IT MAY BE THE ECONOMY (stupid), BUT IT'S NOT ECONOMICS

If I am a legend, then why am I so lonely? ~ Judy Garland

It's not hard to understand why economists may now be among the loneliest professionals. All too often, we suggest that a beneficial, economically-appropriate solution for some public problem (e.g., environmental degradation, decaying infrastructure, budget deficit) is to increase the price of some good, or to remove nasty subsidies or tax credits that the government provides some industry or consumer group (that when purged would have the same effect – increasing goods or services prices). Like virtually all economies, the US government has long provided a multitude of direct and indirect subsidies to a broad array of producers and consumers. Economists, imbued with theory that places a premium on attaining economic efficiency[1] and societal welfare maximization, argue that such subsidies and too-low prices are inapt because society's economic optimum won't be achieved. Economists of varying political persuasions have offered such policy prescriptions for decades.

Unsurprisingly, few consumers are willing to consider paying higher prices a preferred outcome for themselves. After all, who among us personally wants to have our gasoline, food or electricity cost more, or our mortgage or health-care payments rise? The status quo of continued subsidized, low prices rules. In other words, culture trumps economics.

In this regard, a principal difference between economists on the left and right is which prices need to be raised. For example, neocon economists seem far less troubled by government-subsidized fossil energy prices; liberal economists often can rationalize subsidized food stamp programs and Pell grants.

For a long time consumers and producers have been coddled into thinking that not only prices for "necessities" (an ever-expanding term of reference) should remain low, but that they're entitled to them staying low, come hell or high deficits. In a sense, this is the flip side of the Far Right's obsession (one of many) with lowering or eliminating taxes. Logic and economics really don't enter into the argument, only judgment that taxes are bad since they fund government programs that don't work or, worse, are "collectivist" (to use Paul Ryan's description of Social Security). More specifically, conservatives object to such government programs because they don't really help me. This attitude is particularly frustrating when we hear statements from Tea Partiers and their ilk that they would be better off if only the government would get out of Medicare and Social Security – or other government benefit/subsidy programs they participate in.

Mitten's purloined remarks given at a fundraiser stating that 47% of citizens don't pay taxes and are freeloaders receiving government largesse prompted a wave of critical discussion and response. The New York Times posted a blog asking readers to identify which of 21 listed Federal government support programs (e.g., Head Start, unemployment insurance, Pell grants, Medicare, veterans' benefits, employer-subsidized health insurance) they have benefited from. The blog states that 96% of Americans have taken part in and benefited from such programs at one time or another, including folks like Mittens' and Ryan's family members.

No matter who wins the presidential election next week, our economy is likely to continue slowly gaining strength over the coming year. Our GDP growth – measured last week at 2% for the 3^rd quarter of 2012 – is still not high enough to quickly reduce our stubbornly-high unemployment, but it's higher than before.

What's less certain is what Democrats and Republicans will do about the "fiscal cliff" that overhangs the government in December. I am quite certain their economic advisors will ultimately feel fairly lonely and ignored.

Suggestions from economists to public decision-makers to increase tax revenues and/or reduce subsidy and entitlement expenditures will once again fall on politicians' deaf ears. Well-founded economic suggestions that include increasing tax revenues, decreasing tax expenditures, making Medicare, Medicaid and Social Security benefits means-based (the higher one's income or wealth, the lower your benefits) and increasing the qualifying age  for receiving benefits (make it higher than 65) – changes that other nations with structural deficits have already done – will fall to the storms of protest by well-financed interest groups. The so-called "grand compromise" to resolve our unsustainable structural deficit will be thrown in a ditch far from the path of economic progress for all citizens in favor of some partial political "solution" that once again temporizes with a kick of the can down the road.

Perhaps we economists are always to be relegated to the lonely crowd. So it goes…

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[1] Economic efficiency describes a market or economy that is producing what people want at least possible cost – or in plainer English, performing a task (like providing some good) right. By contrast, effectiveness is doing the right thing.

GREENER STOCKHOLDERS?

I try to buy stock in businesses that are so wonderful that an idiot can run them.

