Better than Baseball by David Montgomery


Although October has been depressingly familiar for Washington baseball fans, it has been just the opposite for political observers. While Congress continues to dither, the President has been moving ahead to reverse the expansion of the Administrative State. And he has done so by using his executive authority to force Congress to do the work assigned to it by the Constitution.

In the case of immigration, the President sent a letter to Congress with a comprehensive plan for strengthening enforcement of immigration laws and screening out those who would be a threat or a burden. And he has been explicit about the message he wants Congress to hear: If you care so much about those who are now in the United States illegally, pass a law to change their status. I do not have the authority to do that on my own. Quite a contrast to President Obama’s “I’ve got a pen and I’ve got a phone. And that’s all I need.”

In the case of Obamacare, the President sent the liberal press all atwitter by terminating subsidies to insurance companies losing money under Obamacare. Again, he sends a message to Congress that they must fix the structural problems in Obamacare and not rely on the public purse to hide them.

Third, his EPA Administrator has declared that the Clean Power Plan put into effect by his predecessor is illegal, because it goes beyond what Congress authorized EPA to do in the Clean Air Act.

In taking these actions, the President is fulfilling what I saw as the most important of his campaign promises, to stop government agencies from issuing regulations that make new laws never passed by Congress. That is, he is challenging and attempting to rein in the Administrative State.

I admire the subtlety in President Trump’s cancellation of subsidies to insurance companies for many reasons. The subsidies make the insurance companies fat and happy and motivate them to work against his goal of reforming ACA. His action shows that the excessive delegation of authority made by Congress in ACA can be used to reduce as well as increase the administrative state. And he tosses the political problems back to Congress in a way that should send the message that Congress cannot avoid political responsibility for legislation by leaving all the details up to bureaucrats.

The critical flaw in the Clean Power Plan that took it to the Supreme Court is its insistence that electric utilities pay others to reduce emissions on their behalf in order to satisfy regulatory requirements. This is contrary to the explicit language in the relevant parts of the Clean Air Act that such requirements be feasible for the regulated companies to meet on their own.

I am known as an advocate of emission trading where appropriate, but only when applied through Constitutional processes in which its suitability for a particular task is examined openly, not by an agency using legal casuistry to require something prohibited by the clear wording of the law.

Likewise, I fully support the goal of open borders for all who qualify to be future citizens, but equally, strongly opposed President Obama’s refusal to enforce a clear requirement of the law – not to mention his willingness to accept the lazy and criminals along with those who support themselves and obey the law.

There are much broader issues at stake here than just these specific abuses of powers delegated by Congress in regard to immigration, environmental regulation, and Obamacare. It is the growing role of unaccountable administrative agencies in creating rules and regulations that go far beyond anything considered or authorized by Congress. Philip Hamburger calls this the “Administrative State” and describes its influence by saying “Americans must live under a dual system of government—one part established by the Constitution and another circumventing it.” The Trump Administration has been trying to rein in the Administrative State since its first day in office through its deregulation initiatives.

First, the Administration and Republicans in Congress are reversing the flood of regulations issued by his predecessors. Economically significant rules are defined as those with an annual cost of $100 million or more, and during the Obama Administration, almost 500 of these regulations with an estimated burden of $890 billion were issued. The burden of regulation accelerated under Obama, but it has been growing since the 1970s. Between 1995 and 2016, Congress passed 4260 public laws but the Executive Branch issued 88,899 new final rules. Since regulations have rarely expired or been repealed, this adds up to a growing cumulative burden. These regulations proliferate – 27 new regulations for every new law – because Congress delegates its legislative responsibilities to administrative agencies, which have proceeded without hindrance beyond what Congress intended.

In comparison, under President Trump agencies have pulled or suspended 860 pending regulations, and the number of economically significant regulations still in process fell to 58.

One of President Trump’s first actions was to require all agencies to re-examine their past regulations and eliminate two existing rules for each new one they issue. His Executive Order also required agencies to reduce the burden of existing regulations by an amount at least as large as the cost of any new regulations. Some of my colleagues in the field of environmental economics complained about this order on the grounds that costs should be weighed against benefits and not be the sole criterion. Although I agree with the principle, I am unconcerned about the application because among the regulations issued under the Obama Administration there are ample to choose from that do no net good.

This is also an area where Congress has done good, by exercising its authority to disapprove regulations and especially those issued by a lame-duck President. Voting under the Congressional Review Act, which limits debate on disapproval resolutions, Congress repealed 14 midnight regulations issued in the last days of the Obama Administration.

These actions are the beginning of an effort, with a clear populist base, to rein in the Administrative State that has grown in power and size for decades. Visible actions to limit and repeal unnecessary regulations only address part of the problem of the Administrative State. Like the iceberg, most of the Administrative State is hidden. Wayne Crews of the Competitive Enterprise Institute has called this “regulatory dark matter,” which he defines as “thousands of executive branch and federal agency proclamations and issuances, including guidance documents, memoranda, bulletins, circulars, and letters, that carry practical (if not always technically legally) binding regulatory effect.” None of these show up in the counts of regulations in the Federal Register, and they are subject to none of the public comment and appeal processes that apply to published regulations.

This is also a target of the Administration, and a particularly difficult one since decisions behind these memoranda and guidance letters and individual rulings are not made in open regulatory processes. They are made day to day by permanent bureaucrats buried in agencies and often difficult or impossible for their political superiors to reach and control.

One of the reasons for the expansion of the Administrative State before President Trump was the deference of the courts to decisions of regulatory agencies that did the proper paperwork, no matter how vague the facts or casuistical the legal arguments justifying them.

This is the major uncertainty about whether President Trump will succeed. Courts have already shown a willingness to block his Executive Orders that they never showed to his predecessors. Thus the question is whether courts will defer as readily to an Administration that wants to reduce the Administrative state as to one that wants to expand it. As Philip Hamburger put it “The courts often defer to the executive—both to its interpretations of law and to its fact-finding” and he decries this as depriving those who challenge regulations of due process.

What really matters here is the attitude of 5 Supreme Court justices. Some, like Justice Stephen Breyer, have attitudes toward actions of regulatory agencies that appear to go even further and sound more like admiration than deference. Once again, the key to Making America Great Again may be less in what regulations the President abolishes than in whom he appoints to the Supreme Court.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.


Setting the Record Straight on Tax Reform by David Montgomery


Though I share Rob Ketcham’s concern about the risks of a last minute effort at tax reform, I do so for almost exactly opposite reasons.  My greatest fear is that a tax reform bill will pass with just 50 votes in the Senate, but that it will be so far from the original Brady-Ryan plan to be Tax Reform In Name Only.  If that happens, we will have missed a once-in-a-generation opportunity to complete the process that Ronald Reagan started, of fundamentally changing our tax code into one that encourages Americans to save and invest at home.

This does not seem to be Mr. Ketcham’s concern.  He seems to think that President Trump invented tax reform last Wednesday, when in fact Speaker Ryan spent two years developing the Blueprint for Tax Reform he released even before President Trump won the election.   The President’s message on Wednesday rested on a massive effort by the country’s greatest experts on taxation.

Having read these misrepresentations of tax reform, it appears that I need to try once again to explain the Brady-Ryan plan and why it would lead to substantial increases in investment, wages and economic growth.

The principles that guided Speaker Ryan and Chairman Brady were that tax reform must encourage investment, eliminate incentives for American companies to move overseas, and keep the deficit from increasing.  For personal taxes the goal was to simplify and lower taxes on the middle class.  Every aspect of tax reform in original Brady–Ryan plan that I described earlier this year was carefully designed to serve at least one of those objectives.  

Mr. Ketcham ignores this and singles out two provisions of that plan, elimination of the AMT and the death-tax, as examples of the President Trump’s selfish interest in tax reform.  Contrary to Mr. Ketcham’s allegations, the AMT has unintentionally become a paperwork and financial burden on the middle class and the death tax closes family farms and businesses. And despite the impression Mr. Ketcham creates, these are minor components of tax reform with little revenue effect.

The major parts of the Brady-Ryan plan address the shortfall of investment since the Great Recession.  According to the Bureau of Labor Statistics, growth in labor productivity and output from 2008 to 2016 was lower than for any comparable period of time since 1948.   There are many factors that affect productivity and growth, but investment in new plant and equipment and in R&D are most important.  

In 2010 net private investment had fallen to 1% of GDP, and by 2015 it had struggled back to about 4%.  From 1960 to 2008 net private investment never fell below 5% of GDP, despite Vietnam, oil embargoes, stagflation, and more oil price shocks.   The current lack of investment holds back wage growth as well, because wages cannot increase without productivity growth.  Past cycles in investment and the current low are clearly correlated with increases and decreases in the tax burden on investment.

