Tag Archives: subsidies

Affording My Brave New World

An even longer one. Sorry.

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Even if you found yesterday’s post persuasive, a UBI seems politically impossible and cost prohibitive.

Politically, shifting from a paternalistic and judgmental “welfare” system to one awarding benefits based upon membership in the polity would not only require a significant culture change, but would be vigorously opposed by the large number of companies and individuals whose interests are served by America’s current patchwork of programs, subsidies and policies.

Then there’s the issue of cost.

Although Americans’ deeply-ingrained belief that people are poor because they made bad choices or didn’t work hard enough continues to be a barrier to a more generous and equitable social safety net, the most significant impediment to passage of a Universal Basic Income is the argument that has consistently been made to thwart universal healthcare– that America, rich as the country is, simply cannot afford such a Brave New World. This argument flies in the face of evidence from counties with far more robust safety nets: In 2012, the U.S. spent an estimated 19.4% of GDP on social expenditures, according to the Organization for Economic Co-operation and Development. Denmark spent 30.5%, Sweden 28.2% and Germany 26.3%. All of these countries have a lower central government debt to GDP ratio than the United States.

While specific economic recommendations aren’t possible in the absence of concrete, “fleshed out” policy proposals, it’s possible to identify ways in which universal programs might be financed, and how they might affect economic growth. The short answer is that both the UBI and some version of Medicare-for-All could be funded by a combination of higher taxes, savings through cost containment, economies of scale, reduction of welfare bureaucracy, the elimination or reform of existing subsidies, and meaningful reductions in America’s bloated defense budget.

Debates over taxes rarely if ever consider the extent to which individual taxpayers actually save money when government relieves them of the expense of a service. Even now, requiring citizens to make out-of-pocket payments for such things as scavenger services (in lieu of municipal garbage collection), or private police and fire protection or schooling, would vastly exceed the amounts individual households pay in taxes for those services. Low-income citizens, of course, would be unable to afford them.

The American public is positively allergic to taxes, even when a majority financially benefits from them. If low-and-middle income American families did not have to pay out-of-pocket for health insurance, and could count on a stipend of $1000/month, most would personally be much better off, even if they experienced increases in their tax rates. They would likely see other savings as well: for example, if the U.S. had national health care, auto and homeowners’ insurance rates could be expected to decline, because insurance companies wouldn’t have to include the costs of medical care in the event of an accident or injury in their actuarial calculations. Research also predicts the country would see a decline in crime, child and spousal abuse and similar behaviors that have been found to increase under the stresses associated with poverty. (The extent of such reductions and the cost savings attributable to them is speculative, but a substantial level of abatement seems likely.)

Most tax increases, obviously, would be levied against those capable of paying them. Americans used to believe in progressive taxation, and not simply to raise revenue. Taxes on the very wealthy were originally conceived as correctives, like tobacco taxes, that should be judged by their social impact as well as their ability to generate revenue. High tax rates on the rich were intended to reduce the vast accumulations of money that serve to give a handful of people a level of power deemed incompatible with democracy.

A recent report from the Guardian calculated the results of (relatively modest) increases in taxes on the very rich.

Right now they pay about 30% of their income in taxes. Increasing their overall average tax rate by about 10 percentage points would generate roughly $3tn in revenue over the next 10 years, while still leaving the 1% with an average post-tax annual income of more than $1.4m. (That new tax rate, by the way, would be about the same as the overall rate the richest 1% paid back in the 1940s and 1950s.)

As indicated, in addition to reducing inequality, progressive taxation does raise money, and there is widespread agreement that the very rich aren’t paying their share. At the 2019 Davos World Economic Forum, Dutch historian Rutger Bregman caused a mini-sensation by telling the uber-wealthy assembled there than the “real issue” in the battle for equality is tax avoidance and the failure of rich people to pay what they should. Momentum is clearly building for more progressive tax rates than the United States currently imposes.

There is also growing anger directed at the generosity of various tax credits and deductions, aka “loopholes,” that allow immensely profitable corporations to reduce their tax liabilities (or escape them completely). The use of offshore tax havens and other creative methods of eluding payment devised by sophisticated tax lawyers employed by the uber-wealthy is an ongoing scandal.

