An Open Letter to the Freedom Caucus by David Montgomery


To my friends in the Freedom Caucus who would not agree to a replacement for Obamacare: I share your values and most of your policy preferences, but your legislative tactics are irresponsible and stupid. This is not Israel, where a tiny and extreme party can obtain major policy concessions as a condition for joining a coalition. Your unwillingness to reach a compromise simply guarantees the outcome that you like least.

I cannot understand your motivation. Obamacare is not just a step toward socialized medicine to be opposed in principle; it is a growing catastrophe of rising premiums and reduced choice. I agree that my first preference would be to turn the clock back and prevent Obamacare from being created in the first place. But you can’t be foolish enough to think that you could achieve the same result by bludgeoning your Republican colleagues into total repeal after it has been in effect for 7 years.

Until now, the Democrats that designed and voted for Obamacare owned it, making Obamacare one of the issues that put you in office. But you have very nicely relieved Democrats of the onus of fixing Obamacare and saddled the Republican Party with blame for all its problems. Faced with a Democratic majority that will not agree to any Republican proposals, compromise among Republicans is indispensable. We cannot let Obamacare explode and expect out-of-power Democrats to take the blame. Getting moving toward replacing Obamacare is a political necessity. Otherwise, all you will accomplish in the remaining two years is proving that Republicans can only oppose, and that we are not fit to be put in charge of the country.

What set of moral absolutes could lead you to oppose changes in Obamacare that were clearly moving in the right direction? Even those of us who believe, for example, that the intentional killing of an unborn child is always gravely immoral will vote for legislation that restricts abortion even if it does not do away with Roe vs Wade completely. I share the principles that lead you to oppose Obamacare root and branch, but I cannot see how anyone with the responsibility of elected office could refuse a good compromise in favor of the status quo. This is the same self-serving ego gratification that progressives get from voting for useless gun control laws – it may make you feel good but it makes matters objectively worse. At this point, I would not vote for a single one of you, and would do my best to support primary challengers who understand that a Republican representative should aim to achieve the best outcome possible in a flawed system.

I am glad that Speaker Ryan is not the tyrant that Nancy Pelosi was. But it is frustrating that you take such advantage of Speaker Ryan’s wish to maintain democracy and respect for all members’ opinions within the Republican delegation. Until now, I have thought that Steve Bannon would provide a useful reminder of conservative principles to a President who is more a negotiator than committed conservative. But I would want his head on a platter if he had anything to do with a plot to replace Speaker Ryan with a leader of the Freedom Caucus.

How would you expect a more conservative (and less experienced and nowhere near as bright) leader to achieve more of your agenda? You drove Speaker Boehner out with complaints that he was not taking a hard enough line in opposing the Obama Administration on budgets and debt. Now there seems to be a wish to drive out Speaker Ryan. Is your idea that an uncompromising conservative could whip the Republican delegation into line behind your ideas, in the same way that the uncompromising leftist Nancy Pelosi did?

That is surely wishful thinking. Leaving aside the question of who would want to be elected as a Republican if they were going to be forced to vote for a bill they never read, you don’t have Nancy’s tools. She did not succeed in browbeating her colleagues by sheer nastiness. She controlled the pursestrings of campaign finance, and her purse was filled by George Soros and his friends. No matter what the liberal media claim, we Republicans have no such sugar daddies. You in the Freedom Caucus were elected by a popular groundswell and spent far less on your campaigns than your Democrat opponents. The Republican National Committee and the House and Senate Campaign Committees are run in a pretty democratic way, compared to the authoritarian thought police who dole out money to Democrat candidates. So you will fail to impose your ideas on a Republican delegation that is both more centrist and more realistic than you.

It is nearing midnight on the political clock, and you need to get the message now. You will double-down on disaster if you decide to follow your perverse victory on Obamacare with the same stance on tax reform. Speaker Ryan and Chairman Brady have crafted a tax reform package that will reduce the burden of taxation on American businesses and families, fix the perverse tax policies that drive companies and investment overseas, and stimulate much faster economic growth. Whose side will you be on? Is it really that important to remind the world that you stand for lower taxes and reduced spending and are not happy that tax reform is revenue neutral? Will you help the Democrats stop tax reform or will you vote for a great tax package even though it does not achieve the full Conservative agenda of reducing taxes and cutting spending?

We have a historic opportunity to put the United States back on the right track, with majorities in the House and Senate and a President able to sit down and negotiate. Are you enjoying the gloating of the progressives that the Trump Administration is a failure before even 100 days elapse?

Stop acting like snowflakes who need time off from exams to weep when they do not get what they want in politics. Man up, and take your responsibilities not just to the Republican Party but to the people of the United States seriously. If you remain intransigent, all you will do is return power to those who want to restrict our religious freedom, tax us into submission, and let other countries rule the world. Call President Trump and ask him to sit down with you, Speaker Ryan and Secretary Price to work out a new deal on replacing Obamacare. It is almost too late.

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.

Good or Bad Climate Policy by David Montgomery


A series of recent letters to the Chestertown Spy have castigated our Representative, Andy Harris, for sponsoring HR637, a bill that would change the way greenhouse gases can be regulated. The bill is a necessary step toward sensible and effective climate policies, and the depth of misunderstanding of the nature of greenhouses gases and the Clean Air Act evident in the letters makes them the subject of this column.

HR637 has 120 co-sponsors, and its purpose is to stop the Environmental Protection Agency from using the Clean Air Act to regulate greenhouse gas emissions. To do so, it changes the language of the Clean Air Act to remove the six greenhouse gases from EPA’s jurisdiction. The six are methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, carbon dioxide.

There are three reasons why I think the bill co-sponsored by Andy Harris is a good idea: 1. No one is harmed by breathing any of these compounds at concentrations they could reach in the atmosphere whether regulated or not. 2 Reliance on the Clean Air Act is a terrible way to deal with global warming. 3. There are much less costly and more effective ways to address global warming — like the carbon tax that I discussed several weeks ago.

