What the supreme court upheld today was that the “individual mandate” is, legally speaking, a tax. In fact, it is exactly equivalent to the type of tax that fiscal conservatives want the social security and medicare taxes to become. (Think about it, it’s a tax where you pay into a public system, but you can opt out by paying your money into a private system instead – this is exactly the privatization of social security that Cato and Heritage have been pushing for!)
This is why the whole idea of an individual mandate for health insurance was invented by the Heritage Foundation in 1989 (it was originally created as an alternative to Clinton’s Single-Payer system) and not by the democrats. If Obama had any balls, he would have rammed through a public option, but instead, he decided to take a Republican plan and call it his own thinking (foolishly) that the Republicans couldn’t possibly slam him for promoting their own idea!
Personally, it doesn’t matter to me whether there is an individual mandate or not – I’m going to have health insurance either way – but I definitely approve of the idea of making taxes (in general, not just this one) more transparent (having tax money specifically ear-marked for particular purposes and not “dumped into the general pot”) and in having the ability to opt out of taxes if you can meet the same requirement through the private sector (think private school vouchers). If either Clinton or Obama had pushed through a single-payer system, there would be a huge republican movement to privatize it in exactly the way that the individual mandate does (think social security privatization). The only difference here is that we’re going directly to the Republican’s plan from the 1990’s without having to pass through the democrat’s plan from the 1990’s first…
First of all, thank you to all of you who are listening to the WaddellCast for the first time. This is my third episode since I started last month. My goal is to publish 1 or 2 episodes each month. I have posted a list of topics on my website for future shows – please visit MWaddell.com and post any other topics that you would like me to address in this podcast.
Today, I would like to talk about environmental protection. In this episode, I will focus specifically on industrial pollution – I plan to address wildlife conservation, recycling and automobile pollution on future episodes.
Throughout the history of the industrialized world, mankind has been taking natural resources and producing waste products. As our population increases, our demands for manufactured products increases, and our methods of extracting natural resources and producing waste products become more efficient, we are putting an increasing strain on our world. In order to maintain a habitable planet, we must recognize that, as large as our world is, its size is still finite.
In the U.S., our current method of environmental protection is to allow each company to pollute at no cost up to a certain point, and any pollution above that level is forbidden. There are many problems with this current solution and I will address five of them here. First, because the limits are set on a per-company basis (or a per-factory basis, per-smokestack basis, etc.), they need to be modified as the number of companies changes. Second, the current laws and policies are unnecessarily complex and poorly enforced. The reason that they are poorly enforced is because of the third and forth problems with this system. Third, companies have a lot of lobbying power to make the pollution laws weak and to add numerous loopholes that can be exploited. And fourth, if companies are caught exceeding their pollution limits, they can use their massive legal departments to reduce their fines to a minimum. And finally, we are currently allowing companies to “pollute for free,” but all of the costs of enforcement are paid for by tax money. Shouldn’t the polluters be the ones who have to cover the financial burden of polluting instead of the us taxpayers?
The approach that I will present today for solving this problem utilizes two things that businesses understand very well and are highly motivated by: the free market and financial incentives. The free market (if left to its own devices) is poorly equipped to deal properly with environmental protection. This is because, unlike other raw materials (such as iron or wood), using up clean air or water is free. In a free market, whenever raw materials are offered at no cost, they will be overused. Currently, if a power plant pollutes the air, it is effectively “using up” clean air and “creating” dirty air as a waste by-product. And, as long as the plant uses up less clean air than some arbitrary level, they don’t pay anything for it. They are in effect “polluting for free.”
An alternate system for enforcing environmental protection that would be far more effective and economically-efficient that our current system would be to charge each polluter for all of the pollution that they put out. Companies would then have a great financial incentive to work hard to limit their use of these resources in order to save money – just as companies currently work hard to use all of their other raw materials more efficiently.
