Debunking the idea of lower tax rates for rich

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, June 15, 2012

Right-wing conservative media pundits, journalists, and their sympathizers in the Congress and think tanks, bombard us with constant one-liners that federal income tax rates are too high, and the cure for our unemployment problem is lowering federal income tax rates. Obama administration has proposed increasing tax rates on the rich and lowering the rates on middle- and low-income Americans to raise revenue. But the followers of Grover Norquist's "no tax increase pledge" in the Congress have constantly opposed raising tax rates on the rich.

This opposition to raising tax rates on the rich follows the same old reasoning that increasing taxes on the rich will reduce growth, increase unemployment and hence decrease tax revenues. Therefore, one questions if this stand on taxes is based upon sound economic analysis or is it just old political and bipartisan rhetoric meant to misinform Americans about the effect of increasing taxes on the rich? A recent major study published in the Journal of Economic Literature, March 2012, by Emmanuel Saez, Joel Slemrod and Seth H. Giertz (SSG), provides very convincing evidence that increasing marginal income tax rate (rate when income exceeds an individual's tax bracket by an extra dollar) more than the current 35 percent rate for the top 1 percent of income earners will increase federal government revenues.

SSG find that under very reasonable assumptions, supported by vast literature on tax issues, when one combines maximum federal and average state income tax rates, Medicare and average sales tax rates in the U.S., the top marginal tax rate on ordinary income as of 2009 is 42.5 percent, the estimated revenue maximizing tax rate is 72.2 percent and the estimated corresponding top federal income tax rate is 68.4 percent. These estimates are substantially higher than the current top marginal tax rate of 35 percent. It should be emphasized that no one in the Obama administration is proposing such high rates.

But the data shows that very high federal marginal income tax rates from 91 percent to 68.8 percent did exist from 1952 to 1981.

President Obama has proposed for 2013, a 39.6 percent marginal tax rate for those households with incomes of $388,350 and over, according to the Wall Street Journal.

In 2009, 22,000 millionaires paid only 15 percent of their income in income taxes. SSG does recognize that high tax rates on the rich produce behavioral responses that include actions like reducing hours of work, career choices, timing of compensation or accepting non-taxable compensation, tax avoidance or tax evasion. However, SSG contends that for most rich people, where behavioral responses are concentrated, responses to higher individual income tax rates include a shift away from taxable individual income to other forms of income such as corporate income, deferred compensation that is taxable at a later date, stock options and dividends.

SSG also claims that estimates are affected by the tax system that allows different rates for capital gains and dividends, and a host of deductions and tax credits.

Even with the current complicated tax system, the primary message from the study is that increasing the top tax rate, as President Obama is proposing, will not be detrimental to the economy and will increase tax revenues.

There is no doubt that the current tax system would be much better for the economy if many tax deductions, credits and other loopholes are substantially reduced. In addition, increasing tax rates on capital gains and dividends (constituting a large fraction of income of the rich), combined with substantially reduced corporate income tax rates, will provide a significant boost to businesses and the economy. Our tax/expenditure system has become skewed in favor of the rich and wealthy and does not much encourage human and physical capital accumulation and R&D; its effect also shows up in the skewed distribution of income.

SSG data show that since 1981 marginal tax rate on the top 1 percent has declined substantially, and precisely at that time their income share has started increasing dramatically. Tax Policy Center data show that in 2008 only 59 percent of the top 400 adjusted gross income (AGI) taxpayers paid the marginal tax rate of 35 percent and over and none paid effective average tax rate of 35 percent and over. SSG admits that inequality of income between the rich and non-rich may not be due only to the tax system.

However, starting in 1986 the sharp drop in marginal income tax rate on the top 1 percent accompanies the dramatic jump in their income share. At the same time, the next 9 percent in the income distribution, who also got a tax break starting in 1981, only gained a modest increase in income share. It is hoped that Americans pay attention to objective facts on taxes and about our current tax system and not be persuaded by empty rhetoric on the right based on ideology, emotions and twisted facts.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/

Health insurance and broccoli: A mismatched comparison

Vijay K. Mathur

Published in Standard-Examiner, April 4, 2012, Ogden, Utah

Recently, the U.S. Supreme Court heard arguments for and against the 2010 Affordable Health Care Act. Justice Antonin Scalia, a skeptic of the health insurance mandate in the law, raised the question to the government attorney, Donald Verrilli, that if the government can mandate to buy health insurance, why can't it mandate to buy broccoli?

