From the State House News Service in the Berkshire Eagle:
BEACON HILL INSTITUTE
Forecasted fiscal 2019 growth: $690 million or roughly 2.8 percent
Paul Bachman of the Beacon Hill Institute said revenue growth has slowed down dramatically over the past few years, a situation he called "a little bit puzzling" given the 70,000 jobs created in the past year. But he said personal income growth has also slowed dramatically -- falling to 0.9 percent in the fourth quarter of 2016 after having been over 5 percent in earlier quarters — and now may be on track for a rebound.
"That's what's driving the less than robust tax revenue collections," he said.
Thursday, December 7, 2017
Friday, November 17, 2017
Thursday, October 26, 2017
Private Activity Bonds for Buildings Would Create Jobs, Fast Track Construction, and Save Taxpayers Money
In Wake of Hurricanes in TX, FL, PR and VI, new PABS Could Leverage Private Sector Funds to Speed Rebuilding of Gov’t Buildings and Schools
BOSTON, MA— The economic and fiscal benefits of the proposed Public Building Renewal Act (PBRA) could save taxpayers billions while adding billions more to the economy if Congress decides to unlock the proven benefits of Private Activity Bonds for government buildings. That’s the bottom line of a new study released today from The Beacon Hill Institute (BHI) for Public Policy, which conducted an exhaustive economic analysis of the short- and long-term benefits of P3s for addressing an increasingly challenging public policy issue facing state and local governments.
“Private Activity Bonds for buildings are a triple win for governments, taxpayers, and the economy,” said study author David Tuerck of BHI. “Our findings show that, in the short run, every dollar of new infrastructure investment made possible by the PBRA will add $2.80 to the U.S. economy. At the same time, taxpayers save nearly 25 percent over the life of these projects compared to traditional building methods, while these projects are delivered on time with guaranteed long-term performance”.
These Private Activity Bonds would be utilized through a public-private partnership (P3) for a government building project. A P3 is an arrangement under which a public entity and a private entity work together to build and maintain a public infrastructure project, such as a courthouse or a public library or schools. Presently, the use of P3s in the U.S. to develop public buildings is limited because, unlike transportation infrastructure projects, public buildings are not currently eligible for private activity bonds. This unnecessary impediment prevents public building P3s from combining tax-exempt financing with private, taxable financing, resulting in an increased cost of financing that is passed on to our state and local governments.
The Public Buildings Renewal Act (PBRA), introduced by U.S. Senators Dean Heller (R-Nev.) and Bill Nelson (D-FL) and U.S. Representatives Mike Kelly (R-PA) and Earl Blumenauer (D-OR), would allow state and local governments to use up to $5 billion of tax exempt bonds for P3s to construct and renovate public buildings. The Joint Committee on Taxation scored this legislation, estimating a low cost of $18 million over five years and $48 million over 10 years.
The pending tax reform legislation could be an opportunity to pass PBRA, which currently enjoys significant bipartisan support from the Ways and Means and Senate Finance Committees.
At a time when hundreds of billions will be needed to rebuild Puerto Rico, US Virgin Islands, Florida and Texas, PBRA could provide a critical financing tool to speed the recovery effort while minimizing cost overruns and guaranteeing long- term performance without deferred maintenance. According to the Houston Independent School District, 22 of its 245 schools had extensive damage that will keep them closed for months and about 53 have “major” damage, according to school officials.
Further, if Congress were to make Private Activity Bonds readily available (without a $5 billion cap as proposed in the PBRA), the cost savings and economic effects would soar. Under this scenario, BHI researchers assumed that P3s would expand to 20 percent of all applicable state and local government building, and generate $2.796 billion worth of new buildings. Under this scenario, expanding Private Activity Bonds would increase real GDP by $8.285 billion and create 43,200 jobs in the first year. The increase in economic activity would increase federal and state income tax collections by $860 million in the first year.
Furthermore, the economic effects are cumulative over time as tax-exempt P3s increase the quantity and quality of the public infrastructure. In ten years, the expansion of P3 projects would:
- increase public buildings by $85.90 billion
- create 32,400 jobs
- increase real GDP by $8.06 billion
- increase federal personal income tax receipts by $643 million
- increase state personal income tax receipts by $146 million
Congressman Mike Kelly (R-PA), lead House sponsor of PBRA, noted, “This new study confirms what so many have been saying all along: the Public Buildings Renewal Act is a win-win-win for American infrastructure, jobs, and taxpayers. I expect many more members of Congress to see this report and join the bipartisan effort to unleash the power of Private Activity Bonds to help solve our nation’s public infrastructure crisis. We have a real chance to repair countless schools, hospitals, courthouses, and more, while reviving our local economies. We can’t afford to let this opportunity slip away.”
Senator Dean Heller, lead Senate sponsor of PBRA, remarked that, “Now is the time to use the success of P3s in the infrastructure sector as a financing model for repairing our public buildings and other cornerstones of our communities, particularly public schools and libraries. By empowering the private sector, this commonsense idea spurs innovation and will ultimately allow our country’s public schools and universities? to do even more, including save money. I’ll continue to urge my colleagues to support my Public Buildings Renewal Act so that Nevada and Americans around the country can benefit from the impact P3 investment has on our local economies.”
The complete study is available here.
Saturday, September 16, 2017
September 19: How gun control endangers lives and keeps guns in the hands of the rich; A presentation by John Lott
How gun control endangers lives and keeps guns in the hands of the rich
A presentation by John R. Lott, Jr., PhD President, Crime Prevention Research Center
September 19, 2017
5:30 p.m.
Suffolk University Law School
120 Tremont Street, Boston
First Floor Function RoomThe Crime Prevention Research Center (CPRC), was founded by Dr. John R. Lott, Jr., an economist and a world-recognized expert on guns and crime. Lott has held research or teaching positions at several academic institutions including the University of Chicago, Yale University, the Wharton School of the University of Pennsylvania, Stanford University, and Rice University, and was the chief economist at the United States Sentencing Commission during 1988-1989.
He holds a PhD in economics from UCLA. He has published over 100 articles in peer- reviewed academic journals and written eight books, including More Guns, Less Crime, The Bias Against Guns, and Freedomnomics.
This event is co-sponsored by Stephen B. Jeffries and The Beacon Hill Institute for Public Policy Research.
For more information, contact 855-244-4550 (ext. 1).
Monday, August 15, 2016
How Massachusetts ranks in Cato's Freedom 50 Index
Here is the link to the 2016 Freedom in the States index.
Monday, August 1, 2016
Institute releases 15th annual State Competitiveness Report and Index
The BHI competitiveness index is based on a set of 43 indicators divided into eight sub-indexes – government and fiscal policy, security, infrastructure, human resources, technology, business incubation, openness, and environmental policy. Known in the field as a “productivity index”, the BHI ranking distinguishes it from more narrowly-focused measures that target only taxes, high technology, quality of life, or economic freedom. The State of Washington’s Department of Commerce gives high grades to the BHI Index for its transparency, methodology and variability.
North Dakota once again finished second, followed by South Dakota, New Hampshire, Iowa, Nebraska, Minnesota, Rhode Island, Vermont and Texas. While the rankings in sub-index measures were far from uniform, states that paid attention to fostering a well-educated and healthy workforce scored well. Rhode Island’s rise may be temporary and due to a one-time multi-billion dollar Initial Public Offering by a major bank in 2014.
Massachusetts showed formidable strengths in its human resources (for example a high number of residents with health insurance and low infant mortality rates), technology (as a recipient of National Institutes for Health grants to local institutions and its large base of science and engineering graduates and high-tech employment), and business incubation, where Massachusetts draws the second top ranking in terms of venture capital per capita and ranks eighth in IPO dollars per capita. New Hampshire which has bounced around in the top 20 for the past 10 years appears to have regained its footing.
