“Solutions”

Author’s Note: I regret to report that this post is a little longer than my normally long posts. Some of that is due to the inclusion of more anecdotes than I typically add in an effort to provide more context for the ideas. The length, however, is mostly because the ubiquitous idea that there are unalloyed solutions to public policy issues is so wrong and debunking it is so important that it took a lot of paragraphs to sort out its many aspects. I hope you find the ideas worth your while. I’ll try to be briefer in future posts.

 

Two weeks ago, I was enjoying a Guinness in Dalton’s Bar in Killarney, Ireland when I struck up a conversation with the fellow sitting next to me. When he learned that I had a career in the energy business, he asked me, “Is fracking safe?” I told him that the answer to that question is extremely complicated and gave him an overview of why that is.[i] The presuppositions of his question, however, are more important than its answer.

The question was predicated on two irrational presuppositions: 1) that there are safe ways to access the volume of energy that people need today, and 2) that safety is or should be the ultimate (or near ultimate) goal for public policies. The reality is: 1) almost nothing is safe, and 2) safety cannot and should not be our ultimate goal with respect to anything, i.e., the goal to which all other considerations must be subjugated. Let’s sort this out.

It is often said that “The government’s job is to keep us safe.” Some say that this is the government’s number one job and duty. Does the government advance safety over all other considerations? Of course not. Automobile accidents are the cause of about 30,000 deaths per year in the U.S. Serious injuries from such accidents are surely many multiples of that number.[ii] As George Will observed,[iii] the number of automobile accidents could be slashed to insignificance with two simple changes to traffic laws and strict law enforcement: lowering highway speeds to 35 mph with a comparable lowering of speeds in town and banning left-hand turns. (All in favor, say “Aye.”)

Schools could be made safer by hiring enough police to adequately surround the perimeters. Maybe a high, electrified fence should be added for good measure. A moat? But then there are all of the other things that are not sufficiently protected to be fairly called “safe.” The government cannot make everything safe because there is not enough money in the world to make everything safe.

Nor does the government even try to maximize safety when it makes laws or regulations. For example, the EPA creates rules as to how much of various toxins/carcinogens are permitted in drinking water. The law requires the EPA to perform a cost/benefit analysis before adopting any rule.[iv] The benefits to be derived from a new rule (e.g., the benefits of lowering the permitted contaminants in tap water) must exceed the costs of implementing the rule. Typically, the more safety the rule achieves, the more its implementation will cost. Therefore, if the cost to lower toxins in water was infinite, the rule must be rejected. There might, however, be a level of toxins that is lower than the current permitted level that could be achieved at a cost that equals the value of lowering toxins to that level. If so, a new rule to do that would be legal. Note, however, that this example reveals that even if a lower level of toxins would make water safer, the law says that the EPA may not adopt the safer standard. This is not a solution to water safety; it is a tradeoff.

The government typically tries to hide this kind of reality from the public. In connection with a lawsuit with which I was involved, I reviewed a cost-benefit analysis that the EPA published long ago in relation to the adoption of a rule to reduce the permitted level of benzene (a known carcinogen) in drinking water. I cannot quote what it said verbatim because, to my chagrin, the publication was deleted from the website and I have not been able to find it since.

While my numbers may be imprecise (because I’m going by memory from over 20 years ago), the gist of the later deleted analysis said that the new rule would lower the incidence of deaths from exposure to benzene in drinking water from one level to a lower level. (If memory serves, it was from 1 in 100,000 deaths per year to 1 in 1,000,000 deaths per year.) So, the EPA was establishing a rule knowing full well that people would die (up to 320 people per year if my recollection serves) because the EPA did not set an even lower permitted level of benzene. My guess is, the EPA decided to withdraw the analysis from the public record because it was too revealing about the reality of EPA’s rulemaking for it to maintain its public image of pure benevolence.

Cost/benefit analyses conducted by bureaucrats are systematically biased in favor of what serves the bureaucrats’ self-interest: more regulation. They systematically ignore very important considerations.

