I started Voices of Reason over nine years ago, during the dark days of the Bush years when reason was under assault by an administration riddled with incompetence and arrogance. A lot has changed in the past decade: America has weathered the worst economic downturn since the Great Depression and twice elected a man who, for all of his shortcomings, is firmly in the reason camp and a champion of sensible policies. The country is in much better shape, and a host of new liberal policies have been enacted. While imperfect and incomplete, they’ll significantly improve millions of people’s lives and strengthen our economic system over the coming years.

But we all know that the work is far from done.

On climate change we have barely gotten started and time is running out to mitigate the severe impacts that are becoming increasingly evident by the day. Millions of people are still out of work, and their lifetime economic prospects dim every day they remain so. Even on healthcare, where tremendous progress has been made, the reforms that go fully into effect in 2014 are but the starting point for a series of reforms that are necessary for our long-term fiscal solvency. And we remain far away from sensible gun regulation that can make a serious dent in the stunning levels of violence that continue to make America an outlier among developed nations.

And the simple fact is that reasoned arguments are simply not sufficient to get things done. When the gun legislation proposed by the Obama Administration went down last week, it had the support of 90% of the American people—virtually unheard of in modern America. Yet it wasn’t enough to overcome GOP obstructionism in the Senate and the lobbying efforts of the NRA, one of the most heinous organizations in the land.

It is hard to believe, but the “reason camp” has won almost all of the major policy arguments that confront us. Majorities support action on climate change and green energy, immigration reform, gay marriage, drug decriminalization, single payer healthcare (which is what Medicare is), progressive tax policy, etc. If our laws reflected majority opinion America would look more like Scandinavia than Texas, and we would all be better off for it.

The reactionary forces in America know this, which is why they use every tactic, no matter how unscrupulous or unethical, to sow disinformation and thwart the will of the majority. Since they have no allegiance to the public interest, only to their narrow self-interest, they feel no compunction about pitting one group against the other, about lying and harming others to get their way. As has always been the case, it’s easier to destroy than to create, easier to confuse than to illuminate, to divide rather than unite.

So our task is that much harder.

But it is not impossible, and that’s why I’m transitioning this site from reasoned argument to reasoned action. It’s time for implementation, execution, and performance. Reasoned arguments will form the backbone of all actions; they’ll be the catalyst, the inspiration, the spark. But more is needed. We need to think creatively, better understand human psychology, make use of new technology, and speak to the human emotions that drive behavior.

Sometimes reason in action may take conventional means. Just this past week I learned that Eden Foods, a company whose excellent organic products I have been buying for over 20 years, is run by religious extremists who are fighting to overturn the rule requiring free reproductive health services for women under Obamacare. I joined forces with many others to begin a boycott of Eden products and wrote a letter to the company.

Sometimes reason in action will inspire new businesses, new art, new stories, new political campaigns. Or it may take the form of a new Facebook group to share information, as I and others did this past Earth Week. All evidence points to the overwhelming health and environmental benefits of a plant-based diet, so we led a panel discussion between a vegan (me), a grass-fed beef rancher, and a local sustainable seafood purveyor, followed by a tour of Whole Foods and a vegan food competition. The event drew over 50 people and the food was incredible. Dozens of people had never tasted vegan food this good before and were inspired to transition away from animal products. We are keeping the momentum going with our Facebook group and recipe sharing. People often email me asking me for vegan tips.

All of us have similar stories of things we know that had a direct impact and sowed the seeds of change.

Over the next few months VoR will become a place where those stories are shared and direct action is promoted. I am not sure of the exact format, frequency, and other details of this effort, and I welcome your opinions. Please use the comments section of this piece to send along your ideas. If you’re on the VOR mailing list, I’ll let you know when the new site is up and running; if you’re not on the mailing list, be sure to add your name. I’ll also make sure that this site and the new one are linked.

Thanks for all of your thoughtful emails and comments over these past nine years. They have kept me returning week after week even when readership was low. I look forward to this next phase where we can all share ways to make positive impacts in society and put reason into action.