“Since we do not have oil, gas or mineral deposits, human capital has become our natural endowment, our ticket to progress,” notes Frank Conte, project manager for the BHI report. “The strong showing across most sub-indexes demonstrates that Massachusetts workers are productive. The workforce is one major reason that the Bay State remains attractive to innovative industries and allows us to overcome the perennial soft spots in our economy: the cost of labor, high housing and utility costs.”
The lowest-ranked states were West Virginia (46), New Jersey (47), Alabama (48), New Mexico (49) and Mississippi (50).
Policymakers often compare a state’s performance with that of “leading technology states (LTS).” However, these states do not always prove to be competitive according to the SCI. Massachusetts (1) Minnesota (7) and Texas (10) are the only LTSs to finish in the top 10. Other LTS states ranked as follows: Colorado (14), Connecticut (32), North Carolina (15), New York (27), California (35), Pennsylvania (36), New Jersey (47) and Virginia (12).
“By improving its ranking on the index, a state can realize substantial increases in personal income,” observed Conte. “Since its inception, the index has been highlighting the micro-foundations — the right mix of policies and endowments — that lead to prosperity. It remains a useful guide. ”
The report is available here.
Friday, July 22, 2016
Energy infrastructure options essential to Massachusetts economy
A six-member conference committee is hashing out the details of an extensive energy bill now in two separate bills S. 2400 and H. 4385. The Beacon Hill Institute does not advocate for or against any piece of legislation. However, the Institute provides economic analysis of current proposals related to its research portfolio. Some key observations are in order.
The debate over hydropower from Quebec, natural gas or other renewables such as offshore wind and solar is absolutely critical if the Commonwealth is able to meet the goals outlined in the Global Warming Solutions Act. Everyone wants to reduce greenhouse gas emissions but that goal requires hard thinking, particularly since both coal and nuclear power plants will be closing down. Debates about pipelines generate much heat and little light and ignore the pressing need for reliable, cost-effective sources of energy.
Section 30, would amend current law by adding the following language: “Nothing in this section shall be construed to authorize the department to review and approve a contract for natural gas pipeline capacity filed by an electric company.”
To foreclose on possible construction of energy infrastructure, the direct intent of Section 30, would be shortsighted. In fact, the new language would pose severe economic consequences to the Commonwealth of Massachusetts, which already faces competitive disadvantages on energy costs. According to the Institute’s 2014 State Competitiveness Index, Massachusetts ranks first for having the conditions in place that provide for a high level of per capita income and continued growth. But energy has been a persistent disadvantage for Massachusetts since the Institute began ranking states in 2001. Last year in a sub-index that measures infrastructure Massachusetts ranked 44th when considering electricity prices per kilowatt hour. High-tech manufacturing could use the break in the form of competitively priced energy.
Some energy realism is in order. It is clear from the current economic and climate change literature that natural gas is essential to meeting the goals of a cleaner environment in both the short and long term. The state needs to preserve its options to build such facilities.
ISO-New England, which manages the region’s power grid, notes “wind and solar energy have been expanding dramatically though it will be several years before they generate a significant portion of the region’s electricity.” That means natural gas remains essential. By 2022, natural gas is expected to generate 55% of electricity.
In 2012, the ISO studied a scenario whereby 28 dirty plants would be retired. The grid operator found that “approximately 6,000 MW of resources would need to be replaced, repowered or retained to satisfy both generation and transmission reliability requirements. Given current trends, the majority of replacement resources would be natural gas-fired generation.”
The ISO report diplomatically highlights the shortcomings of renewables saying the “reliable large-scale integration of these resources presents challenges for grid planning and operation.” These include variability, (lack of wind and sun), issues “behind the meter” which make it difficult to forecast demand, and transmission limitations. These shortcomings inherent in renewables make Section 16 of the bill, which would double the state’s Renewable Portfolio Standards, all the more harmful.
Closing the door on natural gas would be a policy mistake.
Thursday, July 7, 2016
Latest BHI contributions to NewBostonPost.com: Social Impact Bonds, Independence Day
Here are the latest BHI columns over at NewBostonPost.com.
Frank Conte: Social impact bonds for public health programs
Frank Conte: Social impact bonds for public health programs
Imagine a public health program that reduces the incidences of childhood asthma. Or imagine another one that assigns a home visiting nurse to women pregnant with their first child. Don’t stop there. Imagine another program that identifies children under six who are at-risk of abuse and another one that helps the mentally ill out of restrictive institutional settings and into meaningful community housing.
The more cynical among us who suffer from “compassion burnout” may say that there’s very little imaginative about the public health programs noted above that have been launched in states like California, New York, New Mexico, Oregon and South Carolina. Read more.
David Tuerck: Independence Day
It is customary this holiday week to remind ourselves why the American colonies declared their independence from Britain some 240 years ago. The Declaration of Independence provides the answer in the form a list of tyrannical acts attributed to King George III. Among their grievances, the authors cited the “swarms of Officers” that the King sent out to harass and steal from them, the creation of “arbitrary government” for the purpose of imposing “absolute rule” and the imposition of taxes without their consent. “A Prince” they said, “whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.” Read more.
Friday, September 4, 2015
Workers are saying: Show me the money! NYT "This Was to Be the Year of Bigger Wage Gains. It’s Not."
Neil Irwin in the New York Times.
The unemployment rate is low by any historical standard at 5.3 percent. Businesses are complaining of worker shortages in industries includinghealth care, construction and trucking. Household-name companies like Walmart and McDonald’s have announced increases to their pay for low-wage workers.
Add those together, and it would seem to point to 2015 as being the year American workers start seeing substantially larger paychecks. The only problem: There is no real evidence in the economic data that this is happening.
Wednesday, May 20, 2015
Co-hosted Atlas Network event a success; Learning the threats to Mexico's reform movement
Thanks to all those who attended Monday's special event at the Park Plaza Hotel with Armando Regil, the Founding President of the IPEA, Institute of Strategic Thinking Agora in Mexico. Co-hosted with the Atlas Network the event drew more than 25 liberty-minded individuals who heard Regil tell how he established a market-oriented think tank in a virtual one party state of Mexico. Regil's work is hard but he's determined to get reform front and center in Mexico, which has long been plagued with governance problems including the collateral damage of the war on drugs and crony capitalism. Regil's success has been based on his insistence that civil society -- life outside of the State-- be respected and nurtured so that citizens can build the market institutions vital for prosperity.
We look forward to working with the Atlas Network and the very capable Brittany Cobb,Development and Events Manager in the future.
We look forward to working with the Atlas Network and the very capable Brittany Cobb,Development and Events Manager in the future.
Friday, March 13, 2015
BHI to the Natural Resources Defense Council: Re-learn Economics 101
Beacon Hill Institute at Suffolk University Response to Laurie Johnson of the Natural Resources Defense Council. The response was written by BHI Executive Director David G. Tuerck.
Available in PDF format at www.beaconhilll.org
March 13, 2015
Laurie Johnson, an economist at the Natural Resources Defense Council, recently posted a blog entry that sharply criticizes recent BHI studies of the EPA’s Clean Power Plan. It is important, in reading this blog, to understand that Dr. Johnson’s job is to defend tooth-and-nail an organization whose purpose is to promote what it deems to be environmental protection at any cost to economic activity at home and abroad.
Now let’s see what Dr. Johnson has to say and how she is willing to mislead her readers and resort to her own brand of junk economics in order to defend her employer’s agenda.