“We” (however you choose to define what resources are available to the government) only have the resources “we” have. Resources spent on one thing cannot also be spent on something else. As more of our resources are spent making water safer, the amount of money left to do other positive things goes down. Assume that reducing the deaths from drinking benzene in tap water from 3,200 per year to 320 per year (2,880 lives) costs $1 billion per year. What if that $1 billion could have been spent on something that would have saved twice as many lives – had the money not been spent on benzene reduction? An example might be funding medical research. Despite the very real possibility of these very real costs, the EPA and other agencies ignore “lost opportunity costs” (especially if the other use for the money would be spent by a different government agency) in what passes as government “cost/benefit analysis.” Neither do they consider the cost of less vitality in the economy by virtue of government spending.

The government gets away with such bureaucratic “analysis” because far too many people do not seriously consider the costs of any proposal that will make something they like better. (The government does not consider all the costs of regulation because the public does not demand it and it is in the personal best interests of politicians and bureaucrats to regulate.) For too many people, “Cost is no object” – literally. Many years ago, Cokie Roberts participated in a Sunday morning roundtable discussion of an EPA proposal to lower the level of arsenic in drinking water. Someone on the panel claimed that lowering the arsenic standard was not worth the cost. Cokie’s jaw dropped. Dumbfounded, she asked how anyone could be opposed to lowering the amount of arsenic in drinking water. She knew as little about the benefits of lowering arsenic levels in drinking water as she did the about the costs of lowering it, i.e., next to nothing. Nevertheless, she was all for it. Even worse, although she was staggeringly insufficiently informed to offer commentary on the subject, she knew more about it than most of the voting public.

Let’s look at how preposterous the “safety at any cost” notion is by considering a hypothetical possibility. The federal budget is about $4 trillion per year. Infant mortality in the U.S. is about 23,000[v] per year. What if Congress correctly determines that infant mortality could be reduced by 1,000 infants per year at a cost of an additional $1 trillion per year? That is to say, we could save the lives of 1,000 infants at a cost of $1 billion per infant.

Should we urge members of Congress to vote for the proposal? The answer is clearly no if the resulting devastation of the economy would cause even more lives to be lost (e.g., people could no longer afford safety items they could have otherwise purchased, lifesaving medical research could not be funded, etc.) and would wreak financial hardships on everyone in many and sundry ways. (If for some reason you do not believe that an additional $1 trillion would do that much harm, increase the cost of the bill to an amount that even you would agree would crush the economy.)

But tradeoffs are not just about money. Consider the EPA’s standards for arsenic in drinking water. Arsenic in large enough doses will kill people. Apparently, arsenic in small doses can improve people’s health and immunize them from arsenic poisoning. What constitutes a “large enough dose” depends on an individual’s tolerance for arsenic. Some people have a very low tolerance for arsenic. Others have relatively high tolerance to arsenic, and others are immune. So lowering arsenic levels would save some people, have no health effect on a great many, and cause others to be less healthy or die. Assume that lowering the arsenic level would save the lives of X number of people a year, but cause 1000X people to be less healthy. How much less healthy would the 1000X people have to be before you would say that lowering the level was a bad idea? The point of this example is, there is no solution to this problem. There are only tradeoffs. The point of this blog post is that the same is true with respect to all public policies.

There are high costs of the government making things too safe. “In the United States, it takes an average of 12 years for an experimental drug to travel from the laboratory to your medicine cabinet.”[vi] Only one in 5,000 invented drugs makes it through the FDA process. The cost of obtaining an approval is so huge and the risk of being rejected is so high that only giant pharmaceutical companies can participate. (Politicians benefit from passing laws with which only large companies can comply.[vii]) Presumably, every approved drug improves health or comfort, and some extend life and are safe for most of the people who consume them. Think, however, of the cost to all of the people who suffered or died because of the slowness with which the FDA approved the drug. Think of all of the drugs that were not invented or developed because the cost and risk of approval is so high. Are there benefits from the FDA’s approval process? Sure. Does the FDA deliver on the promise of efficacy and safety? Not always.[viii] What is clear, however, is that if the FDA is too safe, people will unnecessarily suffer and die. It is also clear that European countries choose a very different set of tradeoffs than the U.S. A 2016 JACC study concluded, “. . . the FDA is sometimes seen as overplaying safety concerns at the cost of commercial enterprise, whereas the European systems are sometimes characterized as being primarily concerned with preserving commercial interests to the detriment of patient safety.”[ix]

Policies to make things safer also cost in terms of convenience, diminishment in rights to privacy, and happiness. Should everyone be frisked before they enter a mall, stadium, or train station? Is anything short of a strip search really safe? The NSA may make us safer from foreign governments and other bad actors, but it clearly makes us more vulnerable to harm from our own government.