First, we can all breathe freely if these compounds are unregulated. Leaving aside the personal animus expressed in many of the letters, their common error is in believing that the six compounds that would be removed from the list of “air pollutants” are themselves hazardous to human health. The repeated claim that “they will impact our crops, livestock, seafood, soil and waters that are the bounty of our Chesapeake Bay region, not to mention our lungs!” is simply untrue. The only reason that EPA is regulating those compounds is their suspected contribution to global warming.

A little history helps here.

In 2009, EPA issued a finding that these 6 compounds “endanger” public health and welfare due to their contribution to global warming. This is the “endangerment finding,” famous in some quarters and infamous in others. Nowhere in the endangerment finding does EPA mention any direct impacts of these compounds on health. That is because the current and future concentrations of these compounds in the atmosphere are far, far below any threshold at which they could be harmful. And some, like the two fluorocarbons and methane, are harmless propellants that have been used in hairspray. The only property that has led EPA to regulate them is their effect as greenhouse gases.

To make this perfectly clear, EPA is required under the Clean Air Act to regulate emissions of hazardous air pollutants. EPA’s current list includes 187 hazardous air pollutants. None of the greenhouse gases appear on this list. Nor are they in the list of criteria air pollutants (particulate matter, ground-level ozone, carbon monoxide, sulfur oxides, nitrogen oxides, and lead) for which EPA is required to establish ambient air quality standards. If these compounds did pose dangers cited by the letter writers, they would have to be on one of these lists.

Second, the Clean Air Act was never intended to deal with problems like global warming. EPA relied on the endangerment finding to issue a rule requiring existing electric power plants to reduce their emissions of carbon dioxide. EPA also issued a rule in 2016 to regulate methane emissions from oil and gas production as greenhouse gases. These rules will significantly increase costs of natural gas and electricity to consumers and do little to slow the pace of global warming. They are just targets of opportunity, singled out because the Clean Air Act does not give EPA the authority to utilize cost-effective, economy-wide policies that could achieve much greater results at much lower cost.

President Obama declared that “if Congress won’t act on global warming, I will use existing regulatory authorities to take action.” EPA chose the Clean Air Act to support its moves on global warming. But under the Clean Air Act, EPA can only issue performance or technology-based standards for particular categories of sources. So the methane rule applies only to oil and gas wells, and requires reductions in methane emissions that could be — and in fact are being — achieved at far lower cost by addressing leakage from transportation and use of natural gas. The Clean Power Plan is itself before the Supreme Court because of challenges upheld by the lower courts that EPA went beyond what the Clean Air Act allows in designing the rule. In particular, EPA based requirements not on what is technically feasible and economically justified “within the fence” of a power plant, but expected power plants to pay for emission reductions by others.

This kind of emission trading is in itself a very good idea, because it allows the market to find the most cost-effective ways to reduce emissions. But under the Clean Air Act, the extent of that market is tightly circumscribed, so that EPA may have exceeded its authority even with the small amount of offsets it allowed in the Clean Power Plan. Even if the courts uphold the Clean Power Plan, its narrow focus on electric power plants means that there are widespread opportunities to reduce emissions more cost-effectively that it cannot touch.

Third, there is a far better way to do all this. The Obama Administration’s devotion to regulation has done little or nothing for the environment, but it has put a stranglehold on economic growth. The Administration also issued rules for new car fuel economy that auto manufacturers cannot meet unless car owners sacrifice affordability and performance and other rules that require amounts of ethanol in gasoline that can harm older cars as well as boat and farm engines.

HR 637 is an important step toward dismantling this regulatory approach to climate policy, and it clears the way for building a consensus for a less intrusive and more effective one. Once this regulatory jungle is cleared away, my preference would be for a carbon tax set at a level that gives the best balance between risks to the US economy from global warming and the cost of reducing emissions. Another wise and cost-effective approach could be a technology strategy emphasizing basic and applied research to develop breakthrough clean energy technologies we cannot envision today.

What is most important is to settle on a policy that has sufficient political consensus to last from one Administration to another. One thing that this election should have proven to anyone is that the regulation that one Administration can impose, the next can undo. Global warming is a process that evolves slowly over time, that we do not understand well enough to predict with any confidence, and that will have to be addressed in a consistent manner for many decades to come. In particular, we will not get the kind of research and innovation necessary for a low carbon future unless we put in place long lasting policies that provide adequate rewards for innovation. Getting rid of hastily contrived and excessively costly regulations is a good first step. HR637 does not mean that global warming will not be dealt with, but it does ensure that global warming will no longer be dealt with quite so badly.

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.

What You Wished You Didn’t Need to Know About Tax Reform by David Montgomery


I have mentioned tax reform in two columns so far, and it seems time to dig deeper into the topic. Long before the election, Paul Ryan started to develop a comprehensive proposal for tax reform. The last major tax reform package was passed in the Reagan administration, though each succeeding President has pushed taxes up (D) or down (R). Ryan’s proposal, taken up by his successor as chief tax writer in the House, Chairman Brady, would reduce personal and corporate income tax rates and fundamentally change how taxes on business are calculated and who pays them.

There are a number of reasons why this kind of tax reform is needed. Burdensome and badly designed taxation is a major contributor to the slow recovery from the recession. Since 2008 investment has fallen from its average of 4.4% of GDP between 1960 and 2008 to 2.8% of GDP last year. The United States taxes business income twice, once in the corporate income tax and then again when what is left shows up in personal investment income. This puts US taxes on investment higher than in all but four of our major economic competitors, and only two out of 173 countries have higher corporate taxes than in the U.S.

These high tax rates not only slow economic growth, in the long run they are self-defeating. We have seen this clearly as large companies move their headquarters overseas, are purchased by foreign companies, or merge with foreign companies in order to move their income to countries where taxes are lower. This not only moves jobs overseas, but erodes the base from which corporates taxes are collected.

Not only that, but when U.S. companies move overseas, they often find that their new host countries refund their taxes on the goods they manufacture overseas and sell back to the United States. Companies that remain in the USA are at a double disadvantage. They have to pay US taxes on goods they export and then find that their goods are taxed again when they arrive in the foreign country.