The question implied that broccoli is good for a healthy diet and hence good for healthy outcomes; hence if the federal government is allowed to mandate buying of health insurance, it can overreach by mandating consumption of food products like broccoli.

Let me examine Justice Scalia's broccoli example and compare the mandate for broccoli consumption with the mandate to buy health insurance.

First, health insurance is not the same type of product as broccoli or cabbage or cauliflower. If a person does not consume broccoli, he has many close substitutes to improve his health.

In addition, if an individual does not consume broccoli he will not get sick and die. However, if a person does not have health insurance and faces serious illness or injury, he may face the choice between not seeking medical care and suffer debilitating health consequences or even death, or showing up in an emergency clinic for medical care. The 1986 law (Emergency Medical Treatment and Active Labor Act) mandates that emergency clinics provide medical care to all who show up. I wonder why Justice Scalia and some other justices are skeptical about a health insurance mandate on buyers but have not raised any questions about the mandate on the suppliers of emergency medical care.

Second, health insurance insures against risk due to the randomness of illness or injury. Most risk-averse people buy health insurance. However, many others who are young, healthy and are willing to take more risk may prefer to free-ride on insured persons. The uninsured are passing part of the cost of risk on to insured people, knowing that they can depend upon emergency clinics. In fact, those who are uninsured may engage in more risky behavior and hence consume more emergency medical care because they have reduced the cost of risk by passing it to others. On the other hand, higher premiums will lead to under-consumption (less than optimum) of medical care by the insured.

Mandating broccoli consumption, or even a healthy diet and lifestyle, will not insure against random illness and injury. Hence, given the mandate in 1986 law, mandating broccoli consumption is inconsequential in its effect on cost of medical-care providers and hence others' insurance premiums.

Third, the insurance system works when the pool of insured consists of people with varied health status. The diversified pool of healthy and relatively sick people keeps the premiums low, since premiums are affected by average risk. However, if the insurance pool consists only of sick people, the price of insurance will skyrocket and hence will drive most people out of the insurance market. This adverse selection problem causes market failure, where insurance providers may not survive due to losses or if they do survive, the premiums may be so high that many people may not be able to afford insurance or many with pre-existing health conditions may not be able to get insurance.

Broccoli market does not face adverse selection problem. There is no need of a pool of consumers -- healthy and sick -- to lower the price of broccoli. Mandating health insurance with penalties (or user charge for risk) forces all, especially healthy and young people, to join the insurance pool to lower the premiums based on average risk of the pool.

Fourth, health insurance, as opposed to broccoli consumption, enables a person or household to use a variety of medical services, including drugs, in case of illness or injury. An uninsured broccoli consumer who shows up in the emergency clinic will not be able to get the most efficient combination of medical services and drugs to treat illness or injury. Therefore, quality of health outcome will suffer and cost will rise over a period of time due the increased frequency of use of emergency clinics by uninsured broccoli consumers.

Fifth, given the mandate to emergency clinics in the 1986 law and the fact that insurance companies cannot refuse to provide insurance based on preexisting health status, according to the Affordable Care Act of 2010, mandating health insurance for all Americans is a least-cost strategy to deal with 30 million uninsured. This policy, with guidelines provided by the FDA for healthy diet and lifestyle, will go a long way in solving the escalating cost of medical care, which is expected to rise from a little more than 17 percent in 2010 to 26 percent of the Gross Domestic Product in 2035.

I hope the Justices of the U.S. Supreme Court are familiar with distinctive features of the health insurance market and broccoli market and are not persuaded by arguments advanced by ideologues and constitutionally challenged people.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.  He blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Public option in private insurance

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, March 6, 2012

During the debate on the health care bill in Congress in 2010, Republicans and some Democrats vehemently opposed the inclusion of public option in the provision of health care insurance for non-seniors.

The opposition from the health insurance industry was expected, but the opposition to the public option from the Republicans in Congress expanded to include the entire health care bill. Finally, the Affordable Care Act (ACA) of 2010 passed, but without the public option and support of all the Republicans in Congress.

