Brookings: Experts - Ted Gayer

Dealing with “Too Important to Fail” Banks

Fri, 14 Jun 2013 10:00:00 -0400

Event Information

June 14, 2013
10:00 AM - 11:30 AM EDT

Falk Auditorium

1775 Massachusetts Ave., NW
Washington, DC

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Introduction

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There is a heated debate about how to handle banks that are too big or otherwise too important for governments to allow them to fail in a crisis. Some call for the largest banks to be broken up, or for them to divest all or part of their investment banking operations, in the spirit of the old days of the Glass-Steagall Act. Others suggest forcing banks to be funded with much more shareholder money to try to make failure very unlikely. Still others assert that the Dodd-Frank Wall Street Reform and Consumer Protection Act and global regulatory reforms have reduced the problem so much that major structural reforms such as these are unnecessary.

On June 14, the Economic Studies program at Brookings reviewed and debated the issue of bank size and bank funding. Panelists included FDIC Vice Chairman Thomas Hoenig, banking expert Rodgin Cohen, and Senior Fellow and Director of the Initiative on Business and Public Policy Martin Baily. Douglas Elliott, fellow in Economic Studies, served as moderator.

Join the discussion on Twitter using hashtag #TooBigToFail.

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Dealing with “Too Important to Fail” Banks

Event Materials

14 dealing with too important to fail banks baily presentation

Participants

Panelists

Ted Gayer

Co-Director, Economic Studies
Joseph A. Pechman Senior Fellow

Douglas J. Elliott

Fellow, Economic Studies, Initiative on Business and Public Policy

Martin Neil Baily

Senior Fellow, Economic Studies
Bernard L. Schwartz Chair in Economic Policy Development

H. Rodgin Cohen

Senior Chairman

Thomas Hoenig

Vice Chairman

American Energy Security and Innovation

Ted Gayer — Tue, 26 Feb 2013 00:00:00 -0500

Chairman Whitfield, Congressman Rush, and Members of the Subcommittee, I appreciate the opportunity to appear here today. My comments will cover the market incentives for energy efficiency innovation, the most cost-effective means of reducing pollution stemming from energy use, and the limitations and problems associated with government energy-efficiency mandates.

Many of the points I will make come from a Mercatus working paper I co-authored with W. Kip Viscusi of Vanderbilt University, which I have submitted along with my testimony. A revised version of the paper is forthcoming in the Journal of Regulatory Economics.

Market prices convey information about the strength of consumer demand for a good and the scarcity of supply for that good, allowing for a balancing of buyers’ and sellers’ interests. In the market for appliances, prices reflect how consumers value features such as energy efficiency and convenience. If the price of energy increases, consumers will be willing to pay more for more efficient appliances, providing a clear incentive to suppliers to respond. The response, in turn, depends on the constraints on production, such as the state of technology. Economists agree that this flow of information between producers and consumers is better achieved through the price mechanism than through government oversight. One important benefit of the market process is that consumers with different preferences can find appliances that best suit their needs. For example, a consumer who lives in a region where energy is inexpensive may prefer appliances that emphasize convenience over energy efficiency compared to a consumer who lives in a region with expensive energy. In short, there is no uniformly “right” amount of energy efficiency in an appliance any more than there is a “right” variety of apple.

However, market prices can provide misleading signals to the extent that they do not account for the pollution costs stemming from energy use. In other words, the price that shows up on one’s electric bill accounts for the private cost of energy, but it does not include the additional environmental damages that impact others due to one’s energy use. Economists refer to these latter costs as “negative externalities.” The best approach to addressing this problem of negative externalities is for the government to price these pollution costs directly. Consumers and firms would then face the full cost of energy use, and markets would respond through some combination of new technologies, alternative fuels, and conservation.

There are a number of reasons why the market-oriented approach of setting a price on pollution is more cost-effective than regulations such as energy efficiency mandates. First, the one-size-fits-all energy efficiency mandates ignore the substantial diversity of preferences, financial resources, and personal situations that consumers and firms must align in order to make their decisions. Second, unlike a price set for pollution, energy efficiency mandates do not promote conservation. Indeed, they lower the cost of using an appliance, reversing some of the energy savings. For example, an energy efficiency standard for air conditioners increases the incentive to run the air conditioners longer. Third, energy efficiency standards apply only to new products, which can create incentives for consumers and firms to retain older (and thus less energy-efficient) products.

Kip Viscusi and I examined a number of recent government regulations that mandate energy efficiency standards for vehicles and appliances. Despite the fact that these regulations are frequently touted as pollution-reducing initiatives, the agencies’ own estimates confirm that the environmental benefits are negligible and are often dwarfed by the societal costs they impose.

In order to justify these expensive regulations, the agencies assert that consumers and firms are making irrational purchase choices and that they therefore benefit if product choices are restricted to those that meet the agencies’ mandated standards. Dismissing consumer preferences as irrational is a significant departure from well-established tenets for conducting cost-benefit analyses set forth in the economics literature and by the administration’s Office of Management and Budget.

By claiming regulatory benefits from the correction of so-called “consumer irrationality,” agencies are shifting regulatory priorities from the important goal of reducing the harm individuals impose on others (through pollution) towards the nebulous and unsupported goal of reducing harm individuals cause to themselves by purchasing purportedly uneconomic products. This shift from environmental protection to consumer protection results in a host of costly regulations that are far less effective than a government policy that simply sets a price for pollution. It also establishes a dangerous precedent: If agencies can justify regulations on the unsubstantiated premise that consumers and firms (but not regulators) are irrational, then they can justify the expansive use of regulatory powers to control and constrain virtually all choices consumers and firms make.

To summarize: I believe that markets generally work well to provide incentives for energy efficiency and to satisfy consumers’ diverse tastes. To the extent that energy prices fail to incorporate the environmental cost of energy use, the most sensible government response is to price the pollution costs directly, and then allow consumers and businesses to respond to the higher prices. Regulations and mandates are inferior policies, but still may be better than doing nothing if the benefits exceed the costs. Unfortunately, by the agencies’ own estimates, energy efficiency mandates frequently lead to minimal environmental benefits that are far less than the costs. In an effort to justify these uneconomic regulations, the agencies have deviated from well-established economic tenets by asserting that consumers and firms are “irrational” and that they therefore benefit from government mandates that restrict choice. The evidence for this view is weak, and assuming that citizens are not capable of making sensible decisions that affect their own pocketbooks is not the right way to advance the important goal of enhancing the quality of our environment.

Authors

Ted Gayer

Publication: Subcommittee on Energy and Power, Committee on Energy and Commerce

Image Source: © Lucy Nicholson / Reuters

Assessing Universal Pre-K Programs in Oklahoma

Ted Gayer — Fri, 15 Feb 2013 17:39:00 -0500

As President Obama continues to roll out his proposal for universal preschool as outlined in his State of the Union address, it is worth looking at results of these types of programs in states that already run such programs.

In a paper with Wiliam Gormley (Journal of Human Resources, 2005 (pdf)) and another with Gormley, Phillips, and Dawson (Developmental Psychology, 2005(pdf)), we studied the impact of Oklahoma's universal pre-K program on children's readiness for kindergarten. In the JHR study, which relied on the results of a school-readiness assessment developed by Tulsa Public Schools, We found that attending pre-school boosted school readiness for Hispanic and black students but not for whites. We also found that pre-school had a bigger effect on school readiness among students who qualified for free lunch at school, than those who did not. In the other study, which relied on a standardized and widely-used assessment of school readiness, we found that attending pre-school improved school readiness for students across all racial and income groups.