The Brady-Ryan plan fixes these problems. By reducing the corporate tax rate from 39.6% to 20%, it moves the US down from imposing the world’s highest taxes on business to the middle of the pack. To remove the remaining biases against manufacturing in the USA, businesses will no longer be able to deduct the cost of goods they import from their taxable income, and at the same time businesses will no longer pay any taxes on income from the goods they export. This “Border Adjustment” will give US manufacturers the same advantages in global competition that most of our competitors already give to manufacturers in their territory.

To further simplify the tax code, depreciation and all the special tax breaks that go with it will be eliminated. Investments will just be another expense to be deducted from income in the year they are incurred. Also, businesses will no longer be able to deduct interest payments. The purpose of this change is to eliminate the bias in favor of borrowing rather than going to the stock market to raise funds for investment, which has enriched banks and made many businesses much more vulnerable to bankruptcy than they would be with less debt to service.

Incentives for individuals to invest will also be increased, by exempting 50% of income from capital gains, dividends and interest income from personal income tax. Thus while businesses will not be able to deduct interest or dividends, double taxation of investment income will be greatly reduced by the combination of lower tax rates at the corporate level and exemption of 50% of investment income to individuals.

Personal income tax rates will be reduced and simplified for all incomes. Taxes will go to zero for many taxpayers now paying a 10% rate on some of their income. Going up the ladder, instead of the current 7 tax brackets there will be just three. The maximum rate in the lowest bracket will be 12% instead of the current 15%, in the next the maximum rate will be 25% instead of 28%, and the highest rate will be 33% instead of 39.6%. The obnoxious AMT that is reaching further into the middle class will be repealed.

Of particular interest to the retirees, farmers and small businesses on the Eastern Shore, the Plan will repeal the Death Tax completely and limit to 25% the maximum tax rate on small businesses that “pass through” income and expenses to their owners.

All of this will be good for the economy and good for consumers. The Tax Foundation, an independent research institution, estimates that after 10 years GDP will be 9.1% larger than it would be with the current system and that an additional 1.7 million jobs will be created. Naturally, this added growth also increases tax revenue.

The problem is how to get a major tax reform package like this passed. It would be very nice to have bipartisan agreement that we do not need to settle for lower economic growth and that tax reform is necessary – not sufficient, but still necessary – to get back to historical levels of economic performance. It would not even take much bipartisan agreement – just 8 of the 10 Democratic senators running for re-election in states that President Trump won in a landslide would be enough to overcome the roadblock of 60 votes.

However, the plan is constructed to make that unnecessary. Under the current budget process – which still exists even as the deficit balloons – a Budget Resolution is passed each year setting out overall spending and revenue targets in some detail. After the Budget Resolution is passed and Congress acts on authorizing expenditures, there is a second step to bring those actions back in line with the Budget Resolution. This “Budget Reconciliation Bill” is privileged with limited debate and requires only a majority vote for passage. It is possible to add the entire tax reform plan to the Reconciliation Bill, as long as it is “revenue neutral” – that is, any loss in revenue from one provision is balanced by an increase in revenue from another.

So far so good. This is where the devil is in the details of arguments over who benefits. Democrats describe the Plan as another example of “trickle-down” economics and claim that it short-changes or harms middle- and lower-income taxpayers. Businesses obviously favor all the provisions that reduce their taxes, but they unite with Democrats in decrying the “Border Adjustment” provisions. Companies like Walmart that import most of the goods that they sell do not like the choice of buying more expensive substitutes made in the USA or seeing their taxes go up substantially. Others worry that either of those choices will raise prices paid by consumers.

The easy solution to some of these objections would be to lower rates further in the two lowest brackets or eliminate the Border Adjustment. This is where the need to stay revenue neutral in order to avoid a 60-vote hurdle comes back to bite us. The Border Adjustment provides about $1 Trillion of revenue over 10 years and meaningful rate reductions are impossible without it.

Fortunately, it is quite likely that some of the impact of the Border Adjustment will be borne by the countries from which we import and to which we export. The argument for this very desirable outcome is that the value of the dollar will automatically adjust to get rid of any upward pressure on consumer prices.

The basis of this argument is the clearly correct observation that unless the value of the dollar goes up, the border adjustment will create a very large incentive to increase exports and a very large incentive to reduce imports. If this happened, the U.S. trade deficit would decline drastically. This is where a counter-intuitive but well-established hypothesis comes into play.

Most economists are convinced that the trade deficit has little or nothing to do with wages and taxes in the US versus China, India, Mexico or Europe. Instead, it is the magnitude of government borrowing that determines the size of the trade deficit. And in accounting terms, this is absolutely correct. If the United States is borrowing from other countries every year, that means that we are consuming more than we produce and are running up debts to pay for it. When the government spends more than it takes in, and everyone else spends all they earn and possibly a little more, we have to import more than we export in order to balance the accounts.

Remembering that the Border Adjustment is part of a Plan that is revenue neutral, it will not change the government deficit and therefore the trade deficit cannot change. This means that the dollar must appreciate by just enough to negate any incentive for more exports or less imports. If this happens, Walmart will find that the dollars it saves on buying imports will be just what it needs to pay its additional taxes due to the Border Adjustment. If that happens, there is nothing to drive consumer prices up and everyone is happy.

I doubt that everything will be quite that simple. Many European countries adopted very similar border adjustments when they adopted their Value Added Taxes, or VATs. Those countries did experience a brief period of inflation, in which some but not all of the higher taxes on imports were passed on to consumers. This produced no major disruptions or long-term problems. I think we are likely to have the same experience, as the dollar will increase but not enough to fully offset any pressure on prices. As long as wages keep up and the Federal Reserve responds appropriately, it is my opinion that the long run benefits of tax reform will outweigh these transition costs for just about everyone.

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.

Trump, Better and Worse by David Montgomery


President Trump’s address to a joint session of Congress last week proved to me that he is the President I was looking for. I did not agree with all the policy prescriptions, but it was a magnificent speech. His delivery was natural, clear and inspiring. He spoke to his base, in simple and understandable terms. He described how far he had come in 40 days toward accomplishing what he had promised and he took responsibility for his blunders.