Jobs and investment have also moved overseas as U.S. companies have moved their headquarters, invested in new factories and R&D centers, and sold themselves to other countries where they pay lower taxes.  This “base erosion” has also moved taxable income out of the U.S. and contributed to growing deficits.

Business pages report on the ballooning Federal deficit nearly every day, so that designing tax reform to avoid contributing to the deficit is an obvious policy goal.  But that is not the only reason it is central to tax reform in the Trump administration.  As long as Democrats make obstruction of President Trump’s initiatives their highest priority, the only way to pass legislation is by using the budget process to move tax reform without their help.

There is nothing underhanded about using the budget process in this way, but it is not a slam dunk.  The process starts with a Budget Resolution, which sets targets for revenues and spending and contains instructions for the committees that flesh it out.  Once those committees have acted, each House of Congress must pass a reconciliation bill to put the committee actions together into a package consistent with the original budget resolution.  That reconciliation bill requires only a simple majority to pass in each house, and it may contain new legislation if it is germane to the budget.   The Congressional Budget Act was designed from the start to make sure that a budget could not be held up by a minority.

The plan this year was to use reconciliation to pass tax reform.  This is where avoiding increases in the deficit comes in.  First, the House Budget Committee instructed the House Ways and Means Committee, which originates tax legislation, to make tax reform “deficit neutral.”  Second, the Senate budget process is constrained by the so-called “Byrd rule” which prohibits any tax cuts that would increase the deficit after 10 years.   That means that to pass the Senate, tax cuts must either expire after 10 years, as happened with President Bush’s tax cuts, or be designed to maintain or lower the deficit thereafter.

So now we see that tax reform must be deficit neutral over the next 10 years as a goal of budget policy and thereafter as a precondition for passage.  But who decides?

Mr. Ketcham sees all sorts of chicanery here.  According to the rules of the House and the Senate, the Budget Committees decide.  In the normal course of business, they rely on the Congressional Budget Office and staff of the Joint Committee on Taxation for revenue estimates.  Until recently, these estimates were based on a single macroeconomic forecast that was assumed to be unchanged by the legislation being analyzed.  This “static” approach has worked well for the mass of legislation that is not expected to have a major effect on the economy.

This clearly is not true of major tax legislation, especially when it is designed to increase incentives for and remove obstacles to investment in the United States.  Because of this, the Budget Committees decided that they wanted revenue estimates to take into account how changes in taxation would affect growth of the economy and thereby alter the net effect of tax changes on revenue.  

Adoption of “dynamic revenue estimation” was not popular among many revenue estimators, because it is difficult, requires development of new tools, and strains CBO and JCT’s resources.  I have banged my head on how to do it right myself.  But nobody denied the obvious fact that budget policy will be better informed if some attempt at dynamic revenue estimation is made than if it is not.

Having decided that they want dynamic revenue estimates, it remained up to the Budget Committees whose estimate to accept. Neither the JCT nor CBO have a track record or established role in dynamic revenue estimation, because the entire practice is new. Other independent organizations, like the nonprofit Tax Foundation and the Tax Policy Center, have done dynamic revenue estimates for some time, and the Treasury Department and Office of Management and Budget could also provide them.  

As a matter of law and practice, it is up to the Budget Committees to decide what analysis they want to rely on, and always has been. This is a power and responsibility no different than that of an agency head, member of regulatory commission, or judge who must decide which expert opinion on an economic issue to accept.  Neither CBO nor the staff of the JCT at this point have a monopoly on expertise about the new practice of dynamic revenue estimation.

So now to the merits of the Brady-Ryan blueprint for tax reform and how this week’s announcement by President Trump suggests it might be changed, focusing on stimulus for investment and growth.

The Brady-Ryan plan would stimulate investment in 3 ways – lower tax rates for corporations and pass-through businesses, lower tax rates on investment income, and immediate expensing of all types of investment.  Of these three, analysis by the Tax Foundation shows that immediate expensing is by far the most important.  Their analysis shows that full expensing accounts for about 60% of the increased revenues attributable to accelerated economic growth.

And it is the first provision sacrificed in President Trump’s plan.  Instead of full and permanent expensing, the more recent plan is to allow expensing for a 5-year window and then return to the current rules.  This is just foolish.  Most surveys of businesses I know of find that temporary tax cuts do little to change long-term strategies about where to locate new factories and how much to invest.   

Moreover, the revenue loss associated with expensing is greatest in the first 5 years.  Expensing a large investment can eliminate tax liability in early years compared to depreciating it, but after the deduction of investment expense is fully utilized the company will have no depreciation to claim going forward.  Thus its taxes will increase in later years.   The additional economic growth stimulated by permanent expensing will also offset the early revenue loss, so that the Byrd rule’s requirement for deficit neutrality after 10 years is easier to satisfy.  Giving expensing for only 5 years may limit its revenue loss during the 10-year budget window but just makes the Byrd rule problem worse.

Now I will move to the goal of keeping jobs and investment here at home.  Contrary to what Mr. Ketcham believes, the one-time tax on the retained earnings of foreign affiliates of US companies is not intended to provide a stimulus to investment, but rather to provide revenues to offset the effects of rate reductions and expensing.  His mention of the failure of past “tax holidays” to induce corporations to bring back money they were hoarding overseas is a red herring.   A tax holiday offers a carrot of temporarily lower tax rates on overseas earnings that only means something if there is a stick of much higher taxes in the future.  

The Brady-Ryan plan recognized the futility of that effort.  Instead it and the President’s plan would tax all foreign earnings still held in overseas affiliates of U.S. corporations whether or not they are transferred to the U.S. parent’s books.  This one time tax has the sole purpose of raising revenue.  The second part of both the Brady-Ryan and the President’s plan is to make all future dividends paid from foreign affiliates to US parents tax-free.  The whole idea is to make sure that U.S. taxes don’t keep our corporations from bringing back foreign earnings for dividends or investment in the U.S.   

But these two provisions still don’t address the problem of U.S. companies finding it advantageous to move their factories to foreign countries, so as to avoid U.S. taxes on earnings from manufacturing and R&D done here.

The problem is that other countries generally rebate taxes when a company exports goods produced in that country, and impose their Value Added Taxes or other direct taxes on goods that are imported.   We do not do that – U.S. companies pay income taxes on revenue from exports just the same as they pay taxes on revenue from domestic sales, and foreign companies pay no taxes on income they earn from exporting goods to the United States.

The Brady-Ryan plan had an elegant solution to this problem:  exempt all earnings from exports from income tax and eliminate the deduction from income tax for the cost of imported goods.  All of a sudden, there would be no incentive to move overseas to pay lower taxes on income from goods produced for shipment to the U.S. market or for export to third countries.  In addition, since the U.S. is a net importer, this provision would provide revenues needed to offset the effects of immediate expensing and rate cuts.

Even better, a little thought about how this “border tax adjustment” would affect imports and exports leads to the conclusion that it will be paid for by other countries, not U.S. consumers.  All else being equal, the effect of higher taxes on imports and lower taxes on exports would be an immediate drop in the U.S. trade deficit.  But that cannot happen if tax reform is deficit neutral, because it is also an economic fact of life that our trade deficit mirrors our borrowing from overseas, and that borrowing is driven by budget deficits.  To keep the trade deficit from changing, the dollar will appreciate until the entire burden of the border adjustment is born by our trading partners who will get fewer dollars for what they export and pay more in local currency for what they import.

Unfortunately, our elected representatives have chickened out on the border adjustment.  A coalition of retail interests and big contributors convinced many legislators dependent on their support to declare against the border adjustment before they had any explanation of how it would work.  In its place, the President proposes a minimum tax on all foreign earnings of foreign affiliates of U.S. companies.  This is small beer compared to the border adjustment, fraught with difficulties of defining income to be taxed and preventing companies from avoiding the tax, and will leave U.S. corporations at a disadvantage to foreign corporations that operate in those low-tax jurisdictions.

The proposal to eliminate interest deductions for businesses is a “base broadening” measure intended to raise revenue needed for the rate cuts that will stimulate investment.  It also has benefits of its own, by eliminating a subsidy for debt financing that has made corporations more highly leveraged and prone to bankruptcy, and made it harder for small, dynamic firms that need equity finance to compete.   The President’s plan is to narrow eligibility for the interest deduction rather than eliminating it completely.  This change will weaken its good effects and, more importantly, reduce the amount of lost revenue it can offset.

