state would have to approve legalization before putting enough pressure on the federal government, will take time. Even though it is moving at seemingly glacial speeds, other countries can follow suit. As much as I think that having stronger governmental institutions and less corruption than it currently has would help immensely, I would opine that marijuana legalization would help the Mexican government put a quash on drug trafficking sooner than institutional reform.