All the best,

Jason Scorse

An aging population and the Medicare safety net make healthcare costs the biggest single threat to America’s fiscal future. To help pay the bill, the Obama Administration is leaning on the rich: two new Medicare taxes, both targeting the well-off, take effect in 2013. Progressives who favor the levies might want to think again. Neither is a great idea, and one of them complicates a reform with far greater potential. Let’s look at the new taxes, and see why the negatives could outweigh the revenue they generate.

The first is an extra Medicare payroll tax of 0.9%, on top of the standard 1.45%, on earned income above $200,000 for single filers or $250,000 for joint filers. The second is a Medicare surcharge of 3.8% on the net investment income of persons above the $200,000 and $250,000 thresholds. (Investment income here includes not only capital gains, dividends and interest, it also includes rental income and income from passive investments, i.e., enterprises in which persons invest but play no active role.)

Tapping the wealthy with these two taxes is fine with the economist Paul Krugman: “I’m not a fan of the Tax Foundation’s work,” Krugman blogged, “but their analysis of the distributional effects of Obamacare looks about right: significant benefits to the bottom half of the income distribution, paid for largely by taxes on the top few percent (the Medicare surcharge and the extra tax on investment income).” These laudable results, however, hold no answer to a larger tax policy question: since when did healthcare costs become the special responsibility of the rich? If the costs are a shared national responsibility, what’s up with dedicated healthcare taxes on the affluent?

There’s a better way to generate more federal revenue, and to sharply reduce income inequality as well: tax income from wealth and income from work at the same rates, as President Ronald Reagan did with his signature Tax Reform Act of 1986. Today, tax-advantaged income from capital gains and dividends is the biggest single driver of income inequality; analogously, taxing wages and investment income at the same rates is the surest way to shrink that inequality. (Some shrinking, of course, will occur in 2013. Taxes on stock market gains and dividends are rising to 20% from 15%, and will hit 23.8% with the Medicare surcharge included. Earners at the very top will also be hit with an increase in marginal rates.)

The rich couldn’t claim they were being singled out if Obama seized the moment to press for the Reagan policy. The President’s own Simpson-Bowles deficit commission came down in favor of the idea; so too did a second blue-ribbon deficit reduction blueprint, the Rivlin-Domenici plan issued by the Bipartisan Policy Center in Washington, D.C.

Besides its debatable focus on the rich, the Obama surcharge on investment income has two other disadvantages: 1) Any inflow to the Treasury is inherently subject to the ups and downs of the financial markets, hardly desirable for healthcare funding, 2) It complicates the otherwise clean case for equal taxes on all income. A simple way to overcome these disadvantages is to scrap the surcharge. The scrapping could become a bargaining chip: the surcharge ends when equal taxes begin.

The new Medicare taxes were no doubt well-intended. All the same, dedicated healthcare levies on the rich only muddle the issue of equal taxes on earned and unearned income. (They could set a troubling precedent as well. Should the rich pay a higher dedicated tax for national defense? For environmental protection?)

It’s time to restore Reagan’s equal taxes on wages, capital gains and dividends. If that reform were enacted, and a financial transactions tax along with it, America’s future budget deficits could magically disappear.

Jason Scorse

Last week I discussed some thoughts about retirement savings to keep in mind if you hope to be prepared financially for old age. The bottom line is that retirement is likely to be more difficult in coming decades. Traditional forms of equity will return lower than average historic yields, traditional pensions will have all but vanished, and Social Security payments will likely be reduced.

I ended by explaining why I think a home purchase is a good investment for a diversified portfolio right now: mostly due to historically low interest rates, but also due to the price levels brought on by the recent housing crash. It is important to note that as interest rates rise homes as investments will become less attractive investments, and will likely yield meager returns on average. As always there will be “hot” real estate markets that return above average yields—but these are almost impossible to predict, and the best reason for buying a home is when it’s a place the buyer wants to live for the long-term.

Climate change is an added factor to consider when buying a home these days, particularly coastal property or property located in flood plains. I’ve almost finished the new book, High Tide on Main Street; besides providing an excellent overview of climate change, it makes the case that coastal property values will decrease significantly in coming decades as the true impact of sea-level rise begins to be felt. The same will be true in areas where climate change leads to increased flooding and overall storm activity. While government insurance currently backstops many of these properties, the public debt burden could become unsustainable; once the risks are fully incorporated into home values, prices are going to plummet. I am not so sure about the time frame the author predicts, but since homes are best seen as long-term investments, it’s obviously smarter to avoid those areas where climate change is likely to hit sooner rather than later. This includes areas (such as Phoenix, AZ) which, according to most models, are in store for huge decreases in water availability that portend a bleak future.