When government budget cuts are proposed, leftist politicians are quick to declare things like what New York Mayor De Blasio said about Trump’s first budget proposal: “It is not an overstatement to say that some children will die because of this.” This could be true. What is certainly true is that some children will die as the economy grows more slowly than would be the case because of spending by the government. At best, De Blasio’s statement is a half-truth. [See, “Truth Is Hard For The New York Times.”]

While non-monetary tradeoffs should be carefully considered in deciding whether to support a proposal, the necessity to consider the dollar cost of government spending is woefully misunderstood, ignored, or both. Some of this is because, when discussing government spending, people’s attention is almost always directed exclusively to taxes and government debt. This is wholly inadequate.

Taxes account for only a fraction of what the government spends. (Tax receipts as a percentage of spending outlays improved during the middle of BHO’s terms, but began falling again toward the end. On average, the federal government’s tax receipts were only 75% of outlays.[x]) The fraction that is not funded by taxes is funded by “printing”[xi] and borrowing money. The facts that unfunded future liabilities are gigantic[xii] and that people are demanding ever more government spending (e.g., government-funded healthcare) leaves little reason to believe that the country’s financial condition will improve and good reason to believe that the national debt will continue to grow.[xiii] If history is a guide, there is every reason to believe that much of the borrowed money will be repaid with devalued currency (i.e., currency with less buying power because of “printing”). In short, over the last several years, taxpayers have been funding with taxes a smaller fraction of government spending (the national debt increased by approximately $10 trillion under BHO) and unfunded future promises to pay skyrocketed. That means that the burden of government spending is increasingly falling on everyone.

Constant devaluation of the currency does not hurt everyone equally. Of course devaluation of currency hurts lenders in particular, but that also results in higher interest costs for consumers.[xiv] More important, currency devaluation saps resources (the buying power of retained capital) and vitality from the economy. A less robust economy means fewer jobs, which means more people are subsidized by the government. It also means slower investment, productivity gains, pay raises,[xv] product improvements, and cost reductions. A less robust economy especially hurts those who are looking for a job or a pay raise and people on fixed incomes.

Taxpayers, as such, actually pay fewer taxes as a result of currency devaluation because they make less taxable income and gain than they would have had the economy not been suppressed by government spending.

All government spending takes money from activities that are relatively more productive and spends it on things that are relatively less productive.[xvi] Progressive taxation takes disproportionately more money from the most productive activities and progressive redistribution disproportionately distributes money to less productive things. (This is not to say that all redistribution is unproductive. In fact, some redistribution can be justified. This is to say that redistribution is much more costly to everyone than most people understand.) Though benefits are gained from such activities, it is a mistake to ignore the costs of those benefits. A less robust economy (slower wealth creation) is a big deal – for everyone![xvii]

Many people dismiss the ideas of the previous paragraph because they believe that taxing the rich is so just and good that “soaking the rich” should be considered to be a benefit, not a cost. Be that as it may (depending on your values and beliefs), everyone bears the burden of government taxing and spending, not just the rich.

In addition to being partially inaccurate, people believing and saying that “taxpayers pay the cost of government spending” creates two problems: 1) People other than taxpayers who are bearing the negative consequences of government taxing and spending are not made aware that they are bearing that burden – which causes them to be in more favor of more government taxing and spending than they would be if they knew how much government spending was costing them, and 2) The people who inspirer and listen to social justice warriors (who believe that punishing “the rich” with more taxes is good and just) remain oblivious to the fact that government spending greatly hurts the people they believe their policies will help, perhaps even more than it hurts the taxpayers they want to punish.

