Tag Archives: New Year

A New Year’s Gift from the Department of Energy

On New Year’s Eve, the Department of Energy (DOE) announced it will be denying a petition brought to the agency by the Landmark Legal Foundation. The petition had requested the DOE reconsider a regulation related to energy efficiency standards for microwave ovens on the grounds that the Energy Department used a new, much higher, estimate of the social cost of carbon (SCC) in the final analysis of the regulation than had been used in the proposed version of the rule. The SCC is a number the Department uses to estimate benefits to society from reductions in greenhouse gas emissions. The public was denied the opportunity to comment on the higher estimate of the SCC since the new estimate was not used until after the time the public was allowed to comment on the regulation.

Here’s some of the DOE’s reasoning for denying the petition:

In the microwave oven rule, the SCC analysis did not affect DOE’s decision regarding the standards that were published in the Federal Register at either the proposed rule or final rule stage because the estimated benefits to consumers of the standard exceeded the costs of the standard, even without considering the SCC values. [emphasis added]

However, as I and others have stated before, these “benefits to consumers” are not benefits at all, and should be excluded from consideration when determining whether the DOE’s energy efficiency standards produce benefits in excess of costs. In a comment I wrote to the DOE as the agency considered this petition, I said:

The preponderance of the rule’s benefits, nearly 80 percent, are not related to reductions in carbon emissions, or even to any environmental effects at all. Instead, these benefits are based on the assumption that consumers behave in an irrational manner when purchasing microwave ovens and that the Department will be able to “fix” this behavior by issuing a regulation, thereby resulting in benefits to consumers. These “savings” should be excluded from the agency’s final analysis of benefits resulting from the regulation.

So the DOE is partly right. The new SCC really doesn’t make a difference in this particular case. However, this is because the regulation produces net costs to society with or without the higher estimate of the social cost of carbon. Thus, the rule can’t be justified on a cost-benefit basis even with the new social cost of carbon number the DOE uses. As I explained in my comment:

Given that the primary estimate of the total benefits resulting from this regulation is estimated at $294 million per year (2011$), and total costs are estimated at $66.4 million per year, subtracting the consumer “irrationality” benefits of $234 million produces net costs to society of $6.4 million per year (2011$).12 If DOE used a lower value of the SCC, like the estimate used in the proposed version of this regulation, that net cost figure would be even higher. The problem is further compounded if benefits to other countries are excluded from the estimates.

The DOE made no effort to respond to this particular critique in its response to the Landmark Legal Foundation petition. The agency does not view the questionable nature of its estimated benefits to consumers as within the scope of the issue it sought comment on. Perhaps this is so. However, there will be more such regulations in the future where this controversial technique is employed by the DOE. Indeed, at Mercatus we have already commented on such regulations. Additionally, the agency’s decision to slip this notice out on New Year’s Eve leads one to question the degree to which the agency is committed to transparent practices. As a result, an inefficient regulation will be implemented and Americans will be made worse off.

 

Don’t like the fiscal cliff? You’ll hate the fiscal future.

Absent an eleventh-hour deal—which may yet be possible—the Federal government will cut spending and raise taxes in the New Year. In a town that famously can’t agree on anything, nearly everyone seems terrified by the prospect of going over this fiscal cliff.

Yet for all the gloom and dread, the fiscal cliff embodies a teachable moment. At the risk of mixing metaphors, we should think of the fiscal cliff as the Ghost of the Fiscal Future. It is a bleak lesson in what awaits us if we don’t get serious about changing course.

First, some background. Over the last four decades, Federal Government spending as a share of GDP has remained relatively constant at about 21 percent. This spending was financed with taxes that consumed about 18 percent of GDP and the government borrowed to make up the difference.

After a decade of government spending increases and anemic economic growth, federal spending is now about 24 percent of GDP (a post WWII high, exceeded only by last year’s number) and revenues are about 15 percent of GDP (the revenue decline can be attributed to both the Bush tax cuts and to the recession).

But the really telling numbers are yet to come.

The non-partisan Congressional Budget Office now projects that, absent policy change, when my two-year-old daughter reaches my age (32), revenue will be just a bit above its historical average at 19 percent of GDP while spending will be nearly twice its historical average at 39 percent of GDP. This is what economists mean when they say we have a spending problem and not a revenue problem: spending increases, not revenue decreases, account for the entirety of the projected growth in deficits and debt over the coming years.

Why is this so frightful? The Ghost of the Fiscal Future gives us 3 reasons:

1) As spending outstrips revenue, each year the government will have to borrow more and more to pay its bills. We have to pay interest on what we borrow and these interest payments, in turn, add to future government spending. So before my daughter hits college, the federal government will be spending more on interest payments than on Social Security.

2) When the government borrows to finance its spending, it will be competing with my daughter when she borrows to finance her first home or to start her own business. This means that she and other private borrowers will face higher interest rates, crowding-out private sector investment and depressing economic growth. This could affect my daughter’s wages, her consumption, and her standard of living. In a vicious cycle, it could also depress government revenue and place greater demands on the government safety net, exacerbating the underlying debt problem.

This is not just theory. Economists Carmen Reinhart and Kenneth Rogoff have examined 200-years’ worth of data from over 40 countries. They found that those nations with gross debt in excess of 90 percent of GDP tend to grow about 1 percentage point slower than otherwise (the U.S. gross debt-to-GDP ratio has been in excess of 90 percent since 2010)

If, starting in 1975, the U.S. had grown 1 percentage point slower than it actually did, the nation’s economy would be about 30 percent smaller than it actually is today. By comparison, the Federal Reserve estimates that the Great Recession has only shrunk the economy by about 6 percent relative to its potential size.