In tone and substance, the President reached out for reconciliation and proposed ways for Republicans and Democrats to work together for the common good. On infrastructure, immigration and health care, his approach should make Democrats – especially the ten senators who will be running for reelection in states he won in a landslide – hesitate to continue saying no to everything.

From first to last, President Trump spoke about unity. Referring to recent threats and desecration of Jewish monuments, he called for us to stand united in condemning hate and evil. He talked of the greatness of the United States, and our unity and strength. He said again that we all bleed the same blood, salute the same flag, and in my words are made by same God. After laying out his plans and goals, he concluded by acknowledging that we can only get there together.

I found it particularly refreshing to listen to a Presidential speech with not a single mention of the politics of identity, a theme that was present in every speech made by his predecessor. President Trump addressed us as a single nation, where our identity as children of God first, then as citizens of the United States, are all that matter, not differentiation by race, color, religion, culture or all the newly-invented identities of gender and preference.

There were some specifics in his proposals and goals that I particularly liked, and others that I was not so happy with.

President Trump was absolutely correct to state that businesses in the United States face the highest tax rates in the world and that it is critical to cut those taxes if we are to return to historical rates of economic growth. This is the centerpiece of the tax reform package developed by Speaker Ryan and Chairman Brady of the House Ways and Means Committee, along with a reduction in taxes on the middle class. The President also discussed how the United States is being taken advantage of by other countries that tax the goods we export to them and rebate taxes to their companies that export to us. In doing so, he came very close to endorsing another key provision in the tax reform proposals, which is to treat our imports and exports in exactly the same way that other countries treat theirs. This so-called border tax adjustment would no longer allow companies take a deduction for the cost of goods they import and then resell, and it would stop taxing revenue from exports. This means that if a company wants to sell here, they will do well to invest here, and these tax changes would put American businesses on the same footing as their competitors.

I emphasize this because eliminating handicaps in the tax system is a far better approach to trade than erecting tariff barriers or creating “buy America” programs. Many Republicans, as well as all economists, were very unhappy with the way Candidate Trump played up job loss caused by imports and threatened to erect trade barriers. Trade barriers always hurt the consumer, and if his speech indicated a willingness to substitute tax policy for trade restrictions, it is a welcome change.

As I discussed in a previous column, I agree that we need to scrutinize carefully all entrants from countries that spawn Islamic terrorism, and that getting reliable background information from countries of origin is critical to doing so. But for immigration from other countries, especially Asia and Latin America, we need to open our doors in a prudent way. His proposal to move to a merit-based system of granting permanent resident status is a good start, but we need to go much further. First, we should repeal the 1917 and1965 Immigration Acts and eliminate all quotas. I would instead give a temporary green card to anyone who passes a strengthened vetting process and accepts a condition that they will be ineligible for public assistance for some period of time. During that time, every applicant for residence should be required to learn English and have no criminal record. If all goes well, at the end of that time, they would become permanent residents eligible for citizenship and all other benefits.

I believe that if we remove quantitative restrictions on immigration, it is critical that we make sure that we admit only immigrants willing to work, assimilate and contribute to the economy. Instead of allowing immigrants to go immediately on welfare, we should let our communities and churches do their job of aiding and integrating them. I would happily increase my contributions to Catholic Charities, our Annual Diocesan Appeal and the Society of Saint Vincent dePaul to support immigrants who are in need thru no fault of their own. This return to the old-fashioned notion of taking care of each other would make charity meaningful again, as we would have to make personal decisions to welcome strangers rather than voting to spend someone else’s money on them. This approach would also favor assimilation and discourage the creation of separate identities.

I am not so happy about the President’s fascination with infrastructure. Infrastructure spending has been dominated by boondoggles designed to put a project in every Congressional district and award members of the appropriations committees. Democrats and too many Republicans see these projects as a right of their office. I was in charge of evaluating these kinds of expenditures while at the Congressional Budget Office, and we found that nowhere near as much spending is needed as the road lobby and others claim. Estimates of substandard highways and bridges, for example, often include a large number of structures that simply have lanes or shoulders a little narrower than current standards. Infrastructure spending needs to be approached critically and with a tight purse. Keeping costs down also requires avoiding the Buy American requirements the President recommended.

I was disappointed that along with the need for infrastructure investment for future generations, President Trump did not mention two much clearer threats to our economic future: the crises of spending on welfare and social security. No matter what is done to cut spending elsewhere in the budget, the national debt will continue to rocket upwards unless spending on these programs is cut. Action is needed on all three to secure our future: prudent infrastructure spending, cutting welfare, and reforming Medicare and Social Security.

On the other hand, I thought the President’s presentation of the need to repeal and replace Obamacare was astute. He made it clear that this action is not a matter of partisan politics but of necessity. Obamacare is not just bad policy. It is in crisis, with insurance companies pulling out and costs of insurance policies skyrocketing.

Even without more specifics of the repeal and replace proposal, I was very pleased with his comment that legal reforms are needed to protect from unnecessary costs. This is another important drain to the swamp. Malpractice suits play a huge role in generating excessive testing and treatment as well as creating astronomical malpractice insurance and settlement costs that are all passed on to patients. Institutional change of this type can play a huge role in making medical care more affordable.

It was also wonderful to hear the President talk with sympathy about the cycle of violence that plagues our cities, and to do so without blaming it on the police. Again, his message was of unity: the police are also members of the community, and divisive rhetoric has to stop. I would put it more strongly: activists, mayors and State’s Attorneys whose actions have prevented police from providing effective law enforcement in poor neighborhoods have only inflicted greater suffering on those they hypocritically claim to champion. But in this case, the President toned down his message.

Finally, I was both touched and pleased by the way the President recognized those who sacrifice to protect our freedom. I thought his tribute to Senior Chief Ryan Owens was appropriate and heartfelt. My heart went out to Senior Chief Owens’s wife, whose appreciation and grief was open and sincere. It has been eight years since our President showed such deep and open respect and affection for our troops.

