Rep. Tom McClintock tells David Fahrenthold of the Washington Post what economists mean by “concentrated benefits and diffuse costs”:

This Congress has also indulged in the habit of letting “temporary” giveaways become effectively permanent. A prime example is the Essential Air Service, a $240 million program that subsidizes flights to 161 small airports.

It was supposed to die in 1988. It didn’t.

Congress has renewed the program, again and again. Now it subsidizes flights to places such as tiny Glendive, Mont., where the government pays for a 19-seat aircraft to visit twice a day.

On average, two people get on each day. The subsidy works out to $836 for each of their tickets.

“If we can’t cut this, we can’t cut anything,” said Rep. Tom McClintock (R‑Calif.), who sponsored an attempt to kill the program last summer.

They can’t cut this.

McClintock’s amendment lost by 74 votes. Then he tried again this summer. And lost. Many members explained their “no” votes by saying they were unwilling to sacrifice the subsidies to airports in their districts. “It’s that old problem of concentrated benefits with diffuse costs. The benefits are lavished on a few select communities, and the costs are diffused across the entire tax base,” McClintock said afterward. The beneficiaries, he said, are the only ones who care enough to fight.

David Fahrentold reports in the Washington Post:

[P]ork, the habit of using taxpayer money for a legislator’s pet cause.… appears to be stronger even than death.

That’s clear from the story of the Robert C. Byrd Highway, a decades-old road project in West Virginia that had received earmarked funds for years from Sen. Robert C. Byrd (D‑W.Va.), the longest-serving senator in history, who died in 2010.

The highway has been maligned as a wasteful road to nowhere. But, now, it has outlived earmarks. It has even outlived Byrd.

This year, with continued support from Sen. John D. Rockefeller IV (D‑W.Va.) the highway got $40 million in federal money. It will need about that much every year, state officials say, until it’s finished in 2035.

In my recent op-ed for The Hill examining the Obama administration’s estimation of the social cost of carbon (SCC)—a measure of how much future damage is purportedly going to be caused by each ton of carbon dioxide that is emitted through human activities—I identified two major problems with their measure.

First, the administration’s SCC was based on an estimate of global rather than domestic damages from anthropogenic climate change—an odd scope for a measure designed to be incorporated in the cost/​benefit analysis of U.S. rules and regulations governing domestic activities (such as the energy efficiency of microwave ovens sold in the United States). In fact, Office and Management and Budget (OMB) guidelines state that

Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.

Instead of “reporting separately,” the administration’s SCC embodies “effects beyond the borders of the United States.”

Second, the administration recently revised (upwards) its initial calculation of the SCC. In doing so, it included updates to its underlying economic/climate-change/damage models, but it did not include any updates to the characteristics of the equilibrium climate sensitivity used by the models. Since the equilibrium climate sensitivity is the key factor in how much climate change will result from a given amount of anthropogenic carbon dioxide emissions, and since there is mounting scientific evidence that the equilibrium climate sensitivity is better constrained and lower than that used in the initial analysis, there is no defensible reason why the new science was not included in the administration’s revised SCC calculation.

So that’s two strikes against it.

What I didn’t go into in my op-ed, because it is a rather complicated topic, is the choice of discount rate used in the administration’s SCC analysis. The discount rate, generally put, reflects how much you are willing to pay now to avert future damages. The lower the discount rate, the more costly (in today’s dollars) future damages become. The same OMB guidelines mentioned above also cover the selection of the discount rate to use in cost/​benefit analysis. The OMB guidance is that as a default an analysis should use a 7 percent discount rate as the base case, and to show the sensitivity of the results to the discount rate assumption, the analysis also should include the results of using a 3 percent discount rate.

The administration ignored that guideline as well. Instead it opted to determine the SCC using discount rates of 2.5, 3, and 5 percent, and didn’t include results for a 7 percent rate—results that would have indicated a substantially reduced cost of future damages.

With now three strikes against it, the administration’s determination of the social cost of carbon should be tossed out.

The door to doing so has just been opened slightly with the announcement that the Department of Energy is opening for public comment a Petition for Reconsideration of its use of the administration’s newly figured and newly increased SCC in its above-mentioned microwave oven energy efficiency rule. We’ll see what becomes of that.