Authors

Ted Gayer

A Trillion Dollar Coin Would Compromise the Federal Reserve

Ted Gayer — Mon, 14 Jan 2013 12:06:00 -0500

Perhaps nothing reflects the absurdity of the current state of governance than the seriousness accorded to the idea of the Treasury issuing a $1 trillion platinum coin. The idea is for Treasury to mint the coin, ship it to the Federal Reserve, which then pays for it by crediting $1 trillion into the Treasury's deposit account at the Fed, which is then available to finance our government obligations. As the Treasury spends the money, bank reserves rise, but that's not inflationary now with the economy still weak. Ultimately, as explained by Greg Ip of the Economist, the Fed can stem inflation by raising the interest rate it pays on bank reserves. The end result is that we would no longer need to raise the debt ceiling (since we don't need to borrow this $1 trillion), and thus a government default is averted. When (if?) the ceiling is raised, the process is reversed and the coin is melted.

The sole virtue of the platinum coin idea is that it is better than hitting the debt ceiling, which could happen as soon as mid-February and would leave the government unable to fund about 40 percent of its obligations. As Chairman Ben Bernanke said, this "would no doubt have a very adverse effect very quickly on the recovery. I'm quite certain of that."

But this was still a very bad idea, and Treasury was right to rule it out as an option. It would have involved the Fed in direct, off-market, financing of the government, compromising its independence. It would have relied on a loophole in a law designed to allow Treasury to issue coins of any denomination for commemorative purposes. It may or may not have held up in court, but it likely would have been challenged, creating legal uncertainty and perhaps even a Constitutional crisis if Congress challenged what would have been, in effect, the president’s usurping control of monetary policy. The result would have been market turmoil, broad economic harm, and evidence to the world of our inability to govern ourselves.

I also agree with Tyler Cowen and Scott Sumner that the more this idea is put on the table, the more likely the Republicans are to not vote to raise the debt ceiling. If the choice is between raising the debt ceiling and economic calamity, public opinion and its effect on political self-preservation will lead Congress to choose the former (albeit, only after a period of brinksmanship). If, on the other hand, the president embraces a bizarre idea of dubious legality, it makes political sense for the Republicans to not raise the debt ceiling and let the president pay the political consequences of the resulting legal and economic market turmoil.

Authors

Ted Gayer

Publication: US News & World Report

Image Source: © Kevin Lamarque / Reuters

The Future of Homeownership in the United States Featuring Bank of America CEO Brian Moynihan

Fri, 14 Dec 2012 10:00:00 -0500

Event Information

December 14, 2012
10:00 AM - 11:30 AM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Homeownership has long been synonymous with achieving the “American Dream.” Yet the collapse several years ago of the housing market calls for homeowners, lenders, and the federal government to re-evaluate their expectations and roles to meet the goal of long-term stability, soundness, and fairness in homeownership.

On December 14, the Economic Studies program at Brookings hosted a discussion with Bank of America CEO Brian Moynihan, followed by a panel discussion of industry and policy experts. The discussion focused on the benefits and costs of homeownership and the appropriate role of lenders, investors and government policies, such as tax incentives and housing finance subsidies, to achieve this goal.

Video

How We're Doing Ahead of the Presidential Election

Ted Gayer, Domenico Lombardi and Darrell M. West — Sun, 26 Aug 2012 00:00:00 -0400

Index #13: Last Five Quarters

Will the 2012 presidential election follow historical trends and benchmarks, or are more complex dynamics at play this year? For the last "How We're Doing" Index ahead of Election Day, a team of scholars at the Brookings Institution looked at U.S. economic growth over the past five quarters, which has decelerated while the "fiscal cliff" and the European financial crisis loom. Historically, high unemployment and poor economic growth have doomed incumbents, yet President Obama's poll numbers remain relatively stable. Will the November election turn on the state of the national economy, or might relatively better economic conditions in key swing states be enough to carry Obama to reelection?Continue reading below chart »

Related Materials:
Past How We're Doing indexes »

See data sources »

The U.S. economy continues to grow, but at a discouraging pace. U.S. real gross domestic product increased at an anemic 1.5 percent annual rate during the second quarter. While employment conditions strengthened earlier this year, new job growth has averaged about 100,000 positions per month since April. That's not enough to keep the unemployment rate from rising. The one bright spot has been the recent moderate improvement in the long-depressed housing market. The glut of houses is beginning to subside, leading to more housing construction and higher prices.

The economic outlook is not expected to improve much, if at all, heading into the election. Growth is likely to remain below 2 percent in the third quarter, while the unemployment rate will stay above 8 percent. Concern is growing that Congress won't act to avert the "fiscal cliff" of tax increases and spending cuts set to take effect in January, which the Congressional Budget Office has predicted would lead the United States into a recession.

The crisis in the euro zone is worsening, and the threat to the global economy escalating. Government bond yields of Italy and Spain have peaked vis-à-vis those of Germany, fueling speculation about the economic and political sustainability of the euro as their common currency. Partly because of continued uncertainty in Europe, the International Monetary Fund has revised growth projections for China and India downward for this year and next. In turn, the outlook for U.S. exports to Europe and the emerging economies is deteriorating. Above all, the dampening effect of the European crisis is likely to delay investment and hiring decisions, further slowing the anemic recovery we have seen so far in the United States.

What does this all mean for the U.S. presidential election?

It's important to remember that this is not a national campaign but 50 simultaneous state elections - and the outcome for 40 of them can be predicted with some accuracy. This year, election observers shouldn't obsess over national unemployment figures. The key is to watch economic and political indicators in the 10 states that are closely contested: Ohio, Florida, Pennsylvania, Nevada, Colorado, Iowa, Virginia, North Carolina, New Hampshire and Wisconsin.

Many of the swing states are doing better economically than the country as a whole. Ohio, for example, has a 7.2 percent unemployment rate, more than a point below the national average. And recent polls in several swing states show Obama running ahead of his national polling margins.

The biggest threat to Obama is a late surge for Mitt Romney, which could be precipitated by a collapse in the euro zone and further weakening of the domestic economy. In a bad economy, late-deciding voters often break for a credible challenger, so Obama's team needs to establish a large lead now, before any further economic weakening. Presidents who fail to set the tone early usually end up losing, as Presidents Jimmy Carter and George H.W. Bush did.

So, yes, "it's the economy, stupid." But this year, it's an economy that stretches from local indicators in just 10 key states to the threat of national and perhaps global economic weakening. Obama needs to hope that the swing-state economies at least stay stable and that any bad news from abroad waits until after Nov. 6.

