The call to limit the effects of climate change have gained more traction over time. Last October, the United Nations released a report saying that if we do not do something in 12 years, we will not be able to minimize the effects of climate change. The good news is that something could still be done. The bad news, per the UN report, is that we need to do something on the more drastic end of the spectrum in order to avoid catastrophe. Granted, a study in Earth System Dynamics (Aengenheyster et al., 2018) provides some skepticism on the "point of no return," saying that it could be anywhere between 2035 and 2042. Even so, it doesn't seem like kicking the can down the road seems like a viable option.
One solution that has been presented as an option is climate engineering, commonly referred to as geoengineering. Geoengineering is the systemic, large-scale intervention of mitigating climate change. There are two main methods of geoengineering: greenhouse gas removal and solar radiation management (SRM). SRM has been the more popular of choices. One of the main advantages of SRM is that it comes at a low cost, especially when compared to other proposed climate change mitigation efforts. The idea behind SRM is to emit [sulfate] aerosols into the stratosphere, which should brighten ocean surfaces and clouds to reflect sunlight back into space. There are a number of criticisms of geoengineering, including termination shock, the politics of implementation, potential weaponization, and cannot be considered a complete solution since it does not remove the greenhouse gases from the atmosphere. The biggest criticism that exists is its control, and thus its predicability. Geoengineering has been considered taboo because it has the real potential to cause greater problems and greater disproportionality of the effects of the climate change.
However, a new study seemingly contradicts the fears of geoengineering. Harvard engineer Peter Irvine and his colleagues (Irvine et al., 2019) have potentially found a solution with geoengineering. Per this study, it is a matter of how much geoengineering we use. A huge quantity would cause major issues, but spraying the "proper dosage" could cut global warming in half. Not only would this geoengineering cut global warming in half, but it wouldn't cause negative effects for any region.
This study does come with a few caveats. One is that it would only halve the upcoming global warming. Although it's rare to have a policy that acts as a silver bullet, solving half of the problem is pretty good. It means we need to avoid the potential moral hazard and make sure we stay on the ball to solve the other half. The second caveat is that, as the authors of the study admit, these results are under a more idealized situation. Third, the scenario they use is one in which CO2 levels double. That might sound like a lot, except that CO2 levels are expected to increase even more than by twofold. Finally, we have to recall that geoengineering is nowhere near ready for large-scale implementation. The effects of geoengineering has only been conducted by computer modeling.
What this study does provide is new possibility for geoengineering. While this study is not definitive enough to inform policy decisions (as the author of the study admits), it is strong enough where geoengineering merits further consideration. Why? While a medium-term solution, natural gas isn't going to bring carbon emissions down adequately. Wind and solar power do not possess the capacity or scale to help, and very well might not be able to do so ever. China, which is the #1 emitter of carbon, is not cutting its production of coal. Not enough nuclear power plants are being built to help offset carbon emission. If the point of return is approaching, then we cannot take geoengineering off the table quite yet, at least until we can better prove its ultimate viability.
Monday, March 25, 2019
Monday, March 18, 2019
Governor Pritzker's "Fair" Tax Is Not So Fair for the State of Illinois
I grew up in the state of Illinois. As much as I have fond memories of living in Illinois, I am not exactly fond of how Illinois is governed or how its finances are run. In 2017, I covered the state of Illinois' budgetary and fiscal standing. Let's just say that it was a mess then, and it hasn't improved since then. The recently elected governor of Illinois, Governor Jay Robert (J.B.) Pritzker, released his Fair Tax proposal last week. What does it entail?
Under current Illinois law, the income rates are the following: 4.95 percent for individual income and 7 percent for corporate income. The feature of the Illinois tax code is that it is a proportionate tax code. Illinois is currently one of eight states with a flat tax rate. The crux of Governor Pritzker's is to change the Illinois tax code to a progressive one (see individual income tax rates below, as well as a report arguing for graduated tax rate from the Illinois-based, Left-leaning Center for Tax and Budget Accountability). There are other features of the proposal, including a $100 nonrefundable child tax credit, raising the corporate income tax from 7 to 7.95 percent, and increasing the property tax credit from 5 to 6 percent. Pritzker claims not only that 97 percent of Illinoisans will pay less in income taxes, but that it will generate $3.4B annually (Reuters).
A regressive tax is assessed on the percentage of the value of a good or service (e.g., sales tax, sin tax, property tax). It can be construed as fair because it charges everyone the same amount, regardless of earnings or income level. On the other hand, it could be construed as unfair since poorer people pay a higher percentage of their income than richer folks.
The second type of tax is a proportional tax, which is also referred to as a flat tax. This tax could arguably be fair since this tax charges everyone the same tax rate, regardless of income. This is most commonly implemented for income and wealth taxes, although it can be implemented for gross receipt taxes, occupational taxes, and per capita taxes.
The third type of tax is a progressive tax. Under a progressive system, the tax scheduling is done based on an individual's income. With the accelerated tax schedule, higher-income earners pay a higher percentage than lower-income earners. The purpose of such a system is to reflect an assumption of fairness that the upper-class is more capable of paying a higher tax burden.
Why is this subjective? Any one of these systems could be argued as "fair." There is no objective formula to determine what is fair. Fairness is based on values, morals, and political philosophy. The idea of fairness is so subjective that one could argue that fairness shouldn't matter because "life is not fair," and it has no bearing on the tax code. I wouldn't necessarily argue that, but rather it is to reaffirm the point that what might be fair to one person might not be fair to another.
The first issue is that his figures are in dispute. The Illinois Policy Institute, an Illinois-based think tank focused on economic liberty and free markets, estimated that Pritzker's plan would only generate $1.4-$2.4B in new revenue, depending on whether you use static or dynamic scoring.
For argument's sake, let's give Pritzker the benefit of a doubt, and assume that his plan will generate $3.4B, which coincidentally is the projected budget gap for 2021. Even with $3.4B in generated tax revenue, his plan runs into problems, including the big problem that in his recent budget address. Last month, Pritzker proposed spending anywhere from an additional $14B to $19B in the 2020 Illinois state budget (a proposal, by the way, that credit rating agency Standard and Poor's said would weaken Illinois' credit trajectory). This additional spending includes paying down bills, funding a capital project, and investing in education. Setting aside the fact that this Fair Tax would be in effect in 2021 at the earliest, the last time I checked, $14B > $3.4B, which means that if both the Fair Tax and Pritzker's spending promises go through, the income tax rates would need to be even higher to close the gap. This brings me to my next point.....
One is that with Pritzker's plan, the richest will pay 7.95 percent, whereas the poorest will only pay 4.75 percent. This creates a difference of 3.2 percent (7.95-4.75=3.2). If the current gap is 7.0 percent, this bill would close less than half of the gap (3.2/7.0=46%). Closing the gap would be nice if your goal is for everyone to pay the same percentage of income in taxes. If your goal is to have the rich pay a higher percentage in taxes, then this wouldn't close it on a state level. However, this doesn't take into account federal taxation.
The second is what happens when you look at what is driving the gap. When looking at personal income tax, the top 1 percent pay 4.1 percent of their income in state income tax, whereas the bottom 20 percent only pay 1.5 percent. That is a difference of 273%! When you look at what is driving the gap, it is two types of taxes: consumption taxes and property taxes.
Consumption and property taxes are more regressive in nature, and it should be no surprise that these taxes are causing the disparity. Another way of closing the gap would be to lower the consumption and property tax rates. If you want to talk about unfair, how about Illinois having the seventh highest sales tax rate of 8.74%, or that Illinois has the ninth highest per capita property tax collection? Given the regressive nature of these taxes, is it fair to burden lower-class citizens with these high tax rates? Why doesn't Pritzker address these taxes in his proposal?
Why should Illinois care about tax competitiveness? We live in an economy that is more capital-intensive than it was in the early- and mid-twentieth century. It is easier than ever for businesses to move. If the tax rates are too high, then companies will be incentivized to move elsewhere.
Looking at Illinois' historic trend, its individual income tax rate has been lower in the past (see below). Illinois is trending towards higher income tax rates.
Source: Illinois Department of Revenue
What are Illinois' neighbors doing? The exact opposite. Missouri lowered its income tax rate from 5.9 percent to 5.5 percent last year. Iowa reduced their rate from 8.98 percent to 6.5 percent in 2018. From 2013 to 2017, Indiana phased their income tax from 3.4 percent to 3.2 percent. Even in the two states that have higher income taxes and are not looking to lower them (Wisconsin and Iowa), the states at least have balanced budget amendments. If this proposal passes, Illinois would be surrounded by states that would have better overall state tax competitiveness.
Illinois already had high tax rates prior to this tax hike proposal. These high tax rates do not only have such businesses as General Mills, Butterball, and Food Warming Equipment Co. leave Illinois. It is also a huge amount of individuals moving out of Illinois. Looking at the North American Moving Services 2018 survey, Illinois ranks on the top of the list of states where people move out of. Illinois has been among the top of this survey's list since 2011. The United Van Lines survey had similar results, showing that the primary reason people left Illinois was for better jobs. And if you need more depressing data, look at the civilian labor force in Illinois decline over the past decade (Bureau of Labor Statistics).