The next topic I’d like to discuss is education. Here are some thoughts:

a. Children who are born today will face an extremely dynamic work environment in which the average time at a single job will likely be short. Preparing them for a cosmopolitan, interconnected world will mean making them comfortable with other languages and cultures, so that they see themselves early on as global citizens. Wherever possible, parents should favor bilingual or trilingual education, significant travel, and continual exposure to international news and issues. In addition, when thinking about higher education, the careers of 2035 and beyond are likely to look radically different than the careers of today, so flexibility and creativity are likely to be more important than ever. Fortunately, America’s entrepreneurial spirit is well-suited to this future. I am confident that the 4-year undergraduate degrees 20+ years from now will be much more tailored to the individual, and much less dependent on general education courses that can easily be taken online. Apart from helping students find their career niches, these developments should greatly reduce the costs of higher education, which will be beneficial to both students and parents and free up significant resources. It is likely that many more people will be self-employed or part of a small business in the coming decades, and providing specialized and customized services across a wide range of industries will provide a large portion of total employment. Preparing for this future will require a lot less rote memorization, and a lot more systems thinking, teamwork, and communication skills.

b. For adults who have graduated from college and elect not to pursue an additional degree, it’s crucial to stay abreast of new trends in your field. While this has always been the case, it’s become increasingly so in modern America. I offer myself as just one example. As a college professor at a school without tenure, my job depends on continued student enrollment in a highly specialized graduate program. My colleagues and I work extremely hard to continually update the curriculum, maintain an intimate scholarly atmosphere (our essential advantage compared to larger, impersonal institutions), and invest a lot of time in job placement and fellowships for our students (last year 22 out of 23 graduates had employment within 6 months, a 96% success rate). We take online education seriously, and are trying to figure out how best to incorporate this technology into our plans. Staying up-to-date and innovative is stressful, but ultimately it is absolutely essential. In today’s workplace, and even more so in tomorrow’s, people who have a hard time adapting, evolving, and changing are going to be in trouble.

Jason Scorse

I’ve written a lot lately about technological changes that are reshaping labor markets and posing major policy challenges. Unfortunately, given the nature of the political process (plus the fact that the system in the U.S. has become borderline dysfunctional), individual persons have to do most of this themselves while they wait for their leaders to act. This is a daunting task but not impossible; I predict that significant amounts of brainpower will be devoted to this endeavor over the coming years, the results of which will hopefully help everyone to better cope.

Before I outline some of my thoughts, a few sentences on the causes of global volatility are in order. It is important to note that increased globalization and financial integration were supposed to make the world less volatile, not more. Spreading risk more broadly and allowing nations to specialize and trade was supposed to generate steadier economic growth without large macroeconomic fluctuations. It hasn’t turned out this way; risks are spread more broadly but there are more of them, and more danger from contagion effects. Even more important, the complexity of financial products has grown faster than our ability to regulate them, making the system inherently unstable.

In addition, increased demand for commodities brought on by the growing global middle class has led to higher prices, increased speculation, and the ability of small changes in supply to cause outsized price reactions. Lastly, accelerating climate change has led to more frequent instances of extreme weather events with devastating impacts: record droughts, storms, and floods, taking heavy tolls in both the developed and developing worlds.

Against this backdrop, what can individuals do to prosper in today’s more volatile world?

1. Planning for Retirement

There’s no more direct threat to our material well-being than the threat to our retirements. The small sums provided by Social Security are in constant danger of being reduced; as things stand now, average benefits will have to be cut by about 20% in 2037 if adjustments to the program aren’t made. Coupled with the near extinction of fixed-benefit pensions (almost completely gone in the private sector, and under constant attack in the public sector), there is very little guaranteed income that people can rely on during their old age.

This means that unless people are able to make other long-term investments, they are likely to have to work well into their 70s or face the prospect of a sharply diminished standard of living. Since Americans are already some of the world’s worst savers, this hardly bodes well.