It is a shame that her courage and the President’s tribute have been met by despicable attacks from the President’s detractors. The supercilious left could only make fun of him and the widow of Senior Chief Owens for showing emotions they do not share and cannot understand.

I am confident that the President meant it when he ended by asking God to bless the United States of America. This is the President I hoped for.

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 Maryland Does Not Need A Fracking Ban by David Montgomery


The fracking revolution is the best thing that has happened to the United States thus far in the 21st Century.

“Fracking” is short for “hydraulic fracturing,” the final step in a sequence of new exploration techniques that pinpoint precisely where oil or gas are located, directional drilling that makes it possible to reach reservoirs previously too thin to be worthwhile, and use of water pressure and sand to open cracks in rock where oil and gas are trapped. In just about ten years, this incredible technology has given us cheaper energy, cleaner air, and lower greenhouse gas emissions. Investment to take advantages of these improved technologies provided the only sustained growth in jobs and income that appeared during the tenure of President Obama. Fracking cannot harm water supplies and does not cause earthquakes. The chemicals involved are harmless, and you use every one in your home now.

Nevertheless, the Maryland legislature is considering two very bad bills that would ban and criminalize the use of this technology to expand production of natural gas in Garrett and Washington Counties. Supporters of this ill-conceived legislation are defending the ban with a combination of innuendo, half-truths, and outright fabrications. It just seems impossibly galling to progressives that something really good could happen for which government can take no credit at all.

Now that my position is clear let us turn to some true facts, not the alternate reality in which the opponents of fracking live.

Screen Shot 2017-02-27 at 12.58.20 PMHydraulic fracturing is one of the great success stories of private initiative. It builds on the computer revolution to locate and get at oil and gas deposits that only a few years ago were thought impossible to use. Those deposits contain huge quantities of oil and gas, but the hydrocarbons are trapped in the pores of rocks, and can’t get out of those pores into a well. Hydraulic fracturing involves pumping fluids at high pressure into the well to cause cracks to appear in the rock so that the oil and gas can flow.

The idea of doing this was around for a long time. The problem was finding the right fluids to make the cracks and a way to keep the cracks open once the pressure was released. A Texas oil man named George Murphy, may he rest in peace, put his own money into experimenting with all sorts of possibilities and eventually found a combination that did the trick.

Since the fracking revolution started, U.S. oil production has nearly doubled, and natural gas production increased by 40%. Before the fracking revolution, pundits were talking about peak oil and peak gas and how the days of plentiful energy were over. Since the revolution oil and gas production just continues to grow. Natural gas prices were cut in half, and oil prices fell to one-third of what they were before the revolution. Despite claims about methane leaks and global warming, methane emissions from the natural gas system have also fallen.

Hydraulic fracturing technology has made the USA a world energy superpower again. We produce more oil and more natural gas than any other country. Even Saudi Arabia and Russia have fallen behind us.

Guess what. This all happened on private land where the landowners welcomed the oil men because they shared in the rewards. Texas, Oklahoma, North Dakota and Colorado were the top producers and the four fastest growing states from 2010 to 2015. They have prospered immensely from the investment and employment opportunities that came along with fracking. Poor Maryland, though it has large deposits in western regions, sits fearfully on its hands and remains one of the slowest growing states in the nation, despite all the good things Governor Hogan has done.

First, to deal with claims of horrible things that have, will or might happen due to fracking. Very few, if any, verified complaints about oil and gas drilling have anything to do with the specific use of fracking; they are due to accidents, errors and criminal activities that are rare in the oil and gas industry and would be just as likely with conventional drilling practices. The only thing fracking has done is bring about a great deal more drilling than was predicted even a few years ago, disappointing those who want to prevent us from having more and cheaper energy.

Understanding how the technology of directional drilling and fracturing works is all that is needed to understand why so many claims are bogus. First of all, any kind of oil or gas well may go through aquifers and underground water supplies, and the standard practice of casing and cementing wells until they are far below any usable water prevents contamination. As a side note, the famous pictures of flames coming out of kitchen faucets is old news, and happened long before current hydraulic fracturing practices were introduced. It has happened when water and natural gas were both drawn from shallow underground reservoirs where they were intermixed. With fracking, this is literally impossible.

Water supplies are found within 1000 feet of the surface, far above any deposits of oil or gas that might be fracked. The Marcellus Shale in Western Maryland is down around 6000 feet, and the deposits are only few hundred feet thick. It lies below impervious layers of rock that trap not only water but natural gas itself that comes out of the shale. The shaft is drilled straight down 6000 feet into the shale rock, than a guided drill bit turns the corner and drives horizontally through the relatively thin reservoir. From a single pad, it is possible to drill multiple such horizontal wells, accessing a huge 2-dimensional area with minimal surface disturbance or impact on neighbors.

Underground, the well is perforated within the reservoir so that oil or gas can flow. Up to this point, everything is the same for conventional drilling or fracking. To get the oil or gas to flow from the rock like the Marcellus shale, a mixture of 95% water, 4.5% sand and less than 0.5% other additives is pumped in under pressure to crack the rock. The cracks propagate several hundred feet, which is enough to open up the oil- or gas-bearing rock.

The additives used in fracking are mostly common household chemicals like pool cleaners, table salt, anti-freeze, laundry detergent, disinfectants, food additives and cosmetics ingredients. In addition to being nearly harmless, these fluids are being put into the ground a mile below any water supply, separated by many layers of impervious rock. There have been no confirmed cases of groundwater contamination from hydraulic fracturing itself in 1 million wells fracked over the past 60 years, according to the American Petroleum Institute.

A lot of water is used for this purpose, and its disposal must be managed carefully. The current state of the art is to recycle the fluids so that water disposal is no longer an issue. Otherwise, the water is reinjected into depleted wells or other locations equally deep in the ground.