The main argument against the public option was that it would be unfair to the private insurers, because they would be at a disadvantage to compete with the government-subsidized health insurance. Furthermore, opposition in Congress, especially Republicans, argued that government intervention in the private market amounts to creeping socialism, creating inefficiencies and resulting in increasing cost of health care. The opposition groups, so fearful of socialism, did not realize that Medicare for seniors, Medicaid for low-income Americans and health care for veterans are actually part of the public health insurance system. There was at least an option of public health insurance in the original health care bill for other Americans who do not meet the requirements of existing public insurance programs.

In the August 2011 issue of The American Economic Review, authors Randall Cebul, James Rebitzer, Lowell Taylor and Mark Votruba (CRTV) present very convincing arguments, supported by their meticulous empirical analysis, in support of the public option in health insurance plans in the insurance market. This study undermines some of the myths propagated by Republicans, Tea Party loyalists and current Republican presidential candidates.

CRTV investigate the private insurance market in the presence of "search frictions." For a significant majority of people under the age of 65, health insurance is provided through group plans purchased by employers. Health insurance is a complex service involving a multiplicity of factors. Employers, especially small size employers, face a complicated task of shopping for insurance. They have to make comparative decisions among insurance policies and companies regarding drug coverage (brand name, generics and formularies), network of pharmacies, doctors and hospitals, copays, deductibles and other fees.

In fact, a service industry, with health insurance brokers, has developed to facilitate choice among policies. Search frictions, according to CRTV, increase the administrative-health insurance cost to employers. Let me summarize their findings:

            First, search frictions result in disparity in insurance premiums for identical policies, and employer groups' premiums are higher (due to monopolistic power) than what a purely competitive market will produce. Due to lack of competition in premiums, insurers engage in a "marketing arms race," resulting in excessive spending on marketing strategies to attract clients. The excess of premiums above the competitive market premiums entails transfer of monetary benefits of consumers (termed as consumer surplus by economists) to insurers, amounting to $34.4 billion in 1997. A study by Leemore Dafny in The American Economic Review, September 2010, also shows that insurance companies engage in price discrimination.

Second, there is a significant turnover in policies (an average of 20 percent per year), since employers, in their quest for seeking less expensive policies, drop insurance for the entire group of employees. High turnover increases administrative cost of insurers and lessens incentive to invest in preventive health care, thus undermining quality of care and disease management (including chronic diseases). In The Journal Economic Perspectives, Fall 2008, CRTV cite a 2007 Commonwealth Fund Report that finds that if the U.S. spends the same amount on administrative cost as Germany and Switzerland, it would save $32 billion to $46 billion a year. Both Germany and Switzerland have a mixed private and public health insurance systems.

Finally, CRTV finds that a socially optimum government policy would be to subsidize a public health insurance option. It would displace the highest-priced policies and would reduce incentive to private insurers to engage in excessive marketing campaigns, thus improving market efficiency. It would also make private insurance more attractive to consumers by narrowing the dispersion of premiums and bringing premiums much closer to the competitive market price.

Our current private health insurance system also hinders mobility of labor and causes dispersion in unemployment rates across cities and states. A public option, besides improving efficiency in health insurance market, would also improve efficiency in labor markets by promoting labor mobility. We should also not forget that healthy people are productive people.

It is ironic that Rep. Paul Ryan has now proposed with Sen. Ron Wyden a new Medicare plan for seniors in which private health insurers will compete with the current Medicare plan. Rep. Ryan, however, joined other Republicans in denying a public option for non-elderly Americans in the ACA. This double standard is not only inequitable but also inefficient. All politicians and policy makers must base their decisions on unbiased facts, not on ideologies and fear-mongering about socialism. Congress should reconsider including the public option in 2012.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Ryan-Wyden proposal on Medicare needs close scrutiny

Vijay K. Mathur

Published in Standard-Examiner, January 13, 2012, Ogden Utah

Rep. Paul Ryan, R-Wis., and Sen. Ron Wyden, D-Ore., have made a new proposal to reform Medicare. This proposal is in sharp contrast to the earlier proposal by Rep. Ryan.

