Niskanen Notes
Decoupling Emissions Reductions from Economic Downturns and Moving Beyond Natural Gas
A carbon price would sustain emissions reductions.
A new report from the Rhodium group finds that after three straight years of decline, CO2 emissions from the U.S. power sector increased significantly in 2018. Based on preliminary power generation, natural gas, and oil consumption data, the report estimates that energy-related U.S. emissions increased by 3.4 percent last year–marking the second largest annual gain in more than two decades, and a departure from recent year-to-year trends.
Between 2007 and 2015, energy-related CO2 emissions from fossil fuel combustion fell at an average rate of 1.6 percent per year. This reduction in emissions was mostly driven by reduced power demand during the Great Recession and a shift from coal to cheaper natural gas, solar and wind power. Natural gas was, and still is, being hailed for its ability to act as a bridge between dirty fossil fuels and renewable energy sources. However, the pace of emissions reductions from energy combustion declined from 2.7 percent in 2015 to just 0.8 percent in 2017-and last year reversed. Increased power demand in 2018, and utilities burning more natural gas to meet this demand, caused the uptick in emissions.
Although the U.S. is on track for record coal plant retirements, natural gas capacity additions outpaced the closure of coal plants by a factor of 3. It is important to note that although natural gas has roughly half the CO2 to energy content than coal does, adding 3 times more natural gas than retired coal plants will increase overall emissions. This suggests that the potential for natural gas to continually replace coal and reduce emissions is not a given. Continued reliance on natural gas in the power industry will limit the ability to achieve deep reductions in CO2 emissions in this power sector, as well as the overall economy.
The Rhodium report also notes that new gas outpaced the addition of renewable energy to the grid by a factor of 4. This makes 2018 the first year since 2013 that renewables did not make up the majority of added capacity to the grid.
Decarbonization of the power sector is integral to reducing emissions in accompanying sectors such as transportation, buildings, and industry. Unfortunately, the Rhodium groups analysis also points out that emissions in all these sectors also went up in 2018.
The slowdown in emission reductions demonstrates the need for a more comprehensive approach to reducing emissions. For all of the progress that environmental groups have achieved in particular states with cap-and-trade schemes and clean energy standards, we are leaving emissions reductions on the table without an economy-wide approach based on carbon pricing.
Without a price on carbon, natural gas prices are artificially low compared to zero-carbon options, a contributing factor as to why natural gas has outpaced renewable power deployment to meet this increased demand by such a large margin. Pricing carbon would ensure that natural gas truly acts a bridge to a renewable energy-based power grid, rather than a road to wanton fossil fuel burning. A carbon tax, for example, would enable more efficient deployments of renewable and natural gas power, and would likely lead to greater levels of coal plant retirements. The combination of these factors would certainly create the environment for a more sustained reduction in power sector CO2 emissions. Although the power sector offers the greatest potential for immediate change, the broad-based incentives created by a carbon price will encourage emissions reductions across sectors, as well innovation in clean-energy technology.
The FY2020 Defense Budget and the Pentagon’s Priorities
In a surprise development late last week, the White House mandated that defense spending for fiscal year (FY) 2020 would be $700 billion. That is down slightly from the $716 billion approved for next year, as well as the $733 billion originally projected for 2020. This move had been foreshadowed in a cabinet meeting the week before, where Trump told all of his department chiefs to prepare to cut five percent of their budgets for the following year. It does raise a number of questions though: How much change does the $700 billion budget actually represent? Is the new figure likely to survive until FY2020 rolls around? And, most importantly, how should the Department of Defense respond to the White House’s mandate?
How significant a “cut” a $700 billion defense budget represents depends on the baseline. As Seamus Daniels, a defense budget researcher at the Center for Strategic and International Studies, noted on Twitter when the $700 billion figure was first raised, it would represent 2.2 percent less than the FY2019 budget.
Despite Trump’s order to his cabinet secretaries to cut five percent, $700 billion would be 4.5 percent less than what had been projected for FY2020. It is up for debate whether it should be considered a reduction in defense spending when reality fails to meet with projections. Seeing as the defense budget cap for FY2020 is $576 billion, it could be argued that $700 billion represents a significant increase.
Whether the $700 billion figure survives the politics to follow is also up for debate. The Pentagon has already announced publicly that it will continue to plan for a $733 billion budget, alongside the $700 budget mandated by the White House. Speaking to Marcus Weisberger of Defense One, former Office of Management and Budget official Gordon Adams suggested a higher figure was more likely:
“The White House may be saying that” — $700 billion — “but I’ll tell you from history, I’ve lived through a lot of White Houses that folded in December,” Adams said. “They had a tough position going in and at some point the Pentagon marshaled its political forces and went and had a conversation with the [president] and in the end it wasn’t what the original proposal was.”
With military pay and benefits already set, reductions in spending will have to come from cutting acquisition programs. General Joseph Dunford, chairman of the Joint Chiefs of Staff, recently suggested that the services’ proposals would undergo rigorous tests through wargamesto determine which programs would survive.
Conducting rigorous simulations to determine acquisition priorities is a wise move, but the Pentagon can go much further in prioritizing. The Department of Defense identified major power competition as its top priority in the National Defense Strategyit released earlier this year. At the same time, the president has at times expressed skepticism about the value of America’s post-September 11 wars. While there are reasons to believe he will not, the president would be best served from both a fiscal and strategic perspective, by mandating that the Pentagon begin to wind down peripheral conflicts and to focus its spending on first order strategic priorities.
OCO Spending and the Essence of Strategy
The Congressional Budget Office (CBO) released a report this week on Department of Defense spending on overseas contingency operations(OCO) that provides insight into how it distorts America’s strategic choices. OCO spending is non-base defense spending. Its original purpose was as an emergency supplemental to fund the War on Terror, yet it has continued to be used even as the war in Afghanistan turned 17 this month.