Sources:

GDP growth:
U.S. Bureau of Economic Analysis

Unemployment rate:
U.S. Bureau of Labor Statistics

Percent unemployed for more than 26 weeks:
U.S. Bureau of Labor Statistics

Disposable personal income:
U.S. Bureau of Economic Analysis

Consumer inflation rate:
U.S. Bureau of Labor Statistics

Dow Jones Industrial Average:
Yahoo! Finance

Consumer sentiment:
Reuters/University of Michigan survey of consumers

Consumer spending:
U.S. Bureau of Economic Analysis

Months' supply of new homes:
U.S. Census Bureau

Interest rate on 30-year fixed mortgage:
Freddie Mac

Metro area employment rates:
U.S. Bureau of Labor Statistics

Metro area home price growth:
Case-Shiller Index

U.S. combat fatalities, Afghanistan:
icasualties.org

Civilian fatalities, Iraq:
Brookings Iraq Index

Approval ratings of president and Congress:
Gallup

Percent of Americans "satisfied with the way things are":
Gallup

Authors

Publication: The Brookings Institution and The Washington Post

Image Source: © Jonathan Ernst / Reuters

Are Pollution Controls Worth Their Costs?

Ted Gayer and W. Kip Viscusi — Thu, 19 Jul 2012 00:00:00 -0400

A recent wave of government regulations mandates the energy efficiency levels of a wide range of consumer and business products, including passenger cars and commercial vehicles, clothes dryers, air conditioners, and light bulbs. The ostensible purpose of these regulations is to reduce pollution, notably greenhouse-gas emissions. But our recent examination of a number of these regulations reveals that, by the agencies’ own analyses, the regulations have only a negligible effect on greenhouse gases, and the environmental benefits are vastly outweighed by the costs of compliance.

The agencies attempt to mask this finding by claiming that the regulations save consumers and firms money, by forcing them to buy more expensive energy-efficient products. By asserting, with little to no supporting evidence, that consumers and firms are making irrational decisions in their purchases of energy-intensive products, the agencies can then claim that energy-efficiency regulations provide private benefits by correcting for this irrationality, and they then use these benefits to justify the expensive regulations that yield minimal environmental gains.

This dismissal of consumer choice deviates from the long-standing methodological practice of cost-benefit analysis—and runs contrary to the guidelines set out by the Office of Management and Budget—in which it is assumed that informed citizens are better able than government bureaucrats at making private purchasing decisions that affect their own bottom line. This is not to say that people are infallible; only that the baseline assumption—supported by much empirical evidence—is that in most contexts consumers with heterogeneous preferences, financial resources and personal situations, are better equipped than analysts and policymakers to make market decisions that affect themselves.

The agencies instead assert consumer and firm irrationality with a generalized appeal to the behavioral economics literature. Behavioral economics seeks to find systematic deviations from rationality and integrate them into economic models, but it does not provide a rationale for taking away consumers’ and firms’ ability to make their own decisions in most market contexts. Rather than just assert irrationality to justify all types of regulations, it is essential for the agencies to document the existence and magnitude of behavioral anomalies in the market they are considering regulating. And where such anomalies are found, the agencies should first resort to less intrusive regulations, such as providing clearer information to consumers and firms in order to help them in their decision-making. Cass Sunstein, the current director of the government office in charge of overseeing the agencies’ regulatory analysis, espoused this policy lesson in his co-authored book called Nudge. To “nudge” is to lightly regulate, primarily through information provision, rather than the current government practice of mandating which products consumers and firms can and cannot purchase.

Perhaps the main failure of rationality is that of the regulators rather than the consumers and firms. Agency officials who have been given a specific substantive mission have a tendency to focus on these concerns to the exclusion of all others. Thus, fuel efficiency and energy efficiency matter, but nothing else does. In effect, government officials are acting as if they are guided by a single mission myopia that leads to the exclusion of all concerns other than their agencies’ mandates.

This agency myopia fosters bad policies. By abandoning the principle of consumer sovereignty, regulatory policy shifts from an appropriate role of mitigating the harm that individuals impose on others through pollution towards a paternalistic emphasis on mitigating the harm individuals impose on themselves. We wind up with more consumer protection (in contexts where there is little to no evidence that it is necessary) and less environmental protection. And if government agencies can justify regulations on the premise that consumers and firms (but not regulators) are irrational, there is no limit to the expansive use of regulatory powers to control and constrain market choices.

Authors

Ted Gayer
W. Kip Viscusi

Publication: Real Clear Markets

Image Source: Shannon Stapleton / Reuters

Energy Efficiency Regulations Set Dangerous Precedent

Ted Gayer — Tue, 17 Jul 2012 11:37:00 -0400

A recent wave of government regulations has mandated energy efficiency standards for products ranging from passenger cars and commercial vehicles, to clothes dryers, air conditioners, and light bulbs. Federal regulators tout these new rules as "greenhouse gas initiatives" with the purported aim of reducing environmental pollutants—especially those that contribute to climate change.

But as the regulatory agencies' own estimates confirm, the environmental benefits of these regulations are negligible, and are often dwarfed by the societal costs they impose.

Read the rest of the op-ed at the US News & World Report website »

Authors

Ted Gayer

Publication: US News & World Report

Image Source: Larry Downing / Reuters

Negative Equity Concentrated in a Few States

Ted Gayer — Thu, 12 Jul 2012 14:08:00 -0400

Yesterday’s release of CoreLogic’s negative equity report showed that in the first quarter of 2012 there were 11.4 million residential properties with a mortgage in negative equity, which is 23.7 percent of residential mortgaged properties. This is lower than the 12.1 million (25.2 percent) from the fourth quarter of last year.[1] The CoreLogic data show wide variation across states in the percentage of mortgage holders that are underwater. Nevada leads the list with 61 percent of all of its mortgaged properties underwater, followed by Florida (45 percent), Arizona (43 percent), Georgia (37 percent), and Michigan (35 percent).

The average underwater borrower has about $61,000 of negative equity, which yields an aggregate debt overhang of approximately $692 billion nationwide. This aggregate burden varies widely across states. The figure below shows each state’s share of the national mortgage debt overhang. While Nevada has the highest proportion of mortgage holders that are underwater, it is the eighteenth highest state in terms of aggregate negative equity. California has about 2 million mortgaged properties underwater, with an average amount of negative equity across these properties of approximately $89,000. This translates into mortgage debt overhang of about $184 billion, which is the highest among the states and about 27 percent of the total national mortgage debt overhang. Florida has the next highest share of the total national mortgage debt overhang at about 16 percent. The aggregate amount of negative equity in five states (California, Florida, Idaho, Arkansas, and North Dakota) makes up about 57 percent of the approximately $692 billion of nationwide negative equity overhang.

[1] Note that these historical numbers have been updated to reflect the change in methodology used by CoreLogic.

Authors

Ted Gayer

Image Source: Larry Downing / Reuters

Overriding Consumer Preferences with Energy Regulations

Ted Gayer — Tue, 10 Jul 2012 13:33:00 -0400

Cost-benefit analyses traditionally assume that informed citizens are best able to understand and choose among the available options for the one that best meets their own interests. An individual planning to buy a car, for example, would understand that a large sedan has worse gas mileage than a compact car and would incorporate into her purchase decision the higher expense of gas over the period she expects to own the car. These expected fuel costs would be considered along with all of the car’s other characteristics, including trunk size, comfort, and so on, to make a decision. Thus, regulations that alter consumers’ choices are assumed not to have any private net benefits. A regulation that requires consumers to buy a more expensive, more energy-efficient product, for example, may produce social benefits from reduced pollution, but it will not otherwise make the consumer herself better off.