I do not have the power of clairvoyance, but I would take an educated enough of a guess as to what would happen. For one, job growth would be hampered further. Illinois' private-sector job growth is already sluggish (so sluggish that it is nearly half the growth rate of the rest of the country) because of tax and regulatory environment. I would also predict further capital flight and labor migration. And to top it all off, the Fair Tax would not help mitigate Illinois' dire fiscal state of affairs. Other states have graduated-rate income taxes, but the Illinois government has historically shown that it cannot keep its taxation or spending in check.
The way to enact this proposal is through a constitutional amendment, which thankfully, is not an easy process. After it passing three-fifths of both legislative chambers, the people of Illinois would then need to vote on it. That cannot happen any earlier than November 2020. I hope that the citizens of my former state are not blindsided by vague, yet ultimately harmful notions of fairness and vote for such foolishness.
Under current Illinois law, the income rates are the following: 4.95 percent for individual income and 7 percent for corporate income. The feature of the Illinois tax code is that it is a proportionate tax code. Illinois is currently one of eight states with a flat tax rate. The crux of Governor Pritzker's is to change the Illinois tax code to a progressive one (see individual income tax rates below, as well as a report arguing for graduated tax rate from the Illinois-based, Left-leaning Center for Tax and Budget Accountability). There are other features of the proposal, including a $100 nonrefundable child tax credit, raising the corporate income tax from 7 to 7.95 percent, and increasing the property tax credit from 5 to 6 percent. Pritzker claims not only that 97 percent of Illinoisans will pay less in income taxes, but that it will generate $3.4B annually (Reuters).
What Is Fair Taxation?
Before getting into the details of what Pritzker is proposing, I would like to briefly discuss fairness, particularly in the context of taxation. Truth be told, fairness is a subjective matter. The subjectivity of fairness can be illustrated by the three main types of taxation systems: regressive, proportional, and progressive.A regressive tax is assessed on the percentage of the value of a good or service (e.g., sales tax, sin tax, property tax). It can be construed as fair because it charges everyone the same amount, regardless of earnings or income level. On the other hand, it could be construed as unfair since poorer people pay a higher percentage of their income than richer folks.
The second type of tax is a proportional tax, which is also referred to as a flat tax. This tax could arguably be fair since this tax charges everyone the same tax rate, regardless of income. This is most commonly implemented for income and wealth taxes, although it can be implemented for gross receipt taxes, occupational taxes, and per capita taxes.
The third type of tax is a progressive tax. Under a progressive system, the tax scheduling is done based on an individual's income. With the accelerated tax schedule, higher-income earners pay a higher percentage than lower-income earners. The purpose of such a system is to reflect an assumption of fairness that the upper-class is more capable of paying a higher tax burden.
Why is this subjective? Any one of these systems could be argued as "fair." There is no objective formula to determine what is fair. Fairness is based on values, morals, and political philosophy. The idea of fairness is so subjective that one could argue that fairness shouldn't matter because "life is not fair," and it has no bearing on the tax code. I wouldn't necessarily argue that, but rather it is to reaffirm the point that what might be fair to one person might not be fair to another.
Why Governor Pritzker's Plan Goes Awry
Now we can return to the details of the plan. One of Pritzker's goals is to shift tax burden from the lower- and middle-class to upper-class individuals. Pritzker would like to raise the proper tax revenue to mitigate Illinois' fiscal woes. While his intentions might be good, we are here to determine whether the results would be.The first issue is that his figures are in dispute. The Illinois Policy Institute, an Illinois-based think tank focused on economic liberty and free markets, estimated that Pritzker's plan would only generate $1.4-$2.4B in new revenue, depending on whether you use static or dynamic scoring.
For argument's sake, let's give Pritzker the benefit of a doubt, and assume that his plan will generate $3.4B, which coincidentally is the projected budget gap for 2021. Even with $3.4B in generated tax revenue, his plan runs into problems, including the big problem that in his recent budget address. Last month, Pritzker proposed spending anywhere from an additional $14B to $19B in the 2020 Illinois state budget (a proposal, by the way, that credit rating agency Standard and Poor's said would weaken Illinois' credit trajectory). This additional spending includes paying down bills, funding a capital project, and investing in education. Setting aside the fact that this Fair Tax would be in effect in 2021 at the earliest, the last time I checked, $14B > $3.4B, which means that if both the Fair Tax and Pritzker's spending promises go through, the income tax rates would need to be even higher to close the gap. This brings me to my next point.....
Not Addressing Illinois' Spending Problem
In his Fair Tax proposal, Pritzker rightly points out there being a dire fiscal condition. You would think that Illinois had a tax revenue problem, but Illinois has collected more tax revenue per capita than the U.S. average (Tax Policy Center). But let's think about it for a second. Illinois has state-level debt of over $151B. If you look at the Mercatus Center's ranking of states' fiscal solvency, Illinois is at the bottom of the list. Illinois does not have enough cash to cover short-term liabilities. Its revenue is only 92 percent of its expenses. Looking at long-term solvency, it has a net asset ratio of 2.86, which means that for every dollar in assets it has, Illinois has nearly three dollars in liabilities. Illinois has a major issue with its pension and benefits system that continues to drive these fiscal indicators into the ground. If Pritzker throws in his additional spending to the mix, the situation in Illinois is only going to go from bad to the point where more than just the wealthiest will end up paying high tax rates.
Not Going to Solve the Issue with Fairness
It is not only Governor Pritzker that is making the argument of fairness. It is also coming from the Institute on Taxation and Economic Policy (ITEP), a national think-tank focused more on tax policy. Full disclosure: ITEP leans to the Left. Their argument for the currently unfair tax code in Illinois comes from their 2018 report measuring tax equality by state. In ITEP's report, it found Illinois being the eighth most unfair tax code amongst all the 50 states. Why? Because the bottom 20 percent pays 14.4 percent of their income in state taxes, whereas the top one percent pay 7.4 percent. That is a gap of 7.0 percent. There are two things to consider with ITEP's report.One is that with Pritzker's plan, the richest will pay 7.95 percent, whereas the poorest will only pay 4.75 percent. This creates a difference of 3.2 percent (7.95-4.75=3.2). If the current gap is 7.0 percent, this bill would close less than half of the gap (3.2/7.0=46%). Closing the gap would be nice if your goal is for everyone to pay the same percentage of income in taxes. If your goal is to have the rich pay a higher percentage in taxes, then this wouldn't close it on a state level. However, this doesn't take into account federal taxation.
The second is what happens when you look at what is driving the gap. When looking at personal income tax, the top 1 percent pay 4.1 percent of their income in state income tax, whereas the bottom 20 percent only pay 1.5 percent. That is a difference of 273%! When you look at what is driving the gap, it is two types of taxes: consumption taxes and property taxes.
Consumption and property taxes are more regressive in nature, and it should be no surprise that these taxes are causing the disparity. Another way of closing the gap would be to lower the consumption and property tax rates. If you want to talk about unfair, how about Illinois having the seventh highest sales tax rate of 8.74%, or that Illinois has the ninth highest per capita property tax collection? Given the regressive nature of these taxes, is it fair to burden lower-class citizens with these high tax rates? Why doesn't Pritzker address these taxes in his proposal?
Tax Competitiveness and Migration
Taxes have two main functions. The first is that it collects revenue for the government. The second is that it alters and distorts people's behavior. We cannot look at a specific tax increase in isolation. It is a question of how it affects the economy and people's behavior. That is what the conservative Tax Foundation does in its thorough analysis of Pritzker's Fair Tax proposal (also see the Illinois Policy Institute's analysis here). In the Tax Foundation's State Business Tax Climate Index, Illinois currently ranks 36th. What would happen if Illinois were to implement this Fair Tax? Tax Foundation projects that Illinois would fall to 48th place on its ranking. This ranking would fall to such depths because if passed, Illinois would have among the highest state tax burden in this country.Why should Illinois care about tax competitiveness? We live in an economy that is more capital-intensive than it was in the early- and mid-twentieth century. It is easier than ever for businesses to move. If the tax rates are too high, then companies will be incentivized to move elsewhere.
Looking at Illinois' historic trend, its individual income tax rate has been lower in the past (see below). Illinois is trending towards higher income tax rates.
What are Illinois' neighbors doing? The exact opposite. Missouri lowered its income tax rate from 5.9 percent to 5.5 percent last year. Iowa reduced their rate from 8.98 percent to 6.5 percent in 2018. From 2013 to 2017, Indiana phased their income tax from 3.4 percent to 3.2 percent. Even in the two states that have higher income taxes and are not looking to lower them (Wisconsin and Iowa), the states at least have balanced budget amendments. If this proposal passes, Illinois would be surrounded by states that would have better overall state tax competitiveness.
Postscript
I am not even going to get into such features of the Fair Tax proposal as the marriage penalty or its atypical "recapture" provision. What I am going to conclude with is the following. The flat tax is one of the only redeemable aspects of Illinois' tax and budgetary policy. Right now, Illinois' individual income tax is on the lower end compared to other states. It is nowhere near California's income tax rate of 13 percent. If this proposal passes, Illinois loses what little advantage it previously had.I do not have the power of clairvoyance, but I would take an educated enough of a guess as to what would happen. For one, job growth would be hampered further. Illinois' private-sector job growth is already sluggish (so sluggish that it is nearly half the growth rate of the rest of the country) because of tax and regulatory environment. I would also predict further capital flight and labor migration. And to top it all off, the Fair Tax would not help mitigate Illinois' dire fiscal state of affairs. Other states have graduated-rate income taxes, but the Illinois government has historically shown that it cannot keep its taxation or spending in check.