Johnson: First and foremost, it [the BHI study] is not an analysis of the Clean Power Plan (CPP). The CPP sets limits on a very specific industry, the electricity system. BHI applies a back-of-the-envelope calculation to an economy-wide carbon tax analysis done by the Department of Energy's Energy Information Administration (EIA). As such, the electricity grid and the changes that would result to it in response to clean energy incentives and energy efficiency savings in the CPP are entirely absent from the analysis.
BHI: In order to analyze the effects of the CPP, it is necessary to determine the cost of achieving the reduction in carbon emissions aimed for the EPA. Because the EIA analyzes a scenario in which carbon emissions are reduced by about the amount intended by the EPA, its analysis provides a useful benchmark for the cost of achieving the intended reductions in emissions. This cost, put by the EIA at $10 per tonne of carbon eliminated, helps get us to an estimate of the cost of the EPA rules on the economy.
Johnson:: While EPA's analysis does show electricity price increases, it also shows electricity bill decreases, because we will be wasting less energy. Further, because the amount of labor associated with clean energy investments is many times higher than the amount associated with fossil generation, you actually get net job increases from the type of investment changes the CPP will promote, not the phantom losses BHI projects.
BHI: The idea here is that consumers should thank the EPA for raising the price of electricity since the higher price will induce them to conserve on electricity and thus reduce their bills. This would be much like thanking the oil companies for raising the price of gasoline since the higher price will induce drivers to use more public transportation.
Dr. Johnson’s excuse-making squares nicely with the NRDC’s environmental-purity-at-any-cost philosophy. One gets the impression, in reviewing the NRDC’s lobbying efforts, that it would have us throw out our TV sets, ride bicycles to work and eat only vegetables organically grown in our home gardens. We wonder if NRDC flaks should also consider turning off their computers.
As for the argument that “clean energy” utilities are all to the good because they require more labor to construct than fossil-fuel plants, we have to wonder if Dr. Johnson slept through her courses in cost-benefit analysis on the way to her PhD. One of the canons of cost-benefit analysis is that labor belongs on the cost side of the ledger when comparing costs and benefits. If we did not classify labor as a cost, someone could use cost-benefit analysis to argue against using machines to move dirt on the premise that we create more jobs by letting men equipped with shovels do the job.
In our studies, we do, in fact, cite job losses as a collateral damage related to higher electricity prices. But those job losses are the result of losses in production that are brought about by higher electricity prices. Jobs are part of the cost of producing something, but when we produce less of something workers get laid off.
Johnson: Using EIA's carbon tax analysis, BHI then does a theoretically bizarre back of the envelope calculation: First, it multiplies EIA's projected electricity price increase by electricity consumption (by sector) to get the total electricity cost increase consumers would supposedly pay under its non-CPP CPP analysis. It then uses an (incorrect) estimate of the climate and health benefits of each ton of pollution reduced (the so called "social cost of carbon," or SCC), and subtracts that from its estimated increase in electricity expenditures to estimate a final change in electricity price. That makes absolutely no sense. The correct way to do this sort of analysis (assuming you were actually modeling the CPP) is to analyze the price effects of a policy on the economy separately from the environmental and health benefits of the policy. Environmental and health benefits are not electricity prices, and should never be fed into a model as if they were.
BHI: We don’t need a lecture on cost-benefit analysis from someone who considers make-work jobs a benefit in modeling climate change legislation. So we will try to give Dr. Johnson a refresher course on the task of estimating the effects of green energy policies on the economy.
Let’s compare two methods by which the government can get utilities to substitute green for conventional power: mandates and subsidies. What the EPA has done is issue a mandate, the effect of which is to compel utilities to substitute more expensive power for coal-fired power. That’s why the mandate raises electricity prices – indeed, causes them to “skyrocket,” per President Obama’s promise.
Subsidies work differently. When the government subsidizes wind and solar power, there is an initial fall in electricity prices as the subsidized power is dumped into the grid. Ultimately, price will rise as demand rises, but the initial impact is the opposite of the impact of a mandate.
The subsidies aren’t free. They require the public to pay the taxes out of which they are funded. But the reduction in electricity prices partly offsets the burden of these taxes. In effect, the reduced electric rates serve as a way to compensate the taxpayer for making it possible for society to reap the (supposed) benefits from reduced emissions.
The problem with modeling a mandate is that we can identify the cost it imposes by estimating the rise in electricity prices. But then how do we account for the social benefits touted by the likes of Dr. Johnson? The answer is to do what we did: Calculate the effect on price as the effect net of those benefits.
We find it ironic that we were faulted in this critique for having thus downplayed the effect of the EPA rules on electric rates. Perhaps Dr. Johnson isn’t comfortable with the fact that the rules inflict net harm on the economy even after we make a generous allowance for the environmental benefits they confer.
It seems that she might have been more satisfied if we had reported higher levels of economic harm than we did, in fact, report.
Or maybe the answer lies in the position taken by the NRDC that individuals and firms burdened by the anti-carbon mandates advocated by the NRDC do not deserve compensation. The argument that they do is defensible under the “Takings” clause of the Constitution – an interpretation the NRDC staunchly opposes. It seems that Dr. Johnson is loath to ascribe any benefit to the reduction in carbon emissions out of fear that someone will then want to find out about the costs.
Johnson: Even though the aforementioned calculation is nonsensical, we should note that it does not use the main estimate used by analysts for climate and health benefits from reducing carbon pollution, of approximately $40/ton (btw, this value itself is likely to be significantly underestimated). Instead it uses $10/ton. Worse, it calls this $10/ton a market-based benefit measure. It is not clear where it gets this price, but one thing we know for sure: there is no "market price" for carbon pollution (i.e. what people are willing to pay in the market to reduce a ton of carbon pollution). That's the whole point!!! We have an environmental mess on our hands that we are trying to fix precisely because polluters are not charged for the pollution costs they impose on others (economists call this an "externality").
BHI: The $10 SCC represents the tax on carbon that would induce a reduction in CO2 emissions to levels sought by the EPA in issuing the CCP mandates, as modeled by the EIA. The imposition of this tax would raise the market price of emitting carbon from zero dollars to $10. Now think of the alleged climate benefits as social costs that are avoided by reducing carbon emissions. If a tax of this magnitude would bring about the reduction in CO2 emissions sought by the EPA and if that reduction were “socially optimal,” then the tax would raise the price of electricity by the social cost that is avoided as a result of the last unit of electricity that is withdrawn from the grid under the tax.
The fact that this $10 benefit (avoided cost) is minuscule in comparison to the private costs of the increased electric rates suggests that all the benefits combined are far lower than the $10 that we were willing to allow.
The reality is that neither the EPA nor Dr. Johnson has a clue as to the magnitude of the avoided social costs. Many economists argue that the social cost of carbon should be assumed to be zero due to the uncertainty as to the level of warming that is induced by CO2 emissions, and the level of harm that said warming would produce. There is significant leakage of CO2 emissions into the United States from other countries that do not impose reductions in CO2 emissions. In recent years, firms in energy intensive industries, such as Dow Chemical and BASF, have located production in the United States to take advantage of the lower energy costs due to the surge in domestic fossil fuel production. Higher electricity costs due to the CCP would send electricity intensive companies and their emissions, such as manufacturing, looking to relocate aboard. This would reduce any benefit from the reducing carbon emissions in the United States. Economists call this term leakage or unintended consequences.
We nevertheless ascribe some social value to the EPA rules in line with the hypothetical tax assumed in the EIA modeling. We do not “feed” the supposed benefits of those rules into the model as prices. Rather we feed them into the model as partial offsets to the price increases brought about by the EPA rules in reflection of the EIA modeling on which our analysis is based.