Because sooner or later, one will. ~ Warren Buffett

A recent New York Times article by Tyler Cowen suggests an alternative to breaking up the "too big to fail" banks; namely, increase the fiscal liability for major financial institutions through their shareholders. Prof. Cowen suggests for every dollar a bank shareholder invests, he/she becomes liable for at least $1.50 worth of losses as insolvency approaches or occurs. He proposes by making shareholders directly liable for the costs that bank failures impose on society, banks could become more adept (and motivated) at sorting out the risks associated with their activities and tactics without having to increase regulatory overview or split up behemoth banks. His idea apparently is gaining some support, although the article does not state how this fundamental change in shareholder responsibility could be enacted.

I think Prof. Cowen's clever idea should be expanded way beyond the finance sector. It should be applied as one solution to the classic problem of how to deal with negative environmental externalities.

But first, some background. Until recently, and in tandem with other market-oriented policies generally favored by Republican policy-makers, the regulatory machinery of government has increasingly focused on using “market” mechanisms to resolve environmental issues like air and water pollution. Public deregulation of the airlines and to a lesser extent of the electric utilities was an early example of such regulatory policy shifts away from traditional, centralized “command and control” mechanisms. In the environmental policy arena the emergence of so-called market-based (M-B) mechanisms for incenting companies to reduce production of environmental effluents, such as greenhouse gases (GHG), gained some prominence.

Two principal M-B mechanisms have been considered, Cap-and-Trade (C&T) and a Carbon Tax (CT), where carbon-based materials (e.g., fossil fuels) are taxed according to their carbon (CO2-producing) content. Cap-and-trade became a favored market-based environmental mechanism for public policy. There are several examples: The Regional Greenhouse Gas Initiative (RGGI), involving states from Maryland to Maine (with Pennsylvania and Canadian provincial governments as “observers”), is a C&T scheme initiated by New York in 2003 to reduce CO2 emissions. The European Union’s Emission Trading scheme, started in Jan 2005, involves each of its 25 nation states, is currently the world’s largest M-B emissions trading market. In Feb 2007, California governor Arnold Schwarzenegger, along with other western governors, created The Western Climate Initiative (WCI) that originally committed California, Arizona, New Mexico, Oregon and Washington to create a C&T-based regional system by Aug 2008 to reduce GHG emissions. As of Jan 2012, the WCI parties include California and four Canadian provinces, British Columbia, Manitoba, Ontario, and Quebec. Every other US state has now dropped out of the WCI.

In various ways these two mechanisms add to the market price of these goods, so that price better reflects environmental impacts. Although it merits no substantive discussion, there is a third policy alternative: to do nothing. This is what the Bush administration followed by myopically and unsustainably assuming it could continue to live in that great Egyptian river, denial. Although during its halcyon, early days the Obama administration stated its interest in following a much more active plan for environmental mitigation. To date nothing significant has come of this to the consternation of many. President Obama cannot be accused of swimming in denial, but has displayed apparent ambivalence (at best) about enacting new M-B environmental mechanisms to counter growing environmental hazards.

As mentioned above, with the notable exception of electricity markets, efforts in the US to make a good's price better reflect the actual environmental costs associated with its production and distribution have failed, in part because of fairness issues. Even advocates of C&T and/or a carbon tax have to conjure up complex means for distributing tax or permit revenues to lower-income folks in order for the M-B mechanisms to not end up having distinctly regressive effects.

Instead of new federal M-B action to relieve continuing environmental degradation, perhaps it's time to engage the Republicans' much-loved equity markets to directly remediate environmental impacts. This could be done by adapting Prof. Cowen's idea of increased shareholder liability to reflect the cost of environmental clean-up.

There would be at least two (2) advantages to significantly broadening firms' stockholder responsibilities to include the social costs (and benefits) of environmental performance. (1) It would elevate the market value of firms that perform better than others – or who take advantage of this new basis of stock value by supplying technology/equipment that contributes to the firm becoming "greener." (2) By its very nature, it would internalize the costs of remaining a polluter and the benefits of becoming greener through the price of firms' equity, rather than other M-T based schemes that would almost exclusively affect the price of the firms' final products. Equity-holders, not just product purchasers, would have a direct stake in a firm's improving environmental performance. Stock prices of "dirty" firms (eg, coal producers) would fall (unless they quickly figured out how to become significantly greener), and that of "clean" companies (eg, renewable energy producers) would rise. Incentives to make our environment healthier would be closely aligned with stock prices, not merely EPA regulations.

All this without direct government regulation of the environment. What could be more beneficial for cleaning up our environment than making stockholders environmentally (not just fiscally) greener?