One common criticism of the idea of charging companies for their pollution is that it is morally wrong to sell “licenses to pollute.” My response to this criticism is two-fold. First of all, how is selling a license to pollute worse than allowing companies to pollute for free, as we do now? Secondly, I am not proposing that we allow a company to release an arbitrary amount of pollution as long as they pay some set rate for it (for example: $100 per cubic foot of mercury released into the water). I agree completely that this would be a bad idea.
Instead, I propose that we treat clean air and water as any other valuable commodity. The EPA would set a level for each pollutant that would be the acceptable level of that pollutant to be emitted per year for the entire country. Permits would be created for each pollutant in some fixed quantity. For example, if the acceptable limit for mercury pollution is 10,000 cubic feet per year, then 10,000 permits, each for 1 cubic foot of mercury polution, would be created. Those permits would be auctioned off at the beginning of each year, and the permits could be traded in the commodities market. At the end of the year, each company would have to give the EPA enough permits to cover all of the pollution that they emitted into the environment for the entire year. Each year, another set of permits would be issued and the cycle would repeat. The EPA would use the money made from the auction to monitor the pollution level of each company so that they would know at the end of the year how many permits each company needs to have. The more effectively they monitor and enforce the permits, the fewer companies will try to get away with polluting beyond the number of permits they own, and, in turn, the more valuable the permits become. The more valuable the permits become, the larger the EPA’s budget for the next year. Thus, the EPA has a great incentive to do their job well, because if they are lax in their enforcement, then fewer companies will bother to buy permits and the EPA’s budget will go down. In fact, environmental groups could easily monitor how well the EPA is enforcing each type of pollution by simply reading the commodities section of the Wall Street Journal!
The advantages of this plan are numerous. For example, because the total amount of pollution is fixed by the number of permits sold, this amount does not need to be adjusted if the total number of polluting companies changes dramatically. Second, the EPA can gradually reduce the number of permits they sell each year, which will result in a reduction in the overall pollution. Third, environmental groups have an easy way to directly reduce pollution. They can raise money to buy up permits that they have no intention of using. This will effectively reduce the number of permits available to businesses. Fourth, this plan is very economically efficient because the money spent to reduce pollution will be spent by those companies who can reduce their emissions the most for the least cost. Fifth, all companies will have a financial incentive to reduce their emissions throughout the year because they can likely sell their unused permits at a profit later in the year to companies that were formed after the auction and need to purchase permits before the end of the year. Under our current plan, companies that are compliant with the emissions laws have no incentive to further reduce their emissions.
The only disadvantage that I can see someone bringing up with respect to this plan is that it is possible that a few companies will buy the majority of the permits and be allowed to emit a large amount of pollution in a few specific locations. My answer to this disadvantage is five-fold. First, having a few companies that produce that majority of our pollution is already what happens under our current system, so we would be no worse off than we are now. Second, because these major polluters would be forced to pay for all of their pollution, they would have a greater financial incentive than they do now to reduce their emissions. Third, the type of pollution released by these major polluters would be the primary target of environmental groups buying up permits to prevent their use. Fourth, because much of the pollution would be located in a few small areas, enforcement would be less costly and a portion of the EPA’s budget could go to cleaning up those specific areas. Finally, this entire plan could easily be implemented state-by-state instead of having one set of permits for the entire country. For reasons of ease of implementation and economic efficiency, I believe that having a single set of permits for the entire country is preferable, but I concede that a plan where each state issues it’s own set of permits may be more politically acceptable.
Another major advantage to this system of environmental protection is that it is much simpler to implement than the complex set of statues and policies currently in effect. Plus, in this system there would be no loopholes (like there are now). Currently, if a company can convince their senator or representative that it would be too hard for their company to meet the EPA’s guidelines, they are likely to get an exemption. Under this market-based system, a company’s only recourse for not reducing their emissions would be to buy more permits. This would increase the overall demand for permits and raise their price accordingly. If the company cannot afford to buy enough permits at this higher price, then they will become unprofitable and go out of business – just like any other company that cannot make enough profit to cover its cost of raw materials. If they were able to convince their senator or congressman that they should be given special treatment, the only aid they could be given would be tax credits to help offset the cost of purchasing extra permits. (I will discuss this, and other types of corporate welfare in a future episode.)