In a departure from the traditional practices of cost-benefit analyses, recent regulatory analyses have incorporated private benefits under the assumption that consumers have made suboptimal purchasing decisions. In effect, these analyses assume regulations have benefits to consumers because they mandate them to buy products that the government believes make them better off. In a just released working paper co-written with W. Kip Viscusi, we examine a number of recent energy regulations proposed or enacted by the Department of Energy, the Department of Transportation, and the Environmental Protection Agency. Among other things, we find that the preponderance of the benefits associated with these regulations stems from private benefits to consumers of lower energy costs, which is based on the agencies’ poorly-supported assumption that consumers and firms make irrational purchasing decisions. Without these benefits, the regulatory costs greatly exceed the benefits, and the environmental benefits of these regulations are minor.

A link to the paper is available at the Mercatus website (PDF).

Authors

Ted Gayer

Image Source: Lucy Nicholson / Reuters

Restoring Fiscal Integrity and Accountability: A Discussion with Governor Chris Christie (R-NJ)

Mon, 09 Jul 2012 10:00:00 -0400

Event Information

July 9, 2012
10:00 AM - 11:00 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

On July 9, Brookings hosted a discussion with Governor Chris Christie (R-NJ) on the economy, job creation, tax reform and the budget. Governor Christie outlined his bipartisan efforts and accomplishments to restore fiscal integrity and accountability to state and local government.

Governor Christie was elected on November 3rd, 2009 and sworn in as New Jersey's 55th Governor on January 19, 2010. After graduating from the University of Delaware in 1984, he attended Seton Hall University School of Law graduating in 1987. He joined a Cranford law firm and soon was named a partner. Governor Christie was named U.S. Attorney for the District of New Jersey in 2002. As the chief federal law enforcement officer in New Jersey, he earned praise from leaders in both parties and drew national attention for his efforts in battling political corruption, corporate crime, human trafficking, gangs, terrorism and polluters.

Vice President Darrell West, director of Governance Studies at Brookings, provided introductory remarks. Senior Fellow Ted Gayer, co-director of Economic Studies at Brookings, moderated the discussion with Governor Christie to include questions from the audience. You can follow the conversation on Twitter using the hashtag #BIChristie.

Video

Audio

Restoring Fiscal Integrity and Accountability: A Discussion with Governor Chris Christie (R-NJ)

Transcript

Uncorrected Transcript (.pdf)

Event Materials

20120709_christie_fiscal_integrity

Campaign 2012: Climate Change and Energy

Mon, 11 Jun 2012 10:00:00 -0400

Event Information

June 11, 2012
10:00 AM - 11:30 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

As the struggling economy and demand for jobs consume the American public’s attention, climate policy has become a second-tier political issue. Although most economists advocate for putting a price on greenhouse gases through a carbon tax or cap-and-trade program, there is little political appetite to do so. Will the next president be able to make climate and energy policy a national priority, perhaps as a component of fiscal reform, or will he seek alternative energy policies? In the context of increasing global energy needs, how can the United States ensure its energy independence?

On June 11, the Campaign 2012 project at Brookings held a discussion on climate change and energy, the seventh in a series of forums that identify and address the 12 most critical issues facing the next president. Darren Samuelsohn of POLITICO moderated a panel discussion with Brookings experts Ted Gayer, Katherine Sierra and Charles Ebinger, who presented recommendations to the next president.

After the program, panelists took questions from the audience.

You can follow the conversation on this event on Twitter using the hashtag #BIClimate or on our @BICampaign2012 Twitter feed.

Download papers from the event:

Linking Climate Policy to Fiscal and Environmental Reform, by Ted Gayer
Five Major Energy Problems the Next President Has to Face, by Charles Ebinger and Govinda Avasarala
World Leadership for an International Problem, by Katherine Sierra

Campaign 2012: Twelve Independent Ideas for Improving American Public Policy is an indispensable guide to the key questions facing White House hopefuls in 2012.

Video

Audio

Campaign 2012: Climate Change and Energy

Transcript

Uncorrected Transcript (.pdf)

Event Materials

20120611_climate_change_transcript_uncorrected

Participants

Panelists

Darren Samuelsohn

Senior Energy and Environment Reporter

Campaign 2012 : Twelve Independent Ideas for Improving American Public Policy

Benjamin Wittes, ed. — Sat, 19 May 2012 00:00:00 -0400

Brookings Institution Press 2012 250pp.

Ready or not, the quadrennial run for the White House is upon us. American voters face a very different landscape than they did four years ago, when the presidential race was relatively wide open and neither the sitting president nor vice president was seeking the nation's highest office. Osama bin Laden and Muammar Qaddafi are gone, but so are millions of American jobs. It is springtime in much of the Arab world, but for many voters this is the winter of their discontent. Governing the United States will be supremely difficult for whoever emerges in November 2012—reading this book would be a good first step.

Campaign 2012: Twelve Independent Ideas for Improving American Public Policy is an indispensable guide to the key questions facing White House hopefuls in 2012. It features a dozen accessible yet authoritative analyses, each one focusing on a specific policy issue currently vexing the nation. All of the authors are Brookings scholars. In addition to contributing a chapter himself, editor Benjamin Wittes draws from each of the Brookings Institution's research programs in this wide-ranging survey of national policy in America. Wittes's previous books include Detention and Denial: The Case for Candor after Guantánamo (Brookings, 2010) and Law and the Long War: The Future of Justice in the Age of Terror (Penguin, 2008). He and Jeffrey Rosen are coeditors of the 2011 Brookings book, Constitution 3.0: Freedom and Technological Change.

The capstone of a major institution-wide initiative, Campaign 2012 truly is Brookings at its best—explaining tough problems in accessible terms, and proposing viable solutions. It is one-stop shopping for citizens in need of a primer on the issues that will drive the 2012 presidential campaign.

Learn more about the Campaign 2012 project »

ABOUT THE EDITOR

Benjamin Wittes

Downloads

Ordering Information:

{BEE4D1CC-5E07-4799-AEF4-76EAC977FCEC}, 978-0-8157-2198-7, $26.95 Order
{B98DCBB0-3580-4D55-ABD4-AB91E00585E6}, 978-0-8157-2199-4, $26.95 Order

Principal Reductions Won’t Solve the Mortgage Mess

Ted Gayer and Phillip Swagel — Thu, 17 May 2012 00:00:00 -0400

Edward DeMarco, the temporary director of the Federal Housing Finance Agency, continues to endure blistering criticism for refusing to allow Fannie Mae and Freddie Mac to pay for large-scale principal reductions for underwater borrowers (those who owe more than their homes are worth) or to facilitate refinancings for those stuck with high interest rate mortgages.

The embattled regulator says he is merely trying to prevent Fannie and Freddie from adding to the more than $190 billion in losses that taxpayers have covered since September 2008. But Representative Elijah Cummings has labeled him “the biggest hurdle standing between our nation and the recovery of the housing market.” House Democrats have accused him of hiding data purportedly proving that principal reductions would save money and reduce foreclosures. And Representative Barney Frank has called for his resignation.

Beating up DeMarco may prove cathartic for policy makers looking to assign blame for economic doldrums. The proposed remedy, however -- having taxpayers pay for principal writedowns and mass refinancings -- would do little to solve the nation’s housing woes.

