Risky gamble in setting taxes, spending

Chances are good that most people missed a major change in national economic policy last month that could effect everything from taxes to spending.  In other words, your wallet.

The issue is how the government calculates the future effect on both the economy and the government budget of bills proposed in Congress.  Obviously, bills with either a projected positive effect or no effect would have a better chance of becoming law than those imposing added costs.

It boils down to something called “scoring.”  In other words, what’s the economic score, winning or losing, from a piece of legislation?

Scoring is based on the rules of the game.  Just as those running any sport can alter its rules, Congress, too, can change the scoring rules.  In this case, changing the rules of the game can change the game itself

Until January, the Congressional Budget Office, the outfit doing the forecasts, used what is called “static scoring.”  It assumed no change in the economy – it would remain static – when the government raises or lowers federal taxes or government spending.

A simple way of calculating the impact, it simply eliminated the need to study what the effect of a measure would be on the economy.  It would look only at the resulting impact on government revenues and expenses.

If, for example, a tax cut was proposed, static scoring would project how much revenue would be lost.  If spending was boosted, it would forecast how much more revenue was needed.

Static scoring does not provide an accurate picture of future effects.  A tax cut might stimulate the economy, which in turn can increase tax revenues.  While it is unlikely that tax cuts can completely pay for themselves, it is likely that the cost of a tax cut can be reduced by the revenues resulting from increased economic activity.

Different measures would have different effects.  A corporate tax cut would produce a different effect than reducing government outlays used to stimulate the economy.  But static scoring could make them seem equivalent by counting only the amount of dollars in each change and not their long-term economic effect.

Now in control of both houses of Congress, the Republicans have ordered a change in the scoring method.  The new approach is called “dynamic scoring.”

Dynamic scoring will look at the effect on the economy of a proposed change in federal revenues and expenses and try to take into account resulting federal tax gains or losses.  To do this, the proposed change will be run through an economic model of the American economy.

For example, corporations say their federal tax rate is too high, making them less competitive in the world.  What would happen to economic growth, possibly bringing in more federal revenues, if that tax were cut?

The answer obviously depends on the model.  That’s the problem.  Just as static scoring with no complete model did not study economic effects, dynamic scoring can be influenced by the design of the model itself.

The other problem created by using dynamic scoring is that effects must be measured over a span of years.  But much can happen in the future that the CBO cannot possibly know.

Congress itself could tinker with the proposed change, almost inevitable in a tax system under which there are more holes than cheese.  And new ones are added every year.

And what about changes in the economy itself unrelated to the change in government policy?  These now-unknown changes could greatly influence how the policy plays out.

Republicans may justify tax cuts by finding their future impact on the federal budget is less than it might appear.  Democrats won’t agree, because they distrust the model.

The new scoring method is a gamble on the future.  It can allow more tax cuts or more spending, but nobody can be sure of really understanding future effects.

Neither the now abandoned static scoring nor the new dynamic scoring can provide more than a guess about the effect of proposed changes in federal taxes and spending.  But the new approach is somewhat riskier than the old one.

Does the same situation apply in states?  No, because all states except Vermont have some kind of balanced budget requirement.

That means, at the state level, every tax cut or spending increase must be immediately balanced by other measures that keep the budget from falling into a deficit.

While the possible future impacts may influence legislators’ decisions, this is the ultimate in static scoring.  The budget offset is not based on future developments; it exists right from the start.

Unions decline; minimum wage lags

To judge from the news, you might think that organized labor was alive and well.

On the West Coast, the slowdown at the nation’s largest ports is coming to an end after lengthy negotiations between unions and employers.

In northern New England, a settlement has been reached between Fairpoint, the telephone company, and its striking workers.  A weak company and an underfunded union finally collapsed into one another’s arms.

On the Gulf Coast, refinery workers have been on strike most of February.

In most cases, the unions seem to be fighting off concessions to management rather than pressing for major improvements in wages and working conditions.  They also must oppose the increased use of outside, non-union workers.

Unions are not nearly as powerful as they are made out to be.  When commentators talk about the financial power in the political arena of big companies and big labor, they give the impression of an equal match, but the facts show employers have far more resources than unions.

And some governors, notably Republicans Scott Walker in Wisconsin and Chris Christie in New Jersey, are cutting back on unions.

About half the states have some form of “right to work” laws, which prevent a union from collecting payment from non-members, even if those people get the benefit of the collective bargaining carried out by the union.  Such laws are meant to weaken unions.

The discussion of government raising the minimum wage is a sign of the waning power of unions.  Over recent decades, labor gains have been made more by legislation than by collective bargaining.