The industry has learned how to manage the reinjection process to that it does not trigger seismic activity, as sometimes happened early in the application of the technology in seismically active regions in the Southwest. Nevertheless, there are constant reports of “frequent, small earthquakes” where fracking is taking place. That is true, but intentionally misleading. One might think that a “small” earthquake would resemble something like a heavy truck driving past, which measures around three on the Richter Scale. The seismic activity that fear-mongers claim is caused by fracking is around -2 on the Richter Scale. Since going down a point on the Richter Scale reduces the energy of an earthquake by a factor of 10, going from 3 to -2 reduces the energy involved by a factor of 100,000. Literally, seismic activity from hydraulic fracturing is noticeable only to sensitive seismic instruments.

Finally, the entire fracking process is tightly regulated by state and federal rules, no matter what its opponents say. To mention a case I know well, Governor Hickenlooper (D) of Colorado created a model regulatory system through negotiations among all concerned parties, and Colorado is becoming a major user of fracking. I mention this because Maryland legislators seem willing to follow Colorado’s idiocy of legalizing marijuana, but not its sensible approach to energy policy.

I like to end on the good side of the story, the facts about what the fracking revolution has accomplished.

The price that gas utilities pay for deliveries of natural gas from interstate pipelines has been cut in half since 2005, from $8 to $4 per million BTU. This has been a tremendous boon to the U.S. chemical industry which now has the cheapest feedstocks among all our global competitors, as well as to consumers who pay less to heat their homes. U.S. production of natural gas has increased by 40% in just ten years, and has displaced coal for electric power generation throughout the United States

Cheap and plentiful natural gas has lead to improved air quality and an immense drop in greenhouse gas emissions. Since 2005, our carbon emissions are down more than 10 percent. We have cut our carbon emissions per dollar of GDP by closer to 20 percent. This means that despite all the posturing by supposedly Greener countries, we have reduced our carbon emissions more than virtually any other country in the world, including most of Europe.

World oil prices have fallen by two-thirds, largely due to the massive increase in U.S. production, saving hundreds of billions of payments for foreign oil and depriving state sponsors of terrorism of billions in revenue. Crude oil prices dropped from $103 per barrel in 2011 to $45 in 2015. U.S. production climbed from 8 million barrels per day in 2008 to 15 million barrels per day currently. Just four years ago, gasoline cost on average $3.64 per gallon, last year it cost $2.14.

So why the hysterical reactions? There have been isolated problems – largely due to local subcontractors disposing of wastewater improperly – but banning fracking for that reason would be like banning crabbing and oystering because a few waterman harvest illegally.

I believe we are observing again a social phenomenon that has happened frequently in the history of environmental regulation. It involves the acceptance of unfounded claims due to social pressure and reinforcement from politicians, media and social groups with whom we associate. It affects everyone – politicians who uncritically repeat what they hear whenever it appears to advance their careers, celebrities who are too dumb to think on their own but understand how to get publicity by attaching themselves to a cause, and all of us who hate to appear contrary in social settings. It is manipulated by activists who seed the process with false news.

This is not the first time this has happened. Remember when Meryl Streep was telling you that alar on apples would kill you? The Governor of New York and EPA officials knew that scientific tests had proven that there was nothing toxic in Love Canal but jumped on the bandwagon to create a massive new liability and regulatory empire. For a great analysis of how and why this happened, there is a fascinating paper by a behavioral economist and a law professor, Cass Sunstein, who served as regulatory czar in the Obama Administration.

The opposition to fracking is conducting a misinformation campaign that would make the Russians proud. It is promoted by those who hate oil and gas in principle, who don’t want us to have cheap energy, and who want to keep it in the ground at all costs. No falsehood about fracking is beneath them, because their end justifies the means. We on the Eastern Shore should not be fooled.

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 Catholic Perspective on Assisted Suicide by David Montgomery


This has been a difficult column to write, and it is even harder when you are third into the debate.   I feel barely competent to write about assisted suicide, but I see no one else stating what I believe needs to be said.  I am a Catholic, I have some education in Catholic moral theology and social ethics, and I am convinced by the reasons that the Catholic Church gives for opposing physician-assisted suicide.  Therefore I will try to state and defend them in this column.

Catholics have frequently participated in this kind of debate by arguing in the same terms as those with whom they disagree.  This is a time-honored tradition, practiced most famously by St Thomas Aquinas (1225-1274).  It takes the form in this case of showing that physician-assisted suicide does not have the practical advantages cited by proponents and conflicts with values that its supporters espouse.  The practical dangers include likelihood that lethal quantities of prescribed barbiturates will end up on the street, possibilities of insurance fraud or fraudulent acquisition of drugs, and cost to the taxpayer.  The secular value conflicts include inherent discrimination on the basis of age and disability and violation of the rights of family members.  

I am impressed by the practical arguments that suggest this is a deeply flawed bill that could do great harm, but to my mind they do not go anywhere near far enough. What I believe need to be addressed are two other arguments in favor of assisted suicide, one based on a relativistic view of morality and one claiming that there is a “right” to suicide.  The Catholic Church dismisses both these arguments, for good reasons.

The controversy over suicide is a textbook example of the difference between relativism and the recognition of moral absolutes.  Relativism holds that there is no single standard by which an action can be judged good or bad, and such judgments all depend on intentions and circumstances.   In application to whether proposed laws are good or bad, this approach would ask whether the good that might be done outweighs the harm, or vice versa.  I see this point of view almost exclusively in the suicide debate.

The relativist tries to answer the questions: Will the suffering that could be avoided by assisted suicide in some circumstances be greater or less than the suffering likely to be caused by the availability of assisted suicide in other circumstances?  How should the pain caused by a father shooting himself when unable to commit suicide in a less traumatic manner be weighed against the suffering of loved ones who lose a father too soon because of the availability of lethal drugs?  I do not believe there is any satisfactory answer if the question is posed in this way.

As an alternative to this way of thinking, Pope St John Paul II (1920-2005) wrote in The Splendor of Truth that “there exist acts which per se and in themselves, independently of circumstances, are always seriously wrong by reason of their object.”  These acts include  “Whatever is hostile to life itself, such as any kind of homicide, genocide, abortion, euthanasia and voluntary suicide….”

Christian, Jewish, Buddhist or Hindu, all the great religions agree on the inherent value of every human life.   From this principle all other moral conclusions follow.   For the Christian, respect for life is enhanced by our belief that we are all created in God’s image.