Real-world experiments like Governor Sam Brownback’s tax cuts in Kansas confirm that, contrary to the ideological arguments against imposing higher taxes on wealthy “makers,” high marginal rates don’t depress economic growth and cutting taxes doesn’t trigger an increase in either job creation or economic growth. In 1947, the top tax rate was 86.45% on income over $200,000; in 2015, it was 39.60% on income over $466,950. During that time span, researchers have found very little correlation between economic growth and higher or lower marginal rates. In 2012, the Congressional Research Service published a research study that rebutted the presumed inverse correlation between tax rates and economic growth.

Climate change is affecting America’s weather, increasing the urgency of efforts to reduce carbon emissions and increase the development and use of clean energy sources. Yet the United States spends twenty billion dollars a year subsidizing fossil fuels, including 2.5 billion per year specifically earmarked for searching out new fossil fuel resources, at a time in human history when the development of those resources is contraindicated. According to Oil Change International, permanent tax breaks to the US fossil fuel industry are seven times larger than those for renewable energy. At current prices, the production of nearly half of all U.S. oil would not be economically viable but for federal and state subsidies.

During the 2015-2016 election cycle oil, gas, and coal companies spent $354 million in campaign contributions and lobbying, and received $29.4 billion in federal subsidies in total over those same years – an 8,200% return on investment. The OCI report concluded that: “Removing these highly inefficient [fossil fuel] subsidies – which waste billions of dollars propping up an industry incompatible with safe climate limits – should be the first priority of fiscally responsible climate, energy, and tax reform policies.” Not incidentally, eliminating these subsidies would free up funds for other uses, including the social safety net.

Then there are farm subsidies– another 20 Billion dollars annually. Arguments for and against terminating these subsidies are more complicated than for fossil fuel subsidies, but the case for means-testing them is strong.  In 2017, the USDA released a report showing that approximately half the money went to farmers with household incomes over $150,000. As Tamar Haspel wrote in the Washington Post, “That means billions of dollars, every year, go to households with income nearly three times higher than the median U.S. household income, which was $55,775 that year.”

Farm subsidies were created during the Depression in order to keep family farms afloat and ensure a stable national food supply. Since 2008, however, the top 10 farm subsidy recipients have each received an average of $18.2 million – that’s $1.8 million annually, $150,000 per month, or $35,000 a week. These farmers received more than 30 times the average yearly income of U.S. families. Millionaires are benefitting from a program originally established to protect family farms during times of economic distress.

Most citizens understand why government should not be providing billions of dollars to support companies that make climate change worse, or adding to the bottom lines of already-profitable corporate farms. Efforts to cut the military budget encounter genuine anxieties about endangering national security, as well as more parochial concerns from lawmakers representing districts with economies heavily dependent upon military bases or contractors. Those concerns may explain why U.S. military spending in 2017 was over 30% higher in real terms than it was in 2000.

The United States will spend $716 billion in 2019, and annually spends more than twice what Russia, China, Iran and North Korea spend collectively.

Critics of the military budget make three basic arguments: the budget is much bigger than threats to U.S. security require; very little of the money appropriated supports efforts to fight terrorist groups that pose the real threat in today’s world; and the countries that might threaten America  militarily are historically few and weak. (Russia, for example, has an energy-dependent economy roughly the size of Italy’s. According to America’s intelligence community, its efforts to destabilize the U.S. are made through social media, assaults by “bots,” and hacks into vulnerable data repositories, not military action.)

The massive amounts that America spends on its military are used to support bases and troops that are ill-suited to the conduct of modern-day defense. (Even the Pentagon has estimated that base capacity exceeds need by 20%) The existence of this enormous military capacity also creates an incentive to substitute military intervention for the exercise of diplomacy and soft power (as the Japanese proverb warns, when the tool you have is a hammer, every problem looks like a nail.)

An argument can also be made that we are supporting a military establishment that is prepared to fight the last war, not the next one.

As one military expert has written, “counterterrorism is poorly served by manpower-intensive occupational wars, which rarely produce stability, let alone democracy.” He argues the U.S. could safely cut the military budget by 25%; even if he is wrong about the size of the savings that could be realized, knowledgable observers suggest that modernizing military operations, restraining America’s all-too-frequent interventions into the affairs of other countries, and focusing on actual threats would translate into very significant savings.