In that proposal, elderly people who turn 65 in 2022 would have received premium support for private health insurance, and those who turn 65 before 2022 would have had the choice to remain in the traditional Medicare plan or opt out to choose private health insurance with subsidized premiums. This plan was dropped when Democrats and elderly groups objected to this attempt to privatize Medicare. Now Rep. Ryan is at it again with the help of Democratic Sen. Wyden to gain traction to his plan in the Congress, and especially among senior Americans.

On Dec. 31, 2011, the Standard-Examiner, in its editorial page, published an editorial by the Chicago Tribune, in which the Tribune has praised the new proposal by Rep. Ryan and Sen. Wyden. Following is a critical look at some of features of the new proposal:

1. Starting in 2022, Americans over the age of 55 would have the choice to remain in the current Medicare plan or choose a private health insurance plan from the Medicare-approved exchange. However, contrary to many media reports, including the Chicago Tribune, the Center on Budget and Policy Priorities reports that premium support for traditional Medicare or private plans would substantially shift costs to beneficiaries, thus "leading to the demise of traditional Medicare over time..."

2. The plan would tie the growth in spending per beneficiary to Gross Domestic Product, plus 1 percent on per capita basis. For over two decades potential (full employment) GDP growth had been close to 3.5 percent per year, however actual growth may differ from potential. For example, in 2011 the growth rate was close to 2 percent and is expected to be 2.4 percent in 2012. If health care cost rises faster than actual GDP growth as it has over time, beneficiaries will bear substantial out-of-pocket costs for health care. The proposal recommends congressional intervention to restrain cost. However, given the recent congressional paralysis on many significant economic issues, I do not expect much from Congress to restrain the cost of health care in the market place. The Affordable Care Act of 2010 (passed without any Republican vote) restrains cost by reforming delivery systems, payment systems, research, and, as a last resort, it creates an Independent Payment Advisory Board to make proposals to restrain Medicare cost if cost rises more than actual GDP growth plus 1 percent.

3. The CBPP appropriately states that the current Medicare plan -- a defined-benefit plan -- will be replaced by a defined-contribution plan in the new proposal. As opposed to the Affordable Care Act, the proposal does not specify health care cost cutting measures.

4. The proposal claims to protect low-income beneficiaries but, as CBPP reports, the proposal lacks specifics about premiums and cost sharing. Jennifer Rubin writes, for The Washington Post, that under the new plan, Medicaid beneficiaries would continue to receive support for out-of-pocket expenses, while other low-income seniors would receive "fully funded" savings accounts. However, according to the CBPP, the proposal is not clear about who would be eligible, how much would be deposited in savings accounts, and how the funding would be indexed yearly. It is also not clear what will be the states' share in this funding. High-income seniors will face reduced subsidies -- a good idea that can be implemented even now.

The new plan may not result in significant budgetary savings, according to the CBPP. The proposal lacks specific actions to restrain costs of medical care, including hospital cost, insurance premiums and drugs' cost. However, it is clear that it is intended to pass the major burden of health care costs onto seniors. Then there are questions, such as, could one switch between the public option and the private option, how the shortfall will be financed in the traditional Medicare funds in the interim period when the new plan goes into effect, and how the private option will be funded.

The idea that private insurance companies will have to compete with traditional Medicare under the proposal makes economic sense. Rep. Ryan should have voted for the public option in Affordable Care Act. Now he is touting the virtues of public option side by side with private insurance in the Medicare proposal. Given the fact of increasing merger activity among hospitals and among insurance companies and medical care institutions, and the fact that the proposal lacks the specifics to control cost of health care, it is not apparent that this public-private competition would succeed in restraining cost.

Once the details come out, one can then evaluate if this change of mind by Rep. Ryan on public-private competition is meant to create a windfall to private insurance companies or meant to reform and save the Medicare system.

Vijay K. Mathur is the former chair and professor of economics and is now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio.  He writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/

Time to consider financial transactions tax

Vijay K. Mathur

Published in Standard-Examiner, Ogden, UT, December 9, 2011

Financial transactions are a transfer of funds from people who are savers-lenders, to people who are borrowers-consumers or investors and financial markets, such as bonds, stocks, or foreign exchange, channel those funds. Financial intermediaries, such as banks, savings and loan institutions, insurance companies, pension funds, and mutual funds, facilitate financial transactions in financial markets. They enable small and large savers and lenders to lend their funds to those who need those funds at reasonable transactions costs, with ability to earn reasonable returns based upon their tolerance and preferences for risk. Financial intermediaries decrease costs of financial transactions due to economies of scale.

Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., have introduced legislation that proposes to levy a 0.03 percent financial transactions tax (FTT). The tax will be on transactions on previously issued securities. For example, if you buy $100 worth of previously issued stocks or bonds, the tax will be 3 cents. According to Dean Baker, Center for Economic and Policy Studies, the tax may raise more than $100 billion per year. The tax, especially on short-term transactions, will tend to reduce volatility in financial markets. Competition among financial intermediaries will prevent them from passing most of the tax burden on borrowers. One can think of FTT as a sales tax on financial transactions.

Financial services have acquired increasing importance in the U.S. private industrial sector and in the economy. Federal Reserve Board data show that total private credit market borrowing/lending was about $3.7 trillion (92 percent of all borrowing/lending) in 2006, before the financial meltdown in 2008. Bureau of Economic Analysis data show that value added growth in financial and insurance services was 6.7 percent when average growth of value added in private industries was 3 percent in 2006; this industry contributed 20 percent to the growth in Gross Domestic Product. In 2009, total private industry growth in value added was -3.0 percent while finance and insurance grew at the rate of 6.1 percent.

John Maynard Keynes advocated the FTT in 1936 to curb excessive speculations on Wall Street. The U.S. used the FTT from 1914 to 1966, and the idea was further revived in 1978 when Nobel Price winner economist James Tobin proposed a tax on short-term foreign currency transactions to stem speculation in the foreign exchange market. A similar problem exists in financial markets with high frequency trading. High frequency trading (increasing at a rapid rate) involves trading where computers are programmed to buy and sell securities when there is even a slight variation in security prices. When millions of securities are traded in an instant automatically without any change in economic fundamentals, it makes long-term business planning risky. Thus, increase in risk increases cost of capital (not financial capital) and thus investment in machinery, tools and factories that contribute to economic growth.

Volatility in bonds and stocks also affects consumption plans due to the wealth effect. For example, when the stock market is very volatile, it becomes riskier to plan ahead on consumption spending, especially for durable goods. This affects economic growth. In addition, when we impose a sales tax on transactions of many goods, the absence of a financial tax amounts to a subsidy to the financial sector, because sales tax on other goods makes those goods relatively more expensive than financial transactions. The financial transactions tax will level the playing field and will make all financial transactions more transparent. Also, there is no economic justification for giving a favorable tax treatment to corporate bonds (debt capital) as opposed to stocks (equity capital). The tax subsidy to bonds is one reason for the increased indebtedness and the financial meltdown in 2008.

Some have claimed that the tax will drive financial businesses away from the U.S. First, as CEPS suggests, we should follow the example of U.K. in levying the tax on trades of firms that are incorporated in the US. Secondly, the tax proposed in Sen. Harkin's and Rep. DeFazio's

CEPS reports that U.K. has a stamp duty of 0.5 percent on trades made on the London Stock Exchange, and London remains a thriving financial hub in the world. Many other countries have a variant of FTT. Germany and France are spearheading a campaign for a 0.1 percent FTT in the European Union, a much higher tax than 0.03 percent proposed by Sen. Harkin and Rep. DeFazio.

Conservatives should join the Democrats in Congress in passing this bill because this tax not only levels the playing field but also reduces volatility in financial markets. Since we are interested in stimulating growth, such a tax will reduce speculation, volatility and uncertainty in asset prices, stimulate investment and consumption for the long run, thus creating more stability in the economy.

Mathur is former chair and professor of economics and is now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio. He writes original blogs for the Standard-Examiner at http://standard.net/economics-etc/

Revival of mercantilist thought among conservatives

Vijay K. Mathur

Published in Standard-Examiner, November 6, 2011, Ogden, Utah

Mercantilism prevailed in Europe after the decline of feudalism in the early 15^th century and the beginning of the Industrial revolution in 1780.   The term mercantilism is derived from the Italian word for merchant.  Mercantilists were a disparate group of writers and thinkers.   Professor E. Ray Canterbury states in his book, The Making of Economics, that mercantilism  “was the first major alliance in modern history between government and business.”