Taking one’s own life or assisting in the intentional act of taking another’s life are denials of the value of the gift of life and rejections of God’s love and mercy.  Suicide amounts to substituting one’s own will for the will of God at the most important possible moment.  Not only does suicide abandon love of self, it is a negation of love for others.  I would add my personal belief that the choice of suicide, if it is made without coercion and with full understanding of what is being done, is the ultimately selfish act, not only for theological reasons but because it inevitably inflicts suffering on those who love the victim.

Catholic, and I suspect all other Christian, bio-ethics recognizes that in the vast majority of cases, dying persons who choose suicide are not making such a choice.  Many, perhaps all, are under such coercion from physical or psychological suffering, guilt for being a burden, or active pressure that they are not fully responsible for their actions. Thus nothing in the statement that suicide is wrong implies any judgment about an individual who makes that choice, but it does make it clear that we must try to prevent suicide in every possible way.  

In particular, the duty of the Christian and society is to provide the loving care for the dying that can make the choice of suicide no longer an issue.  The proper response to descriptions of the suffering of those who wished for assisted suicide is not to vote to make it possible, but to resolve to provide compassionate, loving support whenever a friend or loved one is nearing death so that they will not be compelled to hasten the end.

It is also important to recognize that physical suffering is not a duty or necessity for the dying.  Pope Pius XII (1876-1958) was asked whether it is permissible to administer pain-medication to the dying in sufficient quantities to alleviate suffering, even if is known that the treatment will shorten life.  His answer was “Yes.”

There is much less latitude in Catholic teaching for those who assist in the taking of a life either directly or indirectly.   Again quoting from The Gospel of Life, “To concur with the intention of another person to commit suicide and to help in carrying it out through so-called “assisted suicide” means to cooperate in, and at times to be the actual perpetrator of, an injustice which can never be excused, even if it is requested.”  Even voting for such a law is concurring with the intention to commit suicide and would be considered “co-operation with evil.”

This is the moral case that the Catholic Church makes against assisted abortion.  It is based on natural law and the recognition that  “every person sincerely open to truth and goodness can … come to recognize … the sacred value of human life from its very beginning until its end, and can affirm the right of every human being to have this primary good respected to the highest degree.”

Assisted suicide has also been supported as one of the “rights” that are constantly being invented by liberal society.  One of the co-sponsors of the current Maryland bill is quoted as saying “I believe adult American citizens should be entitled to maximum autonomy and personal freedom.  I don’t want a nanny government controlling my body.” A good libertarian statement by, I am ashamed to say, a Republican member of the Maryland Assembly. While I equally detest the nanny government telling me what I can eat or what kind of health insurance I can buy, the good Republican gives a definition of freedom that is just wrong.  

Contrast his notion of freedom to that of Pope St John Paul II: “The commandment ‘You shall not kill’ thus establishes the point of departure for the start of true freedom. It leads us to promote life actively, and to develop particular ways of thinking and acting which serve life. In this way we exercise our responsibility towards the persons entrusted to us and we show, in deeds and in truth, our gratitude to God for the great gift of life.”

The claim that there is a right to suicide confuses freedom to make an arbitrary choice with freedom to choose that which is right and good in light of our natures.  In the Catholic tradition, freedom means being able to set aside compulsions of habit, social pressure, depression, anxiety, fear, pride and all the other influences that drive us to do things we regret, in order to discern and make the choices that lead us toward our greatest good.  It does not mean being able to choose in a morally indifferent way whatever those feelings incline us to do.

So if rights derive from our nature, and respect for life is part of our nature, there can be no such thing as a right to suicide in any form.  Far from recognizing a natural right, any law authorizing assisted suicide would, in the words of the 1980 Vatican Declaration on Euthanasia, “be legalizing a case of suicide-murder, contrary to the fundamental principles of absolute respect for life and of the protection of every innocent life.”

For an account of Catholic teaching on the subject far clearer than what I can write, I recommend the 1980 Declaration on Euthanasia and Pope St John Paul II’s encyclical The Gospel of Life . Or just the Catechism of the Catholic Church Part 3, Section 2, Chapter 2.

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.


Carbon Taxes, Tax Reform and Reduced Regulation by David Montgomery


The carbon tax has re-entered the political scene with a visit to the White House by a group of former Republican official last Wednesday. Their proposal, endorsed by Senator Van Hollen, would impose a $40 per ton of carbon tax and distribute the proceeds by sending a quarterly check to every American. Perhaps unnoticed by Senator Van Hollen, their proposal included repeal of all existing regulations made unnecessary by the carbon tax.

I agree with all of them about the need for a carbon tax.

First, what is a carbon tax? It is a tax on the carbon content of oil, natural gas, and coal, collected from their producers or importers. Coal contains about twice as much carbon as natural gas, and oil is in between so that the tax promotes switching to cleaner fuels and energy conservation. The carbon tax will show up in energy costs for consumers. A $40 per ton carbon tax is the equivalent of a gasoline tax increase of 36 cents per gallon and would also apply to natural gas, heating oil, propane and electricity generated from any of those fuels.

Why do some Republicans and Democrats like a carbon tax? For me, the reason is that the carbon tax is far less intrusive than regulations put in place over the past eight years to limit carbon dioxide emissions. It will impose far less cost on the economy and American families than the current regulations, and it will motivate free market solutions and innovation to find less costly alternatives to oil, natural gas, and coal, fuels that we cannot now do without.

Even though I am skeptical of the disasters predicted by climate activists and President Obama, there are solid scientific and economic reasons that justify looking for cost-effective ways to reduce the risks that climate change might pose. Studies from a wide variety of institutions with no common ideology agree that the carbon tax will have much lower cost and put less drag on the economy than current regulations and those that might be put in place by future administrations. Unfortunately, a carbon tax doesn’t hide its cost the way that regulations and subsidies do, nor does it give politicians the opportunity to direct benefits to the particular interests they serve like the current inefficient package of regulations and subsidies. I think that is a good thing, but it is a political handicap.