Consider the math on principal reductions. There are 11.1 million residential properties with underwater mortgages, only about 3 million of which are backed by Fannie and Freddie. Almost 80 percent of those 3 million borrowers, however, are current on their mortgage, demonstrating their commitment and ability to make payments without a principal reduction. Consequently, principal writedowns for them would simply transfer money from taxpayers to the borrowers -- with minimal effect on foreclosure prevention.

Targeted Federal Help

Targeting principal reduction to the 20 percent of underwater borrowers with delinquent Fannie and Freddie loans (approximately 600,000 in total) does have the potential to prevent some foreclosures, but at far too high a price. It is extremely difficult to target federal help to a select group of borrowers without providing an incentive for other borrowers to stop paying their mortgages. Indeed, research by Christopher Mayer, Edward Morrison, Tomasz Piskorski, and Arpit Gupta of Columbia University found a statistically significant increase in such strategic behavior in response to principal reduction announcements.

President Barack Obama has proposed using unspent money from the Troubled Asset Relief Program to offset prospective Fannie and Freddie losses from principal reductions. Taxpayers would still pay, but the Federal Housing Finance Agency could meet its legal mandate to avoid losses at the two firms themselves.

Even this would offer scant benefit. Principal reduction is seldom appropriate for underwater borrowers who have not made a mortgage payment in more than six months; it’s too late for most of them to avoid foreclosure. For that reason, the president’s proposal focuses on underwater borrowers who have made a mortgage payment in the past six months. But only about 10 percent of Fannie and Freddie loans meet that criterion. Thus such a targeted policy would assist only about 60,000 underwater borrowers.

A similar logic undermines proposals for government-backed refinancing of underwater and delinquent homeowners to enable them to take advantage of today’s low interest rates. Those who are current on their loans would benefit from a lower interest rate -- but since their payments are current their homes are not at risk of foreclosure. (Most homeowners who are already delinquent won’t be able to pay their loans even at a lower interest rate.)

A stronger economy and more robust job growth are ultimately needed to boost housing demand, spur prices and construction, and finally end the foreclosure crisis.

Downward Pressure

Meanwhile, regulators can encourage programs to turn foreclosures into rentals, which will help ease the downward pressure on home prices. It would also help to remove some of the uncertainties that deter potential lenders from taking on housing-related risks, including the difficulty of taking back a home from a delinquent borrower and the threat of lawsuits resulting from loans that go bad through no fault of the lender, such as a borrower losing a job.

The federal government could also reduce uncertainties over the validity of the Mortgage Electronic Registration Systems used to keep title information, which is essential for mortgages to be packaged and sold to investors. Standard formats for title data would preserve local control while facilitating large-scale housing investments. Similarly, better coordination of information regarding second liens would facilitate some modifications that are dependent on bargaining between owners of the primary mortgage and second lien.

As the housing adjustment continues, we should avoid taking actions that accomplish little while providing incentives for borrowers to renege on obligations. Such efforts will only prolong the problem. Proponents of mass writedowns and refinancings are better off having DeMarco to kick around than having him accede to yet another costly, counterproductive program.

Authors

Ted Gayer
Phillip Swagel

Publication: Bloomberg

Image Source: Larry Downing / Reuters

What the Next President Should Do on Climate Policy

Ted Gayer — Fri, 20 Apr 2012 09:41:00 -0400

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Although the weak economy makes a shift in political momentum toward a comprehensive climate policy unlikely, the urgent need for tax reform and deficit could provide an opportunity for the next administration to achieve a sensible, cost-minimizing and effective comprehensive climate policy. Ted Gayer and Campaign 2012 Project Director Benjamin Wittes discuss what the next president will need to do to address climate policy during his term.

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Addressing the Weak Housing Market: Is Principal Reduction the Answer?

Tue, 10 Apr 2012 09:30:00 -0400

Event Information

April 10, 2012
9:30 AM - 11:00 AM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

The housing market remains weak years after the bursting of the housing bubble and despite numerous administration policies targeted at housing. Prices are still falling, foreclosures are proceeding, and many people have houses valued at less than the principal owed on their mortgages. Although some recent signs have been slightly more encouraging, the economic recovery has been, and continues to be, impeded by weakness in the housing market.

Some policymakers have been calling for federal regulators to push Fannie Mae and Freddie Mac to do principal reduction for borrowers whose house is worth less than what they owe on their mortgages. Is principal reduction the way to finally get the housing market back on its feet? What, if any, would be the cost to taxpayers? What should the future of housing finance look like and what is needed to prepare Fannie Mae and Freddie Mac for changes ahead?

On April 10, the Economic Studies program at Brookings hosted a conversation with Ed DeMarco, acting director of the Federal Housing Finance Agency, the conservator and regulator of Fannie Mae and Freddie Mac. DeMarco was followed by a panel of housing and consumer experts. Vice President and Co-Director of Economic Studies Karen Dynan gave introductory remarks, and Co-Director of Economic Studies Ted Gayer moderated the panel. Speakers took questions from the audience.

Participants followed the conversation on Twitter using the hashtag #BIHousing.

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Addressing the Weak Housing Market: Is Principal Reduction the Answer?

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Participants

Panelists

Ed DeMarco

Acting Director
The Federal Housing Finance Agency

Mark Fleming

Chief Economist
CoreLogic

Paul Nikodem

Executive Director, Head of Mortgage Credit Research
Nomura Securities International

Anthony B. Sanders

Distinguished Professor of Real Estate Finance
George Mason University

Andrew Jakabovics

Senior Director, Policy Development and Research
Enterprise Community Partners, Inc.

Linking Climate Policy to Fiscal and Environmental Reform

Ted Gayer — Fri, 02 Mar 2012 00:00:00 -0500

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Editor's Note: The following is a Campaign 2012 policy brief by Ted Gayer proposing ideas for the next president on climate change. Charles Ebinger and Govinda Avasarala prepared a response identifying five critical challenges the next president must address to help secure the nation’s energy future. Katherine Sierra also prepared a response arguing that the introduction of a carbon tax would encourage the United States to tackle greenhouse gas emissions and help the nation regain its international leadership on the issue.

Introduction

Both presidential candidates in 2008 campaigned for an economy-wide cap-and-trade program for greenhouse gases as the centerpiece of climate policy. Senator John McCain was an early and frequent supporter of cap-and-trade, co-sponsoring a number of such bills, including the Climate Stewardship Act of 2003 and the Climate Stewardship and Innovation Act of 2007. He campaigned on a plan to enact an economy-wide cap-and-trade system to reduce U.S. carbon emissions by 60 percent below 1990 levels by 2050. As a senator, Barack Obama never sponsored any climate bills, but he campaigned on a plan to enact an economy-wide cap-and-trade system to reduce U.S. carbon emissions by 80 percent below 1990 levels by 2050.

Despite this apparent bipartisan support, the past three years has seen cap-and-trade legislation fail to make it through the Senate, and has now seen the politics of climate change transformed to the point where a politician’s stated support of cap-and-trade is commonly viewed as a political liability. According to polling jointly organized by the Yale Project on Climate Change Communication and the George Mason University Center for Climate Change Communication in November 2011, only 12 percent of Americans believe “global warming should be a very high priority for the president and Congress,” down from 21 percent in November 2008. Those who think it should be a low priority jumped from 17 to 30 percent during that same period.