A lot of attention is paid these days to two issues: the income gap between workers and top corporate executives and the minimum wage.

Thomas Piketty, the French economist who has become the leading critic of the growing income gap, suggests that one way to close it is by imposing taxes that would cap executive pay.  That idea is unlikely to gain political traction in the United States, especially with GOP control of Congress.

An alternative is to pull up the bottom by increasing the minimum wage.  This move has nothing directly to do with increasing taxes, though its opponents claim that it would increase companies’ costs, thus reducing their sales and costing jobs.

There’s almost no solid evidence to support that view.  And the minimum wage – $7.25 an hour – has not increased in more than five years, though corporate profits gained 20 percent a year.

The theory may get it backwards.  A higher minimum wage may turn out to cut employer costs.  Higher wages reduce employee turnover, which otherwise imposes heavy costs for training and integrating new workers into a company.  Low pay also encourages workers simply not to show up.

Studies show that better paid workers are better motivated workers.  They do a better job and that can lead to more sales for quality products and services.

Even though Washington seems unable to recognize both the need to keep the minimum wage up to date and the value in improved pay for millions, some states, cities and corporations get the point.

All other New England states, except New Hampshire, have minimum wages above the national level and above Maine.  Many other states have higher minimums.

Walmart, one of the countries’ largest employers, has announced it is raising pay.  Its CEO said, “We’ll raise our starting pay, and we’ll provide opportunities for further raises based on performance.”  New employees will get $9 an hour.  Next year, employees will get $10.

Aetna, a major insurer, recently announced big increases for its employees.  Trader Joe’s and Costco reportedly pay good wages.

An argument could be made that the market will produce wage increases, so no change in the law is needed.  But many companies believe their goal must be to keep wages and benefits as low as possible to enhance profits.  With that view, it might take decades for wage increases to be given.

In an interview with the New Yorker magazine, Aetna CEO Mark Bertolini said, “Companies are not just money-making machines.  For the good of the social order, these [pay increases] are the kinds of investments we should be willing to make.”

The deep political divisions existing in the U.S. today reveal that Mr. Bertolini’s views are not accepted by many conservatives.  But real wages – pay in terms of purchasing power – have barely changed in many years, a sign the private sector acting on its own, without a government-set minimum or effective collective bargaining, is not the solution.  

Electricity: Good policy can produce bad results

Sometimes, bad things happen to good people.  Take electricity.  The more you save, the more it may cost.

You reduce your consumption of electricity by using more efficient equipment and appliances and changing all your light bulbs.  Because you now use fewer units of electricity – kilowatt-hours or kWhs, you expect lower electric bills. 

Now look at this situation from the viewpoint of your electric utility.  It owns the poles and wires used to bring electricity from the generator to you.  In many parts of the country, though not in Maine and most of New England, it owns the generator.

Regulators allow the utility to charge for the use of its grid by the amount of kWhs you use. The owner of the generator gets paid much the same way for the power itself.

With new wind generators coming on line, the utility may have to build new transmission lines to connect suppliers in remote locations.   Federal regulators have ruled that customers rather than power developers should pay for the cost of the new lines.

To try to avoid such rate increases, the Maine Public Utilities Commission is now considering how to develop non-transmission alternatives (NTAs).  It seems to be headed toward some sort of central control rather than requiring that NTAs be considered whenever new transmission is proposed.  Utilities themselves might be allowed to offer NTAs for their own customers

But there is also the problem of wires costs increasing even with no new transmission, because customer use is decreasing.  Utilities face a problem under the current rate system.  By raising kWh rates to recover their costs, utilities run the risk of encouraging customers to cut their use even more.

You can reduce your consumption through conservation and efficiency, but your bill will not decline.  In fact, it is likely to increase because of reduced sales, some customers quitting the grid entirely to self-generate or when remote renewables are added.

The trade organization of the investor-owned utilities has said its members face a “death spiral.”  The obvious solution from the utilities’ perspective is to charge for the wires without linking the rate to the number of kWhs. 

The utility reasons it was authorized by regulators to build new transmission lines and to recover their costs from customers, and it went ahead based on that assurance.  The regulators should honor that deal by allowing a new way to recover costs.

The problem exists for wires, but not really for generators.  The owners of power plants are supposed to be investors taking on the risk of a competitive market.  The wires companies operate regulated monopolies where there is no direct competition.

One solution would be to charge each customer a fixed fee while reducing the unit charge. A Wisconsin utility proposed that plan, but was forced by consumer protests to drop it.

This looks like a serious problem with nobody at fault and no way out.  But, realistically, the wires companies cannot be allowed to fail.