One of the biggest problems facing average Americans is where to put their money if they do have some to save for retirement. As someone who is frugal and likes to save, I have thought a lot about this. Here are some preliminary conclusions:

a. If you choose to keep your money in stocks, the truism that nobody should try to time the market is truer than ever before. If you have a 15, 20, or even a 30-year horizon, you should never buy or sell based on short-term fluctuations. Listen to the tales of the people who sold when the market bottomed out and are wondering now whether to get back in; plenty of these people lost half or even more of their retirement savings, and may never get it back—but if they’d hadn’t gotten out in the first place, they’d already have recovered. The lesson: panic is your biggest enemy when planning for the long-term.

b. Don’t expect interest rates to ever get high again. While rates are near historic lows and will certainly move up, there is little likelihood that they will return to their long-term averages of 7-8%. Even though financial globalization has caused lots of problems, it is also responsible for the continued low interest rates; savers across the world are now helping subsidize borrowing for people everywhere. This is not about to change, and we can expect relatively low rates for years and perhaps even decades to come. This is good news for those who want to buy homes or cars, but bad news for people who like keeping their money in low-risk assets; they’re likely to yield next to nothing for a long time.

c. While stocks are probably still a good long-term investment, they aren’t likely to perform as well as they have in the past. Stocks generally provide higher long-term returns as a compensation for their higher risk. Put simply, people who have the fortitude to keep their money in stocks for decades have historically been rewarded with higher returns. This should mean that the current increased volatility will pay off with even higher average returns in the coming decades. Count me as skeptical. To my mind, much of today’s volatility is caused by financial manipulation that is borderline, if not outright, criminal. Even though economic fundamentals ultimately determine stock prices, the current ups and downs are heavily driven by the various schemes, scams, and macroeconomic shocks stemming from a largely unshackled financial system. Even with the Dodd-Frank financial reforms, the system is nowhere near being fixed; I fully expect new crises in the future. In addition, while corporate profits remain high, profit margins in a highly competitive global environmental are likely to become tighter. As a result, I don’t expect the long-term average of 7-10% real equities appreciation to carry over into the mid-21st century. The return from stocks will remain above the inflation rate, but I don’t think they’ll be the retirement windfall that they once were.

d. With stocks not as profitable, with defined-benefit pensions almost non-existent, with Social Security relatively small and possibly getting smaller, with interest rates near zero, what’s left? I personally believe this is probably a good time to buy a home as part of one’s retirement portfolio. With 30-year interest rates hovering around 3.75% (near a 60-year low), monthly costs in most areas of the country, after putting 20% down, are equal to or lower than rental payments—and the numbers are locked in for 30 years. Home ownership does come with maintenance costs, but rents will also go up. This means that the investment potential can be measured by looking at the 20% down payment versus the eventual value of the home after the mortgage is paid. Let’s take for example a home valued at $675,000. It would require a down payment of $135,000 plus about $5,000 in closing costs. To be conservative, let’s round that $140,000 up to $200,000 to cover the bulk of home repairs over the 30-year period. If the home appreciates at no more than the inflation rate of 2%, it will be worth ~ $1.2 million 30 years from now. This means that the $200,000 initial investment has yielded a little more than 6% nominal or 4% real returns. This is hardly great, but given my bearish outlook on the stock market I don’t think a 401(k) will be doing any better (and in the meantime, a house provides a place to live for the next 30 years). While it is true that home prices may not appreciate much at all in some areas (more on this next week) and maintenance costs can end up being very high with some bad luck, when compared to other assets I think home ownership makes sense now as part of a balanced investment strategy (i.e. I wouldn’t forgo putting money in stocks for retirement in order to buy a home now).

To be continued…

Jason Scorse

Jeb Bush, considered a potential GOP presidential candidate in 2016, had a strange week. He was on record as favoring a path to citizenship for illegal immigrants, but came out against such a path in a book soon to be published. This was viewed, correctly, as a major flip-flop. The reason for it was shocking in its candor: he said the book was written when sentiment in the Republican Party was markedly more hostile to immigration—in effect admitting that his new position simply echoes the party line. (But in what may be a record 360 turn around, just today Jeb reversed course again and says he favors a path to citizenship.)