In general, to the rich, sluggish economies are annoying and cause their aspirations to be fulfilled less rapidly. Their more slowly rising wages are at a comfortable level (perhaps making them have to settle for a new car every other year instead of annually). Compare that situation to someone whose wages are low and who will achieve her aspirations in the future, if at all. The benefit of a faster-growing wage or salary for a person hoping to buy her first home is more valuable than for a person hoping to afford a Ferrari instead of his Porsche. Push the possibility of poorer people achieving their aspirations too far into the future, and many will give up and grow more disgruntled.

Much of the above flies in the face of “Keynesian Economics,” which hold that government spending can stimulate the economy in certain circumstances. Many economists opposed Lord Keynes[xviii] in the 1930s when his ideas came to prominence (the most formidable of which was Friedrich Hayek[xix]). I and many others believe that Keynesian Economics is a primary reason that the recession following the stock market crash of 1929 turned into the first and only Great Depression.[xx] His ideas were widely rejected by economists by the 1980s.[xxi] Keynesianism made a strong comeback among academics when Democrat Congresses wanted the government to spend a lot of money and college professors got wise to which side of the bread the butter was on. You might note that all of the government “stimulus plans” since then did not stimulate anything other than the profits of the companies and organizations that received the stimulus money (and the wages and benefits of those companies and organizations and the politicians they support) – at the expense of all other companies, organizations, and everyone else. Overall, wealth was destroyed and wealth creation was retarded by the process. Note also that federal spending during the Clinton presidency was essentially flat[xxii] due to Republicans taking control of Congress – and the economy boomed.

Hopefully, the above discussion establishes two propositions: 1) assessing whether a proposal will create benefits constitutes only half of the necessary analysis to justify being for or against it (i.e., assessing the benefits without assessing the costs is insufficient), and 2) every policy proposal has both known and unknown positive and negative consequences. Separately, there are both intended and unintended negative consequences of every proposal. (For example, some American politicians – usually surreptitiously – support policies they know will be harmful to America because they believe the policies will serve some higher purpose. Making matters worse, no politician or bureaucrat is omniscient, sufficiently smart, wise, competent, diligent, caring, unbiased, solely focused on serving the public and not themselves, or properly motivated to achieve anything close to the full potential of even well-conceived and well-crafted laws. For the most part, when deciding whether to support a policy proposal, people focus on only the benefits about which they happen to be aware. They either do not know or do not care that the touted benefits will not be fully achieved and that the costs of what good is accomplished can easily be a small fraction of the known benefits that people support.

The object of this blog post was to show that there is no such thing as a “solution” when it comes to public policies. There are only tradeoffs. Of course, some tradeoffs are better than others, and some tradeoffs are necessary. Blindness to this fact of life is especially harmful when we consider things like tinkering with our healthcare systems. It is because of this that I felt compelled to post this article before I post Obamacare – Repeal, or Repeal and Replace? Part III. It will not propose a solution to healthcare in America. It will propose what I believe to be the best set of tradeoffs with respect to healthcare.


[i] A super-brief summary: 1) There are some hazards associated with fracking; 2) fracking operations causing water contamination, and earthquakes are the primary stated concerns with respect to fracking; 3) the probability of such hazards coming to fruition to the extent they might justify shutting down fracking is unknown, but it is not zero; 3) detractors of fracking overstate credible risks and make up data in support of their claims, while promoters understate the risks and purvey data that supports their claims of safety; and 4) other forms of producing energy are much less safe than fracking (e.g., nuclear).

I did not discuss with my bar mate something that is extremely important with respect to environmental matters. That is the driving force that got the environmental movement going in the first place and continues to be a major force in opposition to fracking and all other fossil fuel development. That force comes from people who believe that humans, with their intellectual and technological advantage over all other species and their unacceptable indifference to the negative effects that they have on other species and nature itself, are the bane of the Earth. It was these “anti-industrialists” who stumbled on the brilliant idea that they could slow, if not shut down, humanity’s exorable juggernaut of advancement and self-aggrandizement by getting a majority of people to focus their attention and political demands on “saving the Earth” and perfect safety. As evidenced by the hysteria over fracking afoot in the populous, the anti-industrialists have been remarkably successful with those who they consider to be “useful idiots.”