Finally, I want to make clear that this plan does not sell permits for all pollutants. There are some types of pollution where the only acceptable level of pollution is zero (for instance, dumping arsenic in the water supply). For these types of pollution there are no permits sold, they are simply banned completely. Also, there are some pollutants that cannot be accurately measured and thus cannot have permits issued for them. However, under our current system, you cannot enforce pollution limits on these unmeasurable pollutants anyhow, so we are no worse off under this new system. Also, once a measurement technology becomes available, it will be simple to begin selling permits for this new pollutant as well. Since the EPA would get their funding based solely on the sales of permits, they would have a great financial incentive to develop measurement technologies for pollutants that are currently unmeasurable.
At this point, I would like to make two notes on what I have been calling the “EPA” throughout this episode. First of all, the EPA must get 100% of its funding through the sale of permits in order for it to have adequate incentives to enforce the permits effectively. It has been estimated that, if implemented correctly, this plan would provide the EPA with 5-6 times its current annual budget – and none of that would be from taxpayers! Secondly, (because I really dislike monopolies), I would personally prefer that the “EPA” actually be a group of environmental organizations that all compete for the proceeds from the sale of permits – where the organization that is most effective at enforcement of a certain pollutant would receive the proceeds from the sale of the permits for that pollutant. However, I am willing to concede this as a possible future step, since I know that breaking up the EPA into a group of smaller organizations would be a very unpopular idea politically.
Although I said at the beginning of this episode that I would not discuss automobile pollution until a future show, I would like to point out that this permit system could be applied easily to automobiles in one of two ways. One option would be to require car owners to purchase permits for all of the pollution that their car emits instead of the emissions tests that many cities now require in order to renew a car’s registration. The second option would be to require permits for the suppliers of gasoline and diesel: either the gas stations themselves, or the producers of these petroleum products.
The plan that I have presented today is not a new idea, and I can’t take credit for inventing it. If you would like to explore this plan in more detail, I highly recommend Alan Blinder’s excellent book “Hard Heads, Soft Hearts.” This is an incredibly readable economics primer for anyone interested in the disconnect between politics and economics. In chapter 5, Alan discusses this approach to environmental protection in more detail than I have provided today, and he proves how using this approach will achieve a cleaner environment for a much smaller economic cost to society as a whole.
Thank you for joining me for this episode of the WaddellCast. As always, you can contact me with any questions, comments or constructive criticism you may have by visiting my website at mwaddell.com.
Here is a list of topics that I am planning on addressing in future episodes. Please feel free to leave comments with suggestions of other topics you would like me to cover.
Topics for Future Shows (in no particular order):
• Copyrights and other Intellectual Property
• The Proper Role of the Federal Reserve Board
• Intelligent Design vs. Evolution (The Dover Case)
• Transportation Subsidies
• Universal Healthcare
• Corporate vs. Social Welfare
• The War on Drugs
• Education (Vouchers, etc.)
• Civil Liberties
• Tax Breaks and Supply-Side Economics
• Social Security
• The Principle of Voluntarism
• The Golden Rule
• Wildlife Conservation
• Abortion (The South Dakota initiative)
• Marriage Rights
• The Role of the Post Office
As you may have already noticed, the first episode of this podcast was a rebuttal to a couple episodes of the podcast Quick Hitts. I had so much fun putting that piece together that I decided to make my own podcast. So, first of all, let me thank Dave Hitt of the Quick Hitts podcast for inspiring me to start the WaddellCast.
So, by now you’re probably wondering what “The WaddellCast” is going to be. Well, let me first tell you what it is not going to be. Although I was originally inspired to create this podcast by Quick Hitts, this podcast will not just be a rebuttal to each episode of Quick Hitts.
As the tagline for this podcast indicates, this will be a show where I discuss issues from the perspective of a fiscally-conservative, small-government Democrat. What exactly is a “fiscally-conservative, small-government Democrat?”