The way to enact this proposal is through a constitutional amendment, which thankfully, is not an easy process. After it passing three-fifths of both legislative chambers, the people of Illinois would then need to vote on it. That cannot happen any earlier than November 2020. I hope that the citizens of my former state are not blindsided by vague, yet ultimately harmful notions of fairness and vote for such foolishness.
Wednesday, March 13, 2019
Are One-Way Streets Better Than Two-Way Streets for Urban Planning?
A couple of weeks ago, I got back from my trip to Buenos Aires in Argentina. Looking at the title of today's piece, you are probably wondering what urban planning has to do with my vacation in Buenos Aires. At least when I wrote on the Argentinian economy last week, the connection was clearer. But there does happen to be a connection. When I was in Buenos Aires taking taxis, I noticed that there was a lot of traffic. How Buenos Aires did not make the 2018 Top 200 List for the INRIX Global Traffic Scorecard, I will never know because the traffic there was worse than I have experienced in most major U.S. cities. While traveling throughout the city, I also noticed something else: a lot of one-way streets. I began to wonder: is there a connection between one-way streets and traffic congestion? It then got me thinking of the pros and cons of one-way streets. I will address the cons and scrutinize those since they get more coverage in the one-way/two-way debate.
- Negative impact on local businesses and economies. The idea behind this argument is that there is more exposure for the store because cars in both directions see the building. To further that argument, traffic on two-way streets tends to be slower, which gives greater opportunity to notice local businesses. As for impact on the local economies, one would think that increased business revenue and property tax revenue would cover the costs. However, conversions to two-way streets have had mixed results for the local economy (Riggs and Appleyard, 2018; also see case studies here).
- More difficult navigation. There has to be a certain level of awareness to be able to navigate one-way streets, even with such navigation apps as GoogleMaps or Waze. You would think with such apps, overshooting your route wouldn't happen. What I noticed in Argentina (as well as in the United States with Uber and Lyft drivers) is that even with technology, you can miss a turn.
- Less efficient traffic. This argument is an offshoot of the previous argument. The conventional argument for one-way streets is that directing traffic in one direction allows for more traffic to pass through, usually at a higher speed limit. Many transportation planners find that a higher vehicle moving capacity automatically translates into greater efficiency. However, a study from professors at Penn State and Berkeley (Gayah and Daganzo, 2012) found different results using a trip-serving capacity. Essentially, the time spent navigating the grid is offset by the moving capacity. For shorter trips, this study found that two-way streets were unequivocally preferable. since two-way streets provide more direct routes. As for longer trips, one-way streets did not possess a particular advantage over two-way streets. This does come with some skepticism since two-way street configurations require more left-hand turns, thereby slowing down traffic.
- Are one-way streets less safe? The intuition behind this theory is that one-way streets are more dangerous than two-way streets because the average speed on a one-way street is higher than a two-way street. This makes it particularly hazardous for pedestrians and cyclists. On the other hand, two-way streets have more conflicting maneuvers, most notably left-hand turns.
Thursday, March 7, 2019
A Look at Projections for the Argentinian Economy in 2019
I recently vacationed in Buenos Aires for about a week. It was the first time that I traveled abroad by myself, and I have to say that I quite enjoyed myself. Not only did I get to see the sights of Buenos Aires, but it gave me an opportunity to talk to Argentinians. One of the common themes that came up in conversation with the people I met was the economy. Inflation is not as bad as it is in Venezuela, but it's bad enough where inflation for food went up 3.7 percent between December and January. While I was down there, they had announced on the news that year-to-year inflation went up by 49.3 percent.
This inflation is the latest in ongoing Argentinian economic woes. In the 2000s and early 2010s, Argentina was run by the Kirchners. During the Kirchner administrations, inflation was at 40 percent, unemployment was high, and Argentina endured a recession. In response, the Argentinian people elected Mauricio Macri in 2015. Unfortunately, Macri didn't do enough to fight off economic issues. An increased reliance on external financing got so out of hand that the Argentinian peso (ARS) devalued by nearly half (see my 2018 analysis here). At the beginning of 2018, the exchange rate was about 14ARS:$1USD. When I was on vacation, the peso devalued to about 40ARS:$1USD. From my conversations while I was on vacation, it does not seem like things have gotten better for Argentina. Looking at the current data and economic projections, I wanted to see if things were getting better, worse, or if it is more of the same.
Fitch Ratings: Fitch affirms its rating for Argentina at B. However, in November, it changed its outlook from stable to negative. Weaker prospects for economic growth, as well as uncertainty surrounding fiscal consolidation and market financing availability, drove Fitch's more pessimistic outlook. Fitch does not expect a positive outlook, and even a stable one is unlikely. Strengthening in external liquidity, recovery in economic activity, and complying with IMF's near-term fiscal targets would provide Fitch with more optimism. The political uncertainty of the elections and potential macroeconomic instability could make matters worse. While macroeconomic adjustments take place, investors are likely to be cautious in 2019. On the plus side, Fitch anticipates that sovereign financing needs will be covered in 2019.
Banco Central de la República Argentina: According to its Resultados del Relevamiento de Expectativas del Mercado (also see here), the Argentinian central bank is predicting 28.5 percent inflation in 2019. GDP growth is varied for 2019 (-1.2%), 2020 (2.5%), and 2021 (2.5%), although it looks like 2019 will be the worst of it for the medium-run. The exchange rate is looking to take a hit. It is expected to go from 38.3ARS to 48.0ARS to the dollar.
Heritage Foundation Economic Freedom Index for 2019: Argentina's economy continues to be classified as "Mostly Unfree" under this Index (also see here). The Index's metrics of Property Rights and Monetary Policy improved year-to-year, whereas Government Spending and Fiscal Health decreased. Government spending has amounted to 41.6 percent of GDP, which is problematic when the Macri government is using austerity (i.e., less government spending and higher taxes) to close the fiscal gap.
International Monetary Fund (IMF): In December 2018, the IMF released its latest report on the stand-by agreement it made with Argentina earlier in 2018. As of October 2018, Argentina met the IMF's program targets, and is projected to meet the 2019 targets. The economy is expected to rebound in the second quarter of 2019 because the agricultural sector will pick up after the drought of 2018 (p. 7). Global financial conditions are of worry, as are the results of the 2019 presidential election. Conversely, increased trade with Brazil could help stabilize (ibid.). Another plus is that demand for Argentinian bonds has strengthened and sovereign risk is on the decline. Monetary policy is also geared to bring down inflation (p. 12).
Organization for Economic Cooperation and Development (OECD): In its November 2018 economic forecast, the OECD expressed concern that fiscal and monetary tightening will keep Argentina in a recession through 2019. On the other hand, what will be a drag on short-term growth will help Argentina deal with fiscal and current account imbalances in the longer-run, as well as restore confidence in the Argentinian economy. While it is expected to be painful for Argentina in 2019, developing stronger macroeconomic fundamentals will help Argentina in the future.
Standard and Poor's: The renowned credit rating agency downgraded Argentina from B+ to B in November 2018 (France24) due to inflationary issues and lack of economic growth. Standard and Poor's does predict that if the economy can stabilize and the upcoming presidential election doesn't take Argentina off course, there should be a recovery in the next year or so.
World Bank: In its January 2019 Global Economic Outlook, it predicts that the Argentinian economy will contract 1.7 percent in 2019, followed by 2.7 percent GDP growth in 2020 (World Bank, p. 83). The 2019 GDP growth prediction is in line with the IMF's prediction (IMF, p. 25).
My Concluding Thoughts: The agreement that Argentina made with the IMF in 2018 is putting the Argentinian economy through some short-term pain. That much I witnessed firsthand when I was in Argentina. Argentina has an unusual economic history in that it went from being an economically developed country in the early 20th century to becoming more undeveloped since the mid-20th century. Argentina has decades of subpar public policy that has shaped its economy into the mess that it is today. It is discombobulated enough where there is no easy solution if Argentina wants a long-term remedy. The hard truth is that if the Argentinian economy not only wants to recover but also become a fully developed economy, it needs to deal with the austerity in the short-term.
That is a difficult thing to convince Argentinians of, especially when there is a presidential election later this year. Although Argentinians are having to deal with lower incomes, higher interest rates, and higher unemployment in the short-run, President Macri might have less to worry about than anticipated, as is outlined in this analysis from the Council on Foreign Relations. Aside from security being an issue that is as important to Argentinians as the economy, there is no great alternative to Macri. The best bet right now is former President Christina Fernández de Kirchner. Her policies were the ones that got the Argentinians in this economic quagmire in the first place. Even better, Kirchner is currently wrapped up in a corruption scandal.
This is not to say that Macri has the election secured because another economic downturn shortly before an election would most probably undo his current advantage. That being said, I understand that what the IMF is asking Argentina to do on a macroeconomic level is politically unpopular. But if the next president of Argentina undoes the progress made, not only would that erode global confidence in Argentina, but it would prevent Argentina from much-needed macroeconomic adjustment. If Argentina could stay the course with the IMF agreement, it would do wonders for the Argentinian economy in the medium-term. It is easy to say "no pain, no gain" as a distant observer who does not have to worry about his cost of living skyrocketing because of tight fiscal and monetary policy. At the same time, short-term pain is exactly what Argentina needs to go through if it wants to stop repeating its history of substantial economic downturn.