The elimination of fossil fuel subsidies, and the reduction of farm subsidies and military expenditures would allow lawmakers to achieve substantial savings while pursuing important policy goals. The government ought not be abetting climate change or further enriching wealthy Americans, and it is past time to reconfigure national defense to meet the challenges of the 21st Century.

Andy Stern lists a number of ways a UBI might be funded, including “cashing out” all or most of the existing 126 welfare programs that currently cost taxpayers $1 trillion a year. The UBI would make many if not most of these programs unnecessary.

Stein also lists a number of targeted tax proposals, including a Value Added Tax (VAT), that have been suggested by economists supportive of a UBI. As he points out, these and other proposals constitute a “menu” of possibilities. (Another example: If the UBI allows workers to cover basic essentials, taxpayers would be relieved of the need to supplement the wages of McDonalds and Walmart workers,  saving government some ten billion dollars annually.) If and when America has a Congress that is serious about reforming both our democratic decision-making structures and our social infrastructure, that menu provides a number of options from which to choose.

America’s problem is a lack of political will to confront the special interest groups that currently feed at the government trough, not a lack of realistic funding mechanisms.

Follow The Money

Want to know what America’s real priorities are? Easy; just follow the money.

Some of what we find when we examine federal spending isn’t a surprise. We’ve all watched as the Trump Administration has eviscerated the EPA, for example, so cuts and rollbacks there may infuriate but not surprise us. After all, Trump has dismissed climate change as a “Chinese hoax,” eliminated subsidies for clean energy, and slapped tariffs on solar panels.

Given this administration’s well-known bias against science, evidence and clean energy–not to mention Trump’s fondness for the dying coal industry–I shouldn’t have been surprised by the general thrust of a recent study of America’s federal subsidies for fossil fuels  by the International Monetary Fund.

But I was.

Because the amount of the subsidy was staggering.

The United States has spent more subsidizing fossil fuelsin recent years than it has on defense spending, according to a new report from the International Monetary Fund.

The IMF found that direct and indirect subsidies for coal, oil and gas in the U.S. reached $649 billion in 2015. Pentagon spending that same year was $599 billion.

The study defines “subsidy” very broadly, as many economists do. It accounts for the “differences between actual consumer fuel prices and how much consumers would pay if prices fully reflected supply costs plus the taxes needed to reflect environmental costs” and other damage, including premature deaths from air pollution.

Since most observers consider the U.S. defense budget to be hopelessly bloated, the fact that fossil fuel subsidies exceed that budget is absolutely mind-blowing.

The study concluded that if fossil fuels had been fairly priced in 2015–i.e., priced without those direct and indirect subsidies by the federal government– global carbon emissions would have been reduced by 28 percent, and deaths from fossil fuel-linked air pollution would have been cut in half.

People (like me) concerned about the environment may not have recognized the enormity of the fossil fuel subsidies, but most of us were pretty sure that a lot more federal dollars go to support fossil fuels than are directed to programs incentivizing the development of clean, alternative energy. The IMF study confirmed that suspicion.

And then there’s the extent to which our financial support of fossil fuels exceeds our investment in education. Seeing those numbers was another gut punch. After all, Americans give lots of lip service to education; we’ve had “education Presidents,” and it is the rare politician who doesn’t make education a prominent part of his or her platform.

Nevertheless, according to Forbes Magazine, that same IMF study determined that the U.S. spends ten times more money propping up the fossil fuels that drive climate change than we spend on education.

Globally, fossil fuels receive 85% of all government subsidies. What if we diverted just a portion of the U.S. subsidies and used that money to improve public education?

Virtually every candidate for the Democratic Presidential nomination has expressed concern about climate change, and an intention to combat it. Voters can determine just how committed they are to the environment by asking whether the candidate plans to continue the obscene subsidies that waste our tax dollars, pad the bottom lines of immensely profitable oil and gas interests, and prevent us from effectively addressing an existential threat to the planet.

Just think what we could do if we redirected a substantial portion of the defense budget (as, interestingly, the Department of Defense itself has advocated) and entirely terminated the unnecessary, wasteful and arguably immoral subsidies for fossil fuels.

 

 

What Happened to Faith In The Market?

I’m a capitalist. A real one, not the Congressional variety. I believe in (properly regulated) markets, with the important caveat that I believe in markets in those areas of the economy where markets work. (Markets only work, I constantly remind anyone who listens, in transactions with a willing buyer and a willing seller, both of whom are in possession of all information relevant to the transaction.)