Well, first off, all of us who want a small-government, whether we are Republicans, Democrats, Libertarians, etc., believe in the statement by Thomas Jefferson: “That government is best which governs least.” In other words, we want to limit the role of government to only those things which we absolutely need the government to provide in order to have a stable, functioning society. One way to limit the power of government is by limiting its spending power. Those who believe that the government must exercise prudence in spending and debt are referred to as “fiscal conservatives.”
Because all small-government fiscal-conservatives share these 2 main beliefs, we could all be considered Libertarian-leaning, or minarchist. However, there are considerable differences of opinion in how you define the statement “only those things which we absolutely need the government to provide in order to have a stable, functioning society.” It is because of how I answer this question that I consider myself a Democrat and not a Republican.
I believe that corporate welfare is a greater danger to our society than is social welfare. I believe that environmental protection is essential to our long-term survival. I believe that our civil liberties are more threatened by our government than are our economic liberties. I believe that the war on drugs is just as failed as was the 1920’s prohibition on alcohol. Finally, I believe that accessible education for everyone is the best way to ensure both our democracy and our global economic competitiveness.
Although these beliefs may sound fairly mainstream Democratic, it is in how I propose to address these issues that makes me a small-government fiscal-conservative. It is this exploration – how to address these democratic goals while reducing the size and cost of our government – that will be the focus of this podcast.
In the “Economics for Righties” segment, I addressed 2 issues very briefly: Social Security and Supply-Side economics. I plan to address these issues in more depth in future episodes. However, I did want to follow-up briefly on the email response that I got from Dave Hitt regarding this segment.
First off, Dave correctly points out that his “Economics for Lefties” segment did not mention supply-side economics, although it did deal with tax-cuts in general. However, in the introduction to “Economics for Righties,” I stated that economic misunderstanding is just as prevalent among “Righties” as it is among “Lefties.” I was using supply-side economics as an example of a concept that I believe “Righties” are greatly mistaken about.
At this point, I should pause to explain the terms “Righties” and “Lefties.” These were terms that Dave Hitt uses in his podcast to describe the extremists of the two major political parties. I am using them in this episode because of that – I will most likely not use these terms in future episodes.
Dave’s rationale for why supply-side economics supposedly works is “If someone gets more money to spend or invest, that goes into the general economy and helps people out.” Unfortunately, this statement doesn’t support supply-side economics because any tax cuts will have this effect. Whatever money the government gives out will end up in the general economy, no matter who it is given to. The government could add money to the general economy just as well by spending that money themselves on government employees and contracts (as long as it is spent domestically).
Dave then provides 2 examples that he claims “prove” that supply-side economics has worked in the past. First of all, he mentions the Luxury Tax that Bush Sr. signed into law. The result of putting a 10% tax on luxury purchases was many of the rich simply bought their luxury items overseas and the domestic companies suffered as a result. However, this example doesn’t prove that taxing the rich is bad for the economy, it just proves that it is bad for certain industries. Whenever a certain product becomes more expensive relative to other similar products, that event shifts where people spend their money. If Congress taxed California wines, people would buy more of their wines from Oregon instead. If Congress taxed all wines made in the U.S., then people would buy more wine from overseas. Any tax is going to hurt the overall economy because people have less of their own money to spend, but when you preferentially tax one item over another, you are just shifting business from one group of people to the other – there is not necesarily any overall benefit or detriment to the economy as a whole.
Dave’s second example is an article on how Bush Jr.’s 2003 investment tax cut package reduced the capital gains tax rate from 20% to 15%. As a result of this, there were twice as many capital gains realizations in 2005 as in 2002. This resulted in an increase in tax revenues in 2005 despite the lower tax rate. However, again, this doesn’t prove that supply-side economics works. When capital gains tax rates were reduced, you had a huge number of people dumping stocks that they had been holding onto because of this lowered intrest rate. Generally you see major dumping of loss stocks just before the end of the fiscal year so people have a tax writeoff. Here, you see a major dumping of gain stocks because of the lowered tax rate. This does not reflect an overall increase in stock market investment or stock prices and thus is not necessarily a sustainable effect.