3) Things get worse. The CBO no longer projects out beyond 2042, the year my daughter turns 32. In other words, the CBO recognizes that the whole economic system becomes increasingly unsustainable beyond that point and that it is ludicrous to think that it can go on.

What’s more, if Congress waits until then to make the necessary changes, it will have to enact tax increases or spending cuts larger than anything we have ever undertaken in our nation’s history. As Vero explains:

By refusing to reform Social Security, lawmakers are guaranteeing automatic benefit cuts of about 20-something percent for everyone on the program in 2035 (the Social Security trust fund will be exhausted in 2035, the combined retirement and disability trust funds will run dry in 2033, and both will continue to deteriorate).

In other words, if we fail to reform, the fiscal future will make January’s fiscal cliff look like a fiscal step. I’ve never understood why some people think they are doing future retirees a favor in pretending that entitlements do not need significant reform.

You might think that we could tax our way out of this mess. But taxes, like debt, are also bad for economic growth.

But it is not too late. Like Scrooge, we can take ownership of the time before us. We can make big adjustments now so that we don’t have to make bigger adjustments in a few years. There is still time to adopt meaningful entitlement reform, to tell people my age to adjust our expectations and to plan on working a little longer, to incorporate market incentives into our health care system so that Medicare and Medicaid don’t swallow up more and more of the budget.

Some characterize these moves as stingy. In reality, these types of reforms would actually make our commitments more sustainable. And the longer we wait to make these inevitable changes, the more dramatic and painful they will have to be.

For all the gloom and dread, the Ghost of Christmas Yet to Come was Scrooge’s savior. In revealing the consequences of his actions—and, importantly, his inactions—the Ghost inspired the old man to take ownership of the “Time before him” and to change his ways.

Let us hope that Congress is so enlightened by the Ghost of the Fiscal Cliff.

Maryland’s budget troubles continue into the New Year

Each year a committee made up of Maryland state legislators gets together to set a spending growth limit for Maryland’s general fund budget. The Spending Affordability Committee (SAC) has been in place for 30 years. Originally created to avoid instituting a Tax and Expenditure Limit (TEL), the SAC has proven unable to stop the persistent structural deficit which emerged in 2007. This year the SAC recommends a budget of $37 billion, one billion more than last year. That’s an increase in spending of 4 percent

In a paper for the Maryland Journal entitled, “The Appearance of Fiscal Prudence” Benjamin Van Metre and I detail the flaws of the SAC process based on our read of the official reports. The main problem with the process is that lawmakers have convinced themselves that the SAC imposes fiscal prudence on the legislature. We find while there is some formulaic guidance in the form of a limit based on the growth in personal income, it only applies to part of  the budget. The SAC also involves policymakers deliberating over spending “needs” while referring to revenue estimates. The result is not a hard limit on spending but a recipe for a budget soufflé. To be fair, the SAC wasn’t designed to be a hard limit. It was built to be flexible.That’s fine if the SAC is clear about its own limitations in setting a spending limit.

What’s interesting is that over the years there’s been a bit of hand-wringing in the SAC reports about fast-growing areas of the budget – the Transportation Trust Fund, Medicaid, and a growing reliance on debt finance. Debt limits are covered by a separate legislative committee, the Capital Debt Affordability Committee (CDAC). But, the SAC’s warnings about debt tiered up with the CDAC’s increase in the debt cap. It leads one to conclude that these two committees are, at best, talking past one another.

Given the recent history of Maryland it’s more likely legislators will continue finding ways to fund “increased needs.” And they will do so by seeking more revenues in the form of new taxes, tax rate increases, and debt.  As one legislator put it with this year’s SAC recommendation, “we’re setting our citizens up for massive tax increases.”

 

 

Mayors react to Community Development Block Grant cuts

Though it is a small part of the federal budget, at $4 billion annually, the Community Development Block Grant (CDBG) is a favorite federal program in many local governments. This year cities can expect to receive a bit less CDBG funding as Congress reduces the grant by one billion dollars. City officials are unhappy, claiming without these funds many essential programs will be compromised or cut entirely.

CDBG was created in 1974 by merging together several smaller urban revitalization grants. Intended as stop-gap funding to help cities cope with insufficient local revenues, CDBG has become an established part of thousands of municipal budgets. While popular with mayors, over the years, many problems have emerged with the program. The formula used to target funds was found to be erroneously awarding grants to “college towns.” Many CDBG projects appear to be of dubious worth, and lastly, if CDBG is meant to revitalize distressed cities and stimulate economic development then how do we know if it has worked?  The last question is the subject of a 2007 study I undertook of the program.

The U.S. Conference of Mayors continues to lobby Congress to keep CDBG in place even as both Republicans and Democrats look for things to cut. With a debt of $15 trillion, $2.9 billion is trivial by comparison. But CDBG begs another question, after 38 years of subsidies to foster urban recovery why haven’t cities and local revenues rebounded?

 

 

Not In My Back Yard?

Richard Epstein has a great new article in Forbes detailing his New Year’s resolutions for public policy. Despite the scuttlebutt on a second stimulus, health care, and all the other looming federal issues, he takes time to examine the local and regional policy problems that have proliferated recently; a sort of death-by-a-thousand-cuts:

On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer’s skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don’t let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven’s sake, learn the lesson of Kelo and stop using the state’s power of condemnation for the benefit or private developers.

On labor, state and local governments have to junk the progressive mindset in both the public and the private sector. State and local governments should never, repeat never, be forced to negotiate with local unions. The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves. On the private side, don’t force developers to hire union workers on construction sites or to block the construction of new facilities that hire nonunion labor. If unions are really efficient–and they aren’t–let them compete like everyone else.

(H/T Matt Welch at Reason)

We’ve recently covered the real estate problem. Eileen and I have a forthcoming paper paper on just how monumentally screwed up public pension systems are.