In the meantime, here’s an example of how the SCC is currently being used and abused in the justification of new regulations. Economist Robert Murphy (who recently testified to Congress as to the problems with the administration’s SCC methodology) posted this gem from the Environmental Protection Agency discussions of a proposed new rule regulating discharges from steam electric power plants (and how the rule may impact carbon dioxide emissions from the plants):

Murphy comments:

As the above table shows, EPA is being a dutiful federal agency, following Executive Branch guidelines on how to calculate costs and benefits—it reports its findings using both a 3 percent and a 7 percent discount rate. Yet as the footnote explains, when reporting the benefits of reducing CO₂ emissions, the EPA actually can’t use a 7 percent discount rate, because an estimate of the SCC (social cost of carbon) for a 7 percent rate is “not available.” Why is it not available? Because the [administration’s] Working Group explicitly ignored the OMB guidelines, and only reported the figures for 3 percent and 5 percent.

We thus have an absurd situation, in which EPA and other regulatory agencies will be following the rules and calculating benefits and costs at both the 3 percent and 7 percent discount rates. Yet, when they express the “social benefits” of reducing greenhouse gas emissions at the 7 percent rate, they are actually going to plug in the wrong number, and explain in a footnote why they are doing so. To repeat, this is important, because the “right” number would show that there are virtually no “social benefits” from reducing greenhouse gas emissions.

As I have explained elsewhere, there are far more problems to the Obama Administration’s computer-model-case against carbon, than just the choice of discount rate. Yet the knots into which the federal government has tied itself, in order to avoid revealing the truth about the actual economic literature, is quite revealing—not to mention hilarious.

The administration’s SCC is a devious tool designed to justify more and more expensive rules and regulations impacting virtually every aspects of our lives, and it is developed by violating federal guidelines and ignoring the best science.

All around bad news.

With dead protesters littering the streets of Cairo, Secretary of State John Kerry’s theory that Egypt’s military rulers “were restoring democracy” isn’t looking very good. The dead won’t be able to vote in the new and improved Egypt.

Instead of acting as the regime’s enabler, the Obama administration should cut off foreign “aid.” If there is influence for Washington to exercise, officials should do so quietly and informally.

Unfortunately, U.S. policy toward Egypt has rarely focused on the Egyptian people. The $75 billion in “aid” was largely a payoff to successive dictators and their military Praetorian Guards. Washington worried about “stability,” not democracy. 

Hosni Mubarak was finally overthrown in 2011. In last year’s presidential election, the Brotherhood’s Mohamed Morsi defeated Mubarak’s last prime minister, Ahmed Shafik. The secular liberals were not a factor. 

Morsi failed to establish his organization’s democratic bona fides, and especially to reach out to disaffected Egyptians who only reluctantly backed him. But his opponents were little better, while the Mubarak state remained largely intact and undercut him at every turn.

As I explain in my latest Forbes online column:

It would have taken extraordinary skill, forbearance, and luck, none of which President Morsi possessed, to have succeeded. Had the opposition simply waited Morsi would have discredited political Islam—democratically. In this way, argued Reuel Marc Gerecht of the Foundation for Defense of Democracies: “The Egyptian military may have snatched defeat from the jaws of victory.”

Instead, Morsi’s disparate opponents backed SCAF in staging the July 3 coup: the president removed, his top aides arrested, his movement’s media shuttered and journalists arrested, the president and others charged with fanciful offenses, and his supporters gunned down in the streets.

Certainly it was an odd way to go about “restoring democracy.” David Kramer, Freedom House’s president, cited a “significant decline in most of the country’s democratic institutions” after Morsi’s ouster. What the al-Sisi government actually restored was the old Mubarak structure.

The Brotherhood resisted the military’s demand for abject surrender. After meeting with government officials Sen. Lindsey Graham (R‑SC) said: “You could tell people were itching for a fight.” Indeed, reported the Washington Post, “Two weeks before the bloody crackdown in Cairo, the Obama administration, working with European and Persian Gulf allies, believed it was close to a deal to have Islamist supporters of ousted President Mohamed Morsi disband street encampments in return for a pledge of nonviolence from Egypt’s interim authorities. But the military-backed government rejected the deal and ordered its security forces to break up the protests.” 

The military government acknowledged over 600 dead, and the toll almost certainly was much higher. Many of the killings appeared to be deliberate, the result of army snipers. Sherif Mansour of the Committee to Protect Journalists decried the “systematic” targeting of the press.