Johnson: Which takes me to my penultimate point: BHI's net "cost" calculation (quotes because the CPP actually has a high net benefit, not cost) is dramatically inflated because it removes "co-benefits" from reducing carbon pollution emissions. These are all the lives saved, heart attacks avoided, asthma attacks avoided (and many more benefits) due to reductions in other pollutants on top of the carbon pollution reduction--that also happen to decline when you reduce carbon pollution. Fossil-backed industry analyses try to argue over and over again that because these "co-pollutants" are regulated under other statutes of the Clean Air Act, somehow they don't count. That defies common sense, and I doubt anyone whose paycheck doesn't rely on making assumptions like this buys it. It's like saying that if you start an exercise regime to lose weight, but also get the myriad of other health benefits associated with exercise, these "co-benefits" don't count. Does that make sense? Of course not.
BHI: If my goal is to lose 20 pounds and if I can lose that 20 pounds by taking diet pills, then I can’t justify joining a gym because, by doing so, I can lose the same 20 pounds. It is no answer to say that I might as well join the gym and lose 40 pounds. The Centers for Disease Control recommend that healthy individuals get at least 150 minutes of moderate exercise per week.(1) Dr. Johnson would have us believe that another 150 minutes of exercise would provide the same health benefits as the first 150 minutes.
As we explain in our reports, particulate matter is currently regulated under the National Ambient Air Quality Standards (NAAQS). The NAAQS sets standards “based on such criteria and allowing an adequate margin of safety, are requisite to protect the public health.”(2) These standards are reviewed every five years to confirm that they are up to date with the most recent scientific research available.(3) Any reduction in particulate matter that might be attributed to the EPA rules is either (1) already provided for by the NAAQS or (2) greater than that provided for by the NAAQS and therefore unnecessary.
Johnson: Finally, BHI applies a "coal intensity" multiplier to calculate its estimated state-specific electricity price increases. For example, the average percentage of electricity generated from coal in the U.S. is 40%; if a state's electricity is 80% coal generated, BHI assumes the electricity price increase in that state is twice its national average estimate. That's like saying if the average percentage of smokers across the US is 10% of the population, and 20% of a population in a given state smokes, then the price of cigarettes will be double in that state. Not to mention: electricity is imported/exported across state lines, so even if this silly calculation made sense, it pays no attention to the actual market structure of electricity generation and consumption.
BHI: We used this calculation to distribute the U.S. net costs to the states, before calculating the change in electricity prices. Intentionally or not, Dr. Johnson confuses price differences with cost differences.
Again, to use the author’s analogy let us suppose that Congress raised the tax on cigarettes but not cigars or other tobacco products. If we wanted to allocate the harm to smokers to the individual states, we would need to distribute the tax to industries based on their tobacco sales and then adjust for the portion of those sales that is accounted for by cigarettes. So, we would adjust the total tobacco sales in each state by the ratio to cigarette sales to total tobacco sales in that state.
Now, to return to the task of distributing the cost of the EPA rules across states, Suppose Massachusetts produced 10% of total U.S. electricity and used coal to produce 50% of its electricity, compared to 40% for the United States as a whole. We multiply the total the net costs of switching from coal to more costly fuels for the United States by 10% and the result by 50% divided by 40% to compute the cost to Massachusetts. We then used this cost figure to calculate the effect or energy prices.
Johnson: I don't even need to go into the already discredited STAMP model BHI plugged its silly price estimates into, or the fact that BHI has been denounced by its own host university for politically-driven research plans that did not follow the university's rules or match its mission.
BHI: The apparent basis of this criticism is that we draw on the precepts of Economics 101 in reaching our conclusions. To wit: “Supply equals demand.” Or “If a government policy causes the cost of producing something to rise, its price will rise, too.” This orthodoxy is especially troubling for green advocates who aim to deindustrialize the country in the name of fuzzy climate change objectives. You can find our defense of the STAMP model from a critique by the liberal Institute for Economic Policy and Taxation (ITEP) at http://www.beaconhill.org/STAMP-Method/ResponsetoITEPbybullet2014-0531.pdf
Additional point:
One final smear was Dr. Johnson’s reference to a grant proposal that we once wrote (but was never funded), in which we suggested that if state renewable energy rules lead to higher electricity rates, the state might want to consider repealing them. By seeking to convince the grantor that our work might have policy relevance, we allegedly “sought to manipulate economic research by producing reports that came to conclusions before performing any research.” In the fevered imagination of the NDRC and other groups, even a hint that research that might produce policy changes adverse to their ideological agenda is proof positive of a sell-out to carbon interests.
Our work, however, puts the lie to this claim. Recently, we reported that rules mandating green power could well end up reducing electric rates in three states – Rhode Island, Illinois and Maryland. This is not because we sold out to environmentalists in those states but because our methodology yields different results for different states, depending on what the data show.
It is odd to be attacked by a group that has used junk economics to further policy goals at the public’s expense. Among its credits, the NRDC succeeded in stopping a measure that would have brought water to drought-stricken Central Valley of California. The NRDC doesn’t like video games so it issued a report in which it greatly exaggerated the amount of power consumed by people who play them. It has been behind an EPA rule that would double mileage standards at the cost of safety.
Finally, our host university did not denounce our work. It complained that we didn’t follow certain procedures. We have asked the university to reconsider its complaint on the argument that we did, in fact, follow its procedures.
Johnson: Enough said.
BHI: Indeed!
Notes:
1 Centers for Disease Control and Prevention, “How much physical activity do adults need?", http://www.cdc.gov/physicalactivity/everyone/guidelines/adults.html
2 U.S. Code § 7409 - National primary and secondary ambient air quality standards. http://www.law.cornell.edu/uscode/text/42/7409
3 U.S. EPA, “Process of Reviewing the National Ambient Air Quality Standards, http://www.epa.gov/ttn/naaqs/review.html.
Available in PDF format at www.beaconhilll.org
March 13, 2015
Laurie Johnson, an economist at the Natural Resources Defense Council, recently posted a blog entry that sharply criticizes recent BHI studies of the EPA’s Clean Power Plan. It is important, in reading this blog, to understand that Dr. Johnson’s job is to defend tooth-and-nail an organization whose purpose is to promote what it deems to be environmental protection at any cost to economic activity at home and abroad.
Now let’s see what Dr. Johnson has to say and how she is willing to mislead her readers and resort to her own brand of junk economics in order to defend her employer’s agenda.
Johnson: First and foremost, it [the BHI study] is not an analysis of the Clean Power Plan (CPP). The CPP sets limits on a very specific industry, the electricity system. BHI applies a back-of-the-envelope calculation to an economy-wide carbon tax analysis done by the Department of Energy's Energy Information Administration (EIA). As such, the electricity grid and the changes that would result to it in response to clean energy incentives and energy efficiency savings in the CPP are entirely absent from the analysis.
BHI: In order to analyze the effects of the CPP, it is necessary to determine the cost of achieving the reduction in carbon emissions aimed for the EPA. Because the EIA analyzes a scenario in which carbon emissions are reduced by about the amount intended by the EPA, its analysis provides a useful benchmark for the cost of achieving the intended reductions in emissions. This cost, put by the EIA at $10 per tonne of carbon eliminated, helps get us to an estimate of the cost of the EPA rules on the economy.
Johnson:: While EPA's analysis does show electricity price increases, it also shows electricity bill decreases, because we will be wasting less energy. Further, because the amount of labor associated with clean energy investments is many times higher than the amount associated with fossil generation, you actually get net job increases from the type of investment changes the CPP will promote, not the phantom losses BHI projects.
BHI: The idea here is that consumers should thank the EPA for raising the price of electricity since the higher price will induce them to conserve on electricity and thus reduce their bills. This would be much like thanking the oil companies for raising the price of gasoline since the higher price will induce drivers to use more public transportation.