This inflation is the latest in ongoing Argentinian economic woes. In the 2000s and early 2010s, Argentina was run by the Kirchners. During the Kirchner administrations, inflation was at 40 percent, unemployment was high, and Argentina endured a recession. In response, the Argentinian people elected Mauricio Macri in 2015. Unfortunately, Macri didn't do enough to fight off economic issues. An increased reliance on external financing got so out of hand that the Argentinian peso (ARS) devalued by nearly half (see my 2018 analysis here). At the beginning of 2018, the exchange rate was about 14ARS:$1USD. When I was on vacation, the peso devalued to about 40ARS:$1USD. From my conversations while I was on vacation, it does not seem like things have gotten better for Argentina. Looking at the current data and economic projections, I wanted to see if things were getting better, worse, or if it is more of the same.
Fitch Ratings: Fitch affirms its rating for Argentina at B. However, in November, it changed its outlook from stable to negative. Weaker prospects for economic growth, as well as uncertainty surrounding fiscal consolidation and market financing availability, drove Fitch's more pessimistic outlook. Fitch does not expect a positive outlook, and even a stable one is unlikely. Strengthening in external liquidity, recovery in economic activity, and complying with IMF's near-term fiscal targets would provide Fitch with more optimism. The political uncertainty of the elections and potential macroeconomic instability could make matters worse. While macroeconomic adjustments take place, investors are likely to be cautious in 2019. On the plus side, Fitch anticipates that sovereign financing needs will be covered in 2019.
Banco Central de la República Argentina: According to its Resultados del Relevamiento de Expectativas del Mercado (also see here), the Argentinian central bank is predicting 28.5 percent inflation in 2019. GDP growth is varied for 2019 (-1.2%), 2020 (2.5%), and 2021 (2.5%), although it looks like 2019 will be the worst of it for the medium-run. The exchange rate is looking to take a hit. It is expected to go from 38.3ARS to 48.0ARS to the dollar.
Heritage Foundation Economic Freedom Index for 2019: Argentina's economy continues to be classified as "Mostly Unfree" under this Index (also see here). The Index's metrics of Property Rights and Monetary Policy improved year-to-year, whereas Government Spending and Fiscal Health decreased. Government spending has amounted to 41.6 percent of GDP, which is problematic when the Macri government is using austerity (i.e., less government spending and higher taxes) to close the fiscal gap.
International Monetary Fund (IMF): In December 2018, the IMF released its latest report on the stand-by agreement it made with Argentina earlier in 2018. As of October 2018, Argentina met the IMF's program targets, and is projected to meet the 2019 targets. The economy is expected to rebound in the second quarter of 2019 because the agricultural sector will pick up after the drought of 2018 (p. 7). Global financial conditions are of worry, as are the results of the 2019 presidential election. Conversely, increased trade with Brazil could help stabilize (ibid.). Another plus is that demand for Argentinian bonds has strengthened and sovereign risk is on the decline. Monetary policy is also geared to bring down inflation (p. 12).
Organization for Economic Cooperation and Development (OECD): In its November 2018 economic forecast, the OECD expressed concern that fiscal and monetary tightening will keep Argentina in a recession through 2019. On the other hand, what will be a drag on short-term growth will help Argentina deal with fiscal and current account imbalances in the longer-run, as well as restore confidence in the Argentinian economy. While it is expected to be painful for Argentina in 2019, developing stronger macroeconomic fundamentals will help Argentina in the future.
Standard and Poor's: The renowned credit rating agency downgraded Argentina from B+ to B in November 2018 (France24) due to inflationary issues and lack of economic growth. Standard and Poor's does predict that if the economy can stabilize and the upcoming presidential election doesn't take Argentina off course, there should be a recovery in the next year or so.
World Bank: In its January 2019 Global Economic Outlook, it predicts that the Argentinian economy will contract 1.7 percent in 2019, followed by 2.7 percent GDP growth in 2020 (World Bank, p. 83). The 2019 GDP growth prediction is in line with the IMF's prediction (IMF, p. 25).
My Concluding Thoughts: The agreement that Argentina made with the IMF in 2018 is putting the Argentinian economy through some short-term pain. That much I witnessed firsthand when I was in Argentina. Argentina has an unusual economic history in that it went from being an economically developed country in the early 20th century to becoming more undeveloped since the mid-20th century. Argentina has decades of subpar public policy that has shaped its economy into the mess that it is today. It is discombobulated enough where there is no easy solution if Argentina wants a long-term remedy. The hard truth is that if the Argentinian economy not only wants to recover but also become a fully developed economy, it needs to deal with the austerity in the short-term.
That is a difficult thing to convince Argentinians of, especially when there is a presidential election later this year. Although Argentinians are having to deal with lower incomes, higher interest rates, and higher unemployment in the short-run, President Macri might have less to worry about than anticipated, as is outlined in this analysis from the Council on Foreign Relations. Aside from security being an issue that is as important to Argentinians as the economy, there is no great alternative to Macri. The best bet right now is former President Christina Fernández de Kirchner. Her policies were the ones that got the Argentinians in this economic quagmire in the first place. Even better, Kirchner is currently wrapped up in a corruption scandal.
This is not to say that Macri has the election secured because another economic downturn shortly before an election would most probably undo his current advantage. That being said, I understand that what the IMF is asking Argentina to do on a macroeconomic level is politically unpopular. But if the next president of Argentina undoes the progress made, not only would that erode global confidence in Argentina, but it would prevent Argentina from much-needed macroeconomic adjustment. If Argentina could stay the course with the IMF agreement, it would do wonders for the Argentinian economy in the medium-term. It is easy to say "no pain, no gain" as a distant observer who does not have to worry about his cost of living skyrocketing because of tight fiscal and monetary policy. At the same time, short-term pain is exactly what Argentina needs to go through if it wants to stop repeating its history of substantial economic downturn.
Monday, March 4, 2019
Latest "Medicare for All" Bill Is More Extreme Than Other Single-Payer Systems
The Democrats are gearing up for the 2020 elections by pitching new ideas to excite its more Left-leaning base, whether those ideas are a wealth tax, an increased marginal tax rate, or the Green New Deal. Last week, House representative Pramila Jayapal (D-WA) introduced Medicare for All (H.R. 1384). This is not the first time that the Democrats have tried to persuade the American people of "Medicare for All." Bernie Sanders (I-VT) made "Medicare for All" a part of his 2016 presidential campaign. After taking a look at his 2016 plan, my conclusion was that it would not be feasible. I came to the same conclusion when looking at his 2017 version. What makes this bill different than past versions of "Medicare for All?" The official legislative text hasn't been released, but certain details have been made public knowledge.
Essentially, it is single-payer with unprecedented amount of coverage and government covering the cost. This might seem like a great rallying point for the Democrats, but allow me to express my skepticism I have for this bill.
The cost of "Medicare for All." There has yet to be a cost estimate of Jayapal's bill. However, we do have cost estimates from previous "Medicare for All" attempts, which mostly range from $26T to $32T over the next decade (see CRFB figures below).
It is reasonable to assume that it will be more expensive than previous "Medicare for All" bills. Why? The Left-leaning Vox says that "by covering a more comprehensive set of benefits and asking no cost sharing of enrollees, it is likely to cost the government significantly more than programs other countries have adopted." If a cost estimate is conducted for this "Medicare for All," it should not come as a shock if the amount exceeded $36T over the next decade.
How to pay for "Medicare for All?" Former public trustee for Social Security and Medicare Charles Blahous, the one who received attention for his 2018 report on "Medicare for All," released another analysis on "Medicare for All" the same day Jayapal released her "Medicare for All." Blahous' main takeaway was that "cost is M4A's existential issue, because if federal lawmakers are not willing to impose M4A's cost on taxpayers, no other aspect of the framework will enable its enactment (Blahous, 2019, p. 2)." Dealing with cost is what caused single-payer to fail in Vermont, and it was the main obstacle in passing the 2016 single-payer referendum in Colorado. California had to put single-payer on hold in 2017, as did North Carolina in 2018, due to cost issues.
The increasingly popular solution on the populist Left is to soak the rich with taxes. The reality is that the rich would not be the only ones paying taxes; everyone would. If you wonder how the Scandinavians pay for their government programs, it is through high taxation on everyone. In Denmark, if you make over 50,000 DKK (about $7,600), you pay a 40 percent income tax. And then there are the value-added taxes that are 20-plus percent, which have a regressive effect on the poor.
Looking at this through a more U.S.-based lens, Elizabeth Warren's wealth tax is supposed to bring in $2.75T over the next decade. If we go with a rosy estimate of Ocasio-Cortez's idea to raise the marginal tax rate to 70 percent, that would mean $700 billion over the next decade. I'm sure that the Democrats could come up with other ways to use the tax code to disproportionately tax the rich (e.g., increased estate tax). Nevertheless, soaking the rich would only cover a small fraction of the costs of "Medicare for All." Sanders tried with his 2016 plan, and the math didn't work in his favor. Considering that Jayapal is looking to cover more (see below), the ability to pay for "Medicare for All" seems more out of reach. This does not take into account that various Democrats are looking to implement other large and costly programs, such as the Green New Deal. The burden of proof would have to be on the proponents to prove that "Medicare for All" is not cost-prohibitive.