While in 2008 the president said that “combating global warming will be a top priority of my presidency” and “putting a price on carbon is the most important step we can take to reduce emissions,” a search of President Obama’s 2012 campaign website finds no mention of cap-and-trade. There is also no mention on the website of “climate change,” “greenhouse gas,” or “global warming.” The website of the leading Republican candidate, Mitt Romney, also makes no mention of climate policy; indeed, the only oblique references concern Romney’s proposals to “eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda” and to “amend [the] Clean Air Act to exclude carbon dioxide from its purview.”

Given this turn of events, a comprehensive climate policy faces long odds in the next administration. A possible path forward for the next president that could have political (as well as economic) appeal is to:

Focus on the policy that gives us the most bang for the buck, which is to place a price on greenhouse gas emissions. Inflexible regulatory mandates, and government attempts to target subsidies through such things as loan guarantees, won’t work.
Couple climate policy to fiscal reform, by using the revenues from a carbon tax to fund either deficit reduction or a reduction in economically harmful marginal tax rates.
Couple climate policy with comprehensive environmental reform, by eliminating, reducing or amending existing costly regulations that could be made largely redundant with a carbon tax in place.

The economics and politics of climate policy, and the Obama and Republican Positions

On June 26, 2009, the House of Representatives passed the American Clean Energy and Security Act by a vote of 219 to 212, with eight Republicans joining 211 Democrats voting for, and 44 Democrats joining 168 Republicans voting against. The Senate failed to vote on a comprehensive climate bill. The last major bill, proposed by Senators John Kerry and Joseph Lieberman, was dropped from the Senate calendar in July 2010, after it became clear it would not have enough votes to pass.

The bill that passed the House of Representatives suffered from two key economic (if not political) failings. The first is that it was made unnecessarily complex by including a number of mandates. These included energy efficiency requirements for such things as vehicles and outdoor lighting. It also included a renewable electricity mandate, which would have required electric utilities to substitute renewable energy (such as wind, solar or geothermal energy) for energy-derived fossil fuels. Given that the bill also included an economy-wide cap-and-trade program, these mandates would have only added to the overall cost of the bill without accruing any climate benefits. The attractiveness of an economy-wide cap-and-trade program is that it allows the market the flexibility to find the cheapest sources of pollution reduction in order to meet the capped level of emissions. Cap-and-trade (or a pollution tax) is effective because it raises the cost of activities that emit greenhouse gases, and thus provides market incentives to conserve, to develop and use cleaner fuels, and to innovate cleaner technologies. It was a landmark achievement that the House bill included an economy-wide cap-and-trade program for greenhouse gases. But the additional mandates in the bill would have prescribed where and how these reductions must occur, without affecting the overall level of pollution under the cap. Any reductions achieved through such mandates would be offset by fewer reductions in other sectors, resulting in no net reduction in emissions. The result would likely have raised the cost of the bill with no environmental gain.

The second policy shortcoming of the bill was that it ignored the economic case for using the revenue from the sale of the cap-and-trade allowances to offset existing economically harmful taxes or to reduce the deficit. Using climate revenues from cap-and-trade (or a carbon tax) to reduce economically inefficient taxes or the deficit would result in a substantial decrease in the overall cost of the program. Nonetheless, the bill that passed the House of Representatives called for about 60 percent of the total allowances to be given away over the life of the program. The remaining 40 percent would have been auctioned by the government, but the auction revenue for the most part was not to be used for tax or deficit reduction. The bulk of the value would have gone to such things as subsidizing electric utilities, helping trade-exposed industries and transfers to low-income consumers.

Given that achieving substantial reductions in greenhouse gas emissions is a costly endeavor, it is unfortunate that Congress made things more costly by including unnecessary mandates and by failing to use the cap-and-trade revenue to lower economically harmful taxes and deficits. Still, these policy failings do not explain the political failure of the bill, since it was the cap-and-trade component of the bill (not the mandates or the lack of revenue recycling) that was disparaged by Republican opponents as “cap-and-tax.”

So why did cap-and-trade stir such forceful political opposition, especially from Republicans who presumably should celebrate the use of market-driven policies to achieve pollution reduction? After all, President George H. W. Bush signed into law a cap-and-trade program that is now widely accepted as an extremely successful effort to lower sulfur dioxide emissions from electric utilities at low cost, and President George W. Bush proposed cap-and-trade programs to substantially reduce sulfur dioxide, nitrogen oxides and mercury from electric utilities.

Perhaps Republican opposition to cap-and-trade for climate policy was in part due to the nature of this particular environmental problem. Deciding how the government should respond to the risk of climate change entails considering the uncertainty of the magnitude of anthropogenic climate change, the need for coordination with other countries’ climate policies and the ethics of weighing short-term costs—costs that would be much higher than the existing sulfur dioxide cap or the previous caps proposed for nitrogen oxides and mercury—against the gains in the long term. These factors became more politically challenging over the past three years. In particular, the recession and the continuing weakness in the U.S. labor market have turned political priorities away from environmental causes, and these economic problems now make the expansion of newly available, domestic sources of low-cost fossil fuel a higher priority.

The U.S. unemployment rate, which was only 4.4 percent at the end of 2006, peaked at 10.1 percent in October 2009 and remained extremely high at 9.5 percent in July 2010, which was when the Senate climate bill sponsored by Senators Kerry and Lieberman was dropped from the Senate calendar. Having lost nearly 9 million jobs from the peak, the U.S. economy has since only recovered about 3 million jobs. Assuming that 125,000 people enter the labor market each month, if we were to see 208,000 jobs created per month, which was the average monthly job creation rate for the best year in the 2000s, it would take about 12 years to return to the pre-recession levels. At 321,000 jobs per month, which is the average monthly job creation for the best year in the 1990s, it would take about five years. Given the magnitude of this problem, it is not surprising that there is less public appetite to incur short-term economic costs to mitigate a long-term environmental problem.

A recent positive economic development in the U.S. has been the innovations in horizontal drilling and hydraulic fracturing technologies. These technological innovations have rapidly changed the amount of natural gas that is recoverable from shale rock and the cost at which it can be recovered. The Energy Information Administration (EIA) estimates that U.S. shale gas production grew at an annual rate of 48 percent over the 2006 to 2010 period, and that total annual oil production is expected to more than double by 2035. And the innovation of horizontal drilling is also expected to contribute to an increase in domestic crude oil production, with EIA estimating an increase from 5.36 million barrels per day in 2009 to 5.95 million barrels per day by 2035. The economic rents of domestic oil and natural gas production are especially appealing during this time of low aggregate demand and a weak labor market.

The economic conditions seem to impact the public’s perceptions of the science. Polls conducted by the Pew Research Center indicate that, in November 2011, 28 percent of Americans thought there was no “solid evidence that the average temperature on earth has been getting warmer over the past few decades,” up from 21 percent in April 2008. Of the people who think that the average temperature is increasing, the fraction who thinks it is “because of human activity” decreased from 66 percent to 61 percent. While this increased skepticism likely reflects, in part, the shift in economic priorities, the credibility of climate scientists was not helped by emails leaked in November 2009 from the servers of the Climatic Research Unit (CRU) at the University of East Anglia. These emails cast doubt on the impartiality and trustworthiness of some leading scientists in the field, which likely contributed in some part to the loss of voter interest in tackling the problem through policy.