Dr. Johnson’s excuse-making squares nicely with the NRDC’s environmental-purity-at-any-cost philosophy. One gets the impression, in reviewing the NRDC’s lobbying efforts, that it would have us throw out our TV sets, ride bicycles to work and eat only vegetables organically grown in our home gardens. We wonder if NRDC flaks should also consider turning off their computers.
As for the argument that “clean energy” utilities are all to the good because they require more labor to construct than fossil-fuel plants, we have to wonder if Dr. Johnson slept through her courses in cost-benefit analysis on the way to her PhD. One of the canons of cost-benefit analysis is that labor belongs on the cost side of the ledger when comparing costs and benefits. If we did not classify labor as a cost, someone could use cost-benefit analysis to argue against using machines to move dirt on the premise that we create more jobs by letting men equipped with shovels do the job.
In our studies, we do, in fact, cite job losses as a collateral damage related to higher electricity prices. But those job losses are the result of losses in production that are brought about by higher electricity prices. Jobs are part of the cost of producing something, but when we produce less of something workers get laid off.
Johnson: Using EIA's carbon tax analysis, BHI then does a theoretically bizarre back of the envelope calculation: First, it multiplies EIA's projected electricity price increase by electricity consumption (by sector) to get the total electricity cost increase consumers would supposedly pay under its non-CPP CPP analysis. It then uses an (incorrect) estimate of the climate and health benefits of each ton of pollution reduced (the so called "social cost of carbon," or SCC), and subtracts that from its estimated increase in electricity expenditures to estimate a final change in electricity price. That makes absolutely no sense. The correct way to do this sort of analysis (assuming you were actually modeling the CPP) is to analyze the price effects of a policy on the economy separately from the environmental and health benefits of the policy. Environmental and health benefits are not electricity prices, and should never be fed into a model as if they were.
BHI: We don’t need a lecture on cost-benefit analysis from someone who considers make-work jobs a benefit in modeling climate change legislation. So we will try to give Dr. Johnson a refresher course on the task of estimating the effects of green energy policies on the economy.
Let’s compare two methods by which the government can get utilities to substitute green for conventional power: mandates and subsidies. What the EPA has done is issue a mandate, the effect of which is to compel utilities to substitute more expensive power for coal-fired power. That’s why the mandate raises electricity prices – indeed, causes them to “skyrocket,” per President Obama’s promise.
Subsidies work differently. When the government subsidizes wind and solar power, there is an initial fall in electricity prices as the subsidized power is dumped into the grid. Ultimately, price will rise as demand rises, but the initial impact is the opposite of the impact of a mandate.
The subsidies aren’t free. They require the public to pay the taxes out of which they are funded. But the reduction in electricity prices partly offsets the burden of these taxes. In effect, the reduced electric rates serve as a way to compensate the taxpayer for making it possible for society to reap the (supposed) benefits from reduced emissions.
The problem with modeling a mandate is that we can identify the cost it imposes by estimating the rise in electricity prices. But then how do we account for the social benefits touted by the likes of Dr. Johnson? The answer is to do what we did: Calculate the effect on price as the effect net of those benefits.
We find it ironic that we were faulted in this critique for having thus downplayed the effect of the EPA rules on electric rates. Perhaps Dr. Johnson isn’t comfortable with the fact that the rules inflict net harm on the economy even after we make a generous allowance for the environmental benefits they confer.
It seems that she might have been more satisfied if we had reported higher levels of economic harm than we did, in fact, report.
Or maybe the answer lies in the position taken by the NRDC that individuals and firms burdened by the anti-carbon mandates advocated by the NRDC do not deserve compensation. The argument that they do is defensible under the “Takings” clause of the Constitution – an interpretation the NRDC staunchly opposes. It seems that Dr. Johnson is loath to ascribe any benefit to the reduction in carbon emissions out of fear that someone will then want to find out about the costs.
Johnson: Even though the aforementioned calculation is nonsensical, we should note that it does not use the main estimate used by analysts for climate and health benefits from reducing carbon pollution, of approximately $40/ton (btw, this value itself is likely to be significantly underestimated). Instead it uses $10/ton. Worse, it calls this $10/ton a market-based benefit measure. It is not clear where it gets this price, but one thing we know for sure: there is no "market price" for carbon pollution (i.e. what people are willing to pay in the market to reduce a ton of carbon pollution). That's the whole point!!! We have an environmental mess on our hands that we are trying to fix precisely because polluters are not charged for the pollution costs they impose on others (economists call this an "externality").
BHI: The $10 SCC represents the tax on carbon that would induce a reduction in CO2 emissions to levels sought by the EPA in issuing the CCP mandates, as modeled by the EIA. The imposition of this tax would raise the market price of emitting carbon from zero dollars to $10. Now think of the alleged climate benefits as social costs that are avoided by reducing carbon emissions. If a tax of this magnitude would bring about the reduction in CO2 emissions sought by the EPA and if that reduction were “socially optimal,” then the tax would raise the price of electricity by the social cost that is avoided as a result of the last unit of electricity that is withdrawn from the grid under the tax.
The fact that this $10 benefit (avoided cost) is minuscule in comparison to the private costs of the increased electric rates suggests that all the benefits combined are far lower than the $10 that we were willing to allow.
The reality is that neither the EPA nor Dr. Johnson has a clue as to the magnitude of the avoided social costs. Many economists argue that the social cost of carbon should be assumed to be zero due to the uncertainty as to the level of warming that is induced by CO2 emissions, and the level of harm that said warming would produce. There is significant leakage of CO2 emissions into the United States from other countries that do not impose reductions in CO2 emissions. In recent years, firms in energy intensive industries, such as Dow Chemical and BASF, have located production in the United States to take advantage of the lower energy costs due to the surge in domestic fossil fuel production. Higher electricity costs due to the CCP would send electricity intensive companies and their emissions, such as manufacturing, looking to relocate aboard. This would reduce any benefit from the reducing carbon emissions in the United States. Economists call this term leakage or unintended consequences.
We nevertheless ascribe some social value to the EPA rules in line with the hypothetical tax assumed in the EIA modeling. We do not “feed” the supposed benefits of those rules into the model as prices. Rather we feed them into the model as partial offsets to the price increases brought about by the EPA rules in reflection of the EIA modeling on which our analysis is based.
Johnson: Which takes me to my penultimate point: BHI's net "cost" calculation (quotes because the CPP actually has a high net benefit, not cost) is dramatically inflated because it removes "co-benefits" from reducing carbon pollution emissions. These are all the lives saved, heart attacks avoided, asthma attacks avoided (and many more benefits) due to reductions in other pollutants on top of the carbon pollution reduction--that also happen to decline when you reduce carbon pollution. Fossil-backed industry analyses try to argue over and over again that because these "co-pollutants" are regulated under other statutes of the Clean Air Act, somehow they don't count. That defies common sense, and I doubt anyone whose paycheck doesn't rely on making assumptions like this buys it. It's like saying that if you start an exercise regime to lose weight, but also get the myriad of other health benefits associated with exercise, these "co-benefits" don't count. Does that make sense? Of course not.
BHI: If my goal is to lose 20 pounds and if I can lose that 20 pounds by taking diet pills, then I can’t justify joining a gym because, by doing so, I can lose the same 20 pounds. It is no answer to say that I might as well join the gym and lose 40 pounds. The Centers for Disease Control recommend that healthy individuals get at least 150 minutes of moderate exercise per week.(1) Dr. Johnson would have us believe that another 150 minutes of exercise would provide the same health benefits as the first 150 minutes.
