Category: Economics

It’s Time For A 21st Century Energy Economy

Jerry Pournelle has a suggestion for how we can make this country energy independent:

As to whether American ingenuity can use that technology to help win us energy independence, I have to say it again: cheap energy will cause a boom. The only cheap energy I know of is nuclear. Three Hundred Billion bucks in nuclear power will do wonders for the economy. We build 100 1000 MegaWatt nuclear power plants — they will cost no more than 2 billion each and my guess is that the average cost will be closer to 1 billion each (that is the first one costs about 20 billion and the 100th costs about 800 million). The rest of the money goes to prizes and X projects to convert electricity into mobility.

But he ends on a more somber note:

Of course we won’t do that.

Even though some in the environmental movement have embraced nuclear energy as a way of reducing CO2, the kneejerk reactionaries are still numerous enough to prevent any real progress. The fact that the government horrendously mishandled the regulation of nuclear plants and stifled the chance at making the industry viable didn’t help either. We could have been energy independent right now had we done things right in the 60s and 70s.

Meanwhile, France gets 70% of their energy from nuclear sources, reprocesses their waste, and is far less dependent on Saudi shieks or Venezuelan strongmen for their fuel. Their nuclear plants were build around common plans so that there was little duplication of effort, and spare parts could be made in batches rather than having every reactor be a largely unique design.

A smart politician would be pushing for a new Manhattan Project—the United States getting 25% of our electricity from clean nuclear reactors by 2020. A program that offsets the strain on the electrical grid from electric vehicles by building more capacity from nuclear power. A program to speed the development of safe pebble-bed reactors that won’t be capable of spreading radiation and doesn’t pose a threat from the proliferation of nuclear materials.

We can do those things, but all it takes is the political will to push them through. Sadly, it seems like our political leadership is decidedly lacking in will. Glenn Reynolds is right, we do have a lack of faith in our political leadership, and that comes because politicians are too willing to push for burning more of our food stocks than leading us into the 21st Century. We can do better, but we can’t do that if our political class is more interested in jockeying for power than pushing this country forward.

The Other War In Iraq

Instapundit has a lengthy note from a Colonel in Baghdad on the recent fighting in Basra. He observes that the driving force in that conflict was not Moqtada al-Sadr, but the lack of services being provided by the Iraqi Government. Indeed, that highlights a bigger issue: over the long term, the biggest problem in Iraq isn’t terrorism. Al-Qaeda in Iraq has been largely crushed. Moqtada al-Sadr was forced to cry uncle and is viewed by all as an Iranian stooge. While there are still acts of violence in Iraq, they’re less and less the sort of organized attacks that we’ve seen over the course of the war.

The real issue is going to be corruption. The biggest roadblock to democratization is corruption, and it’s endemic in Iraq. The Iraqis have a source of revenue in oil, and it’s enough to sustain their development. The problem is without a system of accountability and transparency, that money won’t go to where it’s needed.

Over time, we’re going to need a new “surge”—but one that focuses on working with the Iraqi government to stop corruption. We’re in a unique position to help, and working alongside the Iraqis we need to develop systems that help make sure money goes to where it is truly needed and those that steal from the Iraqi treasury are brought to justice.

Most NGOs focus on issues other than helping improve the rule of law in foreign nations—and it seems counterintuitive to think that accountants rather than aid workers can truly help developing nations. Yet, if a nation is to transition successfully from autocracy to democracy, fiscal accountability is absolutely crucial. Many democratizing states fail to democratize because the government does not act with accountability to the people, which causes the people to lose faith in government.

The US needs to work with NGOs like Transparency International and the Iraqi government to create a more democratic and accountable political and financial system for the Iraqi people. We have made great strides in terms of fighting terrorism and providing security—yet that alone won’t be enough to make Iraq a strong and functional nation. The future of Iraq hinges on the ability of the government to provide critical services while remaining accountable to the people. If it cannot do this, then the Iraqi people will be forced to turn to militia leaders for help, and Iraqi society will fragment. This does not have to come to pass, but in order to prevent it we have to start looking beyond basic security and towards governmental reform.