Who knows exactly what he was thinking. Maybe he was floating a trial balloon to see how this change would be met both within and outside the GOP. I’ve never thought his prospects for the presidency have been high, but it seems clear that on this issue he miscalculated and his stock has been diminished. Nobody likes such bald-faced opportunism, even if we’ve come to expect it from our politicians.

But the bind that Jeb finds himself in illuminates exactly what the GOP faces in what may turn out to be the most important political issue of this year, and for subsequent election cycles as well.

To begin, immigration reform is popular; significant majorities support some form of path to citizenship for the nation’s approximately 12 million illegal aliens. Most are Hispanics and can’t currently vote, but many of their relatives can—and they increasingly view the GOP as not only hostile to immigration reform, but excessively nativist and racist.

This puts Republicans on the wrong side of a rapidly growing demographic. Even if they got on the right side, and supported comprehensive immigration reform, there is little chance of significantly improving their political prospects with this group. Most young Latinos are socially liberal and support a robust role for the government in providing safety nets and services; they’re strongly Democratic and likely to stay that way. Even if Republicans support immigration reform, its passage would be viewed mostly as a Democratic victory, in a bill signed by a Democratic president. You can be sure that President Obama and Senate Democrats would claim as much credit as possible and make it a centerpiece of future campaigns.

Making the situation even worse, many Republicans in the House will remain opposed to a path to citizenship; so any bill that passes will do so only because of Democratic support, denying the GOP any clear political upside.

To summarize, the immigration debate is likely going to expose large fissures in the GOP. The Party’s more nativist and racist elements will be on full display. Even if some major figures in the party ultimately support the bill, it will likely be viewed as a Democratic victory. Even worse, if the GOP strongly opposes the bill and it goes down in defeat, this will surely insure another devastating loss of the Hispanic vote in 2016—without which it will sooner or later become virtually impossible to win a national election in the United States.

Jason Scorse

Last week I discussed whether the GOP is likely to moderate its extremist positions now that Obama has won reelection and it has become clear that they can no longer win nationally with such an agenda. With the sequester having gone into effect on Friday and Republicans across the board saying that new revenues are off the table, it is reasonable to wonder whether the party’s intransigence will make compromise impossible.

When the sequester was originally negotiated, President Obama (and most observers) believed that the defense cuts were so large that they would ultimately force Republicans to the bargaining table. This now seems a miscalculation; a sizeable number of House Republicans appear willing to let the Defense Department take the hit in exchange for equally large cuts to discretionary domestic spending. Whether they maintain their resolve as these cuts begin to inflict significant economic pain remains to be seen.

Obama can be forgiven for assuming that Republicans would be compelled to negotiate. It is rare to witness such raw ideology at work, but that is exactly what we are seeing. It is an ideology that eschews evidence; the cuts are ill-timed for a struggling economy, and some affect programs with high rates of return to American society (e.g., medical and other scientific research and prenatal nutrition).

Similar ideology is also on display in some Red states that have agreed to implement Obamacare’s Medicaid extension. States are insisting that the added funds go exclusively to private insurers. As Paul Krugman notes, such a policy is both more expensive than publicly-funded insurance and a direct form of corporate welfare—to the tune of billions a year. It demonstrates once again that the GOP represents the worst of both worlds; economically it’s a corporate patronage party, and on social issues it holds extremist positions.

Recent evidence seems to support the argument that Obama was naïve to believe that his reelection could “break the fever”. But let’s not forget that fevers peak just before they break. An equally compelling argument can be made that we are witnessing the last gasps of a movement that wants to inflict as much pain as possible before becoming too marginalized to matter. Just as wounded animals are often the most dangerous, so too is the GOP’s right wing. Knowing that the future will be less and less hospitable to its tenets, the Right is trying to lock in everything it can before demographics simply overwhelm them.

The Tea Party members in Congress—those most directly responsible for the austerity measures just imposed—can always move on to lucrative lobbying jobs, positions at Fox News, or any number of right wing think tanks. There they’ll be hailed as heroes for standing firm against Obama’s liberal onslaught.