I see some parallels between mercantilist thought and the views of some right-wing conservatives in state governments, in the Congress, and our Republican presidential candidates.  Let me first discuss some salient features of mercantilist thought.  A detailed analysis can be found in the book A History of Economic Theory and Method by Professors Robert Ekelund Jr. and Robert Hebert.

Mercantilists were obsessed with material gain, a source of power to the state (monarchy).  They favored selective regulations, subsidization and taxation of industries, and monopoly in some sectors. Their efforts and writings were mainly directed at state actions to benefit the merchant-capitalists.  They even advocated import tariffs to achieve trade surplus, because it would  result in the accumulation of gold and silver (acceptable currency during those times), and therefore power and benefits to merchant-capitalists.  David Hume, 18^th century British philosopher-economist, discredited this idea, arguing that surplus in the trade account and hence accumulation of gold and silver will increase money supply and therefore inflation.  Inflation in turn will reduce exports and increase imports, causing the surplus to dissipate.

The most telling feature of mercantilist thought was their views on labor.   As Ekelund and Herbert state, interests of mercantilists and aristocrats converged on the issue of wages.   Mercantilists argued labor should be paid subsistence wages; high wages would make them work less.  Poverty  would make them industrious.  “Unemployment was, … , simply the result of indolence.”   They even advocated that children of the poor should not be educated at public expense because it is destructive to the poor and promotes idleness.  Education is only relevant for the livelihood of the business class.  

Now let us look at what today’s conservatives and their wealthy and corporate supporters are proposing.  As opposed to mercantilists, most tend to support free trade.   However, they want to restrict trade with countries that manipulate their currencies, do not follow humanitarian treatment of labor, subsidize industries, and have lax environmental laws.  Even some academic research is raising doubts about benefits of free trade based upon comparative advantage.

There are similarities between mercantilists and current corporate world, wealthy and conservative politicians.  Money spent by business class and wealthy on contributions to political campaigns and on lobbying congressional politicians to maintain and/or increase their share of income and wealth through favorable taxation, spending and regulatory policies has grown manifold; influence peddling in politics by corporations even has the blessing of the Supreme Court.   Researcher Lee Druutman reports in his paper that corporate lobbying expenditure increased 77% from 1998 to 2008.  A U of Kansas study, reported in The Christian Science Monitor, April 10, 2009, estimated that every $1 spent by corporations on lobbying Congress brought $220 in return.

Tax policies proposed by Republican presidential candidates would further worsen the income distribution problem.  There is no convincing evidence that prevailing income inequality is beneficial for economic growth.  Backed by deep-pocketed lobbyists, conservatives in state and federal government want to take away the countervailing bargaining power of labor unions, thus worsening income inequality.  Among many conservatives there is a belief, just like mercantilists, that poor people are poor because they are basically lazy and lack work ethics.  They also think that minimum wage laws should be abolished.  Herman Cain, Republican candidate for president, and Tea Party favorite, argues that it is the fault of unemployed that they do not have jobs.  Public education is also under attack, and some are advocating eliminating the US Department of Education.

In the present political climate mercantilist thought controls the overall ideology among right-wing conservatives, often legitimized by some conservatives in think tanks with a forum in conservative media.  

Right-wing conservatives’ ideology is even worse than mercantilism because it gives the impression to Americans that their policy actions, aimed at corporations and wealthy, will ultimately benefit low and middle income Americans.  It is high time to bury the idea that making rich richer and wealthy wealthier through government policy will generate more opportunity for non-rich.  What the political establishment has to do is to open up more avenues of opportunity aimed directly at non-rich, so that they can acquire more human capital and become successful entrepreneurs.  I hope that conservative politicians’ alliance with business and wealthy is a temporary phenomenon, because otherwise it will take the country’s progress back to the mercantilist era and dismantle the middle class—the fountain of entrepreneurship.   It will have a deleterious effect on democracy, free competitive markets and growth.

Mathur is former chair and professor of economics, and is now professor emeritus at Cleveland State University, Cleveland, Ohio.  He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.     