According to CBO, “non-base” spending since September 11 has followed a different pattern than previous eras. As the figure below shows, previous conflicts also used contingency funds. However, the use was temporary before the costs of a war could be incorporated into the base defense budget. Since 2001 though, CBO finds that an average of more than $50 billion (in 2019 dollars) of OCO spending each year has gone to enduring, rather than temporary, activities.
The use of an emergency supplemental after a security shock, such as a large-scale terrorist attack on U.S. soil, makes sense. The usefulness diminished though as the requirements of America’s post-September 11 wars became more predictable. However, it did provide some political advantages. In recent years, it became a convenient workaround for the Pentagon to avoid the budget caps imposed in the Budget Control Act of 2011 (BCA). War spending was exempt from the caps, so there was incentive to shift non-war spending to OCO.
The major problem with this practice is that it creates a distorted picture of future defense spending. As the CBO report notes:
A key disadvantage of excluding the cost of OCO activities from the base budget is that doing so creates an inaccurate picture of what future defense spending might be in the absence of military conflicts. As contingency operations have become the norm and [the Department of Defense (DoD)] has adjusted its allocation of resources to accommodate them, it has become increasing difficult to distinguish between the incremental costs of military conflicts and DoD’s regular, enduring costs.
CBO provides the following figure to show just how distorted the picture is due to the use of OCO over the past seventeen years:
More perniciously than its effect on Pentagon planning though, might be its political effect. “War funding” was exempt from the BCA for a reason. Failure to approve war funding is likely to prove politically unpalatable for legislators. While the unclassified summary of the National Defense Strategy released earlier this year emphasizes great power competition as the country’s top defense priority, the continued use of contingency funding for ongoing military operations with relatively predictable requirements distorts the choice between resourcing peripheral and core needs.
But strategy is about making choices. It links military means to political ends and determines priorities and resource needs. Doing so is difficult. Adversaries react and adjust to countermeasures. Domestic priorities sometimes overtake foreign policy concerns. Exogenous shocks occur. These factors lead to a budget cycle that includes large spikes and gradual drawdowns. The need to prioritize is the essence of strategy though. The distorted picture created by the use of contingency funding for enduring needs undermines that.
Roofs or Ceilings: The Debate Over Rent Control Goes On
Research on the economic effects of rent control goes back more than 70 years, to the pubication of a monograph titled “Roofs and Ceilings,” by Milton Friedman and George Stigler. That work found that rent control could be expected to restrict the supply of rental housing and would cause inequities and market inefficiencies, despite the help it provided to some sitting tenants.
Today, rent control is back in the news. California’s Proposition 10 would expand rent control. Lawmakers in Oregon and Illinois are considering similar legislation.
A report from Brookings, written by Stanford economist Rebecca Diamond, looks at recent research on rent control, based on natural experiments that have occurred as cities have extended or narrowed the scope of rent control over the years. Her review of the recent literature suggest that Friedman and Stigler’s conclusions stand up, but also adds some new twists.
A 2014 study by David Autor, Christopher Palmer, and Parag Pathak looked at the effects of rent decontrol in Cambridge, MA. The authors found that decontrol boosted the value both of previously controlled properties and of neighboring properties. They concluded that
Rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live. In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.
A 2018 study conducted by Diamond with colleagues Timothy McQuade and Franklin Qian looked at the effects of an extension of rent control to previously exempt small units in San Francisco in 1994. It found that rent control benefitted sitting tenants but reduced the supply of housing. They also found that rent control led to an increase in condominium conversions and construction of high-income housing.
Taking all of these points together, it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.
Taken together, the two studies paradoxically suggest that both expansion and removal of rent control cause can cause increases in the value of non-controlled real estate in the affected areas. Diamond explains the seeming paradox occurs because rent control both increases incentives for condo conversion and at the same time reduces incentives to invest in maintenance of controlled units. Thus, expanding controls causes a spurt in conversions while removal of control causes a spurt in catch-up improvements to previously controlled units, with beneficial effects on neighborhood quality.
Many Americans Live in Terror of Surprise Medical Bills. Could Bipartisan Help Be On The Way?
A recent Kaiser Family Foundation poll finds that surprise medical bills top the list of financial fears for American families:
Surprise medical bills can be astonishingly large, as when Drew Calver, who thought he was fully insured, received a bill for $109,000 for emergency treatment of a heart attack – more than twice his annual salary as a high school teacher.
Surprise medical bills for insured patients most often occur in two situations. One (as in Calver’s case) is emergency treatment at a hospital that is not in the insurer’s network. The other is complex treatment, as for a joint replacement or transplant, which is undertaken at an in-network hospital but with the assistance of some out-of-network participants, such as a radiologist or anesthesiologist. Patients typically do not get to choose these practitioners, and often are unaware of their participation until bills arrive.
An increasing number of states have laws protecting patients from surprise medical bills, but even in those states, there are loopholes. One big loophole concerns certain employer-sponsored insurance plans that are regulated at the federal level. Federal law currently offers no protection against surprise bills.
In September, a bipartisan group of six Senators – Michael Bennet (D-CO), Tom Carper (D-DE), Bill Cassidy (R-LA), Chuck Grassley (R-IA), Claire McCaskill (D-MO), and Todd Young (R-IN) – introduced draft legislation that would offer the needed protection. An analysis by the Brookings Institution summarizes the main provisions of the draft legislation, and offers some suggestions for resolving potential problems.
If enacted, the bill would limit patient cost-sharing to the amount they would owe to an in-network provider; set a payment standard regarding what insurers owe providers in these situations; and, prohibit providers from balance billing patients.
The Brookings analysis provides numerous links to further discussion of the issue of surprise medial bills.