Why Universal Health Care Keeps Failing

The Wall Street Journal has an interesting piece on the failure of California’s attempt at universal health care and what it means for the rest of the nation. It is interesting to see how many of these plans have failed to pass or ended up being scrapped due to cost overruns. If universal health care was such a great thing and so economically compelling, it’s hard to see why so many states would be having such a hard time making it work. The reason why is simple: universal health care doesn’t actually work in the real world:

Like collapses in Illinois, Wisconsin and Pennsylvania, this one crumpled because of the costs, which are always much higher than anticipated. The truth teller was state Senate President Pro Tem Don Perata, who thought to ask about the price tag of a major new entitlement amid what’s already a $14.5 billion budget shortfall.

An independent analysis confirmed the plan would be far more expensive than proponents admitted. Even under the most favorable assumptions, spending would outpace revenue by $354 million after two years, and likely $3.9 billion or more. “A situation that I thought was bad,” Mr. Perata noted, “in fact was worse.”

This reveals that liberal health-care politics is increasingly the art of the impossible: You can’t make coverage “universal” while at the same time keeping costs in check — at least without prohibitive tax increases. Lowering cost and increasing access, in other words, are separate and irreconcilable issues.

Universal health care has a basic and fatal flaw, you can’t simultaneously reduce the cost of a service and increase access to it. If you have universal access, you have to find a way of paying for people to get that access, which raises costs. If you want to keep costs down you can only economize so far before you have to restrict access. Universal health care is a bit like a perpetual motion machine—it would be wonderful in theory, but it can’t actually exist in reality.

What inevitably ends up happening is that governments cut costs first—which requires them to cut off access. This is how Britain’s NHS and the Canadian system work. You end up either waiting in line or having a government bureaucrat deny your request for treatment. That’s why the healthcare systems in those countries are having such trouble managing costs without drastically cutting back on services—and why both are more and more turning to private agencies to provide services they cannot.

The failure of the California plan isn’t a shock—people support universal health care in theory, but when confronted with the fact that there’s no such thing as “free” health care most people balk at the price. A further sign that the support for universal care is theoretical comes from evidence that most Americans are satisfied with their current health care coverage. When confronted with a plan that forces people to change their coverage—and not necessarily for the better—it’s not surprising that the theoretical support for universal coverage ends up losing to the desire not to lose what people already have.

Universal health care is not the only solution, and already there are better solutions out there. In fact, of all the possible solutions, universal health care is almost certainly the least advantageous. Corporations love it because it passes on the costs to the federal government—turning it into a corporate welfare transfer payment. Bureaucrats love it because it gives them more power, as it would with politicians. However, it’s hard to see where the groundswell of demand for universal health care really is. If there was such a groundswell, a liberal state like California wouldn’t be balking at the price.

The failure of California’s initiative demonstrates why universal health care simply doesn’t work. The laws of economics and human behavior go against it, and those factors can’t be legislated away. You can’t square the circle of trying to simultaneously lower costs and increase access without throwing a ton of money at the problem and continuing to throw more and more money at it until the system collapses. If even California legislators can learn that principle, hopefully Congress can as well.

Failing To Learn From History… Correctly

Mitch Berg takes a rhetorical baseball bat to a Star-Tribune op-ed calling for a new New Deal. Columnist Bob MacLean thinks that the US badly needs a make-work program to “rebuild infrastructure”—a theory which Berg manages to tear apart with aplomb. The columnist suggests the following:

Let’s use the $150 billion currently proposed for rebates and corporate welfare to instead fund an 18-month infrastructure and government-efficiency initiative. This initiative — call it IGE — would be a contemporary version of the indisputably successful WPA program launched in 1935 by presidential order to cure economic depression.