As we explain in our reports, particulate matter is currently regulated under the National Ambient Air Quality Standards (NAAQS). The NAAQS sets standards “based on such criteria and allowing an adequate margin of safety, are requisite to protect the public health.”(2) These standards are reviewed every five years to confirm that they are up to date with the most recent scientific research available.(3) Any reduction in particulate matter that might be attributed to the EPA rules is either (1) already provided for by the NAAQS or (2) greater than that provided for by the NAAQS and therefore unnecessary.
Johnson: Finally, BHI applies a "coal intensity" multiplier to calculate its estimated state-specific electricity price increases. For example, the average percentage of electricity generated from coal in the U.S. is 40%; if a state's electricity is 80% coal generated, BHI assumes the electricity price increase in that state is twice its national average estimate. That's like saying if the average percentage of smokers across the US is 10% of the population, and 20% of a population in a given state smokes, then the price of cigarettes will be double in that state. Not to mention: electricity is imported/exported across state lines, so even if this silly calculation made sense, it pays no attention to the actual market structure of electricity generation and consumption.
BHI: We used this calculation to distribute the U.S. net costs to the states, before calculating the change in electricity prices. Intentionally or not, Dr. Johnson confuses price differences with cost differences.
Again, to use the author’s analogy let us suppose that Congress raised the tax on cigarettes but not cigars or other tobacco products. If we wanted to allocate the harm to smokers to the individual states, we would need to distribute the tax to industries based on their tobacco sales and then adjust for the portion of those sales that is accounted for by cigarettes. So, we would adjust the total tobacco sales in each state by the ratio to cigarette sales to total tobacco sales in that state.
Now, to return to the task of distributing the cost of the EPA rules across states, Suppose Massachusetts produced 10% of total U.S. electricity and used coal to produce 50% of its electricity, compared to 40% for the United States as a whole. We multiply the total the net costs of switching from coal to more costly fuels for the United States by 10% and the result by 50% divided by 40% to compute the cost to Massachusetts. We then used this cost figure to calculate the effect or energy prices.
Johnson: I don't even need to go into the already discredited STAMP model BHI plugged its silly price estimates into, or the fact that BHI has been denounced by its own host university for politically-driven research plans that did not follow the university's rules or match its mission.
BHI: The apparent basis of this criticism is that we draw on the precepts of Economics 101 in reaching our conclusions. To wit: “Supply equals demand.” Or “If a government policy causes the cost of producing something to rise, its price will rise, too.” This orthodoxy is especially troubling for green advocates who aim to deindustrialize the country in the name of fuzzy climate change objectives. You can find our defense of the STAMP model from a critique by the liberal Institute for Economic Policy and Taxation (ITEP) at http://www.beaconhill.org/STAMP-Method/ResponsetoITEPbybullet2014-0531.pdf
Additional point:
One final smear was Dr. Johnson’s reference to a grant proposal that we once wrote (but was never funded), in which we suggested that if state renewable energy rules lead to higher electricity rates, the state might want to consider repealing them. By seeking to convince the grantor that our work might have policy relevance, we allegedly “sought to manipulate economic research by producing reports that came to conclusions before performing any research.” In the fevered imagination of the NDRC and other groups, even a hint that research that might produce policy changes adverse to their ideological agenda is proof positive of a sell-out to carbon interests.
Our work, however, puts the lie to this claim. Recently, we reported that rules mandating green power could well end up reducing electric rates in three states – Rhode Island, Illinois and Maryland. This is not because we sold out to environmentalists in those states but because our methodology yields different results for different states, depending on what the data show.
It is odd to be attacked by a group that has used junk economics to further policy goals at the public’s expense. Among its credits, the NRDC succeeded in stopping a measure that would have brought water to drought-stricken Central Valley of California. The NRDC doesn’t like video games so it issued a report in which it greatly exaggerated the amount of power consumed by people who play them. It has been behind an EPA rule that would double mileage standards at the cost of safety.
Finally, our host university did not denounce our work. It complained that we didn’t follow certain procedures. We have asked the university to reconsider its complaint on the argument that we did, in fact, follow its procedures.
Johnson: Enough said.
BHI: Indeed!
Notes:
1 Centers for Disease Control and Prevention, “How much physical activity do adults need?", http://www.cdc.gov/physicalactivity/everyone/guidelines/adults.html
2 U.S. Code § 7409 - National primary and secondary ambient air quality standards. http://www.law.cornell.edu/uscode/text/42/7409
3 U.S. EPA, “Process of Reviewing the National Ambient Air Quality Standards, http://www.epa.gov/ttn/naaqs/review.html.
Thursday, November 20, 2014
Tuerck letter to Suffolk Environmental Club
The following letter from BHI Executive Director David G. Tuerck was sent to the Suffolk Environmental Club on November 20, 2014:
Dear Students:
Concerning your comments in the Suffolk Journal about Koch money “influencing … scientific results,” I find it appalling that a group of students at Suffolk – or any student anywhere – would sign on the idea of banning money that goes to support research without even the slightest attempt to confer in advance with the authors of the work being condemned.
You say you have “questions about what the [Koch] money is being used for exactly.” Well, I have already told the Journal that almost all the money from Koch has gone to support faculty salaries, student scholarships and a speaking program.
As for the funds that go to the Beacon Hill Institute or its research, you, in my opinion, violated generally-accepted standards of academic integrity when you allied yourselves with the “Koch-free” people without first talking to me and my staff. I have to wonder how you would blindly attach yourself to what is a blatant, anti-free-speech, radical-left political campaign without first finding out what you are talking about. Where, I have to ask, was your faculty advisor when you did this?
What you do when you sign on to that the anti-Koch campaign is ally yourself with a political operative who is using her Suffolk connection to advance her career. It seems to me that you might want to reconsider allowing yourselves to be used as pawns in her game.
I have a suggestion: Contact Frank Conte, our Director of Communications, and ask for an appointment to meet with my staff to discuss our work. Then you can reach your own conclusions about the quality of our research and whether you want it banned from Suffolk.
Sincerely,
David G. Tuerck
Executive Director, Beacon Hill Institute
Professor of Economics
Suffolk University
Related: Letter to the editor, Suffolk Journal, November 19, 2014
Dear Students:
Concerning your comments in the Suffolk Journal about Koch money “influencing … scientific results,” I find it appalling that a group of students at Suffolk – or any student anywhere – would sign on the idea of banning money that goes to support research without even the slightest attempt to confer in advance with the authors of the work being condemned.
You say you have “questions about what the [Koch] money is being used for exactly.” Well, I have already told the Journal that almost all the money from Koch has gone to support faculty salaries, student scholarships and a speaking program.
As for the funds that go to the Beacon Hill Institute or its research, you, in my opinion, violated generally-accepted standards of academic integrity when you allied yourselves with the “Koch-free” people without first talking to me and my staff. I have to wonder how you would blindly attach yourself to what is a blatant, anti-free-speech, radical-left political campaign without first finding out what you are talking about. Where, I have to ask, was your faculty advisor when you did this?
What you do when you sign on to that the anti-Koch campaign is ally yourself with a political operative who is using her Suffolk connection to advance her career. It seems to me that you might want to reconsider allowing yourselves to be used as pawns in her game.
I have a suggestion: Contact Frank Conte, our Director of Communications, and ask for an appointment to meet with my staff to discuss our work. Then you can reach your own conclusions about the quality of our research and whether you want it banned from Suffolk.
Sincerely,
David G. Tuerck
Executive Director, Beacon Hill Institute
Professor of Economics
Suffolk University
Related: Letter to the editor, Suffolk Journal, November 19, 2014
Friday, October 3, 2014
BHI work cited in Campaign 2014
BHI's work on labor market reform and interstate competitiveness has drawn the attention of office-seekers far and wide. Safe to say both parties like us. After all, the work speaks for itself.
