Remember that we spent nearly $800 billion to arguably get something ranging between $0 and $1 trillion of additional economic stimulus? Remember that even under the most optimistic of cases, this stimulus happened by raising taxes on Americans (in the future of course). Remember that even under the most optimistic of cases, this stimulus is a one-shot deal – we won’t be seeing $1 trillion of new economic activity generated year after year after year. And remember that in the real world, it is questionable just how much of that stimulus was not funneled to favored parties – I am sure the Solyndra fiasco was just a one-off mistake.
In economics, we say that there are no free lunches, but we can get pretty close. Let me briefly describe three of them for you. They all require a pen stroke in varying degrees, which pretty much is the kiss of death for why we’ll never see them happen.
One does not have to be a regulation fanatic in either direction for this to make sense. Suppose we agree to the current level of environmental regulation. This still leaves open the question of how to regulate. Economists have long understood that directly regulating an industry or activity is more costly than using indirect methods. For example, suppose we agree that we want less pollution to come out of a powerplant smokestack. We can either regulate directly by telling the powerplant exactly how to reduce that pollution (such as mandating the installation of a smokestack scrubber – perhaps itself designed and produced by a politically favored domestic company). We can, instead, measure the emissions coming from the powerplant adn simply mandate that they be reduced by the desired quantity (there are of course other approaches). The latter is by rule a cheaper alternative. Why? Because not the powerplant has options about how to most effectively meet the emissions reduction requirements, and these still include the installation of the scrubber, but now also include the option to switch fuels, change the combustion technology, encourage end users to conserve, etc.
Right now, we still employ direct regulatory standards for some pollution control. Economists have estimated that the cost of environmental regulation (link forthcoming!) on the economy comes in at about 3% of GDP each and every year. Thus, in a $15 trillion economy, environmental regulations cost us about $450 billion each and every year. An older paper by the Brookings Institute (again, looking for that link! I have an e-mail into them for a reprint) found that if the US moved its entire regulatory approach to an output standard which used market oriented tax and/or permit instruments to achieve the same environmental outcomes we would save 1% of GDP each and every year. How much is this? This is a “free-lunch” of $150 billion per year, every year. With long term interest rates in the 3% range, this represents an unused asset worth something on the order of $5 trillion.
Education Policy and Teacher Quality
This now famous paper by economist Erik Hanushek finds that moderate improvements in the quality of teachers in the K12 school system can have remarkably large increases in American living standards. How large and what must “we” do? If we replaced the worst 8% of teachers and replaced them merely with average teachers (which sounds difficult – but if one simply eliminated teacher licensing requirements or any number of a host of other reforms this would not be hard to do), how much might we gain? Well, by doing this, our student performances would increase to levels that Finnish students perform at (surely Americans are capable of competing with the Finns, right?). And by doing this, it would increase the earning power of millions of children, and it would do so permanently. Let Hanushek tell you how large this impact might be:
The estimates of the growth impacts of bringing U.S. students up to Finland imply astounding improvements in the well being of U.S. citizens. The present value of future increments to GDP in the U.S. would amount to $112 trillion (Hanushek and Woessmann 2010). These returns dwarf, for example, all of the discussions of U.S. economic stimulus packages related to the 2008 recession ($1 trillion).
You read that correctly – $112 trillion. For comparison’s sake, the entire global economy produces $65 trillion in income in any given year. By the way, find me any other institution on earth that leaves so much cash on the table? And remember that this fine institution here is nearly 100% government controlled and vertically integrated to boot. The government sets common standards. The government controls the accreditation process. The government strongly influences the ed schools. The government hires the teachers. The government retains the teachers and tenures the teachers. The government teaches the kids.
The Cost of the War on (the people involved in) Drugs
Of course, to suggest that there is any such thing as a war on inanimate objects is absurd. Economist Jeff Miron estimates that eliminating drug law prohibitions would reduce murder by 25% to 75% and save billions on enforcement and imprisonment costs. It’s not like the imprisonment of over 1.5 million people for drug offenses has done much to stop the drug trade or imprisonment at all (75% recidivism rates in California if I recall correctly). The economic benefit of this pen stroke include over $30 billion per year in savings in direct reductions in enforcement and imprisonment costs, plus untold billions of dollars worth of increased productivity from people not spending time defending us and instead producing something of value, plus the savings from the avoided dead weight loss of the taxes avoided. What is a $30 billion annual cash flow worth? Given current long term rates of 3% they’d be worth something closer to $1 trillion.
The three policy options outlined above require virtually no out of pocket expenditure to be implemented. Indeed, there would be immediate and dramatic cost savings from even making incremental progress on any one of these goals. Any one of these programs promises to deliver billions of dollars of annual benefits – and successful implementation can deliver on the order of many hundreds (perhaps trillions) of dollars of annual benefits each and every year.
When thinking about these, consider that our deficit reduction committee was asked to find “savings” to reduce the deficit by something like $1.2 trillion over a decade – or about $120 billion each year. When thinking about these, remember the big fact. When thinking about these, remember that we are being asked to hand over the entire health care sector to the same people who cannot get out their own way when it comes to educational quality and performance. When thinking about these, remember Solyndra. When thinking about these, remember the California High Speed Rail fiasco. When thinking about these remember that the Big Dig should have cost $4 billion and ended up costing $14 billion. When thinking about these, remember that we are 10 years since 9-11 and still half a tower remains to be built at the WTC site. When thinking about these remember Greece and Europe. And so on. By the way, I was once under the impression that the current (and future – you can bet on it) President was going to make some progress on some of these “win-win” proposals.