First of all, the idea that the WPA was “indisputably successful” is wrong—in fact, there’s been a significant amount of economic research supporting the contention that the New Deal in fact made the Great Depression worse by preventing the normal market mechanisms from restoring normal employment. In fact, throughout the Depression and the height of the New Deal, unemployment remained incredibly high. For those who could get jobs, wages were propped artificially but that came at the expense of wider employment—the lowest the unemployment rate ever got during the New Deal period was around 14%, and in fact unemployment peaked again in the late 1930s despite all of Roosevelt’s programs. What truly ended the Great Depression was not the New Deal but the outbreak of World War II.

Even if we ignore the data and take the popular view, MacLean’s argument still doesn’t make much sense. Berg points out the obvious: do we really want unemployed mortgage brokers and software engineers either doing engineering inspections or digging ditches? Either you’re taking skilled labor and making it do unskilled work or taking skilled labor and putting it into a position where all those skills are wasted. It makes absolutely no sense, and it’s why such programs are completely worthless as an economic stimulus. How do you advance an economy by taking skilled labor and turning it into unskilled labor? The short answer is you don’t. Digging ditches does not prepare a worker for competing in the 21st Century.

Then there’s the fact that this is an 18 month program. If the real purpose is to reduce unemployment over the long term, then what’s the point? You’ve taken people with marketable skills and taken them out of the skilled labor pool for 18 months, putting them even further behind. The fatal flaw in this theory is the completely ridiculous assumption that the amount of productive work in digging ditches for 18 months is greater than the amount of productive work that people could get in the free market. That’s not a very intelligent argument, and it belies the kind of economic illiteracy seen frequently from the left.

If the goal was really to reduce unemployment, there’s a case to be made for funding worker retraining programs to increase the pool of skilled workers. If the goal is to increase domestic employment in unskilled or semi-skilled labor, the quickest way to do that is to start enforcing immigration laws—the effects of that alone would be a dramatic increase in the number of open jobs.

Instead, this is an example of trying to return America to the days when Fabian socialism was an active part of American politics—which is why we constantly hear the drumbeat of economic despair from the left. If there’s a crisis, then their radical ideas can have more of a purchase. When things are looking up, there’s less of a need for radical government intervention. Ironically, the party that once said “we have nothing to fear but fear itself” now has an economic position that requires scaring the American people into accepting radical policies.

Following In The Footsteps Of Carter?

Dave Kopel blasts into the Bush-Pelosi “stimulus package” at The Volokh Conspiracy:

Here’s how to deal with a recession: A federal government which is already spending more than its income should borrow even more money, so as to give lots of people a tax rebate. This is the bipartisan plan of President Bush and Congress. They are taking a leaf from the presidency of Jimmy Carter.

Even accounting for inflation, the Bush-Reid-Pelosi rebate is far more profligate than the proposed Carter rebate of 1977. But the two rebates appear to be based on the same demand-side principles.

He’s right on that. The “stimulus package” is great politics, but absolutely horrendous policy. When we’re already running the budget into the ground, the last thing this country should be doing is trying to jump-start the economy by giving everyone a check. It’s a bit of “bread and circuses” politics that demonstrates just how economically illiterate the government is.

Middle class voters are feeling a squeeze, but that’s a symptom of a larger problem. The reason why the dollar is falling and the markets are volitile is because the US is on an economically unsustainable course: we’re spending too much, regulating too much and we have a massive entitlement crisis looming and no one has the political will to touch it. When even the French are being more fiscally responsible than we are there is a serious problem.

A realistic stimulus plan would involve significant cuts in spending, making the current tax rates permanent, and structural economic reforms like ensuring that depreciation tables don’t artificially increase the taxable assets of a business. However, none of those things are particularly “sexy” and don’t have much impact to the average voter. So instead, President Bush and Congress are planning to bribe the American people.

In the end, this plan is ultimately self-defeating. We can’t get out a problem created by fiscal profligacy by being even more profligate—and while a tax rebate check is a nice thing to have, it’s not going to have the long-term effect necessary to lift the economy. Even if we do get some economic stability in the next few months, that’s more likely due to the sub-prime crisis easing rather than some government check.