The slaughter in Cairo sparked more violence nationwide, including Brotherhood attacks on government buildings and Coptic churches. Although the army has the near-term advantage, the movement has survived prior attempts at suppression. Moreover, the government is encouraging the rise of a more radical and violent leadership. Al-Qaeda’s head, Ayman al-Zawahiri, was a member of the Brotherhood and imprisoned and tortured during a prior crackdown. 

Continuing civil disorder and violence is almost certain. Terrorism is possible. The kind of strife in Iraq after the U.S. invasion and Algeria in the 1990s also is a risk. Of course, in any such conflict there will be little room for liberal and democratic values. 

The Obama administration has ignored U.S. law requiring an aid cut-off after a coup because it wanted to preserve its “leverage.” Unfortunately, Washington has consistently demonstrated its impotence in Cairo. Most recently, Washington has been begging the military to promote reconciliation, without evident success. 

The carnage in Cairo mimics that in Beijing’s Tiananmen Square. To subsidize Cairo today is to underwrite murder. Washington’s best policy is to support neither side and leave this tragic conflict to the Egyptian people.

As regular readers know, one of my great challenges in life is trying to educate policy makers about the Laffer Curve, which is simply a way of illustrating that government won’t collect any revenue if tax rates are zero, but also won’t collect much revenue if tax rates are 100 percent.

After all, very few people will be willing to earn and report income if the government steals every penny.

In other words, you can’t estimate changes in tax revenues simply by looking at changes in tax rates. You also have to consider changes in taxable income. Only a fool, for instance, would assume that you can double tax revenue by doubling tax rates.

But how do you explain this to the average person? Or, if you want a bigger challenge, how do you get this point across to a politician?

Over the years, I’ve picked up a few teaching examples that seem to be effective. People are always shocked, for example, when I show them the IRS numbers on how rich people paid a lot more tax when Reagan cut the top tax rate from 70 percent to 28 percent.

And they’re also more likely to understand why class-warfare tax policy won’t work when I show them the IRS data on how upper-income taxpayers have considerable control over the timing, level, and composition of their income.

Perhaps my favorite teaching technique, though, is to ask folks to pretend that they’re running a restaurant and to think about what might happen to their sales if they double the price of hamburgers. Would it make sense to assume that they would get twice as much revenue?

Almost everybody understands that hamburger sales would plummet and that they would likely lose revenue.

Well, great minds (or at least wonky minds) think alike, because the Tax Foundation has released a great video on dynamic scoring and they use donuts to make the same point.

The video suggests that it would be a good idea to modernize the revenue-estimating process.

I fully agree. The Joint Committee on Taxation, which is responsible for revenue estimates on Capitol Hill, is notorious for using antiquated and biased methodology.

I elaborate (and use my hamburger example) in this video I narrated for the Center for Freedom and Prosperity.

P.S. The Joint Committee on Taxation also is responsible for producing biased estimates of so-called tax expenditures.

P.P.S. Only 15 percent of CPAs (the folks who see first-hand how taxes impact behavior) agree with the Joint Committee on Taxation’s methodology.

A new essay at Downsizing Government focuses on infrastructure investment. The essay discusses problems with federal infrastructure spending and the advantages of privatizing infrastructure to the full extent possible.

Unfortunately, the current administration’s infrastructure policy has been mainly focused on increasing spending on misguided activities such as high-speed rail. But here are some of the problems with such a federal-led approach to infrastructure:

• Investment is misallocated. Federal investments are often based on political pork-barrel factors rather than actual marketplace demands. Amtrak investment, for example, has long been spread around to low-population areas where passenger rail makes little economic sense. Most of Amtrak’s financial losses come from long-distance routes through rural areas that account for only a small fraction of all riders. Every lawmaker wants an Amtrak route through their state, so investment gets misallocated away from where it is really needed, such as the Northeast corridor.
• Infrastructure is utilized inefficiently. Government infrastructure is often utilized inefficiently because supply and demand are not balanced by market prices. The vast water infrastructure operated by the Bureau of Reclamation, for example, greatly underprices irrigation water in western United States. The result is wasted resources, harm to the environment, and a looming water crisis in many areas in the West.
• Investment is mismanaged. Federal agencies don’t have the strong incentives that businesses do to ensure that infrastructure projects are constructed and operated efficiently. Federal highway, energy, airport, and air traffic control projects, for example, have often experienced large cost overruns. The Big Dig in Boston—which was two-thirds funded by the federal government—exploded in cost to five times the original estimate. And over much of the last century, the Army Corps of Engineers and the Bureau of Reclamation were known for spending on boondoggle projects, distorting their analyses, harming the environment, and spending on projects to further private interests rather than the general public interest.
• Mistakes are replicated across the nation. Perhaps the biggest problem with federal intervention in infrastructure is that when Washington makes mistakes it replicates them across the nation. High-rise public housing projects, for example, were a terrible idea that federal funding helped spread nationwide. Federal subsidies for light-rail projects have biased cities to opt for these expensive systems, even though they are generally less efficient and flexible than bus systems. High-speed rail represents another federal effort to induce the states to spend money on uneconomical infrastructure.
• Burdensome regulations. A final problem with federal infrastructure spending is that it usually comes part and parcel with piles of regulations. Federal Davis-Bacon labor rules, for example, raise the cost of building state and local infrastructure. In general, federal regulations impose one-size-fits-all solutions on the states even though the states may have diverse infrastructure needs.