Cost containment. Jeffrey Sachs, a Left-leaning economist and policy analyst who supports "Medicare for All," says that it comes down to whether Medicare for All could contain costs. I agree with Sachs' sentiment, which is also why I think "Medicare for All" will not work. Name me one country in which they implemented single-payer healthcare and were able to contain costs. You can't because it doesn't exist. Given that Jayapal is looking to unprecedentedly provide such comprehensive services without having out-of-pocket costs, it becomes all the more unbelievable that costs would be contained.
Incapability of providing such comprehensive services. Jayapal would love to provide an exhaustive list of health care goods and services. The problem with this goal is economic reality. One of the most fundamental concepts in economics is that we live in a world of scarcity. What single-payer healthcare does is that it shifts the demand curve so high that demand for healthcare greatly exceeds supply. When demand exceeds supply, there is a shortage, which is not at all shocking since single-payer does not address supply. As we see in other countries, it means implementing a rationing mechanism of some short. In Canada, it means longer waiting times. The United Kingdom limits what is offered to patients. Taiwan rations by keeping its consultation times shorter than average. Plus, as the Iron Triangle of Health Care suggests, increasing comprehensiveness would mean sacrificing quality and/or cost.
Political Feasibility. When looking at polling, most people are in support for "Medicare for All," at least in concept. When you start discussing details, it changes the story. A Morning Consult/Politico poll shows that support for "Medicare for All" drops by about half if it means eliminating private insurance. The Kaiser Family Foundation also found through its survey work that support drops considerably if "Medicare for All" would entail higher taxes and longer waiting times, which it would. I imagine as more details come to light, support for "Medicare for All" will continue to drop.
There is also the matter of gearing up for 2020 elections. The Democrats were able to regain the House in 2018 in large part being able to snag districts in which the GOP was more divided. Something like "Medicare for All" might energize the Democrat's more Left-leaning base, but it will likely not get larger voting blocs. This is why Democratic leadership is skeptical of a single-payer push, and would rather focus on smaller goals (e.g., fixing Obamacare, dealing with prescription costs).
Why Trust the Government with Single-Payer? I ask this question not simply as a self-identified libertarian. I ask this as a citizen of the United States. The U.S. government passed Medicare in 1965, and it is a fiscally unsustainable program that has a penchant for making improper payments. And then there was Obamacare, the program that was supposed to provide universal care while keeping costs down. Unsurprisingly, it ended up being the disaster critics predicted because it increased premiums and deductibles, provide less choice in insurance and in doctors, increased taxes for working-class Americans, and increased the deficit. If the U.S. government couldn't get it right with past programs, why should I trust something such as "Medicare for All?"
Postscript. Single-payer healthcare is a very costly payment mechanism that diminishes healthcare quality and raises healthcare costs. The 100-plus Democrats who co-sponsored this bill made it clear that they support a single-payer plan that is more disruptive, more costly, less popular, and less efficient than even previous single-payer plans. However, they do not want to make that clear to its constituents because vagueness better advances the path towards single-payer healthcare than actually discussing details. This bill goes beyond being impractical. It would be financially ruinous for the healthcare market, as well as the typical American citizen. I hope the Democratic leadership can rein in the Far Left for something more attainable and less damaging.
- The bill pushes for a single-payer, government-funded healthcare system in which the government attempts to control prices, so that's not new.
- One thing that is new is how much Jayapal's plan covers. She is looking to cover vision, dental, prescription drugs, rehabilitative services, substance abuse treatment, and home health services. Not even Canada's single-payer system is that generous! As a side note, Obamacare had to remove its long-term care provision because it was too costly.
- Jayapal's plan does not require any out-of-pocket spending aside from prescription drugs. This is significant because other countries that have single-payer systems (e.g., Canada, U.K., Norway, Taiwan) require at least some payment for seeking most services.
- In terms of payments made to providers, Jayapal's plan shifts from individual service-based payments to global budgeting, which puts a gap on total spending and allocates that amount to providers accordingly. You can read about the pros and cons about global budgeting in this Urban Institute policy brief here.
- The bill includes a compulsory licensing provision, which would allow the government to negotiate prices with pharmaceutical companies, as well as take away and reissue drug patents if the companies didn't cooperate.
- Jayapal's version has a transition period to eliminate private insurance in two years, whereas Sanders had a four-year transition period.
- One thing that is not in the bill, as CNBC points out, is that it does not provide methods to pay for this bill. Jayapal mentions the possibility of higher taxes on the wealthy or contributions from employers. The bill provides much detail on coverage, and next to nothing on cost.
Essentially, it is single-payer with unprecedented amount of coverage and government covering the cost. This might seem like a great rallying point for the Democrats, but allow me to express my skepticism I have for this bill.
The cost of "Medicare for All." There has yet to be a cost estimate of Jayapal's bill. However, we do have cost estimates from previous "Medicare for All" attempts, which mostly range from $26T to $32T over the next decade (see CRFB figures below).
It is reasonable to assume that it will be more expensive than previous "Medicare for All" bills. Why? The Left-leaning Vox says that "by covering a more comprehensive set of benefits and asking no cost sharing of enrollees, it is likely to cost the government significantly more than programs other countries have adopted." If a cost estimate is conducted for this "Medicare for All," it should not come as a shock if the amount exceeded $36T over the next decade.
How to pay for "Medicare for All?" Former public trustee for Social Security and Medicare Charles Blahous, the one who received attention for his 2018 report on "Medicare for All," released another analysis on "Medicare for All" the same day Jayapal released her "Medicare for All." Blahous' main takeaway was that "cost is M4A's existential issue, because if federal lawmakers are not willing to impose M4A's cost on taxpayers, no other aspect of the framework will enable its enactment (Blahous, 2019, p. 2)." Dealing with cost is what caused single-payer to fail in Vermont, and it was the main obstacle in passing the 2016 single-payer referendum in Colorado. California had to put single-payer on hold in 2017, as did North Carolina in 2018, due to cost issues.
The increasingly popular solution on the populist Left is to soak the rich with taxes. The reality is that the rich would not be the only ones paying taxes; everyone would. If you wonder how the Scandinavians pay for their government programs, it is through high taxation on everyone. In Denmark, if you make over 50,000 DKK (about $7,600), you pay a 40 percent income tax. And then there are the value-added taxes that are 20-plus percent, which have a regressive effect on the poor.
Looking at this through a more U.S.-based lens, Elizabeth Warren's wealth tax is supposed to bring in $2.75T over the next decade. If we go with a rosy estimate of Ocasio-Cortez's idea to raise the marginal tax rate to 70 percent, that would mean $700 billion over the next decade. I'm sure that the Democrats could come up with other ways to use the tax code to disproportionately tax the rich (e.g., increased estate tax). Nevertheless, soaking the rich would only cover a small fraction of the costs of "Medicare for All." Sanders tried with his 2016 plan, and the math didn't work in his favor. Considering that Jayapal is looking to cover more (see below), the ability to pay for "Medicare for All" seems more out of reach. This does not take into account that various Democrats are looking to implement other large and costly programs, such as the Green New Deal. The burden of proof would have to be on the proponents to prove that "Medicare for All" is not cost-prohibitive.
Cost containment. Jeffrey Sachs, a Left-leaning economist and policy analyst who supports "Medicare for All," says that it comes down to whether Medicare for All could contain costs. I agree with Sachs' sentiment, which is also why I think "Medicare for All" will not work. Name me one country in which they implemented single-payer healthcare and were able to contain costs. You can't because it doesn't exist. Given that Jayapal is looking to unprecedentedly provide such comprehensive services without having out-of-pocket costs, it becomes all the more unbelievable that costs would be contained.
Incapability of providing such comprehensive services. Jayapal would love to provide an exhaustive list of health care goods and services. The problem with this goal is economic reality. One of the most fundamental concepts in economics is that we live in a world of scarcity. What single-payer healthcare does is that it shifts the demand curve so high that demand for healthcare greatly exceeds supply. When demand exceeds supply, there is a shortage, which is not at all shocking since single-payer does not address supply. As we see in other countries, it means implementing a rationing mechanism of some short. In Canada, it means longer waiting times. The United Kingdom limits what is offered to patients. Taiwan rations by keeping its consultation times shorter than average. Plus, as the Iron Triangle of Health Care suggests, increasing comprehensiveness would mean sacrificing quality and/or cost.
Political Feasibility. When looking at polling, most people are in support for "Medicare for All," at least in concept. When you start discussing details, it changes the story. A Morning Consult/Politico poll shows that support for "Medicare for All" drops by about half if it means eliminating private insurance. The Kaiser Family Foundation also found through its survey work that support drops considerably if "Medicare for All" would entail higher taxes and longer waiting times, which it would. I imagine as more details come to light, support for "Medicare for All" will continue to drop.
There is also the matter of gearing up for 2020 elections. The Democrats were able to regain the House in 2018 in large part being able to snag districts in which the GOP was more divided. Something like "Medicare for All" might energize the Democrat's more Left-leaning base, but it will likely not get larger voting blocs. This is why Democratic leadership is skeptical of a single-payer push, and would rather focus on smaller goals (e.g., fixing Obamacare, dealing with prescription costs).