This isn’t a stimulus package, it’s a bribe, and while it may be politically popular, it’s not going to fix our underlying economic problems.

Feeding The Panic

Larry Kudlow has effusive praise for the Fed’s massive rate cut which slashed interest rates this morning.

I’m not so sure. Right now the markets are panicking, and such a massive rate cut reinforces the idea that there’s some major short-term problem on the horizon. We got into this mess because of over-lending, and it’s hard to imagine how over-lending will get us out of it. The markets are correcting, which is what a market should do in this situation. What I’m concerned about is that the Fed has bought into the panic psychology and is trying to get a quick fix in that will make things worse rather than letting the storm pass.

A rate cut and an economic stimulus package are both short-term solutions that will only blunt the effects of an economic downturn. We have a set of policies that are based on trying to calm fears in an election year rather than making the set of structural reforms that would actually solve the underlying problems in the US economy.

There are things that can be done—such as reducing taxes on business assets, fixing depreciation tables and reducing unnecessary regulation. Instead, we’ll get a “stimulus” in the form of a couple hundred dollars in tax rebates that will end up being used to pay down credit cards and the like. Depreciation tables don’t make for good campaign ads, but tax rebates do, even though tax rebates don’t do anything to fix recessions.

The fundamentals of the US economy remain strong, but the Fed keeps sending the wrong signal and is feeding the global panic. Even if an additional shot of liquidity is the right prescription, the Fed’s dramatic rate cut may only make nervous investors even more skittish rather than reassuring them into stopping the fall of global markets.

A Little Radicalism Is Good Medicine

Ramesh Ponnuru has an interesting pice in Time on why the GOP’s health care platform represents a radical shift. Instead of health care being something that you get through your employer, many of the Republican plans would see health care as something you have—just like auto insurance, life insurance, or homeowner’s insurance.

That’s the way it should be. The only reason we have the system now is because the tax system forces it—there’s no economic reason why risk pools have to be so small or why health coverage shouldn’t be portable from job to job. Losing your job should not mean losing your health insurance. Moving to a new job shouldn’t require you to have to think about what coverage you’ll get. People who work from Mom’s Apple Pie Bakery should have access to the same level of care that someone who works for Microsoft has.

The Republicans need to push back on health care, because despite all the hew and cry, it’s a winning issue for them. Even after years of scurrilous attacks, polling shows a market-oriented approach being more popular, winning over the Democratic plan 49-40%. When confronted with the options of having a federal bureaucracy or having real choice, it’s not hard to figure out why Americans tend to choose the latter. The last thing we need in this country is more bureaucracy in medicine.

Emphasizing personal choice is key to this issue. The electorate is justifiably upset at the status quo in which the HMO bureaucracy makes health care more expensive and harder to get. The huge rise in health care costs in this country is due to the fact that we have an unworkable system: the Democrats want to make that system bigger, the Republicans want to fix it. Instead of forcing everyone into a federalized Mother of All HMOs that combines the efficiency of the DMV with the caring service of the IRS, it’s a much more attractive option to give people real choices.

Put the only way something like this will get passed is if the GOP is willing to fight for it. The Democrats are promising the moon, but giving us more bureaucracy. Nobody (other than Democrats, who take it as an article of faith) really believes that things run better when the government takes them over. Healthcare is no different. The GOP has the right policy, but they have to have the political will to see that policy enacted. That will mean actively fighting back against all the pressure groups backed with special interest cash who are invested in the broken status quo.

It’s a battle worth fighting, both politically and on behalf of the American people who need real choice in health care. The question is who will be willing to lead that fight?

SCHIP Veto Override Fails

As expected, the House failed to override the President’s veto of the SCHIP legislation that would have extended government child health care benefits to families making over $80,000 per year. The bill would have eroded the health care market, raising premiums for everyone, while providing benefits to families that don’t need government-paid child health care. A family with an annual income of over $80,000 is not “poor” by any stretch of the means. The government has no business providing benefits to those who don’t have any need for them.