The administration’s political response to the changing politics of climate policy was, and continues to be, to sell climate policy as an economic opportunity for the nation—as an engine of “green job” creation. Indeed, the “energy and the environment” issues section of the President’s 2012 campaign website focuses almost entirely on job creation, including the top three featured points: the President is “investing in clean-energy jobs,” has “helped the private sector create 1 million jobs through public investments that jump-started additional private investment,” and the “clean energy sector creates the jobs of today and tomorrow.”

But the economics of green job creation are dubious. If a worker for a government-subsidized environmental project is hired away from a private job, then there is no net job creation, and indeed, society’s opportunity cost is the worker’s wage rate in the private sector, as this reflects the value of the lost output that the worker had been producing. In other words, the labor used for the government-financed program represents a cost, not a benefit, of that program. However, if the government-financed project hires someone who is currently unemployed, then there is a net increase in jobs and no decrease in output elsewhere in the economy. The question then is whether the government-financed environmental project is displacing private-sector jobs. Even given our weak labor market, it is unlikely that all, or even much, of the labor used for the government-financed environmental projects is drawn from the unemployed, especially as many such projects will take many years to acquire the necessary permits, undergo competitive contract selection and negotiate the scope of the work. The clean-energy-related funding of the American Recovery and Reinvestment Act stacks up poorly against other forms of fiscal stimulus.

Sadly, the political focus on green job creation—and on avoiding a politically unpopular increase in energy prices—has led us away from the economically sound policy of placing a price on greenhouse gas emissions through a cap-and-trade program or a carbon tax. Instead, policies have been adopted that either mandate or subsidize alternative fuels and technologies. These are much less cost-effective approaches.

Mandates, such as government-prescribed minimum energy efficiency standards for vehicles, appliances, or light bulbs, increase costs and reduce choice for consumers, but these costs are less salient than the higher energy costs associated with other policies. The administration has justified these standards by claiming that the amount that consumers gain in long-term energy savings outweighs the higher initial cost of the more energy-efficient goods, despite the lack of market demand for such goods. This paternalistic approach shifts environmental policy from an emphasis on mitigating the harm that individuals impose on others towards an emphasis on mitigating harm individuals impose on themselves. This results in less effective pollution control because energy-efficiency standards do not promote conservation; indeed, there is some evidence—known as the rebound effect—that people use products more when they become more energy efficient. Energy-efficiency standards also apply only to new products, which can create incentives to retain older (and thus less energy-efficient) products. The result is a higher cost per amount of pollution reduced compared with market-based environmental regulations.

Whereas cap-and-trade and pollution taxes rely on the market to identify the lowest-cost means of reducing emissions, targeted government subsidies for certain clean energy producers rely on government officials to determine the best environmental use for each tax dollar. Given the diverse and ever-changing number of decisions involved with energy use, the former decentralized approach of raising the market price for pollution-intensive activities is much more cost-effective than the latter centralized approach of government trying to pick promising cleaner energy alternatives.

In addition to the informational problem confronted by the government, there is also the inevitable role that politics plays in deciding the recipients of government subsidies. The most prominent recent case concerned the solar-panel producer Solyndra, where there is now evidence that the White House pressured the Office of Management and Budget to expedite review of the loan guarantee request and where the announcement of layoffs at the company were timed around the election cycle. Similarly, a leaked memo to the President concerning the renewable energy loan guarantee program illustrated the possible problems of such a guarantee for the Shepherds Flat wind farm, including: the total government subsidies for the wind farm exceeded $1.2 billion, 76 percent of which was from subsidies aside from the loan guarantee (“double dipping”); the sponsor’s equity was only about 11 percent of the project costs (“no skin in the game”); and the project likely would have moved forward without the loan guarantee (“non-incremental investment”). Nonetheless, the memo provided the politically relevant (yet economically irrelevant) information that the production of 338 GE wind turbines was to occur in South Carolina and Florida. (The loan guarantee was subsequently approved.)

The economics is clear that the most effective climate policy, and the one that would minimize the cost to the economy, is one that sets an economy-wide, government-prescribed, price on greenhouse gas emissions and that uses the resulting revenues to offset economically harmful taxes or deficits. While the price on emissions can be accomplished through either a cap-and-trade program or through a carbon tax, the latter is preferable. The alternative approach of inflexible government mandates or special-interest subsidies (or tax breaks) for certain technologies won’t work.

Policy recommendations for the next administration

Is a renewed push for climate policy feasible for the next administration? Given the politics of the issue—shaped in large part by the high unemployment rate—the chances are doubtful. Yet, the political infeasibility of putting a price on greenhouse gases may weaken as we confront the political necessity of confronting our growing public debt burden.

A continuation of current government policies will lead to a debt-to-GDP ratio that grows to about 170 percent by 2035, with continued and indefinite growth thereafter. Over the infinite horizon, the fiscal gap is over 9 percent of GDP— meaning that keeping the debt-to-GDP ratio at the current level would require an immediate and permanent increase in taxes or a reduction in spending of this enormous magnitude. While there is an important and open question of how much of this gap to achieve through reduced spending, it is undoubtedly the case that tax revenues will have to increase.

Tax reform should therefore be a priority for the next administration. Our current tax system is economically harmful, complex, unpredictable and often unfair. The economically sensible way to increase tax revenues is through comprehensive reform that simplifies the tax code and broadens the tax base, rather than increasing the marginal tax rates on labor and saving. This was the approach taken by the National Commission on Fiscal Responsibility and Reform (co-chaired by Alan Simpson and Erskine Bowles) and by the Bipartisan Policy Center’s Debt Reduction Task Force (co-chaired by Pete Domenici and Alice Rivlin). The bipartisan nature of these commissions suggests that a path to political compromise is for Democrats to accept lower marginal income tax rates (even levels lower than those enacted during the Bush administration) and for Republicans to accept higher revenues through base-broadening (including an increase in tax rates for capital gains and dividends).

A carbon tax offers an additional means of efficiently raising revenue for deficit reduction, and thus might have political appeal for otherwise reluctant Republicans as a way to help keep marginal tax rates low while affording an increase in net revenue. A carbon tax of similar stringency to the cap-and-trade bill that passed the House in 2009 would raise about $60 to $80 billion annually in the early years, rising to about $100 billion after about 25 years, before dropping again thereafter. This is a substantial amount of tax revenue, but it would only play a small part in closing our fiscal gap. If one focuses on just the 10-year window, annual carbon tax revenue would be on par with our expected revenue from excise taxes, which amounts to about half a percent of GDP annually. This is slightly smaller than the revenue loss due to the mortgage interest deduction. Over the longer-term, which is when we face our most pressing fiscal problems due to rising health care costs and the aging population, we could expect the carbon tax to contribute less to closing our fiscal shortfall, since emission reductions would be likely to outpace increases in the carbon tax.