Thus Mr. Ketcham and I have some areas of agreement.  I do not want to see real tax reform derailed by TRINOs for another generation, and I don’t want contrived budget estimates to conceal the inferiority of the latest incarnation of tax reform to the original Brady-Ryan plan.  I am actually a great deal less worried about the second than the first, because I believe there are plenty of good Republican advocates of tax reform to keep the process honest, if not necessarily going in the best direction.  I think many will share and express my opinion that the most recent proposals are not revenue neutral and that they fall far short of the Brady-Ryan plan in what they would do for investment and growth.  

Finally, to the virtues of bipartisanship in tax reform.  I do not know of anyone in the White House or Republican leadership who would not be delighted to have a bipartisan, permanent, growth-oriented tax bill.  But it takes two to tango.  Singling out Republicans for blame when Democrats show no more willingness to work together for the good of the country is pure partisanship.

To my eyes, the problem is that Democratic leaders have made it very clear that they care only about redistribution in tax reform, no matter what damage that does to incentives and economic growth.  Indeed, President Trump moved toward Democrats’ wish to redistribute income when he indicated willingness to impose a surtax on the highest incomes.  

I tried in my earlier column to add something to attract moderates in both parties by offering an approach to climate change that they should all like.  That was a carbon tax along the lines proposed by George Schultz and other old-time Republicans.  

Their proposal combined a carbon tax that I thought would provide useful revenues in a tax reform package with legislation to remove all the unnecessary regulatory measures that the Obama Administration imposed in its Climate Action Plan.  A double dividend for growth

But readers of this column have had a preview of the likely reaction of the Democratic leadership.  When I made this proposal, our own Senator Van Hollen immediately contacted the Spy to correct the record and make his position clear: more taxes, great, but less regulation, no way.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.


No Easy Solutions by David Montgomery


Once again, attempts by the Senate leadership to design an Obamacare replacement that can gain 50 votes are back in the news. It should not be a surprise that this is a hard task. Very few politicians appear willing to admit that there is no way to give every American all the health care that he or she wants without making someone a great deal worse off.

It is not necessary to be an expert on health economics to diagnose the problems with Obamacare itself and every attempt to replace it. Nobel prize-winning economist Kenneth Arrow did so 50 years ago in an article that started systematic economic thinking on the subject. He emphasized the unique character of the doctor-patient relationship and gave names to three fundamental problems of health insurance: asymmetric information, adverse selection, and moral hazard.

Asymmetric information simply means that the prospective patient knows more about his or her health condition than the insurance company. This means that if everyone is offered identical insurance at identical premiums, those that are relatively healthy will decline to purchase insurance, leaving the insurer with only the less healthy as patients. This is the fundamental problem of adverse selection.

To prevent adverse selection, health insurers may require physical examinations, put limits on coverage of pre-existing conditions, and charge premiums that differ by age, sex, and other factors correlated with health status and unchangeable by the insured. It is also the reason that insurers offer a variety of plans, so that those who believe they are healthy can choose plans with low premiums and limited benefits.

A closely related problem is that having insurance leads to greater use of healthcare unless there is some form of rationing or coinsurance. This is the problem of moral hazard, in which the patient (and doctor) are likely to choose more costly and marginally more effective treatment if a patient has health insurance than if he or she does not.

Insurance companies use coinsurance to provide some incentive for the patient to avoid totally unnecessary expenditures, such as visits to the doctor or emergency room for the common cold. This has been augmented by managed care plans, requirements for pre-approval of procedures, and exclusion of certain treatments. Arrow thought that the relationship of trust between doctor and patient that he observed in 1963 would also reduce moral hazard.

Unfortunately, the healthcare system more broadly seems to defeat these efforts to limit moral hazard. When insurance covers a large portion of costs, hospitals cannot compete for patients on price and instead compete on quality by offering the best and newest equipment and the most famous surgeons. This inflates everyone’s costs Moreover, cost-based insurance reimbursement formulas for hospitals can also encourage premature replacement of equipment.

The elephant in the room for moral hazard is, of course, malpractice liability. A noticeable difference between the United States and countries that are claimed to have better and cheaper health care is that no other country allows the kind of lawsuits that have caused the cost of malpractice insurance and defensive testing and treatment to explode here.And those costs are fully reflected in the pricing of medical services.

The fundamental requirement of an insurance system is that it collect enough premiums to pay claims and build a reserve to cover the uncertainty of needs for medical care. Prior to Obamacare, health insurers used the practices I have described to attract enough subscribers to remain solvent. No one was forced to buy insurance so that premiums and coverage were tailored to maximize revenue while exclusion for pre-existing conditions kept costs down, to the extent permitted by regulators in each of the 50 states. The indigent were covered by subsidized insurance through Medicaid or by hospital emergency rooms that spreads the unreimbursed cost through their paying customers.

Obamacare broke this system by requiring everyone to purchase health insurance, requiring coverage of pre-existing conditions, and limiting the ability of insurance companies to charge higher premiums to groups likely to make higher claims. The result made nobody happy, because it ran into the iron law that the less one group pays into the system, the more others will have to pay in order to keep the system solvent. This is true whether the insurance provider is a for-profit insurance company, a non-profit insurance company or the government.

Despite its ironically inaccurate title of “Affordable Care Act,” the clear purpose of Obamacare was to make sure that every American family was covered by health insurance. This includes those who decided they did not need insurance at the premiums offered by insurance companies, those who could not afford insurance (which is another form of deciding not to participate), and those who were excluded due to pre-existing conditions.

The method of getting each group into the system differed.

The young and healthy were required to buy insurance whether they wanted it or not, and minimal coverage plans were prohibited to ensure that they put more than a toe in the water. This made all of that group unhappy.

Those denied coverage were guaranteed coverage, and insurance companies were prohibited from charging premiums high enough to pay for their expected claims.

Medicaid was expanded to increase subsidies to the poor so that they could afford insurance, and insurance companies were granted subsidies. This necessitated the tax increase that went along with Obamacare.

Premiums for all those who were already insured rose to help pay for all this, and premiums for those forced to buy insurance for the first time became even higher than the premiums they had previously declined to pay. This infuriated those who were getting what they wanted from the previous system.

The failure of Obamacare arose from incompatible goals: universal coverage, limits on premiums charged the highest-risk groups, lower rates or free insurance for the poor, limits on taxpayer subsidies, and no increase in premiums to those already insured.

Those goals proved impossible to achieve simultaneously given the current state of the broader healthcare system. To fix Obamacare, Republicans must decide which goal to sacrifice or else address those broader problems. As usual, politicians on all sides are pretending that there are not any hard choices of who to benefit and who to hurt.

If Obamacare continues to be dealt with in isolation, eliminating coverage mandates will just increase the insolvency of the system as those who never wanted insurance to drop out. That makes it necessary to increase premiums, increase taxpayer subsidies or limit coverage, since insurance companies cannot be forced to operate at a loss forever.

Simple repeal of the Affordable Care Act would work, and the politics are clear. Those who do not want the insurance they are forced to buy would be satisfied, and those who had insurance before would see their lower rates return. Those paying higher taxes to support the current system would also benefit from its repeal. Those with pre-existing conditions would face higher premiums or denial of coverage and Obamacare-based subsidies to allow the poor to afford insurance would cease.

Different political and ethical judgments about which of these groups is most deserving will lead to different preferences about how to change Obamacare, and it is clear that Republican Senators do not agree about those judgments. Unwillingness to admit that difficult choices must be made does not help with resolving such disagreements.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Op-Ed: Would Nelson Mandela Remove Statues of Lee and Jackson? By David Montgomery


Those who want to ban or destroy all symbols of the Confederate States of America need to learn from Nelson Mandela. For no particular reason, I put the movie Invictus in my Blu-ray player last night and viewed it for the first time. It is the story of how Nelson Mandela used the national rugby team of the apartheid government as a means of national reconciliation. Their rugby team, known as the Springboks, were hated by Mandela himself and the black majority as a symbol of apartheid, and an opening scene shows white faces rooting for the Springboks and black faces rooting for their opponent England during the first international match after sanctions on South Africa were lifted.

In a later scene, the South African Sports Union votes to change the name and colors of the Springboks to erase what they saw as symbols of racism. Does this sound familiar yet? Mandela intervenes and insists that the Springboks retain their name and colors. He explains that the Springboks and their colors are revered by the Afrikaaners and that preserving them would be a significant gesture of reconciliation toward the white minority. In another notable scene, Mandela attends a rugby match in which many whites were waving the old Union flag of the apartheid regime. When his assistant whispers that they should be banned, he whispers back that “it is their constitutional right, and we decided already not to ban the flag.”