Politically, this move will probably hurt the GOP, but given that the election is a year out, the effects will be minimal. What the GOP needs to be doing on the political front is strongly pushing for a compromise bill that preserves the current SCHIP program while encouraging responsible solutions at a state level. That way, the Republicans can claim that they helped the poor without compromising the rest of America’s healthcare system.

The SCHIP expansion is part of an incremental strategy advancing this country towards the failed policies of universal government-run healthcare. The last thing this country needs is a bureaucratic system like the NHS in Britain or the Canadian healthcare system. The smaller populations of those countries have helped slow the inevitable collapse of those systems. If tried in the United States, such a system would collapse with even greater speed and lead to the same widespread rationing of care that already exists in the UK and Canada. Government price controls lead to shortages—the economic evidence is virtually irrefutable. Yet the Democrats in Congress, ever desirous of more and more power in the hands of the state, are perfectly willing to sacrifice the quality and accessibility of American healthcare to to achieve their political ends.

The SCHIP veto holds the line against this back-door attempt at socialized medicine, but in order to avoid political consequences, the Republicans need to be able to push out a better solution. There are viable policy proposals that keep the essential mission of SCHIP alive without expanding it into yet another runaway entitlement. The Republicans need to be able to spearhead these initiatives in order to demonstrate that they can get things done—unlike the party across the political aisle.

The Shrinking Deficit

Megan McArdle observes that the national budget will be nearly balanced by the time George W. Bush leaves office, provided that current trends continue:

Thanks to George Bush’s amazing deficit reduction plan, the budget deficit is now only 1.2% of GDP. If this trend continues, by the time George Bush leaves office, the budget will be within a hair’s breath of being balanced. I can only hope that Democrats don’t squander this precious legacy of fiscal responsibility.

Just kidding! Not about the budget deficit, I mean, but about the reason for it. The reason the budget deficit has closed is a combination of economic growth and increasing inequality, which has allowed the government to collect more revenue on a smaller base. The rich really are different–they pay higher tax rates.

McArdle argues that it’s not Presidential policy that drives these changes, but larger macroeconomic factors. While that’s certainly true to a point, I don’t think that one can dismiss the role of Bush’s tax policies in driving those two factors of economic growth and income. The economic growth of the past few years has come in spite of the collapse of Enron and WorldCom, in spite of the aftereffects of the September 11 attacks and in spite of high oil prices. There’s a very strong argument to be made that the last few years of economic growth are attributable to a national policy of low taxes encouraging productive investment. That isn’t the whole story, but it is a very crucial part of why these last few years have seen solid levels of economic growth.

It’s also interesting that the standard Democratic argument against the Bush tax cuts is that they reduce the tax burdens on the rich. Yet the empirical evidence suggests that the tax burden is shifting the opposite way. Ms. McArdle is correct: the tax base is shrinking, and more is being gathered from a smaller subset of the population. From an economic perspective, that’s helping fuel the reductions in the deficit. Politically, such a thing can foster a sense of entitlement and dependence which is unhealthy over the long term.

The evidence indicates that the Bush tax cuts did what they were supposed to do: increase economic growth and tax revenue. The fact is that in 2003 the Congressional Budget Office predicted $2,421 billion in income tax revenues for 2007. The predicted tax revenue for 2007 now is $2,574 billion. The deficit has decreased to 1.5% of GDP, which is lower than it has been for 24 of the last 30 years. Economic growth remains strong despite the sub-prime mortgage scare and the unemployment outlook for the last few quarters has been revised upwards to show continued job growth.

All the fundamentals are working, but the real problems are spending and entitlements. It won’t matter whether we’re running a deficit or a surplus when the bill for Social Security and Medicare comes due. None of the reduction in the deficit came from cuts in spending, with spending still increasing far above the rate of inflation. The looming entitlement crisis guarantees that any advances made in the next few years will be nothing compared to the liabilities incurred when the Baby Boomers start hitting retirement age. The priorities for the next administration must be in reigning in both the out-of-control levels of spending and the equally out-of-control levels of mandatory entitlement spending. If those problems aren’t fixed, none of the progress of the last few years will matter much.