Nevertheless, I disagree in several ways with this specific proposal.

$40 per ton is too high and letting the tax increase forever is too much. Even the Obama Administration found that that the damage to the United States from carbon dioxide emissions was no more than $10 per ton. A tax at $40 per ton clearly fails the test of having costs greater than benefits. The Republican proponents of the $40 per ton tax cited the Paris Agreement, in which President Obama promised to reduce U.S. emissions to 26% – 28% below 2005 levels by 2025, as justification for that large a tax. But the numbers in the Paris Agreement, to which President Obama unilaterally committed the U.S. last year, were an arbitrary political choice, backed by no cost-benefit analysis and were a bad deal for the U.S. President Trump intends to change that deal, and he is right.

President Obama’s Paris commitments were a bad deal because more than 50% of carbon dioxide emissions that will be released in the next century will come from China and India, and their commitment in Paris was that they would start thinking about reducing emissions some time after 2030. It is bad geopolitical strategy to commit ourselves to take actions that require comparable action by others, when our counterparts have indicated no willingness to match us. Nor will fulfilling our Paris commitments do noticeable good for the world.

By the time our Paris commitments made any difference to the rate of increase in global temperature, those who now face risks of natural disasters and weather that might be made worse by climate change will have died of old age. We would do better to spend our resources now delivering aid directly to those people, not through their almost universally corrupt governments, and to do so in ways that are effective in reducing their vulnerability now as well as far in the future.

The idea of giving the revenues from a carbon tax directly to the people has many merits, including making sure it does not just go for frivolous spending. But it is not the best use of the revenues. First, Senator Van Hollen and other advocates of that approach err when they claim it will offset all the burden of the carbon tax. That is impossible. The government can return the out of pocket cost of the carbon tax by returning every dollar collected, but that will not reverse the drag on the economy that comes from replacing cheap with expensive energy. The problem with all taxes is that they create harm to the economy beyond the money they take from people’s pockets, by misallocating resources and reducing incentives to work and produce.

But some taxes are worse than others, and the best use of the revenue collected by a carbon tax would be to eliminate taxes that do far more harm. And right now there is an opportunity to make that trade that we have not seen since the 1980s.

After Obamacare, the highest priority of the Republican Congressional Leadership and the President is to enact comprehensive tax reform, which we have not seen since the Reagan Administration. President Trump has promised that action will begin in the next few weeks. A carbon tax could play a critical role in making tax reform possible and even more effective.

It is much more beneficial to use a carbon tax to fund tax reform than the rebate plan, which gives up economic benefits for political appeal. There is a cost to reducing emissions – it entails a shift to energy sources that cost more creating drag on the economy that slows wage growth and cuts into investment returns. And the carbon tax doesn’t raise enough money to cover these added costs. Using the revenue to reduce other burdensome taxes gives a Double Dividend – it not only gets the money back in the form of reduced taxes but it eliminates the disincentives for work and investment created by the current tax law. That leads to higher wage growth and better investment returns and a double dividend.

The Blueprint for Fundamental Tax Reform proposed by Speaker Ryan Chairman Brady of the House Ways and Means Committee attacks the most growth-killing taxes as well as eliminating paperwork and unfair preferences. The non-partisan Tax Foundation concluded that the Blueprint will give almost 10% higher GDP, create 1.7 million jobs and raise after-tax income for all classes of taxpayers by over 8%.

Since the Democrats have stonewalled every action by the Trump Administration, no matter what the merits, getting tax reform through requires using the Budget Reconciliation bill. This only requires 51 votes in the Senate, but the measure must be 1. relevant to the budget, which tax reform is, and 2. budget-neutral over the next ten years. To be budget-neutral, the plan only cuts taxes as much as possible without increasing the deficit. The carbon tax would make it possible to cut tax rates for individuals and businesses even further, or could overcome the revenue-draining effects of the inevitable carve-outs and exemptions for special interests. Or the carbon tax could provide a substitute for some of the provisions of the Blueprint that raise revenue if they prove too unpopular.

But none of this matters unless we roll back the badly designed and overly burdensome regulations and subsidies that have accumulated over the years. The greatest increase in regulatory burden took place during the Obama Administration, but the list of costly and ineffective regulations goes further back and further west. The Bush Administration gave us mandates and subsidies for renewables and California holds the country hostage with its ability to set fuel economy standards.

Quite literally, the power of a carbon tax to unleash market forces to find least cost solutions and stimulate innovation is neutralized by regulations that mandate particular actions to reduce emissions whether they make economic sense or not. Here is a short list of what has to go if the carbon tax is to be fully effective: the Clean Power Plan regulating electric utilities, the recent tightening of Corporate Average Fuel Economy Standards that will make new cars more and more expensive, the Renewable Fuel Standards that enrich only the ethanol lobby and require more ethanol in gasoline than engines can safely burn; and tax subsidies for renewable energy that hide its cost in the income tax rather than revealing it in electricity bills. That is a partial list of Federal regulations, but it is not enough. California was given authority to set its own fuel economy standards by President Obama, and that must also be pre-empted to relieve the burden on auto manufacturers that will otherwise be shared nationwide. Likewise, Maryland’s Renewable Portfolio Standards that force utilities to pay for excessively costly solar and wind installations must be pre-empted, if these sources are to compete on a level playing field created by the carbon tax. And there are others at the state and Federal level.

But eliminating regulations and subsidies is the hardest step. They are supported by an unholy alliance between the environmental activists and politicians who prefer government intrusion and the industries that benefit from it. I hope Senator Van Hollen is ready to break the mold and go along with this part of the proposal he endorsed, but I suspect he will change his mind when he realizes that the carbon tax will do away with the regulations and subsidies he loves so much.

So I do hope the White House listens to and sensibly modifies the proposal from moderate Republicans. The proposal fits and would advance their priorities for regulatory and tax reform. It is the most free market way to address the potential risks of climate change. But will only achieve all this as an inseparable package – carbon tax, tax reform, and rollback of regulations. There will be little benefit from a carbon tax if the money is given away and regulation remains.