Another, so far under-explored, opportunity for political compromise involves coupling a carbon tax with broader environmental policy reform. Republicans should embrace market-based environmental policies, as they have in the past, as the best means of improving air quality at minimum economic cost. The traditional approach taken by the Environmental Protection Agency (EPA), as prescribed in most of the environmental laws of the 1970s, attempts to achieve environmental improvements through inflexible and economically costly mandates that set uniform technology standards across firms. By demonizing cap-and-trade in the latest debate, Republicans risk a reversion of environmental policy away from market-based approaches toward these more costly options.

This reversion already has begun, as the 2007 Supreme Court decision in Massachusetts v. EPA found that the EPA had the authority to regulate greenhouse gases under the existing Clean Air Act. The EPA’s 2009 “endangerment finding” that greenhouse gases threaten public health and the environment has led to new EPA regulations to reduce emissions, and EPA plans further regulations, including for refineries and coal-fired power plants. These inflexible, command-and-control regulations will result in considerably higher economic costs to reduce emission than would a flexible market-based approach.

A sensible response would be for Republicans to instead double-down on market-based environmental policies. Not only can (and should) a carbon tax substitute for the default policy of imposing inflexible greenhouse gas standards throughout the economy, it can also substitute for a broader set of other existing environmental and energy regulations. For example, fuel economy standards and energy efficiency standards are largely redundant given a clear and predictable price on carbon. And greenhouse gas reductions stemming from a carbon tax should result in co-benefit reductions in other conventional pollutants currently regulated by the EPA, thus obviating the need for some existing, costly regulations.

With the unemployment rate forecasted to be at about eight percent by the end of 2012, we are unlikely to soon see a shift in political momentum toward a comprehensive climate policy. But the urgent need for tax reform, and the political appeal of broader environmental policy reform, could provide an opportunity for the next administration to achieve a sensible, cost-minimizing and effective comprehensive climate policy.

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Ted Gayer

Negative Equity Concentrated in a Few States

Ted Gayer — Fri, 02 Mar 2012 00:00:00 -0500

Yesterday’s release of CoreLogic’s negative equity report showed that in the fourth quarter of last year there were 11.1 million residential properties with a mortgage in negative equity, which is 22.8 percent of mortgage holders. This is slightly higher than the 10.7 million (22.1 percent) from the third quarter. The CoreLogic data show wide variation across states in the percentage of mortgage holders that are underwater. Nevada leads the list with 61 percent of all of its mortgage properties underwater (an increase from 58 percent in the third quarter), followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent).

The average underwater borrower has about $65,000 of negative equity, which yields an aggregate debt overhang of approximately $717 billion nationwide. This aggregate burden varies widely across states. The table below shows state-level data of the number of mortgage properties that are underwater, the average amount of negative equity for these properties, the aggregate negative equity, and the state’s share of the national mortgage debt overhang. While Nevada has the highest proportion of mortgage holders that are underwater, it is the sixth highest state in terms of aggregate negative equity. California has about 2 million mortgaged properties underwater, with an average amount of negative equity across these properties of approximately $92,000. This translates into mortgage debt overhang of about $187 billion, which is the highest among the states and about 26 percent of the total national mortgage debt overhang. Florida has the next highest share of the total national mortgage debt overhang at about 16 percent. The aggregate amount of negative equity in four states (California, Florida, Arizona, and Massachusetts) makes up over 50 percent of the approximately $700 billion of nationwide negative equity overhang.

The administration has recently increased taxpayer-financed incentives to banks to engage in more principal reductions for underwater borrowers, and it has pressured Edward DeMarco, acting director of the Federal Housing Finance Agency, to allow principal reductions for Fannie Mae and Freddie Mac loans. The distribution of negative equity across states suggests that any serious attempt at wide scale principal reductions would reap benefits to borrowers concentrated in only a few states.

State	Negative Equity Mortgages	Average Negative Equity Amount	Aggregate Negative Equity	Percentage Share of Nationwide Aggregate Negative Equity
Alabama	43,431	$44,526	$1,933,808,856	0.27%
Alaska	6,273	$48,473	$304,071,971	0.04%
Arizona	631,126	$58,704	$37,049,636,573	5.18%
Arkansas	25,676	$71,662	$1,839,983,520	0.26%
California	2,041,276	$91,621	$187,024,071,967	26.14%
Colorado	241,682	$43,488	$10,510,260,953	1.47%
Connecticut	111,140	$112,147	$12,463,982,075	1.74%
Delaware	28,919	$77,112	$2,229,996,542	0.31%
Florida	1,916,082	$57,905	$110,950,170,016	15.51%
Georgia	541,178	$41,147	$22,267,822,137	3.11%
Hawaii	24,118	$97,578	$2,353,394,765	0.33%
Idaho	64,135	$45,393	$2,911,301,900	0.41%
Illinois	489,535	$59,412	$29,084,236,461	4.07%
Indiana	69,123	$36,369	$2,513,963,937	0.35%
Iowa	38,125	$55,444	$2,113,790,975	0.30%
Kansas	32,552	$44,288	$1,441,668,766	0.20%
Kentucky	26,704	$69,100	$1,845,246,383	0.26%
Louisiana	36,546	$144,987	$5,298,693,940	0.74%
Maine	7,662	$58,723	$449,935,894	0.06%
Maryland	331,159	$63,243	$20,943,444,374	2.93%
Massachusetts	240,887	$127,772	$30,778,641,582	4.30%
Michigan	480,075	$40,143	$19,271,670,396	2.69%
Minnesota	109,407	$38,566	$4,219,372,191	0.59%
Mississippi	11,209	$42,347	$474,669,190	0.07%
Missouri	137,177	$41,959	$5,755,815,289	0.80%
Montana	10,754	$66,122	$711,071,659	0.10%
Nebraska	26,140	$57,584	$1,505,239,249	0.21%
Nevada	343,256	$82,435	$28,296,313,698	3.96%
New Hampshire	47,206	$53,056	$2,504,538,822	0.35%
New Jersey	329,780	$78,782	$25,980,883,310	3.63%
New Mexico	36,898	$82,371	$3,039,337,194	0.42%
New York	122,125	$130,341	$15,917,855,328	2.23%
North Carolina	205,764	$54,865	$11,289,339,673	1.58%
North Dakota	3,763	$58,326	$219,478,984	0.03%
Ohio	526,802	$30,878	$16,266,566,980	2.27%
Oklahoma	33,205	$60,754	$2,017,331,352	0.28%
Oregon	131,126	$40,102	$5,258,416,029	0.74%
Pennsylvania	156,376	$71,702	$11,212,482,487	1.57%
Rhode Island	52,286	$78,393	$4,098,877,472	0.57%
South Carolina	99,936	$52,123	$5,208,989,529	0.73%
South Dakota	NA	NA	NA	NA
Tennessee	162,058	$39,203	$6,353,082,233	0.89%
Texas	347,021	$43,374	$15,051,777,345	2.10%
Utah	100,687	$43,879	$4,418,092,031	0.62%
Vermont	NA	NA	NA	NA
Virginia	303,800	$63,596	$19,320,458,450	2.70%
Washington	271,505	$50,279	$13,651,107,650	1.91%
Washington, DC	12,446	$83,987	$1,045,297,365	0.15%
West Virginia	1,225	$76,345	$93,522,139	0.01%
Wisconsin	104,548	$54,206	$5,667,083,140	0.79%
Wyoming	5,056	$44,377	$224,371,648	0.03%

Source: CoreLogic

Authors

Ted Gayer