Perhaps the solution comes from how you look at the problem.  The current model is based on the electric utility as it was invented in the Nineteenth Century.  But the world has changed, even if the industry lags behind.

People are increasingly interested in avoiding the grid and the costs of power supply, even if competitive.  An executive of NRG, a generation company, says the country faces the “era of personal power.”

People are reducing their use of electricity from the grid.  Efforts to promote renewables and efficiency are paying off.  Most important, people accept change far more readily than in the past.

The new smart meters and the smart grid, already paid for by customers, can realize their potential and integrate power coming off utility lines with local measures.  That should be done automatically without the customer having to control switching.

In an important new development, Tesla, the battery powered car company, has just announced that it expects to launch home-level electric storage in about six months.  That would make renewables more reliable and encourage purchasing from the grid only when low-cost power is available.

Answering the problem of falling customer demand could turn out to be the salvation of utilities.   If they get fixed fees, these charges should be phased out over a set period, and the utilities should be allowed to try to make up for lost revenue by setting up unregulated affiliates to compete with others in providing “personal power” and NTAs.    

This is the new world for electric customers and utilities, and both could benefit from it. 

Measles issue: Can you trust government, science?

The argument over measles shots is really about bigger questions – if citizens are free to reject government authority and if science merits the public’s respect.

By now, most people are aware of the political debate about the proper role of government.  These days, it focuses on the size of government budgets, taxes and the effect of government regulation on private enterprise.

The measles controversy, caused by the unwillingness of some people to let their children get shots and the willingness of some politicians to support them, goes far beyond that familiar debate.  It goes to the core question of the relationship between individuals and their government.

This question was at the heart of the American Revolution, caused to a great degree by British suppression of Americans’ human rights and freedom.

Take the Third Amendment to the Constitution, which just about everybody likes.  It bans the government from lodging soldiers in private homes in peacetime, and only by law in wartime. Previously, the British, when short on barracks space, had simply required soldiers to be lodged on private property.

The British imposed government demands over people’s rights.  The Bill of Rights was meant to deny government such excessive power.

One reason that some parents fight measles vaccinations is simply the historic opposition to governmental power.  With all the political campaigning against big government, some people have come to see the requirement for measles shots as just another example of its excesses.

Government exists to protect public health and safety, and it alone can carry out that responsibility.

Conservative advocates say people should not get government aid, but should be left to sink or swim economically in the marketplace.  But public health and safety cannot be a matter of sink or swim.

The initial reaction of some potential Republican presidential candidates, saying that parents ought to decide on measles shots independent of government control, amounted to pandering to GOP primary voters who oppose “big” government.

These same Republican leaders backed off, at least to some degree, perhaps because they realized there are many parents whose children might be unnecessarily exposed to measles carried by unprotected school mates.  Maybe they also recognized that government has a legitimate and necessary role to play.

Resistance to government requirements results not only from a desire to limit government but also from distrust.  If you believe it is bloated, corrupt, all about self-enrichment, and, worst of all, consciously seeking to substitute socialism for freedom, can you trust anything it says?

Having grown to distrust government authority, some may end up distrusting any authority whose word they must accept. Good science, which does not do government’s bidding, gets the same lack of deference as government itself.

In good science, ideas are advanced and tested, and the results of carefully designed tests are used to reach conclusions.  In addition, any finding can be challenged by new discoveries and research, and challengers are encouraged.

Some findings are continually tested.  Did dinosaurs walk the earth millions of years ago?  Is the universe getting larger? Are measles shots effective and do they cause other illnesses?

One of the benefits of good science is that scientists spend years learning how to design and conduct reliable tests to make sure they are correct. They often collect massive amounts of data and subject it to careful analysis. That ensures that scientific findings are not a matter of opinion, but an effort to get as close to absolute truth as possible.

If people worry about the side effects of measles shots, science must try to find out if there is any basis for these worries.  No problems have been found and the benefits of the shots are well known, so they continue being given.  The known and proven benefits far outweigh the unknown and unproven risks.

The problem with measles shots may have been caused by one study of 12 children in Britain years ago.  Based on phony data, it sensationally claimed the shots caused autism.  The author sought fame, but, while it took years, he was finally caught in his lies and his conclusions rejected.

The unfounded prejudice against good science is fostered by politicians whose stock-in-trade is causing distrust and who are willing to assert their politics-based opinions as having equal weight with research-based science.  People may get to pay the price.

Government and science each have legitimate and necessary jobs to do – public health and safety and searching for the truth -- and, to that degree at least, both are worthy of respect. 

Right now, that means children should get measles shots.