Why Trust the Government with Single-Payer? I ask this question not simply as a self-identified libertarian. I ask this as a citizen of the United States. The U.S. government passed Medicare in 1965, and it is a fiscally unsustainable program that has a penchant for making improper payments. And then there was Obamacare, the program that was supposed to provide universal care while keeping costs down. Unsurprisingly, it ended up being the disaster critics predicted because it increased premiums and deductibles, provide less choice in insurance and in doctors, increased taxes for working-class Americans, and increased the deficit. If the U.S. government couldn't get it right with past programs, why should I trust something such as "Medicare for All?"
Postscript. Single-payer healthcare is a very costly payment mechanism that diminishes healthcare quality and raises healthcare costs. The 100-plus Democrats who co-sponsored this bill made it clear that they support a single-payer plan that is more disruptive, more costly, less popular, and less efficient than even previous single-payer plans. However, they do not want to make that clear to its constituents because vagueness better advances the path towards single-payer healthcare than actually discussing details. This bill goes beyond being impractical. It would be financially ruinous for the healthcare market, as well as the typical American citizen. I hope the Democratic leadership can rein in the Far Left for something more attainable and less damaging.
Wednesday, February 13, 2019
The Green New Deal Is More Alarming Than Climate Change Itself
For many years, the Democratic Party has talked about fighting climate change. Sure, there was the Clean Power Plan, but there was nothing on a grand scale...at least not until last week when Congresswoman Alexandria Ocasio-Cortez (D-NY) and Senator Edward Markey (D-MA) released the Green New Deal (GND), as well as the FAQ that has since been archived on the Internet before Ocasio-Cortez took it down from her website. For Ocasio-Cortez, addressing climate change is a major issue. She said that the world will end in twelve years, although the UN report from which she pulled that assertion stated that we have twelve years to limit its effects and keep it in check, not that twelve years was when the world was going to end. She feels so strongly about it that she called climate change "our World War II."
I understand that what was released was a non-binding resolution, as opposed to a formal piece of legislation. At the same time, the GND struck me as peculiar. Yes, there were ideas to address environmental issues. However, there were also elements seemingly having nothing to do with climate change or the environment, including "safe and adequate housing," racial justice, creating "millions of good, high-wage jobs," and an economic environment free of monopolies. NPR stated that the GND "combines big climate change-related ideas with a wish list of progressive economic proposals." The GND has many vague, far-reaching goals, but is short on details of how to accomplish its goals. In spite of this major shortcoming, we're going to make do here and do the best to analyze the feasibility of some of the GND's goals that are directly related to climate change and the environment.
Shift 100 percent of national power generation to renewable resources: Part of what makes this untenable is that the GND has this shift taking place by 2030. As of 2017, 11 percent of U.S. energy consumption and 17 percent (7 percent of which is hydroelectric) of electricity generation came from renewables (EIA), which is a far cry from 100 percent. The Union of Concerned Scientists are hopeful that we can reach 80 percent by 2050. A study from the National Academy of Sciences predicts that we cannot reach 100 percent renewable energy until 2059 (Clack et al., 2017).
Removing nuclear power from the equation: The GND is not simply about shifting away from fossil fuels. As the GND's FAQ section stated, the GND will not consider nuclear power as an option. If your goal is to have zero-carbon energy, removing nuclear power is unwise. Why? For one, nuclear power currently accounts for 20 percent of U.S. energy (EIA). Two, as I brought up before, nuclear power is the only zero-carbon energy source with high enough capacity and scale to meet demand for energy. Any realistic plan of zeroing out carbon requires more nuclear power, as a 2018 study from MIT argues. If Ocasio-Cortez truly viewed climate change as an emergency or as catastrophic, she would not want to remove nuclear power from the energy portfolio.
Eliminate air travel with high-speed rail. The resolution calls for overhauling the transportation system, which includes high-speed rail. The GND's FAQ calls for removing air travel, even though it admits that it might not be possible in ten years. Let's forget about Hawaii and Alaska or the need for international air travel for a second. A high-speed rail system sounds fine in theory. At least in Europe and East Asia, they have high-speed rail systems that compete with airplanes. Why can't the United States do that? After all, China is larger than the United States, although China racked up massive debt to pay for the high-speed rail system, not to mention China's population density per square mile is over four times that of the United States (United Nations).
The thing with comparative politics is that what might work in one country may or may not work in another country. Replacing air travel with high-speed rail would mean ensuring that major cities are connected. Let's take a look at an example of a Left-leaning state that has tried to implement high-speed rail: California. California has been trying to build a high-speed rail route from Los Angeles to San Francisco since 2008. As of last year, it could end up costing anywhere between $77.3B and $98.1B. It is a project of a decade's worth of delays and rising costs (L.A. Times), and I say that because the initial cost was supposed to be $33B. Even better is that the Governor of California abandoned the project today, thereby illustrating how difficult it is to implement a high-speed rail system, regardless if it is in a state that is strongly supportive of the idea.
What's even more worrisome is that assuming medium ridership, it would take 70 years to offset the greenhouse gas emissions because high-speed rail is an energy-intensive undertaking (Chester and Horvath, 2010). One study found that for high-speed rail to work, it needs average of 10 million one-way trips, and needs to divert the ridership mostly from airplanes (Westin and Kågeson, 2012).
I wouldn't expect the Green New Deal to replace all 5,000-plus of the U.S.' public airports. At the same time, it is not unreasonable to assume that such an endeavor would cost trillions. I think high-speed trains have the potential to replace airplanes in shorter trips, and I think it makes more sense to try high-speed rail in areas with higher population density (e.g., the Northeast). But trying to develop a nationwide high-speed rail system is not realistic or sensical.
Upgrade buildings to be energy-efficient. Nearly half of commercial buildings in terms of floorspace were built prior to 1980 (EIA). According to the latest American Housing Survey from HUD, the median year in which a residential home was built is in 1977. I point the age of the housing out to show that the prevalence of older buildings will either make it more challenging to upgrade the buildings or would mean knocking down old buildings and replacing new ones. It is difficult to comment without further details, but it is not hard to imagine an astronomical price tag. Plus, if the GND were successful, Ocasio-Cortez would still have to contend with the reality that land-use and zoning regulations are done at the local level.
A word about cost. Yes, this was a resolution, but the lack of details on the authors' part is a letdown. Even so, let's try to estimate costs of some of the initiatives. When running for President in 2016, Green Party candidate Jill Stein had a much less ambitious Green Deal, and she estimated that her plan would cost $700B to $1T a year. This figure could be used as a low-bound estimate, but we know that it would be an unrealistic cost expectation given what the GND has covered.
Engineers from Stanford calculated that meeting power demand through all renewable energy would have capital costs of $14.6T (Jacobson et al., 2015), although another study figures it would be more expensive (Clack et al., 2016). If we take the costs from the study that is more flattering for the GND and spread them out over ten years, that would amount to $1.46T a year. It would be difficult to determine the cost of high-speed rail because, as previously discussed, it costs significantly more than initial cost projections.
If we were to add in the GND programs having nothing to do with reducing greenhouse gas emissions, the cost of the GND would be even higher. Investment management firm Bridgewater estimates that a universal basic income would cost $3.8T a year. The Mercatus Center found that a national single-payer healthcare system would cost $3.26T a year, which is not far off from the Urban Institute's estimation of $3.T. If we use Bernie Sanders' College for All Act as a proxy for the cost of free college tuition, then it would cost $47B a year. Providing affordable housing is tricky to measure. The Left-Leaning Center for American Progress estimated that "Homes for All" would cost $20B a year, but that was only for construction costs.
Just using the cost estimates provided above that are most favorable to the proponents of the GND, the GND would cost no less than $8.53T a year. This does not even factor in the cost of the other initiatives, including sustainable farming, making buildings energy-efficient, and replacing combustible-engine vehicles with environmentally-friendly ones. Given what we have already, the annual cost for such the GND would be easily over $10T annually, and could feasibly reach the equivalent amount of the U.S.' GDP. Compare this to the cost of the original New Deal of $653B [in 2009 dollars] (or $777B in current dollars) that took place over six years, and the New Deal pales in comparison to the GND. And while we're on the topic of the New Deal, when FDR passed the New Deal, the debt-to-GDP ratio was only 40 percent. As of 2018, the debt-to-GDP ratio was at 104 percent, and it is only projected to get higher.
A word about burden of proof. If the United States government was even beginning to consider spending this much money, it better do what is intended in terms of bringing the global temperature. It was not something that the Clean Power Plan could do since it was only projected to reduce the global temperature by 0.2ºC. A similar issue with the Paris Agreement. What would happen if Ocasio-Cortez got her wish, and the United States ceased emitting greenhouse gases? How much would it reduce the global temperature? The Heritage Foundation estimates it at 0.13ºC, which would be consistent with what other estimates show for comparable GHG reductions. Another study estimated that the world would need to reduce oil consumption by a third, natural gas reserves by half, and coal reserves by 80 percent to reach the 2ºC benchmark (McGlade and Eckins, 2015). The burden of proof is on the proponents' side. Since past climate change initiatives could not adequately reduce the global temperature (even if implemented perfectly), it will be more difficult for Ocasio-Cortez to illustrate how implementation of her plan would succeed in reducing the global temperature, even if that is in conjunction with other countries' plans. We cannot simply say "doing something is better than nothing" because that is how we got Obamacare and the damage it caused the U.S. healthcare system.