Invictus no doubt exaggerates the success of Mandela’s support for the Springboks, though South Africans of all colors are now Springbok fanatics. Nevertheless, it was a part of Mandela’s much broader policy of forgiveness and reconciliation, a policy that prevented South Africa from descending into the madness of Zimbabwe and made it a more successful multiracial country than any other in Africa.

Unlike Mandela, politicians of both parties in the United States are pandering to uninformed animosity toward any person, thing or symbol associated with Secession or with how the South fought the Civil War. It is particularly galling that the Republican Governor of Maryland, Larry Hogan, approved the midnight removal of statues of Civil War soldiers by the mayor of Baltimore.

No matter what you think about a historical event or period, erasing the memory of it is always a bad idea. So is destroying symbols that are meaningful to other groups of fellow citizens. It is said that history is written by the victors so that history books say little or nothing about the motivations, conduct or virtues of the losers. We know a great deal more about what the Romans thought of the Carthaginians than what the Carthaginians thought about themselves or the Romans. Our fellow Americans who served the South deserve more of an effort at understanding.

Tearing down statues of predecessors is a universal practice in countries where succession is based on intrigue or coups rather than democratic processes. Stalin and Khrushchev both removed depictions of prior leaders and struck reference to them out of official histories. So does every new dictator who murdered his predecessor along with his supporters or clan.

Surely, no one wants to follow these examples in dealing with the South and the Civil War.

Granted, there are times when seeing a statue toppled is gratifying and consequential – the fall of communism was celebrated throughout Eastern Europe by destroying statues of Lenin, and I cheered as much as anyone at the confirmation that we had won the Cold War. Statues of Hitler and Nazi monuments likewise were eradicated quickly after the Second World War, and Germany banned the Nazi flag just as we seem to be heading toward banning the battle flag of the Army of Northern Virginia.

But not all examples of triumphal destruction of symbols of the previous regime are good ones. Greeks celebrate the soldier who wrapped himself in the Greek national flag and jumped off the Parthenon when forced to desecrate it by Nazi invaders. Muslim victors have destroyed the religious symbols of conquered peoples from the time of Mohammed to the reign of ISIS. The same liberals who were outraged when radical Islamists defaced ancient Buddhist monuments are now applauding the destruction of monuments of the Confederacy.

Unfortunately, some of those who want to remove memorials to Confederate soldiers and leaders and other symbols of secession put the Confederacy in the same moral category as Nazis and see the removal of all signs of the Confederacy as no different from the elimination of Nazi symbols. And they adopt the same triumphalism as ISIS.

That is historically inaccurate, morally indefensible, and an atrocity against civil society. First, let’s take our own example of misdirected outrage. The statue to the Talbot Boys lists the names of men who died in the Civil War. Very few Confederate soldiers owned slaves, and historical accounts that pay attention to who they were and why they fought overwhelmingly to conclude that they fought for the same reasons as all other American soldiers throughout history: to defend their loved ones and communities against aggression and out of loyalty to the men standing next to them. They have been buried side by side by Union troops and given the same recognition as American veterans.

The Southern leaders targeted by Maryland’s governor and the mayor of Baltimore are no less worthy of memory and respect. Robert E. Lee was more conflicted than most. He was opposed to slavery, wanted to work toward its abolition, and tried to prevent secession. It was only after he concluded that Lincoln would not deal peacefully with the South that he took the job offered by his home state of Virginia to lead its army. Stonewall Jackson was one of the greatest tactical commanders in history, and his character and ability need to be recorded and remembered. I honor both men highly and am outraged at seeing their statues removed and names erased. And I am no neo-Nazi or white supremacist.

Granted, there are also statues of evil Southern aristocrats who maneuvered the South into Civil War and scoundrels who benefited from it, but remaining aware of misdeeds and their consequences help us to identify similar acts and politicians today. There are a great many statues of figures not associated with the South or slavery that I would like to see torn down first, not to mention almost all signs naming bridges after politicians.

What I find morally indefensible and a civil atrocity is the accompanying effort to depict anyone who defends the display of the so-called “Confederate flag” or monuments honoring Confederate heroes as a white supremacist or worse. That is at its most innocent a reprehensible form of bullying and name-calling intended to silence anyone who would defend those symbols. In its worse manifestations, it is an incitement to violence, as we have seen in the recent physical attacks by Antifa groups against peaceful citizens of a less left-wing temperament. At most malignant, such name-calling is a predecessor to the kind of laws that let Canadian and German officials jail or fine anyone who flies a prohibited flag or says something offensive to a sensitive group.

Destruction of symbols important to many for innocent reasons is also politically stupid, as Nelson Mandela clearly saw. To paraphrase Mandela’s lines in Invictus, he pointed out to those who disagreed about preserving the Springboks that “we have to live with those who are passionate about this symbol, and destroying it will just alienate them from the united country we want to build. The rainbow coalition contains white as well as other colors.” He could see the difference between symbols of innocent loyalties to teams and the banners of armed resistance to his government. He was also willing to eviscerate the militant arm of his own party.

The destroyers of Civil War heritage do not seem to share Mandela’s understanding. They demonize everyone with a different understanding of the South and its role in the Civil War and pursue a triumphalist strategy that is destined to achieve just the opposite of what they wish. They may frighten many into silent acquiescence with their destruction of treasured symbols, but at the same time, they create much more sympathetic feelings toward the very few true white supremacists who exist today.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Op-Ed: Disaster Relief and Flood Insurance by David Montgomery


President Trump’s economic, political, and moral instincts are right when he calls for $6 Billion in Federal aid for Houston. To take the last first, giving aid to those who have lost much or everything is right for civil society and government as well. The problem both face is how to do it effectively. That requires planning and rebuilding far beyond the scale of clothing drives or even what effective, community based relief organizations like Catholic Charities (a plug for my favorite charity) can do. Hence the role for government and the moral obligation to support that funding.

Offering aid with no strings attached is politically wise, especially because it is not political payback. As another columnist pointed out, Houston was one of the few regions in Texas that Hillary won, so that everyone should understand that this is not generosity motivated by Red-state favoritism. President Trump has not had much time to promote his program of infrastructure spending, which is the one part of his platform with bipartisan support. His unconcern with the budgetary consequences of this relief effort should reassure Democrats that he is sincere in his desire to spend. At the same time, his deference to the governor of Texas and the good things the Governor said about him will please his base and other Republicans. Rarely does a politician get to make both sides happy.

It is on the economic side that questions might be raised about the implications of such an increase in spending, starting with how it will be fit into the Federal budget. Will the increase in Federal spending to rebuild the area of Texas ravaged by Harvey derail plans to reduce taxes? Will it have to come out of defense or other high priority spending? Or will it be added to the already enormous Federal debt?

I will argue that the correct economic answer is to let the additional spending ride directly into the Federal deficit and debt. This is also the most likely procedural outcome. Both these conclusions rest on the unexpected and extreme nature of the event. The whole point of saving and borrowing is to make it possible to minimize unnecessary economic harm from unexpected events. True, we have done a lousy job of saving as nation, but that does not mean that we should not tap into our continuing ability to borrow when an extraordinary need arises.

The problem with the rising national debt is that it is driven by the intended and predictable growth of spending on entitlement programs – a classic case of living beyond our means and passing the problem onto our children and their children. Nevertheless, the United States government remains able to borrow additional funds, and an occasional unexpected expenditure need not alter the timing of policies intended to deal with longer-term problems of national security, economic growth and debt reduction.

The alternatives to additional borrowing are reducing planned spending on other programs or increasing tax revenues. Both alternatives are political minefields, and would forego the long-term benefits that restoring military strength and tax reform are expected to provide. Politically, further cuts in domestic programs would strengthen Democrats opposition to the Trump budget and increase Republican defections, and taking away from increases in defense spending would outrage Trump’s base (and me, to make my preferences clear). Tax reform is already stalled because of lack of ways to offset revenue loss from rate reductions and increases in investment incentives. Its problems would just be made worse if revenue must be raised for Houston as well as offsetting tax reductions.

The most worrisome consequence of this additional borrowing is very arcane: how it will affect the Federal Reserve System’s plan to correct its balance sheet. A great deal of the recent increase in Federal debt was acquired directly by the Fed and put on its balance sheet as an asset, and the Fed has announced a schedule for selling off that debt. A new increase in borrowing by the Federal government could upset the Fed’s delicate calculation of how its selloff will affect interest rates and as a result slow its progress toward a normal balance sheet which puts it less at risk.

Procedurally, there is no obstacle to increasing the Federal deficit to accommodate disaster spending. Anticipation that disasters requiring added Federal spending will on occasion occur is the reason why the Congressional Budget Act allows the budget to be revised through Reconciliation Instructions.