Tuesday, August 26, 2014
A peek at the Fed's model
From the Fed's authors:
The U.S. labor market is large and multifaceted. Often-cited indicators, such as the unemployment rate or payroll employment, measure aparticular dimension of labor market activity, and it is not uncommon for different indicators to send conflicting signals about labor market conditions. Accordingly, analysts typically look at many indicators when attempting to gauge labor market improvement. However, it is often difficult to know how to weigh signals from various indicators.Statistical models can be useful to such efforts because they provide away to summarize information from several indicators. This Notedescribes a dynamic factor model of labor market indicators that we have developed recently, which we call the labor market conditions index (LMCI). Details of the data, model, and estimation will be presented in a forthcoming FEDS working paper.We look forward to reading the paper.
Hat tip: Brian Wesbury of First Trust.
Friday, July 18, 2014
Composition of the Massachusetts workforce: By sector
Education and Health Services is the largest job sector in Massachusetts. More on the June Employment Situation in Massachusetts.
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| Source: Executive Office of Labor and Workforce Development, Commonwealth of Massachusetts |
Thursday, June 19, 2014
BHI's Conte in the Herald: Bay State benefits from foreign trade
This morning the Boston Herald published our op-ed on extending Trade Promotion Authority to extend free trade pacts. This benefits Massachusetts.
Thursday, June 5, 2014
State Tax Collections - U.S. Census Bureau
Wednesday, June 4, 2014
A response to the Institute on Taxation and Economic Policy's misguided critique of the STAMP model
On May 21, 2014, The Institute on Taxation and Economic Policy (ITEP) released a report entitled, “STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes.” The report makes several criticisms of the Beacon Hill Institute (BHI) State Tax Analysis Modeling Program (STAMP®). BHI responds here on what ITEP gets wrong about the STAMP model. (PDF file)
Thursday, May 22, 2014
In defense of STAMP as a tax modeling tool
A PDF version of this primer is available here.
The following is an assessment of the appropriateness of modeling state tax policy using methods that came to the fore in The General Theory of Employment Interest, and Money, published in 1936 by the British economist, John Maynard Keynes. The two features of Keynes’s book that are most relevant to the topic at hand are (1) that it was written to address the economic conditions of the Great Depression, which was in its 7th full year at the time of the book’s publication, and (2) that it offered a tool, called the Keynesian multiplier, for measuring the effectiveness of the policy recommendations that came out of the book.
Keynes saw it as his purpose to replace the hitherto recognized economic paradigm, then called the “classical” model, with a new paradigm that reflected the depth and persistence of the Depression. In the classical model, economic downturns, even severe economic downturns, were supposed to be self-correcting. The relevance here is that the classical model (whose assumptions mirror those of our CGE model) assumed that supply equaled demand except for brief periods of imbalance between supply and demand, which would be eventually corrected by price and wage adjustments.
Given that the ongoing economic downturn was clearly not self-correcting, argued Keynes, it was necessary to forge a new approach that both explained that downturn and provided a path back to more normal conditions. It was necessary to build a model in which the supply of goods and labor could exceed the demand for goods and labor over a protracted period of time.
Keynes’s approach turned the classical model on its head: Previously, saving was necessary for investment and therefore for production and employment. Now saving was a “leakage” from the spending stream that slowed the pace of economic expansion. Previously, government spending crowded out personal consumption. Now government spending provided a spur to consumption. Government could rescue the economy from a protracted downturn by using its tax and spending powers to boost aggregate demand.
In doing so, the government would take advantage of how the Keynesian multiplier could be relied upon to increase production and consumption. Government would spend, say, another$1,000 on some activity. It didn’t matter if the activity was something useful like building a bridge or something wasteful like paying men to dig holes and fill them in again. Spending was spending. And this spending would cause production to expand by some multiple of $1,000.
A key concept in computing the multiplier is the “marginal propensity to consume,” or ”MPC,” defined as the additional consumption that another dollar of disposable income would yield. Suppose this MPC equaled .5. An “injection” of $1,000 in government spending would immediately bring about $1,000 in new production. But then consumers would spend 50% of that, adding another $500 to production. Then consumers would spend 50% of that, or $250, leading to further new production and to further rounds of new consumption and production so that, at the end of the day, the initial ”injection” of $1,000 in government spending yielded altogether $2,000 in new production. Thus by spending only $1,000, the government would cause production to rise by twice that amount. Hence, the Keynesian multiplier.
A further wrinkle in this analysis is the Keynesian “balanced budget multiplier.” This concept, which comes up in Keynesian models of state tax policy, begins with the idea that, just as government spending is good for the economy, taxes are bad (though for reasons unlike those considered by STAMP). Taxes are bad in this analysis because they reduce disposable income. Suppose that the government decided to raise taxes by $1,000, rather than increase spending by $1,000. Now disposable income would fall by $1,000, and as a result, consumption would fall by $500, causing production to fall by the same amount. Then consumption and production would fall by another $250, and so forth, until both had fallen by $1,000.
Now suppose the government decided to raise spending and taxes by $1,000. We get the following effects on production:
Despite the fact that Keynes himself recognized that this line of analysis was legitimate only when production and employment were significantly below their ”full-employment” norms, the Keynesian model dominated economic thinking well beyond the end of the Depression and until the early 1970s, when “stagflation” cast doubt on its applicability to current conditions. Thereafter, economists started to rehabilitate the previously discarded classical model, causing mentions of Keynes to disappear almost entirely from the academic literature and to receive less and less consideration in college textbooks.
The recent economic downturn did, in fact, breathe new life into the Keynesian corpse. But the failure of the economy to respond measurably to the 2009 “stimulus” policies suggests that this renewed life will quickly fade. The current economic weakness appears to be due, not to an insufficiency of demand, but to uncertainties surrounding Obamacare and Dodd Frank and to safety net measures that deter people from taking jobs, all of which operate on the supply-side of the economy. When ITEP criticizes us for assuming full employment, it is implying that we should be more “Keynesian” in our approach. We should treat government spending as good for the economy and taxes as bad only insofar as they reduce disposable income. The balanced budget multiplier is a handy tool for government expansionists who want to claim, in effect, that the state government can make the state economy as big as it wants by merely spending more.
We prefer the alternative approach is to revert to classical arguments that government spending crowds out consumption and that taxes matter, not for how they affect disposable income, but for how they affect incentives to work, save and invest. In that framework, a reduction in government spending translates into an increase in personal consumption. Reductions in tax rates, as they apply to sales or income taxes, increase the reward to work, saving and investment and, through that mechanism, cause production to expand. This “supply-side” approach makes sense insofar as the demand-side palliatives called for by the Keynesian model seem to have lost their usefulness some 70 years ago. No one outside of some other modeling organizations takes the idea of the balanced budget multiplier seriously anymore.
It is the position of the Beacon Hill Institute that, in modeling tax policy, Keynes’s ideas work well, insofar as they do at all, for considerations of federal tax policy changes in an economy that is clearly depressed owing to a lack of aggregate demand. The federal government can influence national economic conditions through Keynesian policies since it can run budget deficits and print money, whereas state governments can do neither. Furthermore, the federal government doesn’t have to concern itself with the outmigration of capital, jobs and consumer activity in the way that the states do when it comes to raising taxes.
Economic models that use Keynesian multipliers to rationalize individual projects, such as building a sports arena in a depressed area, are also fine as far as they go. But state policy makers should be wary of models that presume to generalize that approach to making to state tax policy.
The BHI approach to modeling a reduction in, say, the state sales tax is focus on how that tax change will expand consumption by making consumption cheaper in the state and thus bring in more retail business and, by doing so, increase production and salaries. Sales tax revenues will go down, but the reduction in those revenues will be partly offset by an increase in income tax revenues and other tax revenues. Government spending will fall but the taxes previously paid to government will show up as increased consumption. The alternative view, that the path to economic expansion lies in combined spending and tax increases does not fit the facts of the current economy at the national level and certainly does not fit those facts at the state level.