But while they have little to lose in the immediate future, they surely know that their Party’s long-termed prospects are essentially doomed.

P.S. Ezra Klein comes to the conclusion that compromise with the GOP is impossible at this point because they simply refuse to take yes for answer no matter what Obama proposes because of their steadfast refusal to accept a dime in new revenues.

Jason Scorse

President Obama predicted that if he won reelection it would help bring the GOP to its senses and begin the work of governing instead of just obstructing; he referred to this as “breaking the fever.” With the sequester set to kick in on March 1st, leading to billions in indiscriminate and destructive budget cuts, we will soon see if his prediction was right.

The President and Senate Democrats have proposed replacing the sequester by closing tax loopholes benefiting corporations and the rich, and by targeted budget cuts aimed at areas of government excess. So far the GOP has refused to cooperate, insisting that no new tax revenue can be part of any deal. Some Republican proposals would make the sequester even worse, replacing defense cuts with deeper cuts to programs for the poor.

As Friday’s deadline approaches, the pressure will ratchet up and the “blame game” will intensify. Whether this will be enough to change the GOP position is yet to be seen. Indications are that the Republicans are more than willing to harm the American economy in order to protect the rich and corporate interests. My sense is that the politics are against them, and the polls indicate that a majority of the public will blame the GOP if the sequester goes into effect, but this may be insufficient to stop them.

Two other issues where the GOP’s extremism will soon be tested are gun safety and immigration reform. While there’s sufficient Republican support in the Senate to help pass comprehensive immigration reform, indications so far in the House suggest that a majority of Republicans will not support a path to citizenship—a path which is critical to any bill that Democrats and the President will support. With gun safety, the situation is largely the same; there are likely enough Senate Republicans in support of new rules to prevent a filibuster, but in the House it is a different story with the NRA calling the shots.

The key question is whether Speaker Boehner will call for a vote on Democratic-supported proposals, knowing they can pass with Democratic backing against the will of his own caucus. This repudiation of the so-called “Hastert Rule” (where only bills supported by Republican majorities are brought to the floor) is what happened with the recent debt-ceiling vote and the vote on the expiration of the Bush tax cuts. It will be fascinating to see if Boehner can persuade a sufficient number of Republicans to support gun safety and immigration bills without once again embarrassing the GOP and allowing Democrats to pass signature pieces of legislation.

Either way, we will soon see whether Obama was correct that the fever of Republican extremism could be broken by his reelection. If it was, we will likely get substantive legislation that can materially improve people’s lives and make America stronger. If not, then the only strategy going forward will be to continue to beat the rightwing at the ballot box, making them irrelevant to the political process. So far, Republicans have yet to grasp that America intends to move forward with or without them.

Jason Scorse

It is always risky to predict major political realignments in America; the pendulum can swing rapidly from one party and ideology to the next. However, this time things may be different. Both the demographic and structural factors currently at play portend a long-term center-left shift in American politics.

In many ways this shouldn’t be surprising, as America is truly a center-left country. Republicans and the rightwing would have us believe that America actually leans right, but the citizenry overall has always been more liberal than our governing institutions. These are “small c” conservative by design, and provide tremendous power to the minority.

Now—for the first time since Ronald Reagan’s first election—the forces of liberalism have strong headwinds at their back. These headwinds will be increasingly difficult to keep at bay, despite institutional barriers that favor smaller, conservative states both in the Senate and in the Electoral College.

Every month, tens of thousands of Latinos turn 18 and become eligible to vote while even more old white voters pass away. These trends are so significant that during every election cycle from here on, the share of the non-white voting population will increase by millions. These new young voters are not only socially liberal, they also favor an active role for government: strong social safety nets, increased support for education, meaningful environmental protections, and progressive tax policies.

To take just one issue, the tide in favor of gay rights has turned so favorably in just a few years that the reactionary rightwing is almost a national laughing stock. Within a decade or two, the victory of the gay rights movement will be so complete that it won’t even be an issue at election time (and it barely was in 2012).

No doubt, the rightwing and its allies (Fox News, the Wall Street Journal, the Heritage Foundation, and dozens of shadowy propaganda outfits bankrolled by anonymous mega-donors) will continue to sow disinformation and discontent, and stall progress wherever they can. But their followers are declining and their influence is waning, and their demise is all but assured.

