Fixing America, Part III

Point three on our list is energy dependence. This can and must be addressed on multiple levels and from multiple angles. Much of this is related to one particular type of so-called market failure, a situation in which markets do not provide optimal results. Even staunch believers in markets (like the writers of this blog) know these exist. The type in question here are called externalities. These are costs of doing something that are not paid by the person doing it. Pollution is the prime example. It is much cheaper for a factory to dump its waste into a nearby river than to pay to dispose of it properly. This does not mean that dumping waste in the river has no cost. On the contrary, the costs are extreme. The pollution may kill fish and poison water supplies downstream, killing people and making them sick. When the overall cost of dumping waste into a river is seen, one notices that the costs to everyone in total of properly disposing of the waste are actually very small by comparison. If the factory owner had to pay the costs in both situations, he or she would choose to properly dispose of the waste, as it is much cheaper.

In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).

But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).

Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.

Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.

All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.

OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.

Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.

How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.

This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).

All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...

Fixing America, Part II

Now for part two on our list of problems to be fixed in America: inequality. I'm a believer in equality of opportunity, not overall equality. Everyone should get similar chances in life. The outcome, then, is up to each individual. I would consider inequalities that then form to be "fair."

That said, we are far from this in the US. We like to believe that anyone can do anything (and there's certainly truth to that), and complete equality of opportunity is not possible, nor is it really desirable. Nonetheless, some find it much harder to reach their potential than others. Being born in a wealthy family and going to a good school increase your chances of success dramatically.

This is why education reform is so important. Education is strongly correlated with income. The current system is unfair, for obvious reasons, but it's also economically inefficient: talent is wasted. Kids with potential who live in bad neighborhoods are much less likely to reach that potential. More charter schools and federal funding for poor schools are needed, as well as more teacher and school accountability. Some of this is happening, but teachers' unions are standing in the way of more sweeping reforms. This is shameful.

Fixing America (and the rest, really)

There are four problems in America right now that, if solved, would restore a great deal of America's strength:

1. Exorbitantly priced, patchy healthcare
2. Inequality of opportunity resulting in an undesirably high level of income inequality
3. Energy dependence
   
4. Budget and current account deficits, debt, and America's labyrinthine tax system.
   

These problems all seem nearly intractable, but they're not! Let's start today with the seemingly most incurable of them all: healthcare. The current healthcare bill would solve some of the patchy coverage problem, but it is a band-aid at best and does nothing to address the underlying problems with the system. Part of the problem is that we have been presented with two false options: private health insurance, or one managed by the government. These are NOT the only two options, however. The economist Tim Harford calls attention in his book The Undercover Economist¹ to a system that has been in use in Singapore for two decades. It would cut costs hugely, give control of most of healthcare to individuals, not government OR insurers, would ensure a high standard of care, and would be universal. Sound impossible? It would be if we remained inside of the private/public health insurance box we've been stuck in.

Here's how it works:
Instead of buying health insurance, individual health accounts are set up. Every person in the US gets a $1,500 per year tax break (roughly the amount paid in taxes to public healthcare in the US already) that is deposited into an individual health account. The deposit is obligatory, but the use of the money is optional and at the individual's discretion (as long as it's for healthcare). Those who do not earn enough to pay over $1,500 a year in taxes will be given a subsidy in that amount. Two things will happen here: younger people, who often avoid health insurance because they (usually rightly) think they can save money by betting they won't get sick, can leave the money untouched. Deposited in a high-rate bank account, this money will grow over the years and can be used for health problems later in life. The other thing that happens is that each individual can decide what types of care she would like. Homeopathy? Flu shots? Massage therapy? No one would have to worry about whether insurance would cover it: there's no health insurance!

There's a third effect, and this one is huge: currently, government and private health insurance companies spend unbelievable sums of money on administration (risk assessment, lawyers, etc.) to attempt to provide low-cost coverage to healthy people and predict who will need more care. These costs disappear under this system.

Finally, the point of this personal responsibility is that, when people see how much things cost, they will make decisions about whether to get treatment or not. That is currently not the case in America's employer-based insurance system. Rationing currently occurs by who can pay the most (insurance companies and employers decide who gets what). In a government-run system (think Britain), the government decides who gets what. In this system, the individual decides what he would like. I think we can all see why this is attractive.

I know, I know, I can already hear the objections: a single MRI or a round of cancer treatment can cost significantly more than $1,500! You're right, of course. That was only one part of the picture, although this plan would likely bring those costs more in line with treatment costs in other developed countries because people would choose less treatment knowing the real costs. The other two are catastrophe insurance and government aid for the unfortunate, along with changes to liability laws, which currently lead to high legal and insurance fees for doctors and to doctors prescribing every treatment in the book, making all treatments more expensive.

Catastrophe insurance is cheap, as only really serious events are covered. In addition, there would be some co-pay (maybe $500). This would provide some encouragement for people not to put themselves in dangerous situations or to run down their personal accounts with frivolous spending.

The government aid is for people who don't suffer catastrophes, but rather who are born with bad genes and need to spend more on healthcare. Here, to be fair, the government would simply have to help out.

There's another result not mentioned in Harford's book: this would all serve to increase wages and tax revenues, making the system more than pay for itself. Studies have shown that much of the cause of wage stagnation in the US in the past decades has been due to healthcare cost inflation. Workers' wages were rising, they just didn't know it because the money was flowing into healthcare. With that system eliminated, employees would receive more cash. They would also then pay more in taxes.

In this system, the benefits for nearly all are obvious. The only ones who would not benefit are the insurance companies. For this reason, you can expect this plan to never come up and, if it did, to be heavily lobbied against. The other problem: it takes a while to explain - voters don't like policies that seem complicated up front (although this one would be much simpler in reality than the current healthcare bill!).

That said, something will have to happen eventually. Americans will not be able to afford their healthcare system indefinitely, unless they want to trade everything else. Let's hope they make the right choice...

1. Tim Harford, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor - and Why You Can Never Buy a Decent Used Car! (New York: Oxford University Press, 2006), 130-135.