Being predisposed to competition and markets doesn’t mean I think government’s role is unimportant, or that public assistance is never warranted.Government can help markets in a number of ways: outlawing monopolies and anti-competitive practices or, in compelling cases, granting subsidies or tax incentives to industries deemed critical to the national interest.

It won’t surprise anyone reading this to discover that, in today’s America, subsidies are more often used to suffocate progress and protect profitable, established industries than to move the nation forward.

American business spokespersons can be counted on to profess devotion to markets. They can also be counted on to avoid competition whenever possible, because their belief in the market’s level playing field is wholly fictional.

As Vox recently reported,

The coal industry and its allies in the Trump administration have recently devoted considerable energy to arguing that subsidies to renewable energy have distorted energy markets and helped drive coal out of business. “Certain regulations and subsidies,” says Rick Perry, “are having a large impact on the functioning of markets, and thereby challenging our power generation mix.” You can guess which regulations and subsidies he’s talking about.

This is nothing new, of course. It is in keeping with a long conservative tradition of challenging the economic wisdom and effectiveness of energy subsidies.

At least, uh, some energy subsidies.

Energy analysts have made the point again and again that fossil fuels, not renewable energy, most benefit from supportive public policy. Yet this fact, so inconvenient to the conservative worldview, never seems to sink in to the energy debate in a serious way. The supports offered to fossil fuels are so old and familiar, they fade into the background. It is support offered to challengers — typically temporary, fragmentary, and politically uncertain support — that is forever in the spotlight.

The article goes on to shine that spotlight on those older subsidies, beginning with the twenty billion dollar annual production subsidy we taxpayers provide to the fossil fuel industries that contribute massively to climate change. We provide that financial assistance despite the fact that these companies are very, very profitable.

The twenty billion dollar figure is only a beginning. It subsidizes only direct production costs.  Another $14.5 billion in consumption subsidies also benefit fossil fuel companies–things like the Low Income Home Energy Assistance Program(LIHEAP), which helps lower-income residents pay their (fuel oil) heating bills.

It also leaves out subsidies for overseas fossil fuel projects ($2.1 billion a year).

Most significantly, OCI’s analysis leaves out indirect subsidies — things like the money the US military spends to protect oil shipping routes, or the unpaid costs of health and climate impacts from burning fossil fuels. These indirect subsidies reach to the hundreds of billions, dwarfing direct subsidies — the IMF says that, globally speaking, they amount to $5.3 trillion a year. But they are controversial and very difficult to measure precisely.

Finally, OCI acknowledges that its estimates of state-level subsidies are probably low, since many states don’t report the costs of tax expenditures (i.e., tax breaks and credits to industry), so data is difficult to come by.

The best available estimate is that energy companies get $20.5 billion annually in corporate welfare, of which 80 percent goes to oil and gas, and 20 percent to coal. And we don’t know how much remediation will eventually add to that figure.

Vox’s summary says it all better than I could:

If you ask people in fossil fuel industries, their support staff in conservative think tanks, or fossil-state politicians, they will tell you why these fossil fuel production subsidies are necessary. It’s always been this way. They’re more than paid back by tax revenue. Other industries get them too. (For the record: More than half the $20 billion is available to fossil fuels alone). They create jobs. They’re important for national security. Tax expenditures aren’t subsidies at all, if you think about it. Etc.

If the endless debate over energy subsidies has taught me anything, it’s that nobody thinks their own subsidy is a subsidy — and no one outside think tanks and universities really gives a damn about the economic distortions of subsidies as such. Everyone thinks their favored energy sources deserve support and the other guys’ don’t. Period. They use whatever economic argument is handy — “picking winners” if you’re against the subsidy, “supporting jobs” if you’re for it — but such arguments are always instrumental. As I said recently about coal’s rent-seeking, there are no true free marketeers in struggling industries.

Speaking of rent-seeking, here’s a final fun factoid from OCI: In the 2015-2016 election cycle, oil, gas, and coal companies spent $354 million in campaign contributions and lobbying and received $29.4 billion in federal subsidies in total over those same years — an 8,200% return on investment.

The next time some corporate poo-bah piously invokes the genius of the market, tell him to give it a rest. It’s abundantly clear that no one really wants to “let the market decide.”