Looking just a couple of years out, it seems likely that Hillary Clinton will run for president in 2016. Given her sky-high approval ratings, the pent-up aspirations of her supporters (who will have waited eight years since her first run), the large number of unmarried women voters, and the lack of any superstar candidate in the GOP field, she would be very hard to beat. If she runs and wins, during her term(s) she would almost certainly get a chance to replace the most rightwing Supreme Court justices—Scalia, Kennedy, and Thomas—thereby cementing a liberal legacy for another generation.

A lot can happen in politics in a short time and there are a lot of unknowns, but a long-term center-left alignment definitely seems to be shaping up. It’s a compound of demographic changes, the fact that political preferences ingrained in the young are hard to reverse, and the hard right turn that the GOP has taken, especially since 2008. The new alignment will be good for the country, for the health of our civic discourse, and for the world. If we are fortunate, we won’t have to wait too long before we can finally relegate the far right elements to a totally inconsequential fringe.

Jason Scorse

Since its inception, the environmental movement has had an uneasy relationship with economics. The environmentalism that arose in the 1970s relied almost exclusively on “command and control” regulations that mandated certain actions by polluters, with little attention paid to issues of economic efficiency, business incentives, or how markets are likely to evolve over time. The movement was populated largely by scientists, lawyers, and activists, many of whom believed that our capitalist system was the main driver of environmental degradation—and that economics was little more than capitalism’s enabler.

This skepticism, and sometimes outright hostility, towards economics stemmed from many firmly held beliefs: that the quest for economic growth by definition resulted in the exploitation of the natural world; that private entities with their focus on profit will always degrade the environment; that assigning dollar values to nature was counter-productive, and one of the main drivers of the unhealthy relationship between humans and the environment. The overarching position of the environmental community for much of its first 20 years (roughly1970 to1990) was that markets could not be harnessed to benefit the environment, but instead needed to be suppressed and reined in to promote environmental values.

This position still prevails in some environmental circles, but the profound distrust of economics has largely given way to a more balanced and realistic assessment. Environmentalists have discovered that the theory of market failure (the foundation of much of microeconomics) contains a powerful environmental message: private markets alone will not fully account for the costs they impose on the environment and human health, nor under many routine circumstances will they promote the sustainable use of natural resources. Environmentalists can now point to classical economic theory for one of their strongest arguments in favor of government action to protect the environment.

This theory not only provides diagnostic criteria to determine when markets work effectively and when they don’t; it also offers prescriptive action on how to make markets function better. For example, the rationale for greenhouse gas taxes comes directly from the economic theory of Pigouvian taxation, which posits that polluters should be charged on a per unit basis for the damages they impose on society. Microeconomics can also provide insight into the best stage of the production process to levy the taxes (in order to maximize their efficacy), as well as methods to redistribute the tax revenue to reduce any regressive impact and help transition to cleaner modes of production.

The primary alternative to direct emissions taxation is “cap and trade,” which allows the government to set an overall cap on total pollution while allowing firms to achieve emissions reduction by buying and selling pollution permits. Cap and trade was successfully implemented in the U.S. in 1990 for sulfur dioxide emissions (and was adopted by the EU in 2005 for greenhouse gas emissions), with cost savings to the industry in the hundreds of millions a year, without compromising the target reductions. Environmentalists used to fret about the moral implications of giving polluters a “right to pollute;” now that cap and trade has a demonstrated record of success, there is growing acceptance that the method can be a powerful environmental policy mechanism.

There is also growing recognition that, where property rights are nonexistent and natural resources are being exploited unsustainably, assigning property rights and limiting access can help reverse the damage. The principle has been applied with significant success in many ocean fisheries; it’s also being put into practice to help reverse deforestation in areas where ownership is currently contested.

Sometimes markets fail in subtle ways that have major environmental implications. For example, private entities have little incentive to provide the public with information about their toxic emissions. Consumers, therefore, make purchasing decisions with limited information about what types of production processes their purchases support. Policies that force firms to provide complete information on their toxic emissions can empower users to make better-informed purchases, and more knowingly express their preferences for greater environmental quality.