The paramount procedural question is how to deal with the Federal flood insurance program. Economists (including me) have long criticized that program for subsidizing flood insurance in a way that encourages development in vulnerable areas – and even my friends in the Intergovernmental Panel on Climate Change have concluded that the increased economic damage done by tropical storms is due to increased development rather than increased storm activity.

Now it is pretty clear that the extent of subsidization will become politically relevant – when the reserves of the flood insurance program are deleted by claims for damage by Harvey. Since flooding from Harvey is characterized as a 500 year event, it is likely that the reserves of the flood insurance program would have been deleted even if premiums were much higher. That is why additional Federal aid to Texas is justified. At the same time, the magnitude of the loss should signal policymakers that rates for Federal flood insurance should be increased to levels based on an actuarially sound calculation of expected payouts. After all, the definition of “insurance” is pooling of funds to share risks not a free payout for damage.

That premium is still likely to be less than the rate that a private insurer would require, for reasons also made clear by Harvey. Whereas the Federal government can use its borrowing capacity to cover claims in excess of reserves, the ability of even large insurance companies to do the same is limited. Therefore private insurers must include a risk premium to build reserves against the possibility of the “gamblers ruin” while the government does not need to do so. That is why there has to be cap on the amount of coverage provided by the Federal government to avoid driving private insurers out of the market.
Extraordinary disaster relief is another form of risk spreading that is appropriate for unforeseen events, and government insurance spreads that risk over the largest possible pool. But that does not excuse subsidies in the form of premiums that do not generate enough revenue to pay foreseeable claims.

Unfortunately, the political calculus for this most needed reform leads to the opposite conclusion from the economic one. But if predictions of sea level rise and increased storm activity with climate change do turn out to be even partially correct, ending flood insurance subsidies will become more and more necessary and extraordinary relief after the fact will be less justified. There is little reason to believe that the growth of the Houston area was driven by subsidized flood insurance, but that is not true of many other areas that could become increasingly vulnerable to flooding. Including the Eastern Shore.

Therefore, I anticipate comments similar to those made in response to an earlier column in which I defended reduction of Federal funding for Bay cleanup in favor of an interstate compact. My answer is the same, though I will be less colorful. We cannot move toward national policies designed to promote the common good unless some of us are willing to stop taking Federal money for things we could do for ourselves. Because of where I live, I would surely pay a great deal more for flood insurance if I could not get some from the Federal program. My choices of where to live and how to build would likely change if I did bear those costs. That would be a good thing for the economy as a whole, even if it changed the amenities that some of us could afford.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Is Message More Important Than Facts? By David Montgomery


Never have I thought I would write a column about something that was written about me.  The self-referential topic makes my head spin.  Nevertheless, a recent article that claimed I had single-handedly (well, with one colleague) held back progress on climate policy for 25 years makes me think there is something worth sharing.

Since I have a perverse sense of humor, my first reaction was to send a copy of the article to many friends, asking them to help me celebrate one of the finest compliments ever paid to me.  But the column provoked too many disturbing thoughts to leave the matter there.

The article was titled “Unmasking the Climate Deniers.”  Its stated purpose was to “investigate more deeply the forces driving delay” in climate policy.  In itself, that is an interesting and admirable topic.  Political scientists could analyze the dynamics of American politics, the polarization of the electorate, the dominance of constituency service in the US Congress, and the ability of a minority to block legislation.  Experts in international affairs could examine the incentives to join a treaty to manage a global public good and the difficulty of enforcing such a treaty.  Policy analysts could evaluate the actual legislative proposals and regulatory actions to ascertain whether they would achieve their purposes in a cost-effective way.  Public opinion specialists could measure the depth of public support for action.

Instead, the writer knew that the answer was much simpler: “Throughout the 1990s, the American Petroleum Institute…repeatedly relied on economic models created by two economists, Paul Bernstein and W. David Montgomery, to argue that pro-climate policies would be devastatingly expensive.”  The author then cites studies he claims we did in 1991, 1993, 1996, 1997 and 1998, and drives the nail in our coffin by reporting that “the first two authors of the report Trump cited [in withdrawing from the Paris Agreement] are Bernstein and Montgomery.”  He concludes from all this that “The same arguments – and people – used by the fossil fuel industry to block climate policies decades ago are back.  For the sake of humanity, we must not let them succeed again.”

The idea that studies that Dr. Bernstein and I were responsible for the slow progress of climate policy is so absurd that all it deserves in itself is a good laugh.  But if we realize it is a symptom of much deeper problems, it deserves more attention.   Unimportant as this article was, it was a perfect example of four disturbing trends in public discourse: carelessness about facts, unwillingness to listen to the reasoning of those we disagree with, uncritical acceptance and repetition of statements by politically congenial sources, and finally, the wholesale politicization of academic disciplines.

The article reveals quickly how careless advocates are about facts.  We could start with the title of the article, because neither Dr. Bernstein nor I have ever denied that there is a scientific basis for concern about climate.  Continuing down his list of grievances, the author obviously did not read more than the title of my (Dr. Bernstein and I had not yet met) 1991 study, because that is all the hyperlink in his article provides.  Had he even read the executive summary, he would have seen my conclusion that a carbon tax or gasoline tax would be much more cost-effective than fuel economy standards in achieving greenhouse gas reductions.  Hardly a torpedo against carbon dioxide controls, unless any criticism of any climate policy, no matter how bad, makes you a denier.

Sometimes distortion of facts is an intentional effort to deceive, but in this case it may just be intellectual laziness and bias so deep that it eliminates all thought of checking facts.  This tendency shades over into the more deadly disease of unwillingness to confront the actual substance of arguments that reach distasteful conclusions – or even read what those arguments say.  The author calls Dr. Bernstein and me “co-opted scholars” because, among other things, we pointed out flaws in the Kyoto Protocol.   

His citation to our 1996 work on the Kyoto Protocol is a hyperlink to a Greenpeace broadsheet against Exxon, which is also the apparent source of his only criticism of the substance of our work: “they ignored the negative costs of climate change, and suggested that clean energy would never be price competitive with fossil fuels.”

The problem with this criticism is that in the case of Kyoto, there were no benefits to ignore, and we were and are right about renewables.  Our critic either failed to investigate those possibilities or suppressed what he knows.  

The Kyoto Protocol never gained much respect among experts on climate policy.  Researchers at MIT’s Joint Center for the Science and Policy of Climate Change wrote: “Kyoto Protocol … costs are borne by the United States—the U.S. pays almost two-thirds of the global cost …”  

The consensus of climate scientists on the benefits of Kyoto was stated by one of their number: “. . . the long-term consequences are small. . . . The influence of the Protocol would, furthermore, be undetectable for many decades.”

Substantial costs to the United States, as we said, and virtually no effect on global warming.

The problem with attacking us for suggesting that clean energy would never compete with fossil fuels is that we are correct.  According to the Energy Information Administration, even by 2022 the cost of wind and solar will still exceed the cost of natural gas fired generation (and they do not count the amount of additional backup capacity that must be built because wind and solar are not always available when needed).

It is very disturbing that our critic does not seem to care whether what we wrote was right or wrong.  All he needs to know is who funded some of the work and what its conclusions were.  A diatribe by Greenpeace was all he needed to read.  

A short paper I wrote in 1998 is my critic’s last piece of evidence that I am a mouthpiece for the oil industry.  It was based on testimony I gave at a Congressional hearing alongside the chairman of President Clinton’s Council of Economic Advisors, Janet Yellen.  My conclusion was that “Given her assumptions, Dr. Yellen’s analysis is internally consistent and compatible with mainstream economic analysis. However, … Dr. Yellen has assumed worldwide permit trading and very extensive purchases of these permits by the U.S., whereas the Kyoto Protocol includes only limited trading possibilities and may preclude such extensive U.S. purchases.  If these assumptions fail to materialize, the administration’s estimates of permit prices and GDP costs will need to be adjusted upwards by a factor of ten or more.”

I am rather proud of that testimony, and was complimented on it by Dr. Yellen’s staff at the hearing.  Citing it as evidence of my bad faith simply shows that my critic never bothered to read it.

In a previous column, I discussed the false statements made about how my colleagues and I performed the study cited by President Trump, including claims that we failed to account for jobs created by renewable energy and that renewables make electricity cheaper.

Our critic brought to my attention that this is exactly what Greenpeace stated in a broadsheet dated May 2002.  That is not only the only source of our critic’s knowledge of what we did, it makes the same statements as the attacks on our most recent work.

These statements were untrue in 2002 and untrue now.  It appears that the environmental know-nothings have been quoting each other and not bothering to read the works they condemn for at least the past 15 years.  