UPDATE: Ramesh Ponnuru notes that tax cuts do lower overall revenue. I would argue that it is possible to have a tax cut that pays for itself, but that would require a much higher marginal rate than we’ve had in decades. The reason why the Bush tax cuts should get some credit for the surge in revenues is because of their collateral effects. One of the biggest sources of increased revenue was on strong corporate profits, and those can be attributed to a combination of low interest rates and tax policy that is conducive to new investment.

Ultimately, federal revenues are much more dependent on the overall health of the economy than on tax policy. Worrying about maximizing federal revenue is the wrong approach; the primary concern should be in maximizing overall economic growth. The Democrats tend to obsess over the former, while the Republicans look to the latter. Tax cuts won’t necessarily bring an economy out of recession by themselves like some Republicans claim, nor will they cause one as some Democrats claim. Monetary policy has a big impact, as does productivity, the balance of trade and other factors large and small.

That doesn’t mean that tax cuts aren’t sound policy—they most certainly are, but the case that tax cuts by necessity pay for themselves isn’t the strongest.

Winning On Health Care

Karl Rove has an interesting piece in The Wall Street Journal on how Republicans can offer a compelling solution to the nation’s healthcare woes. His solution is to put more control in the hands of consumers through Healthcare Savings Accounts combined with low-cost catastrophic insurance that is portable from job to job.

It’s the right plan for American workers. The current system is completely idiotic — there’s no good reason why health benefits should be tied to your employer. It hurts small businesses, the unemployed, and drives up the cost of healthcare for everyone. The first step in restoring sanity to the nation’s healthcare system is to decouple heath benefits from employment. Employers don’t buy food, they don’t buy transportation, and we wouldn’t expect to live in corporate-owned housing. The healthcare system in America is a throwback to the days of the company store, and that needs to change.

The Hillarycare solution is the same solution that’s failing in Canada and Britain. Because we have a larger, more diverse population, the rate of failure in the United States would be even faster. The inevitable result of a socialized single-payer system is the rationing of health care, the loss of consumer choice, and a system that costs more and more money. There is no such thing as “free” health care — and like anything else, the more intermediaries that exist between payor and payee, the higher the cost.

Mr. Rove is correct: what we need is a system that offers people choices. A combination of MSAs and tax benefits can cover the small stuff — routine doctor’s visits, preventative healthcare, and other minor medical issues. For catastrophic coverage, programs like AFLAC already provide low-cost catastrophic care insurance. Allowing for better risk pooling will keep those premiums low and ensure that Americans can be protected from more serious issues. The more control people have over healthcare, the more options they have and the more incentives the system has for keeping the quality high and the costs low.

We have a competitive marketplace for life insurance, for annuities, for car insurance, and for just about everything else. The cost of those products hasn’t seen the sort of dramatic inflation that healthcare has. The reason why healthcare in this country is so expensive isn’t because we have a free-market system, it’s because we don’t have a free-market system.

The GOP has to stake their claim on this issue. The principles of a sane free-market system are the best principles for America. We can ensure that every American has access to affordable and quality healthcare without creating yet another stifling bureaucracy. In fact, that’s the only way that Americans can get access to quality, affordable healthcare. However, the GOP will lose unless they’re willing to put up a fight against the special interests who want to keep the current system in place. The pro-worker side lost the Social Security fight specifically because they never bothered to counter the inaccurate and misinformed attacks being thrown out by the side wanting to keep the statist status quo.

When conservatives stand on their principles, they tend to win. When conservatives run away from their principles, they tend to lose. America needs leadership willing to stand up for the right principles. If the current crop of GOP candidates are unwilling to do so, we could end up with a socialized system of healthcare that will result in thousands of needless deaths and a healthcare system that will end up like the collapsing Canadian and British systems — except we’ll get their faster and with more devastation in our wake. The American people deserve better than that, and if the GOP leaves the field to the advocates of socialized medicine, they’ll have betrayed both their principles and their constituents.