Finally, Dave pointed out that insurance is a method of sharing the risk for an event that may or may not happen and he still maintains that social security is fundamentally a Ponzi scheme and not a poorly-run insurance plan. And now a word from our sponsor…
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In the next couple of days, I will be posting a list of topics that I am planning on addressing in future episodes, as well as a list of other podcasts that I subscribe to and recomend, to my website. These will not appear in the podcast feed, so please visit mwaddell.com to view these lists and to add your ideas and suggestions.
As always, you can contact me with any questions, comments or constructive criticism you may have by visiting my website at mwaddell.com.
I recently came across Quick Hitts thanks to a promo on Skepticality. Overall, I think that Quick Hitts is a great podcast, however after listening to the 2 “for Lefties” episodes [1, 2], something bothered me. That something is that Lefties clearly do not have a monopoly on economic misunderstanding – there’s more than enough of that to go around! In that vein, I present:
Economics for Righties!
Supply-side economics, also known as “trickle-down economics” by President Reagan, “voodoo economics” by President George Bush the First, and simply as “economics” by President George W. Bush, is the theory that if we give tax breaks that primarily benefit the wealthy, that they will use this money in a way that will grow the overall economy and help everyone.
This sure sounds nice, doesn’t it. Unfortunately, the real world just doesn’t work that way.
A businessman with any economic sense knows that the only reason to add an extra dollar to his company is if he can make a profit on that dollar. How much money he has sitting in his personal bank account has absolutely no bearing on the answer to that question. In fact, a smart businessman won’t invest extra money in his business if he could make more on it just by investing in an index fund.
If you want to encourage business growth, all you need to do is lower the interest rates on business loans. Now, the decision on whether to grow the business is not “will this money I’m investing make more than an index fund?,” but instead “will this money I’m investing make more than the interest rate that I’m borrowing it at?”
So, if personal finances don’t enter into a business’s investment decisions, then maybe supply-side economics works because if you give the rich tax cuts, they’ll go buy new yachts and help create jobs at the local yacht manufacturer? Unfortunately, this argument doesn’t work either because the rich spend a very small fraction of their wealth compared to the poor. If we want to increase consumer spending, we should give those tax breaks to the poor, who spend almost all of their money on consumer goods anyway.
If Righties want to give tax breaks to the rich because they think the rich pay too high of a tax rate and they want to make the tax flatter, or just because the rich helped them win that last election, then they should at least have the decency to say so and not try to pass their tax cuts off as something that they’re not.
In the episode Social Security for Lefties, Dave discussed how Social Security is a very poorly-run retirement plan, and could even be described as a Ponzi scheme.
So, what exactly is a Ponzi scheme? According to Wikipedia,
“A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business…. The high returns that a Ponzi scheme advertises require an ever-increasing flow of money from investors in order to keep the scheme going.”
Does that sound like Social Security to you? When I think of Social Security, I definitely don’t think of “abnormally high returns on your investment.”
So, what exactly is Social Security? We already know that it is not a retirement plan, because if you die before you retire, you don’t get any benefits. So what is it then?
Well, with Social Security, you have a system where a group of people pay regular premiums and when a certain situation occurs, they get a pay-out, if that situation never occurs, they get nothing. You know what? That sounds like an insurance plan to me! In fact, that’s just what Social Security is – it is an insurance plan which pays out in case you become too old to work or you become disabled and cannot work.
That all sounds like a pretty good idea, right? However, just like everything else run by the government, social security is a very, very poorly-run insurance plan. The government has made it way too easy to qualify for benefits which is why it is having financial problems right now.
So, remember “Social Security is not a terrible retirement plan, it’s a terrible insurance plan!” Let’s just be clear what it is that we’re trying to fix.
If this podcast taught you just a little bit you didn’t know before, or helped you understand a different point of view, congratulations, you’ve been Smartenized! [For those of you who didn’t go listen to the relevant Quick Hitts podcasts before reading this page, this sentance is how Dave Hitt ends every Quick Hitts episode.]
If you would like to contact me, please visit my website at mwaddell.com.
If you would like to contact Dave, you can contact him at davehitt.com.