Postscript. Instead of detail, the GND provides false hope and blind optimism. The truth is that the GND is no plan at all because it is not a remotely actionable blueprint. Additionally, the fact that it adds provisions having nothing to do with reducing greenhouse gas emissions further minimizes the seriousness of the resolution. If the Democrats could take the House, the Senate, and the White House in 2020, there would still be the reality that many politicians come from states that are dependent on oil, natural gas, coal, and nuclear power. The probability that this would become a resolution, much less actual legislation, is low. Senator majority leader Mitch McConnell (R-KY) is going to bring the GND to a Senate vote in the near future, so we'll get to see shortly just how unlikely it is.
If it is not going to pass, why talk about it? Because it shows how the political Left is shifting in this country. The fact that there are already 60 Democratic co-sponsors in the House shows just how much this shift is taking place. Much like I have been perturbed by the Republican's populist shift on such topics as trade or immigration since Trump was elected, I don't like how the Democrats are shifting further to the Left in a populist bent because it will lead to further polarization in this country.
You don't have to lean hard to the Left to care about the environment. I have called for a modest carbon tax to fund research on renewable energy as a solution. If the GND were simply about lowering greenhouse gas emissions, that would be one thing. I would happily have a conversation about that policy goal. But that is not what the GND is. The GND simultaneously is pie-in-the-sky utopianism while playing the fear card by saying "we need to work on this fast or the world is going to end." Yea for false dilemmas! The GND is less about saving the environment and acts as a pretext for shoving progressivism down the throats of the American people. It is a guise for an unprecedented amount of government intervention in the lives of Americans, as is illustrated by the number and types of initiatives listed in the GND, not to mention the amount of government intervention that would be required to make the GND work. Based on the cost and implications of the GND, the GND is the very sort of resolution that embodies the aphorism of "the road to hell is paved with good intentions."
I understand that what was released was a non-binding resolution, as opposed to a formal piece of legislation. At the same time, the GND struck me as peculiar. Yes, there were ideas to address environmental issues. However, there were also elements seemingly having nothing to do with climate change or the environment, including "safe and adequate housing," racial justice, creating "millions of good, high-wage jobs," and an economic environment free of monopolies. NPR stated that the GND "combines big climate change-related ideas with a wish list of progressive economic proposals." The GND has many vague, far-reaching goals, but is short on details of how to accomplish its goals. In spite of this major shortcoming, we're going to make do here and do the best to analyze the feasibility of some of the GND's goals that are directly related to climate change and the environment.
Shift 100 percent of national power generation to renewable resources: Part of what makes this untenable is that the GND has this shift taking place by 2030. As of 2017, 11 percent of U.S. energy consumption and 17 percent (7 percent of which is hydroelectric) of electricity generation came from renewables (EIA), which is a far cry from 100 percent. The Union of Concerned Scientists are hopeful that we can reach 80 percent by 2050. A study from the National Academy of Sciences predicts that we cannot reach 100 percent renewable energy until 2059 (Clack et al., 2017).
Removing nuclear power from the equation: The GND is not simply about shifting away from fossil fuels. As the GND's FAQ section stated, the GND will not consider nuclear power as an option. If your goal is to have zero-carbon energy, removing nuclear power is unwise. Why? For one, nuclear power currently accounts for 20 percent of U.S. energy (EIA). Two, as I brought up before, nuclear power is the only zero-carbon energy source with high enough capacity and scale to meet demand for energy. Any realistic plan of zeroing out carbon requires more nuclear power, as a 2018 study from MIT argues. If Ocasio-Cortez truly viewed climate change as an emergency or as catastrophic, she would not want to remove nuclear power from the energy portfolio.
Eliminate air travel with high-speed rail. The resolution calls for overhauling the transportation system, which includes high-speed rail. The GND's FAQ calls for removing air travel, even though it admits that it might not be possible in ten years. Let's forget about Hawaii and Alaska or the need for international air travel for a second. A high-speed rail system sounds fine in theory. At least in Europe and East Asia, they have high-speed rail systems that compete with airplanes. Why can't the United States do that? After all, China is larger than the United States, although China racked up massive debt to pay for the high-speed rail system, not to mention China's population density per square mile is over four times that of the United States (United Nations).
The thing with comparative politics is that what might work in one country may or may not work in another country. Replacing air travel with high-speed rail would mean ensuring that major cities are connected. Let's take a look at an example of a Left-leaning state that has tried to implement high-speed rail: California. California has been trying to build a high-speed rail route from Los Angeles to San Francisco since 2008. As of last year, it could end up costing anywhere between $77.3B and $98.1B. It is a project of a decade's worth of delays and rising costs (L.A. Times), and I say that because the initial cost was supposed to be $33B. Even better is that the Governor of California abandoned the project today, thereby illustrating how difficult it is to implement a high-speed rail system, regardless if it is in a state that is strongly supportive of the idea.
What's even more worrisome is that assuming medium ridership, it would take 70 years to offset the greenhouse gas emissions because high-speed rail is an energy-intensive undertaking (Chester and Horvath, 2010). One study found that for high-speed rail to work, it needs average of 10 million one-way trips, and needs to divert the ridership mostly from airplanes (Westin and Kågeson, 2012).
I wouldn't expect the Green New Deal to replace all 5,000-plus of the U.S.' public airports. At the same time, it is not unreasonable to assume that such an endeavor would cost trillions. I think high-speed trains have the potential to replace airplanes in shorter trips, and I think it makes more sense to try high-speed rail in areas with higher population density (e.g., the Northeast). But trying to develop a nationwide high-speed rail system is not realistic or sensical.
Upgrade buildings to be energy-efficient. Nearly half of commercial buildings in terms of floorspace were built prior to 1980 (EIA). According to the latest American Housing Survey from HUD, the median year in which a residential home was built is in 1977. I point the age of the housing out to show that the prevalence of older buildings will either make it more challenging to upgrade the buildings or would mean knocking down old buildings and replacing new ones. It is difficult to comment without further details, but it is not hard to imagine an astronomical price tag. Plus, if the GND were successful, Ocasio-Cortez would still have to contend with the reality that land-use and zoning regulations are done at the local level.
A word about cost. Yes, this was a resolution, but the lack of details on the authors' part is a letdown. Even so, let's try to estimate costs of some of the initiatives. When running for President in 2016, Green Party candidate Jill Stein had a much less ambitious Green Deal, and she estimated that her plan would cost $700B to $1T a year. This figure could be used as a low-bound estimate, but we know that it would be an unrealistic cost expectation given what the GND has covered.
Engineers from Stanford calculated that meeting power demand through all renewable energy would have capital costs of $14.6T (Jacobson et al., 2015), although another study figures it would be more expensive (Clack et al., 2016). If we take the costs from the study that is more flattering for the GND and spread them out over ten years, that would amount to $1.46T a year. It would be difficult to determine the cost of high-speed rail because, as previously discussed, it costs significantly more than initial cost projections.
If we were to add in the GND programs having nothing to do with reducing greenhouse gas emissions, the cost of the GND would be even higher. Investment management firm Bridgewater estimates that a universal basic income would cost $3.8T a year. The Mercatus Center found that a national single-payer healthcare system would cost $3.26T a year, which is not far off from the Urban Institute's estimation of $3.T. If we use Bernie Sanders' College for All Act as a proxy for the cost of free college tuition, then it would cost $47B a year. Providing affordable housing is tricky to measure. The Left-Leaning Center for American Progress estimated that "Homes for All" would cost $20B a year, but that was only for construction costs.
Just using the cost estimates provided above that are most favorable to the proponents of the GND, the GND would cost no less than $8.53T a year. This does not even factor in the cost of the other initiatives, including sustainable farming, making buildings energy-efficient, and replacing combustible-engine vehicles with environmentally-friendly ones. Given what we have already, the annual cost for such the GND would be easily over $10T annually, and could feasibly reach the equivalent amount of the U.S.' GDP. Compare this to the cost of the original New Deal of $653B [in 2009 dollars] (or $777B in current dollars) that took place over six years, and the New Deal pales in comparison to the GND. And while we're on the topic of the New Deal, when FDR passed the New Deal, the debt-to-GDP ratio was only 40 percent. As of 2018, the debt-to-GDP ratio was at 104 percent, and it is only projected to get higher.
A word about burden of proof. If the United States government was even beginning to consider spending this much money, it better do what is intended in terms of bringing the global temperature. It was not something that the Clean Power Plan could do since it was only projected to reduce the global temperature by 0.2ºC. A similar issue with the Paris Agreement. What would happen if Ocasio-Cortez got her wish, and the United States ceased emitting greenhouse gases? How much would it reduce the global temperature? The Heritage Foundation estimates it at 0.13ºC, which would be consistent with what other estimates show for comparable GHG reductions. Another study estimated that the world would need to reduce oil consumption by a third, natural gas reserves by half, and coal reserves by 80 percent to reach the 2ºC benchmark (McGlade and Eckins, 2015). The burden of proof is on the proponents' side. Since past climate change initiatives could not adequately reduce the global temperature (even if implemented perfectly), it will be more difficult for Ocasio-Cortez to illustrate how implementation of her plan would succeed in reducing the global temperature, even if that is in conjunction with other countries' plans. We cannot simply say "doing something is better than nothing" because that is how we got Obamacare and the damage it caused the U.S. healthcare system.