That is not unusual.  True believers do tend to associate with and believe only one another, but scientists and scholars are expected to consider and evaluate all points of view.  

What makes me most unhappy is the author’s biography: “… a former research fellow at … the Harvard Kennedy School of Government, [he] is a doctoral student in the history of science at Stanford University, where his research focuses on climate politics and the manipulation of science “ A topic that does not even pretend to weigh the evidence for whether its hypothesis is true or false.  

My own PhD is from Harvard; I have taught at Stanford and participated from 1980s to the present in Stanford’s Energy Modeling Forum, where the models the author of this diatribe dismisses as “co-opted” were presented, peer-reviewed and published.  To me the most disturbing aspect of all this is that those two institutions are turning out graduates with so little capacity for logical thought and such careless research practices.  To put it more simply, how can you claim to be doing a PhD when you never learned to do your homework?  

I truly hope that some historians getting PhD’s at Stanford learn how to do more than write propaganda, but perhaps that is how far the liberal arts have fallen.  Being rewarded for careless and politicized scholarship, this young man may well join the ranks of professors who have abandoned all pretense of rigor or objectivity and perpetuate the views they taught him on another generation.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Climate Policy Lessons from California by David Montgomery


California was the first state to enact comprehensive legislation to reduce greenhouse gas emissions, and a key part of that plan – the emission trading system – will sunset in 2020. Paradoxically, environmentalists are leading the opposition to California Governor Brown’s effort to extend and improve the cap and trade system, and businesses are supporting it. This conflict serves as an illuminating case study of the difficulties that states face in making climate change policies work.

The cap and trade system has been hailed as the great achievement of California’s climate strategy but it has been hamstrung by the proliferation of regulatory measures. Although Governor Schwarzenegger highlighted emissions trading in his Executive Order that introduced the strategy, he made the colossal error of turning design of the strategy over to California’s existing bureaucrats. As a result, the “Scoping Plan” that emerged was 80% regulation and at best 20% cap and trade. The bulk of the emission reductions would come from fuel economy standards, mandates for alternative fuels and renewable electricity generation, efficiency standards, regulations on shipping and trucking, industrial process standards, etc. listed in a 198 page appendix to the Scoping Plan. The cap and trade system would clean up around the edges to achieve the remaining reductions.

As a result, the ability of the cap and trade system to achieve certainty in emission reductions while minimizing cost was destroyed. The proliferation of command and control regulations (known in California as “complementary measures”) made the cost per ton of emissions avoided in the transportations sector several times higher than the cost per ton of emissions avoided in the electricity sector, and doubled the overall cost of achieving California’s goals.

There were several reasons for this failure to rely more heavily on cap and trade, and they are still in play. One is clearly bureaucratic incentives and inertia. The Air Resources Board was given the lead, and its approach to air quality regulation has always been heavily command and control. Every other state agency was invited to submit its ideas on how to reduce emissions, and naturally every one suggested more regulations that it could issue and administer.

There is also simple arrogance. The California Air Resources Board has a long history of asserting that it has a better understanding of technology and economics than the industries it regulates, and has not hesitated to tell them what technologies to develop and adopt. Cap and trade means leaving these decisions up to individual businesses, and the ARB has never been willing to relinquish that power.

Although one environmental organization, the Environmental Defense Fund, was from the start a strong supporter of cap and trade, many environmental organizations preferred strict command and control regulations for the ostensible reason that they gave greater certainty that reductions would be achieved. Underneath this rationale, which is entirely specious with a cap and trade system that puts a strict limit on the total number of emission permits that may be traded, is their desire to use regulation to achieve purposes beyond its ostensible objective of reducing greenhouse gas emissions.

In particular, these environmental organizations and allied trade associations prefer the regulatory approach because it promotes specific fuels and industries that would not survive if a cap and trade program were used exclusively. Thus California’s low carbon fuel standard mandates use of ethanol and other biofuels, creating a market and increasing profits for their producers. California’s renewable portfolio standard requires utilities to buy solar, wind and other “renewable” energy sources no matter how their cost compares to natural gas. California’s electric vehicle program creates a market for battery manufacturers and car-makers like Tesla. And so on to creation of smaller and smaller market niches for favored “Green” industries that could not exist otherwise. Relying solely on cap and trade would be at least equally likely to achieve California’s climate goals, but cap and trade would direct investment to the most cost-effective approaches and in the process leave behind more costly but politically favored fuels and technologies.

The so-called Environmental Justice movement took this opposition to cap and trade even further, though the fact that greenhouse gases are no more concentrated near their sources than half the world away should have kept climate policy off their radar. Nevertheless, EJ activists raised specious concerns about cap and trade allowing factories and powerplants to continue polluting poor neighborhoods. They then demanded increased funding for unrelated policies or programs benefiting their constituents as the price for moderating their opposition.

Willful ignorance has been encouraged by the California press which panders to the Environmental Justice movement with misrepresentations of how cap and trade works combined with horror stories about how it would allow industries to continue to pollute poor neighborhoods. Some news articles characterize cap and trade as allowing businesses to pay to pollute, without mentioning that the overall cap guarantees that emission targets will be met. Others moan about how the greenhouse gas cap and trade program failed to solve pollution problems unrelated to climate change.

Some real problems with the California climate strategy were raised by businesses concerned about how the system could damage to their ability to compete with out-of-state suppliers. For some products and regulations, this is not an issue and for others it is critical.

For example, all suppliers of fuels into California, no matter where they are located, must comply with the low carbon fuels standard, and likewise suppliers of electricity. But oil refiners outside California are subject to neither California’s regulations of emissions from the refining process nor its cap and trade program.

These costs are borne only by California refiners, and since gasoline is a fungible commodity easily shipped to California from other states, tighter regulations or high prices for emissions allowances could cause California refiners to shut down. If this were to happen, there would be no reduction in global greenhouse gas emissions, just a shift in those emissions from California to other states. And since those emissions do no local harm, the result would be costs to California with no benefit for global warming.

To deal with this problem, it is necessary to identify industries that are vulnerable in this way and to modify how they are treated under both regulations and cap and trade. This is an unavoidable problem when states attempt to go it alone in dealing with the global phenomenon of climate change. But it also invites rent-seeking by industries and accusations of caving in to big business or big oil.

All of these obstacles to adoption of a sensible and cost-effective policy can be seen in the controversy over renewal of authority for a cap and trade program. The specific bill supported by Governor Brown deals with some of industry’s concerns, by restricting the authority of state agencies to issue new regulations on greenhouse gas emissions covered by cap and trade and by limiting both how high and how low the price of emission allowances can go.

All of this makes perfectly good sense. The legislation would prohibit the Air Resources Board from issuing new regulations requiring additional reductions in emissions from refiner processes. This provision has been attacked as caving into big oil, when in fact it does nothing but reduce the chances that California refineries will shut down and be replaced by refineries from outside the state with even higher greenhouse gas emissions. It has no effect on California’s total emissions, as the overall cap under cap and trade takes care of that. And if additional emission controls at refineries are cost-effective at the price of carbon established by cap and trade, they will be undertaken anyway.

Likewise setting upper and lower limits on carbon prices is a balanced and useful step. Many environmentalists complained about how low carbon prices were in recent auctions by the state of some permits. By setting a lower limit on carbon prices, the cap and trade system gives a more consistent incentive to reduce emissions, and by setting an upper limit it gives businesses more certainty about future regulation. In this the cap and trade system comes to resemble a carbon tax. In typically inconsistent fashion, the same Environmental Justice organizations that oppose Governor Brown’s approach have come out in favor of the carbon tax that it emulates ( ).

Nevertheless, Governor Brown’s proposal has aroused the ire of all those opposed to cap and trade in the first place, and the Environmental Justice movement has already been offered its pound of flesh. In companion legislation, existing industrial facilities are required to install the best available controls to reduce their other, non-greenhouse gas emissions.

No wonder other states are slow to emulate California’s lead in establishing a cap and trade system. What governor wants to take on the headaches now plaguing Governor Brown as he faces interest groups that want to distort the cap and trade system, weaken its ability to achieve cost-effective emission reductions, keep provisions that weaken in-state businesses, or just demand payoffs in the form of additional unrelated programs to benefit their constituencies? California has provided more enlightenment about how difficult it is to construct an efficient, market-based program than about how to do it well. It will be instructive to see who wins in the current battle to reauthorize cap and trade.