The above examples are only a few of the ways in which environmental goals have been advanced by addressing market failures. Assigning dollar values to ecosystems has also been accepted by many environmental organizations, who now view this as an essential ingredient in making sure policymakers and businesses don’t overlook, and underestimate, the benefits that nature provides.

New York City decided to purchase its upland watershed because forests could provide water filtration cheaper than a sanitation plant. Costa Rica elected to pay private landowners for the forest ecosystem services their properties provide to the general public. These are just two real-world examples of how placing a dollar value on ecosystems led directly to increased preservation.

The ability of economic theory to advance environmental goals has helped the economics profession win over many once-skeptical environmentalists. The environmental community has come to recognize that market failures are to blame for much of our environmental degradation, along with market distortions—e.g., subsidies, tax breaks, and the right to pollute without accountability. These market failures and distortions are the antithesis of healthy capitalism, and are opposed by most economists.

Summing up, over the decades environmentalists have become far more sophisticated in their understanding of economics. Economic theory provides many important tools to analyze when markets work and when they don’t, and how to use that knowledge to benefit the environment. Most important, there’s a growing recognition that well-functioning markets aren’t the enemy of the environment, but in fact may be one of its greatest allies.

Jason Scorse

This post appeared on the blog of the American Sustainable Business Council this past week.

Externalities are costs (or benefits) not directly borne by those engaged in an economic transaction. Pollution is the most ubiquitous negative externality in the world. All externalities allow companies, large and small, to effectively cheat by pushing costs onto society that they should bear. With climate change accelerating, the failure to address externalities is literally threatening the future of human civilization.

Because of the prevalence of negative externalities throughout all sectors of our economy, we are living in a world of massive economic distortions, misallocation of resources, and grand illusions. This is not hyperbole, but simply the economic reality we face today. Pollution externalities allow us to fool ourselves into thinking that $4 a gallon gasoline is too expensive, or that .99 cent hamburgers are a good deal.

If fossil fuel producers had to pay for the greenhouse gases they emit, agribusinesses for the nitrogen pollution that cause “dead zones”, chip makers for the heavy metal pollution from the production of laptops or shipping companies for the diesel pollution that creates smog in the world’s port cities; the industrial landscape would be radically altered. Instead, we would have many more wind farms and less oil rigs, more recycling and less waste, smaller and more efficient homes, and more locally made goods.

Sadly, not only do many of the most polluting businesses oppose measures to address the negative externalities they produce, but due to their tremendous economic power (ironically, oftentimes due to the fact their goods are underpriced in the market) they can disproportionately influence the political process to their advantage. This leads to a situation where not only do the largest polluters often pollute for free, but they secure all sorts of subsidies and tax breaks. This is truly perverse, hence the term “perverse subsidies” to label government handouts for environmentally destructive activities.

Opposition to paying for the pollution is both short-sighted and representative of a true market failure. It is short-sighted because well-crafted policies to address externalities could make the entire American economy stronger by spurring innovation and creating new products. It is unfair because in America we believe in personal responsibility. If someone crashes their car into someone else’s, they are liable for the damages. The same should be true for pollution from a business activity. The thousands of people who become ill from exposure to heavy particulate matter or from drinking contaminated water produces just as much real suffering as getting injured by a more obvious cause. Rising health care costs to address these hidden externalities place an undue burden on the entire society. But today, those who injure people through polluting activities often are allowed to continuing do so with impunity.

Businesses need to work with the Administration and Congress to craft new laws to address these market failures by taxing pollution at the source. The revenues can be used for a combination of deficit reduction, new technology R&D, and education, healthcare, and infrastructure investments. As a result, America would become much stronger. Yes, corporate profits might take an immediate hit in heavily polluting industries, and yes, consumers would feel an immediate pinch in their wallets, but with more money pumped into innovation, and a healthier, smarter, and more productive workforce, these costs would be more than mitigated over the medium term. And getting new revenue streams for critical infrastructure needs (both physical and virtual) would benefit all businesses.

Instead of running away from externalities, businesses should be leading the charge to effectively curtail them, and channel that new revenue into a host of productive uses for the greater economic good.

Jason Scorse