The following is an assessment of the appropriateness of modeling state tax policy using methods that came to the fore in The General Theory of Employment Interest, and Money, published in 1936 by the British economist, John Maynard Keynes. The two features of Keynes’s book that are most relevant to the topic at hand are (1) that it was written to address the economic conditions of the Great Depression, which was in its 7th full year at the time of the book’s publication, and (2) that it offered a tool, called the Keynesian multiplier, for measuring the effectiveness of the policy recommendations that came out of the book.
Keynes saw it as his purpose to replace the hitherto recognized economic paradigm, then called the “classical” model, with a new paradigm that reflected the depth and persistence of the Depression. In the classical model, economic downturns, even severe economic downturns, were supposed to be self-correcting. The relevance here is that the classical model (whose assumptions mirror those of our CGE model) assumed that supply equaled demand except for brief periods of imbalance between supply and demand, which would be eventually corrected by price and wage adjustments.
Given that the ongoing economic downturn was clearly not self-correcting, argued Keynes, it was necessary to forge a new approach that both explained that downturn and provided a path back to more normal conditions. It was necessary to build a model in which the supply of goods and labor could exceed the demand for goods and labor over a protracted period of time.
Keynes’s approach turned the classical model on its head: Previously, saving was necessary for investment and therefore for production and employment. Now saving was a “leakage” from the spending stream that slowed the pace of economic expansion. Previously, government spending crowded out personal consumption. Now government spending provided a spur to consumption. Government could rescue the economy from a protracted downturn by using its tax and spending powers to boost aggregate demand.
In doing so, the government would take advantage of how the Keynesian multiplier could be relied upon to increase production and consumption. Government would spend, say, another$1,000 on some activity. It didn’t matter if the activity was something useful like building a bridge or something wasteful like paying men to dig holes and fill them in again. Spending was spending. And this spending would cause production to expand by some multiple of $1,000.
A key concept in computing the multiplier is the “marginal propensity to consume,” or ”MPC,” defined as the additional consumption that another dollar of disposable income would yield. Suppose this MPC equaled .5. An “injection” of $1,000 in government spending would immediately bring about $1,000 in new production. But then consumers would spend 50% of that, adding another $500 to production. Then consumers would spend 50% of that, or $250, leading to further new production and to further rounds of new consumption and production so that, at the end of the day, the initial ”injection” of $1,000 in government spending yielded altogether $2,000 in new production. Thus by spending only $1,000, the government would cause production to rise by twice that amount. Hence, the Keynesian multiplier.
A further wrinkle in this analysis is the Keynesian “balanced budget multiplier.” This concept, which comes up in Keynesian models of state tax policy, begins with the idea that, just as government spending is good for the economy, taxes are bad (though for reasons unlike those considered by STAMP). Taxes are bad in this analysis because they reduce disposable income. Suppose that the government decided to raise taxes by $1,000, rather than increase spending by $1,000. Now disposable income would fall by $1,000, and as a result, consumption would fall by $500, causing production to fall by the same amount. Then consumption and production would fall by another $250, and so forth, until both had fallen by $1,000.
Now suppose the government decided to raise spending and taxes by $1,000. We get the following effects on production:
- Change in production from $1,000 in new government spending = $1,000 + $500 + $250 + $125 + ... + 0 = $2,000.
- Change in production from $1,000 in new taxes = -$500 - $250 - $125 - ... - 0 = -$1,000.
- Adding: $2,000 - $1,000 = $1,000.
Despite the fact that Keynes himself recognized that this line of analysis was legitimate only when production and employment were significantly below their ”full-employment” norms, the Keynesian model dominated economic thinking well beyond the end of the Depression and until the early 1970s, when “stagflation” cast doubt on its applicability to current conditions. Thereafter, economists started to rehabilitate the previously discarded classical model, causing mentions of Keynes to disappear almost entirely from the academic literature and to receive less and less consideration in college textbooks.
The recent economic downturn did, in fact, breathe new life into the Keynesian corpse. But the failure of the economy to respond measurably to the 2009 “stimulus” policies suggests that this renewed life will quickly fade. The current economic weakness appears to be due, not to an insufficiency of demand, but to uncertainties surrounding Obamacare and Dodd Frank and to safety net measures that deter people from taking jobs, all of which operate on the supply-side of the economy. When ITEP criticizes us for assuming full employment, it is implying that we should be more “Keynesian” in our approach. We should treat government spending as good for the economy and taxes as bad only insofar as they reduce disposable income. The balanced budget multiplier is a handy tool for government expansionists who want to claim, in effect, that the state government can make the state economy as big as it wants by merely spending more.
We prefer the alternative approach is to revert to classical arguments that government spending crowds out consumption and that taxes matter, not for how they affect disposable income, but for how they affect incentives to work, save and invest. In that framework, a reduction in government spending translates into an increase in personal consumption. Reductions in tax rates, as they apply to sales or income taxes, increase the reward to work, saving and investment and, through that mechanism, cause production to expand. This “supply-side” approach makes sense insofar as the demand-side palliatives called for by the Keynesian model seem to have lost their usefulness some 70 years ago. No one outside of some other modeling organizations takes the idea of the balanced budget multiplier seriously anymore.
It is the position of the Beacon Hill Institute that, in modeling tax policy, Keynes’s ideas work well, insofar as they do at all, for considerations of federal tax policy changes in an economy that is clearly depressed owing to a lack of aggregate demand. The federal government can influence national economic conditions through Keynesian policies since it can run budget deficits and print money, whereas state governments can do neither. Furthermore, the federal government doesn’t have to concern itself with the outmigration of capital, jobs and consumer activity in the way that the states do when it comes to raising taxes.
Economic models that use Keynesian multipliers to rationalize individual projects, such as building a sports arena in a depressed area, are also fine as far as they go. But state policy makers should be wary of models that presume to generalize that approach to making to state tax policy.
The BHI approach to modeling a reduction in, say, the state sales tax is focus on how that tax change will expand consumption by making consumption cheaper in the state and thus bring in more retail business and, by doing so, increase production and salaries. Sales tax revenues will go down, but the reduction in those revenues will be partly offset by an increase in income tax revenues and other tax revenues. Government spending will fall but the taxes previously paid to government will show up as increased consumption. The alternative view, that the path to economic expansion lies in combined spending and tax increases does not fit the facts of the current economy at the national level and certainly does not fit those facts at the state level.
Wednesday, March 26, 2014
Blasts from the past for critiques of BHI that don't last.
Another day, another reason for a handy compendium of response to "critiques" of BHI's work (and an note on argumentation.)
Update: Keynesian v. Classical Methods in Modeling State Tax Policy (November 2013)
Response to Rep. Hunter (March 2014)
Response to Rep. Hunter (March 2014)
An Appeal to Facts in a “Fact Check”: Response to Critique of BHI's Renewable Portfolio Standards studies (November 2013)
BHI’s response to TP’s Climate Progress blogger Michael Conathan’s critique of NJ wind farm study (August 2011)
The Beacon Hill Institute’s Tax Analysis Modeling Program: A Response to Charney (April 2010)
The Beacon Hill Institute’s Tax Analysis Modeling Program: A Response to Charney (April 2010)
The Beacon Hill Instituteʹs Analysis of Pennsylvania Tax Policy: STAMPing Out the Nonsense from Our Critics (July 2009)
Information about the BHI State Tax Analysis Modeling Program (October 2012, rev)
A brief primer on the motive fallacy.
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