Editor’s Postnote: The voters of California approved the continuation of the state’s Cap and Trade program for ten years. Read a full accounting of the election results here

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

A Radical Proposal for Immigration Reform by David Montgomery


On Monday June 26 the Supreme Court announced its decision on President Trump’s executive order on travel from certain countries. That event has made me decide to describe more completely my own thinking on immigration. I have two firm opinions: First, President Trump’s temporary travel plan is a fully justified action designed to make it more difficult for potential terrorists to enter the country. Second, I am convinced that we should allow any immigrant who can demonstrate good moral character and willingness to work to enter and reside in the USA.

To reopen our country to the kind of immigration that brought most of our ancestors here, it will be necessary to abolish all statutory immigration quotas. But it will also be necessary to vet thoroughly every individual who wishes to emigrate to the United States to determine that they satisfy the test for character and willingness to work. I would apply the same test to all immigrants who have not yet become citizens, welcome those who pass whether they entered legally or illegally and deport immediately all felons, gang members, and those exploiting the welfare system.

Aside from establishing procedures that could be used to vet all potential new residents, a travel ban directed at potential terrorists is beside the point of how we should treat law-abiding potential entrants and those already here who have committed no crime other than crossing the border or remaining in the United States illegally. These immigrants have not come from countries that harbor terrorists. They are for the most part individuals and families of Hispanic descent who have crossed our southern border. The real debate about immigration deals with these immigrants from Latin America, and I believe that having them here in the United States is a very good thing.

Our American culture and faith have been greatly enriched by our Latin American brothers and sisters. The culture of the Southwestern United States, our literature and music, and most of all our Christian faith would be much poorer without them. Not to mention the lives and families of descendants of Northern European immigrants who met and married someone from Latin America.

As a Roman Catholic, I am reminded of our common heritage because Our Lady of Guadalupe is revered as the patron saint of the United States as well as the rest of the Americas. Indeed, the entire North American church would be declining in numbers if it were not for immigrants from the rest of the Americas. While attendance of those born in the USA is declining in the Roman Catholic Church, our numbers are growing because of immigrants from Latin America. And, as a Catholic I regret to admit, Evangelical churches are doing even better, as they provide community and welcome as well as an energetic presentation of the Gospel.

Not only do Latin American immigrants fill our churches, they obey our laws. A study by the very conservative Cato Institute finds that relative to their population, there are far fewer immigrants in prison than native-born Americans. This is true of both legal and illegal immigrants. Refining the data, there are fewer Hispanic immigrants in prison relative to their population, whether they are here legally or illegally, than native-born Black Americans or any other ethnic group except Whites and Asians. Asians have the lowest ratio of prisoners to population, and even Hispanic illegal immigrants have a lower ratio of prisoners to population than do all ethnic groups together. Across the board, prison is more associated with being native-born than being an immigrant, possibly because immigrants have not grown up under the corrupting influence of the American welfare system.

There are also practical reasons for advocating removal of quantitative limits on immigration.

On balance, immigrants make a net positive contribution to the US economy. That is obvious for highly-educated Asian immigrants, but it is also found to be true for Hispanic immigration. A study by the politically neutral consulting firm IHS Global Insight finds that Hispanic immigrants will create through their work more value than they receive in wages and government transfers. Increased immigration of Hispanics is forecasted to lead to higher employment and income for the non-immigrant population. That is, those of us born in the USA are better off financially with immigration than without. And that is pretty amazing, considering how hard the liberal welfare state makes it for an unskilled worker to retain his or her self-respect and avoid the Scylla of crime and Charybdis of welfare.

There is also an important economic problem in pay and employment conditions for illegal immigrants. Callous employers can offer lower pay to undocumented employees who are frightened of rising onto ICE’s radar. This is a reason for supporting amnesty as a matter of simple justice. It is also a reason some might oppose amnesty to keep a source of cheaper labor available. Unfortunately, this problem cannot be cured just by legitimizing the status if illegal workers.

The demand for undocumented labor is in many ways a product of our counterproductive minimum wage laws and high labor taxes, which make employment of less-skilled but useful workers unprofitable for many businesses. But once the workers who are now paid below minimum wage achieve legal status, they will be “protected” by minimum wage laws and many will lose their jobs.

Thus there is a real danger of unemployment among new and formerly illegal Hispanic immigrants, caused by minimum wage laws and high labor taxes. With increased legal immigration, there are likely to be more workers unable to find the legal jobs, even though they could have found work as illegal immigrants being paid what their employers could afford. But it is unjust to banish those who aspire to a better life because our own perverse policies prevent them from getting work. So the immigration question brings front and center the failure of the liberal approach to the working poor.

It cannot be right to offer legal immigrants a choice between crime and welfare in order to survive. The failed policies of minimum wages that make it impossible for the less skilled to find work and welfare programs that pay unmarried women to have children would threaten the ability of many immigrants to support and keep their families together. Thus welfare reform and abolition of unreasonable minimum wage laws must accompany abolition of immigration quotas if newly legal immigrants are to continue to find work. I believe this is possible.

President Trump’s election proved that American working families have seen how the progressives abandoned them, and those working families in turn rejected the candidate who would continue that liberal condescension. Illegal immigrants now living in the US are likewise victims of the liberal welfare state, not the seekers of welfare that they are so often painted. I have been fortunate to avoid crossing paths with any of the Hispanic gang members, drug dealers and other felons whom we must find, arrest, and remove permanently from our society. Every illegal immigrant I have met wants to work hard, earn his or her own way, and be part of American society. They reject both crime and welfare as ways of life. What more could a conservative want, or a hard-working non-immigrant family not recognize as a kindred spirit?

So we not only to repeal and replace all immigration laws, we need to repeal and replace the Great Society programs that drive the unskilled and semi-skilled into crime or dependence on government — both of which enhance the power of the state.

Neither is easy. For the good of the country, we should welcome all but the potential terrorists and those who have been criminals or unwilling to work in their home countries. In charity, we need to replace entitlements with incentives to work and income supplements that provide a decent living to those, and only those, who work and earn as much as they can.

There has been an idea of how to do this for a long time — a broader form of the Earned Income Credit knows as the negative income tax.

The idea behind the negative income tax is that it is not enough to allow all families below some income level to pay no taxes. Under proposed tax reforms, this zero-bracket income for an average family would rise to at least $24,000 per year. With a negative income tax, working families with incomes below this or some other chosen benchmark would receive a refundable tax rebate equal to some percentage of their actual earnings. For example, there could be a payment of 10% of every dollar of earnings up to $24,000, resulting in a total income of $26,400. Earnings between $24,000 and, say $36,000 would incur zero tax liability. Earnings above that upper limit would be subject to the standard progressive tax brackets. This system creates no disincentive for work at any level of income, and the rebate percentage and bracket levels can be set to provide a living after-tax income for those willing to work and earn their share.

The change is worth making. What we can achieve is an increasingly Christian country, greater freedom and self-respect for those now prevented from working by minimum wages and welfare or victimized in the underground economy, stronger families, and over time likely less crime and drug use in groups weaned from welfare.

How much hope is there? I would like to see President Trump propose combining repeal of all quantitative immigration limits in the 1917 and 1964 Immigration Acts at the same time that he establishes secure borders and extreme vetting. At the same time, I want the President to propose elimination of all means-tested entitlements and substitute a negative income tax for all those able to work. And “able to work” must include most unmarried mothers and working age males who are exploiting the easily availability of disability payments and opioids created by his predecessor. This could also make the expanded negative income tax budget-neutral.

This program should appeal to the progressives who condemn what they perceive to be President Trump’s attitude toward immigrants, or else reveal their hypocrisy in giving lip service to open borders while really wanting to maintain the welfare programs that keep certain minorities dependent on their largesse and therefore willing to vote to keep them in power.

But the most important message is one from President Trump to his base and crossover voters. He needs to convince those conservative working class families that immigrants (with the obvious exceptions of Islamic terrorists and Russian, Asian and Hispanic gang members) share their interests, values and faith and are looked down on by the same elites. I would like him to convince his base and formerly Democrat supporters that immigrants do them no harm, and that the harm comes from those who perpetuate the welfare state and the minorities that live off welfare and crime rather than honest, individual effort. Then, I think there is hope for a country that welcomes those who are prepared to work hard and join American society.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.

Why? By David Montgomery


Are the Left’s persistent and vituperative attacks on Donald Trump and his supporters based on misunderstanding, emotion, or strategy? I have been convinced at various times that one or another of the three motivations was behind some particular attack, and my responses have been intended to deal with the specific motivation I inferred.

Now that the Left’s violent and unrestrained rhetoric has achieved its predictable outcome of homicidal attacks on Republican Members of Congress, it is even more important to find an effective way to neutralize that rhetoric. And the first step, for me, is to reflect longer on what motivates the Left in this campaign.