Postscript. Instead of detail, the GND provides false hope and blind optimism. The truth is that the GND is no plan at all because it is not a remotely actionable blueprint. Additionally, the fact that it adds provisions having nothing to do with reducing greenhouse gas emissions further minimizes the seriousness of the resolution. If the Democrats could take the House, the Senate, and the White House in 2020, there would still be the reality that many politicians come from states that are dependent on oil, natural gas, coal, and nuclear power. The probability that this would become a resolution, much less actual legislation, is low. Senator majority leader Mitch McConnell (R-KY) is going to bring the GND to a Senate vote in the near future, so we'll get to see shortly just how unlikely it is.
If it is not going to pass, why talk about it? Because it shows how the political Left is shifting in this country. The fact that there are already 60 Democratic co-sponsors in the House shows just how much this shift is taking place. Much like I have been perturbed by the Republican's populist shift on such topics as trade or immigration since Trump was elected, I don't like how the Democrats are shifting further to the Left in a populist bent because it will lead to further polarization in this country.
You don't have to lean hard to the Left to care about the environment. I have called for a modest carbon tax to fund research on renewable energy as a solution. If the GND were simply about lowering greenhouse gas emissions, that would be one thing. I would happily have a conversation about that policy goal. But that is not what the GND is. The GND simultaneously is pie-in-the-sky utopianism while playing the fear card by saying "we need to work on this fast or the world is going to end." Yea for false dilemmas! The GND is less about saving the environment and acts as a pretext for shoving progressivism down the throats of the American people. It is a guise for an unprecedented amount of government intervention in the lives of Americans, as is illustrated by the number and types of initiatives listed in the GND, not to mention the amount of government intervention that would be required to make the GND work. Based on the cost and implications of the GND, the GND is the very sort of resolution that embodies the aphorism of "the road to hell is paved with good intentions."
Wednesday, January 30, 2019
Eight Reasons Why Elizabeth Warren's Wealth Tax Is a Poor Idea
Since the Democrats regained power in Congress, they have been pushing for their wholly unoriginal idea of increasing taxes on the wealthy. Democrats are eyeing a corporate tax increase, which would be a reverse trend of the Republican's tax reform bill: the Tax Cuts and Jobs Act. Earlier this month, freshman Congresswoman Alexia Ocasio-Cortez (D-NY) proposed a misguided marginal tax rate of 70 percent that got a lot of people talking. Now it's Senator Elizabeth Warren's (D-MA) turn. Last week, Warren proposed to levy a 2 percent wealth tax on assets over $50 million, and a 3 percent wealth tax for assets over $1 billion.
Since it is a progressive tax, the first $50 million would be taxed at 0 percent, and anything between the $50 million and $1 billion mark would be taxed at 2 percent. Anything above $1 billion would be taxed at three percent. Since both income and wealth inequality have reached new highs, Warren hopes that a wealth tax could redistribute the wealth and mitigate the inequality. Economists Emmanuel Saez and Gabriel Zucman estimate that Warren's wealth tax could generate $2.75 trillion over the next ten years. Most Americans don't make over $50 million, which means it has populist appeal, and it is calculated to generate a fair amount of income. The Left-leaning Institute for Tax and Economic Policy (ITEP) released a report just last week making the case for a wealth tax, which means the idea is catching some traction. What could possibly go wrong? I covered the topic of a wealth tax in 2014. I will use that 2014 analysis as a starting point for this 2019 analysis, as well as the OECD's April 2018 report on wealth taxes, but the short answer is "plenty could go wrong." Here are a few issues with Warren's plan to implement a wealth tax:
Since it is a progressive tax, the first $50 million would be taxed at 0 percent, and anything between the $50 million and $1 billion mark would be taxed at 2 percent. Anything above $1 billion would be taxed at three percent. Since both income and wealth inequality have reached new highs, Warren hopes that a wealth tax could redistribute the wealth and mitigate the inequality. Economists Emmanuel Saez and Gabriel Zucman estimate that Warren's wealth tax could generate $2.75 trillion over the next ten years. Most Americans don't make over $50 million, which means it has populist appeal, and it is calculated to generate a fair amount of income. The Left-leaning Institute for Tax and Economic Policy (ITEP) released a report just last week making the case for a wealth tax, which means the idea is catching some traction. What could possibly go wrong? I covered the topic of a wealth tax in 2014. I will use that 2014 analysis as a starting point for this 2019 analysis, as well as the OECD's April 2018 report on wealth taxes, but the short answer is "plenty could go wrong." Here are a few issues with Warren's plan to implement a wealth tax:
- The wealth tax is difficult to valuate. One of the advantages of an income tax is that it is easy to determine one's income: just use the W-2 or 1099 Form. Not so with wealth. Wealth includes land, stocks, bonds, cash, cars, retirement savings...you get the idea. What is more is that determining the value of these various assets is more subjective than determining one's income (OECD, p. 69).
- The wealth tax can be evaded. Especially with increased capital mobility over time, which won't go away anytime soon, tax avoidance and evasion have increased (OECD, p. 67). To provide a U.S.-based example, the closest thing the United States has to a federal wealth tax is the federal estate tax. As the Left-leaning Center on Budget and Policy Priorities points out, wealthy people have been able to evade an amount equivalent to a third of the estate tax revenue raised since 2000. Granted, this was primarily caused by the GRAT loophole. Saez and Zucman expressed confidence in Warren's plan lacking such loopholes.
- In spite of Saez and Zucman's confidence, there are multiple ways to get around the wealth tax, including hiring tax attorneys to exploit IRS loopholes, dividing assets among family members, divorcing for tax purposes (if there are different asset thresholds), moving it overseas, and hiding it in trust funds (e.g., OECD, p. 67-68). Warren might be able to address some of these shortcomings, but it's also true that people will find new ways to get around the wealth tax.
- According to a Swiss case study co-authored by the co-architect of Obamacare, a 0.1 percent increase in the wealth tax resulted in the wealth reported to the government to drop by 3 percent (Gruber et al., 2016).
- As former Republican tax policy advisor Alan Cole points out, since it is difficult to enforce the wealth tax, it is easier to go the route of the capital gains tax than it is the wealth tax.
- Other countries have abandoned the wealth tax. In 1990, 20 countries from the OECD (Organization for Economic Cooperation and Development) had a wealth tax. Now, only four countries have a wealth tax: France, Norway, Spain, and Switzerland. The Executive Summary in the OECD's April 2018 report on wealth taxes points out that the wealth tax repeals were "justified by efficiency and administrative concerns and by the observation that that net wealth taxes have frequently failed to meet their redistributive goals." If they frequently failed to meet their redistributive goals, that will end up being a problem for Warren since that is the primary reason she is advocating for the wealth tax in the first place.
- Since 2000, France had 60,000 millionaires leave France because of a high wealth tax. French President Emmanuel Macron limited and lowered the wealth tax to mitigate the capital flight.
- The wealth tax in other countries have not collected a lot of revenue. Saez and Zucman believe that the wealth tax would contribute $2.75T over ten years, or an annual average of $275B. As the OECD report shows (p. 19-20), most countries kept their wealth tax revenue collection below 0.5 percent of GDP. Switzerland's 3.7 percent is explicitly stated by the OECD as an exception to the norm (p. 18). If we use the BEA's 3Q 2018 GDP estimate of $20.66T as a basis for the GDP, that would be 1.33 percent of the GDP. Adjusting the GDP for inflation would still not get the desirable figure: Saez and Zucman's estimate is rosier than historical data. The past, especially that of other countries, is not indicative of the future. At the same time, what the historical data show is that other countries have found it challenging to have rich people pay the wealth tax. The burden of proof would have to be on Warren to prove how her plan would be different from the other countries that tried and ultimately abandoned the wealth tax.
- The wealth tax poorly targets capital income. As the Tax Foundation explains, the wealth tax poorly targets capital income (or simply capital) because the wealth tax goes after normal returns. What it should be going after instead are the super-normal returns, which are the returns that go above the amount needed to compensate someone for saving and subsequently delaying their consumption. Since super-normal returns are unexpected, they do not have as much potential to distort investment decisions.
- The wealth tax lowers economic growth. In its 2014 analysis of Thomas Pikkety's global wealth tax, the Tax Foundation calculated that it would reduce GDP by 0.49 percent per annum. On the other hand, a 2010 World Tax Journal analysis calculated it at just 0.02-0.04 (Hansson, 2010). In either case, no one is arguing that the wealth tax is going to boost the GDP.
- The wealth tax affects more than the super-wealthy. Savings finance business investment. This drives more than wealth for the rich or the economy. The capital acquired by these super-wealthy individuals is used to employ others, create products that are consumed by other individuals, or generates wealth for pensions and retirement accounts.
- The wealth tax is arguably unconstitutional. The Constitution prohibits federal direct taxes that are not apportioned by the states (Article I, Section 9, Clause 4). The exception to this rule is the income tax since the Sixteenth Amendment creates a separate constitutional provision. Given the nature of the wealth tax, it could be classified as a direct tax. It might not be clear whether a wealth tax would constitute a direct tax, but one thing that is clear is that it would be challenged in court shortly after Warren attempted to implement it.
As the OECD points out (p, 59), the wealth tax does not work in isolation. Its effects depend on the overall composition of the tax code. At the same time, there are considerable and observable drawbacks to the wealth tax that Warren would rather not mention. Given that we are approaching an election cycle, this will not be the last the American people hear of income inequality or higher taxes for the rich.
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