Many policymakers are concerned that America have top-notch infrastructure to compete in the global economy. But the best way forward is for the federal government to cut subsidies and to devolve control over infrastructure to state and local governments. To meet demands for new infrastructure capacity, the states should innovate with privatization.

America’s entrepreneurs are looking for new opportunities. So let’s give them a crack at improving the nation’s infrastructure by reducing federal subsidies and regulations that deter private investment in airports, highways, and many other facilities.

For more, see www​.down​siz​ing​gov​ern​ment​.org/​i​n​f​r​a​s​t​r​u​c​t​u​r​e​-​i​n​v​e​s​tment.

We support getting publicly funded schools public accountability.… No exceptions, no excuses, no special treatment.

Thus spake John Johnson, spokesman for the Wisconsin Department of Public Instruction, on the subject of a new bill his agency co-wrote with Republican legislators. Among other things, the bill would allow the DPI to kick private schools out of the state’s voucher program if it rates them perennial failures.

Here’s the thing: Way back in … August of 2013, (a.k.a., “this month”), the head of a state department of instruction was forced to resign because, while in that same post in another state, he had personally revised his department’s ranking of a school run by a major political donor. State officials and agencies, contrary to the implicit assumption of “accountability” mavens, are not all wise, objective, beneficent philosopher-kings. They are people–and organizations made up of people–who have political and personal vested interests that do not always align with those of the families they nominally serve.

Fortunately, over the course of human history, a system evolved which tends to align the interests of producers and consumers more effectively than any other. It is the free enterprise system, in which producers must compete for the privilege of serving each and every customer, and consumers have the freedom to easily choose from among many competing providers. Let schools do their best to serve families and let families choose their schools: let the chips fall where they may. Some schools will succeed, others will fail. Those that succeed, grow. Those that fail are prevented from continuing to ill-serve families. It is a system that works not simply in theory, but in practice, as I found when I surveyed the worldwide within-country research comparing alternative school systems. The least regulated, most market-like education systems most consistently outperform state school systems, such as we have in the United States.

School choice advocates want all families to have access to that system, but not all policies appear equally capable of accomplishing that goal. When I compared the red tape that vouchers and tax credits impose on private schools, I discovered that vouchers, but not tax credits, impose a large and statistically highly significant extra burden of regulation. It’s not hard to see why: Wisconsin DPI spokesman Johnson has a point. Public strings always follow public funding, at least in K‑12 education. When you force people to pay for something under threat of incarceration, which is what tax funding does, people want a say in how that money is used. It doesn’t matter that regulations frequently fail to accomplish their stated aims or are even counterproductive to them. People still want that perception of control and they will vote and even lobby for the rules and regulations to obtain it.

The likely reason that education tax credits add little regulation to private schools is that no one is forced to pay for private schooling under a tax credit program. Participation is voluntary, and those who participate get to choose which school or which scholarship granting organization receives their money. There is no coercion to support any particular kind of schooling that they may object to, so there is no pressure to try to regulate that kind of schooling out of the program.

That is a virtue that vouchers and state-funded Education “Savings” Accounts (ESAs) both lack.

Perhaps, as I recently wrote in the Washington Times, a new body of evidence will accumulate in the coming years that will cast doubt on the regulatory pattern that now seems to divide tax credits from state-funded school choice programs. Or perhaps further evidence will bolster that pattern. Either way, collecting additional evidence on this point should be a priority for education policy analysts. The more the better.

But in the meantime, we have to make policy with the evidence we have. And, today, publicly funded school choice programs seem likely to induce the suffocation by regulation of private schools.

Voucher/​ESA advocates: what say you?