Environmental quality is a jobs-growth strategy

Vijay K. Mathur

Published in Standard- Examiner, October 7, 2011

It appears that Americans are divided into two camps on the promotion of environmental quality and the role of the EPA to enforce environmental quality standards. One camp, dominated by Tea Party activists and many conservative politicians, asserts that environmental regulations are killing jobs, hence the EPA should be abolished or environmental regulations should be scaled down. Many of them trust the free market to improve environmental quality. The other camp is demanding that EPA should vigorously enforce environmental quality standards and believe that more regulations may be needed to head off climate change.

 Let me first clarify a point that is a source of misunderstanding. In a market economy, private goods benefit only those who are able and willing to pay prices for those goods. In markets, with property rights for private goods, demand and supply determine prices at which goods are traded. However, markets cannot efficiently provide public goods. Like national defense, most environmental goods, e.g., air and natural waterways, are public goods.

 

 Take the case of air quality. First, clean air use by someone who pays for it does not diminish its quantity to others who do not pay for it. Second, use of clean air by those who do not pay for it cannot be prevented without incurring substantial cost. Third, the extra cost of providing clean air to an additional person is close to zero. These characteristics of air quality prevent emergence of a market for clean air. Since property rights to any entity cannot be defined, allocated and enforced, the market fails to provide clean air. Environmental quality is an externality, and it faces the usual common problem in which common property is overused and despoiled. Only collectively clean air could be provided at a shared cost. That collective mechanism is the EPA, created during the Nixon administration. A conservative president saw the value of preserving our natural assets so that generations of Americans could continue to reap their rewards.

 Promotion of environmental quality is pro-productivity and hence a pro-growth strategy. We need economic growth to create more jobs. Arthur Okun, chairman of the Council of Economic Advisors under the Johnson administration, proposed a simple rule that states that a 2 percent increase in the growth rate of real gross domestic product (GDP) is associated with a 1 percent decrease in unemployment rate.

Environmental quality is essential for a healthy work force. It preserves health capital and thus enhances human capital in the present and in the future by keeping children healthy. No amount of spending on education and training of workforce will preserve and promote human capital unless workforce and children are healthy. Earth Policy Institute reports 70,000 deaths annually due to air pollution in the U.S., 1.75 times annual traffic fatalities. Similarly, environmental pollution degrades physical capital and natural resources, such as forestland and natural waterways, at a faster rate and hence adversely affects productivity and growth. Our environmental record does not give us bragging rights. Resources for the Future reports that in 2006, U.S. ranking on Environmental Performance Index, based on 16 indicators developed by Professor Daniel Esty of Yale University, is 28th from the top among 133 countries in the world.

I do not see a conflict between good air and water quality and jobs. Conservatives who think that promoting environmental quality kills jobs are mistaken. Improvement in environmental quality requires allocation of resources to the production sectors that contribute to environmental quality and jobs. A well thought-out strategy could be instrumental in guiding labor, capital and natural resources to cleaner activities. A comprehensive study by Florentin Krause, Stephen Decanio, J. Andrew Hoerner and Paul Baer, in Contemporary Economic Policy, October 2002, showed that an integrated least-cost strategy to achieve Kyoto greenhouse emission reduction targets would have added $250 billion in 2010 and $600 billion by 2020 to GDP on net present value basis.

In a recent study in the American Economic Review, August 2011, Nicholas Muller, Robert Mendelsohn and William Nordhaus proposed that damage to the environment should be part of GDP accounts. They calculated air pollution damage by industrial sectors, labeled as Gross External Damage (GED). They find total GED of $184 billion in 2002 in 2000 prices in all 19 industrial sectors combined. However, most of the GED is concentrated in nine sectors and one-third of the GED is in the utility sector. One least-cost policy to enhance environmental quality and create jobs would be to tax damaging economic activities and shift tax revenues to cleaner jobs activities.

If conservatives and their sympathizers believe in productivity, growth and jobs creation, they should support EPA and regulations to promote environmental quality.

Good environmental quality not only creates jobs, but also assures robust economic growth with environmental amenities that enrich the lives of all Americans now and in the future.

Mathur is former chair and professor and now professor emeritus of economics, Cleveland State University, Cleveland, Ohio.  He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.