[ii] It is interesting to note that in the 1970s, before many of the lifesaving innovations we take for granted today were invented and the general public was less able to afford to buy all the safety features that were available, annual fatalities from car accidents were 50,000 per year. Deaths per vehicle mile in 1969 were about five times more than they are today.

[iii] I’m describing here what I recall George Will said in a Sunday roundtable discussion. I can’t find a transcript of that show, so I’m guessing at some of the specifics. Hopefully, I’m getting the gist of his argument correct.

[iv]The Safe Drinking Water Act (SDWA) and other regulatory process laws require EPA to conduct economic analysis during the development of new drinking water contaminant regulations.”

[v] https://www.sciencedaily.com/releases/2016/10/161013103132.htm

[vi]Drug Approvals – From Invention to Market … A 12-Year Trip.”

[vii] As it does with the financial sector, the government enacts regulations with which only large companies can economically comply, thereby creating monopolies or oligopolies. Government-facilitated or protected oligopolies can grow larger faster than firms that are forced to compete in the market. The purpose is to enable companies to become huge. Politicians crave control of money (for personal use and power). Taxing small companies and individuals is unpopular, so politicians need long-term, reliable, hated giant companies because those companies can be fleeced for the benefit of the government and politicians to the jubilation of most of the public. Politicians kill two birds with this stone — securing more money for themselves and making duped voters happy. Politicians claim many other reasons for adopting the regulations, e.g., safety. If they were really that interested in safety, they would lower speed limits, but politicians cannot make much money by lowering speed limits.

[viii] FDA apology. 35 FDA-Approved Prescription Drugs Later Pulled from the Market

[ix] Drugs and Devices: Comparison of European and U.S. Approval Processes

[x] http://www.taxpolicycenter.org/statistics/federal-receipt-and-outlay-summary

 

YEAR RECEIPTS OUTLAYS R/O
2009 2105 3518 60%
2010 2163 3457 63%
2011 2304 3603 64%
2012 2450 3537 69%
2013 2775 3455 80%
2014 3022 3506 86%
2015 3250 3688 88%
2016 3336 3951 84%
AVG. 2676 3589 75%

 

[xi] “Print” is put into quotes because such a large percentage of the currency is now in the form of digital code rather than bills.

[xii]You Think The Deficit Is Bad? Federal Unfunded Liabilities Exceed $127 Trillion.” State and local governments are also facing serious unfunded liabilities problems.

[xiii] While robust growth in the economy could change America’s financial future in theory, the public outcry for more government spending, more worker protections and benefits, more regulation of business, and more trade barriers and taxes (all of which are antithetical to rapid growth) appears to be winning the day politically.

[xiv] Some may think that interest rates have been and currently are historically low, so currency valuation has not affected interest rates. This overlooks the fundamental economic reality of the devaluation of a currency. Interest rates would have been even lower had the currency not been devalued.

[xv] See “Income Inequality Is More Than It’s Cracked Up To Be.”

[xvi] For a discussion of how the government siphons off the nation’s resources to non-productive and corrupt purposes, see, “Siphoning.”

[xvii] See “Wealth” and “Wealth Creation. No Happiness, Why Bother?

[xviii] I prefer John Maynard Keynes (good lord!).

[xix] Hayek was the author of the seminal book Road to Serfdom, of which more than two million copies were sold (a book that I highly recommend).

[xx]Keynesian Economics and the Great Depression.”

[xxi]History shows Keynesian economics doesn’t work

[xxii] History of Federal Spending

7 thoughts on ““Solutions””

    1. The article pasted below mentions several studies that found negative consequences. The “stimulus” plan hurt both the auto industry (clearly an unintended consequence) and the economy. According to the Brookings study, it create jobs at a price of $1.4 million each (wildly more expensive than had been predicted). I recall reading several horror story assessments of that program several years ago.

      A Google search for “”cash for clunkers” consequences” yields pages of horror stories.

      http://dailycaller.com/2014/08/09/obamas-economy-in-action-data-shows-cash-for-clunkers-was-an-epic-debacle/

      Like

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