Leading up to the shooting of Representative Scalise and his colleagues, the incitement of violence from the Left became more and more explicit. As soon as Inauguration Day, we had Madonna saying “I have thought an awful lot about blowing up the White House.”

Then we have the constant dehumanizing of President Trump and his family by the talk-show hosts and comedians showcased by the media opposed to him. It is impossible to watch the most popular late night talk show without seeing and hearing caricatures of the President and tasteless jokes about every aspect of his appearance, family and character.

This shades over into the substitution of speculation about Trump’s motives and prejudices for substantive debates about the merits of his actions and policy proposals. Thus his eminently sensible efforts to screen out potential terrorists from entry into the USA are evaluated by the media and activist judges based on campaign statements and attributions of religious bias rather than on their merits. His efforts to reform ObamaCare are described as willingness to let people die without healthcare rather than debated as approaches to saving an obviously failed system. His well-reasoned efforts to extricate us from an overly-burdensome agreement on climate change illegally ratified by his predecessor are attacked by claiming that the President does not believe in climate change, as if it were the secular version of the Immaculate Conception, rather than debating the legality of bypassing Senatorial ratification of treaties. He is accused of obstruction of justice by the same Democrats who demanded the FBI Director be fired for the very reasons given by President Trump.

Democrats in Congress, failed candidates whose message on public policy has narrowed down to a single word “Resist,” and an activist Attorney General contribute to the demeaning of the President and his advisors with accusations of personal malfeasance based on sheer speculation and frivolous lawsuits.

The personal attacks escalated recently with Kathy Griffin’s foul display of the severed and bloody head of the President, and even worse with the performance of Julius Caesar portraying the Roman Emperor as Donald Trump and celebrating his assassination. Though some sponsors acted properly to drop the offenders, they were endorsed by fellow-celebrities for their courageous efforts to influence public perceptions. I didn’t realize it took courage to attack Donald Trump in Manhattan and Hollywood.

The rhetoric spilled over into overt physical violence against anyone who would defend the President or express conservative views in public. Demonstrators from “Resist” and other Leftist organizations rioted to prevent their appearance at Berkeley and other universities that once defended free speech, and assaulted students who indicated their support for the speakers or the President.

And then this verbal and sometimes physical violence culminated in the attempted assassination of Republican members of Congress by a gunman radicalized by the Left.

How can this be dealt with? If the hostility toward all things Republican were based simply on misunderstanding of the actual content and consequences of our policy proposals, the response would be easy. Many of us are decent writers and have the requisite expertise in climate and environmental science, environmental economics, regulatory economics, tax policy, financial regulation, labor issues, healthcare, international relations, national security and other disciplines to explain the problems that our policies address and their likely consequences. To the extent that we think the slogans and arguments of the Left are based on misrepresentations and falsehoods, the challenge of correcting those errors should be our first priority. Then, we could hope, with better understanding the fear and anger could abate.

But the way in which blatant and easily refuted misrepresentations are continually resurrected and repeated, and the unwillingness of those shouting them to listen to contrary points of view, suggest that correctable ignorance is not the primary reason for attacks on the President and his policies. The nation seems to be too committed to choosing sides on policies based on the perceived character, appearance, mental state or biases of political players ever to pay attention to the real good or bad consequences of policy proposals.

That suggests that emotion or strategy or both, not simple misunderstanding of his policies, are the drivers of current agitation against the President.

It is easy to make the case that emotion is the driver. Generations younger than mine have been taught from childhood that their feelings are all that matters. When your parents, teachers and college professors encourage you to believe that how you feel is more important than what is true or right, that everyone is entitled to his or her own facts, and that there is no such thing as objective truth or moral absolutes, then nothing does matter except the emotions that a politician or policy evokes. When you are as stupid, self-centered, and publicity-seeking as most entertainers and celebrities, the notion that some people actually think about things probably never entered your atrophied brain. And President Trump can present himself in a manner that is repulsive even to those who, like me, are convinced that by and large his policies are the right ones for our country.

If some or all of these reasons for unrestrained emotional responses were the primary drivers of the current malaise, we would be right to reiterate the need for civility in politics as our primary response. We could hope that the shooting of Representative Scalise and his slow and painful recovery would be a corrective shock bringing a majority back to their right minds.

So that leaves us with the likelihood that there is a strategy behind the incitement of hatred and violence that we have seen. According to Rusty Reno, editor of the journal First Things, there is such a strategy, designed and directed by the wealthy, largely white elite that runs the Democratic Party. Disconnected from the middle and working class voters necessary for the party to win, those elites can only hold onto voters by inventing new forms of discrimination for them to fear. Until the election of Donald Trump, they generated that fear by pushing an agenda so radical that it was guaranteed to generate resistance, and then labeling anyone who objected to that agenda as a bigot, a homophobe, a misogynist or a white supremacist.

How else, Reno asks, can we explain a President facing ISIS, Russian aggression, North Korean nuclear weapons, an expansionist China and the slowest recovery from recession on record making transgender bathrooms his highest priority? Most of us probably thought that election of the first black President would be the end of race-baiting, yet during his term we experienced repeated assassinations of police officers in the name of “Black Lives Matter” and banners proclaiming that “Republican Hate Kills.”

According to Reno, the Democratic Party came back from its defeats as the party of segregation during the civil rights era by promising to “promote and protect those who feel ‘excluded’ or ‘marginalized.’” But those promises to African-Americans, women and other minorities have been fulfilled. We have made immense progress over the past 50 years in eliminating discrimination based on race, sex, religion and other differences.

Once real discrimination ended, Democrat leaders and their sycophants in movies and the news media had to invent claims of discrimination to keep their coalition together. They found a new group they could label as marginalized in lesbian and gay activists. Then after winning on issues like gay marriage, they needed to invent discrimination against even more obscure sexual orientations. In the process, Democrats wrapped an activist agenda centered on LGBTQ privileges that have no direct appeal to most voters in a narrative of discrimination that they expect African-American and Hispanic voters – not to mention wealthy whites — to accept automatically.

To make that narrative work politically, there has to be a villain. To create a villain, the demands have to be so extreme that they will provoke opposition. Since political correctness has by now intimidated most of those outraged by this social agenda into silence, it becomes easy to claim that all those willing to take a public stand are bigots. Transgender bathrooms were a perfect ploy. The demand is so contrary to any sensible view of human nature that it generates widespread outrage, and all those who express that view can be labeled “haters.” Then the mostly rich, white liberals who run the party can sustain their power by promising even more protections from these symbols of oppression.

Now there is someone else to hate – Donald Trump. Someone the same elites can label racist and sexist based on his own statements. The vehemence of the blogosphere and the unanimity of sicko comedians makes it clear that many of them can’t imagine any reason to stop, not even boredom at repeating themselves and certainly not escalating violence. That their strategy and that of the liberal elites is to create a new symbol of oppression in order to maintain their hold on power is a very compelling explanation.

It is also a strategy to continue the intimidation of voters who voted for Trump in order to express how fed up they are with the radical program and condescending attitudes of the liberal elites. What better way to demonize the deplorable racists, sexists and homophobes who voted for Trump than by harping continuously on his gaffes and impetuous actions? We Trump voters might eventually get fed up with being accused of being white supremacists or worse and vote out those who condemn us unjustly, but we can be put down over and over again by making our choice for President out to be a boob or a monster.

I don’t disagree that Donald Trump has shown a talent for turning victory into defeat nearly as great as his talent for turning defeat into victory in the election. Just as he shows his chops as a negotiator by getting health care reform through the House of Representatives, he surrounds himself with a firestorm of criticism for firing the FBI Director. It would be a great help to take away his tablet and restrain his willingness to validate every criticism by responding to it. But if it were not for Trump, the strategy behind the rising storm of hatred would be diverted to creating some other symbols of oppression against which the elites running the Democratic Party can pretend to stand.

In response, those of us who are appalled by these developments must continue trying to explain clearly and objectively the basis for the policies we favor. We must also practice and encourage civility rather than emotional rants about policies and politicians (though I think celebrities, entertainers and opponents of free speech are still fair game).

That will not be enough. Continued engagement in electoral politics to keep the coalition of hard-working, faithful, family-oriented, financially stressed and totally ignored voters who elected President Trump together is the only antidote to the strategy of demonization pursued by the elites who think they own the Democratic Party.

David Montgomery was formerly Senior Vice President of NERA Economic Consulting. He also served as assistant director of the US Congressional Budget Office and deputy assistant secretary for policy in the US Department of Energy. He taught economics at the California Institute of Technology and Stanford University and was a senior fellow at Resources for the Future.