Forum – Winter 2003
Federal research funding
The sharing of costs between sponsors and performers is a contentious issue with ancient roots. What we know for sure is that performances have definite costs and that someone has to pay them. What we do not know is how much performances should cost and what strategies are best for society if, after the performance, the costs are judged excessive. Anyone who has had a kitchen remodeled or a car repaired knows that buyers and sellers approach the transaction with different expectations and different mental pictures of what is at stake.
Arthur Bienenstock’s article, “A Fair Deal for Federal Research at Universities” (Issues, Fall 2002), summarizes well the status of these issues for federally sponsored research from a university administrator’s viewpoint, a perspective with which I have much sympathy. As an official broker of advice between universities and government agencies, I take mild exception to the implication that the government is unwilling to pay its fair share of federally sponsored research. I say only mild exception, because there is an unfortunate lack of policy consistency among agencies regarding research costs, especially indirect costs. One could reasonably infer from the chaotic pattern of federal research cost reimbursement policies that at the very least the government does not know what “fair” means.
The problem centers on indirect costs, which are real enough but sensitive to management strategies for providing the essential environment for research and which include not only heat, light, and ventilation but also the bureaucratic apparatus needed by any organization that does business with the federal government. The cost of the latter is easier to estimate than to justify. Apart from more or less arbitrary choices of how to respond to the federal appetite for data, there is an element of risk involved in failing to satisfy that appetite. Federal auditors are likely to question expenses that seem excessive, whereas university auditors and lawyers aim to identify all relevant expenditures.
Then there is the question of the value to the performer of federal sponsorship. Do universities gain earning power from a portfolio of federal grants? What is the value to a university of intellectual property rights; competitiveness in recruiting students, faculty, and donors; curricular enrichment; or access to summer salaries for faculty? Is it fair for taxpayers to pay for these benefits?
Bienenstock is an expert on all these issues, having been a federal science policy official when the RAND study of federal research reimbursement was commissioned. He cites this study as evidence that there is a reimbursement shortfall, and he points to the Federal Demonstration Partnership, which is the most productive mechanism currently working to generate better models for sponsorship. I agree with Bienenstock’s admonition that this effort needs to be expanded, and my office is establishing a new subcommittee within the National Science and Technology Council to do just that. The university research enterprise is such an important part of U.S. science leadership that its costs and sources of support must be completely understood. Thanks in part to Bienenstock’s efforts, the issue is beginning to get the attention it deserves.
Many years ago, Vannevar Bush wrote in Science, The Endless Frontier that universities, in conducting research for the federal government, should be neither unduly taxed nor unduly rewarded. This delicate balance has, for almost 50 years, been the subject of a perennial and sometimes acrimonious debate. Arthur Bienenstock’s article helpfully frames today’s dialogue.
At its core, the costing issue remains unchanged and unresolved: Who shall pay the costs of federal research conducted by our public and private universities? For decades, government has sought ways to limit cost recovery and to shift the cost of its research programs to the universities. Policy has ratcheted steadily toward a one-size-fits-all costing system. Universities and government are locked into a process of perpetual change in costing policies, cost shifting, negotiation, and endless analysis of increasingly technical detail.
Lost in this adversarial process is a deeply shared commitment to a costing system that is equitable, efficient, effective, and appropriate to the requirements of government and to the diverse and unique needs of our preeminent public and private universities. The debate too often ignores the policy and costing implications of rigorous third-party analyses that document chronic underrecovery of costs, growing unmet facility needs, and the implications of steadily expanding administrative burdens.
For example, one of the most significant issues now facing research universities and the government is the issue of research compliance. There has been a tendency in the past decade for the government to issue compliance regulations that universities must follow, but legitimate as these regulations may be, they are promulgated without the funding to support their development or implementation. With the current 26 percent cap on administrative reimbursement, some universities are left with no choice but to absorb the cost of these mandated changes. The problem is exacerbated because rarely do new regulations replace existing regulations; they are added instead. In an era when universities and businesses have made substantial investments to redesign and improve their business practices, it is important to consider that Office of Management and Budget Circular A-21 is substantially the same document that was introduced in 1958. A reevaluation and rethinking of this circular are long past due, including a careful assessment of the problems created by the administrative cap. It is important to recognize that, overall, indirect cost rates at universities have not increased during the past decade, although the distribution between the facilities and the administrative portions of the rate may have changed.
As our national goals expand and society’s expectations of our universities grow, the problems posed by our obsolete costing system will only intensify. As Bienenstock rightly implies, it is time for government and universities to clarify and reaffirm fundamental first principles that will correct and sustain a cost recovery system that is appropriate to sustaining the world’s preeminent research and education enterprise–an enterprise that is essential to our future economic vitality, security, health, and quality of life.
Authur Bienenstock provides a powerful illustration of the destructive consequences of government policy that seeks to keep university cost reimbursement revenue-neutral rather than commensurate with documented expenditures for research. The Council on Governmental Relations (COGR), which comprises in its membership 150 research-intensive universities, agrees with Bienenstock’s serious warning that the progressive shifting of government research costs to the research providers is based on unrealistic expectations about the universities’ capacity to absorb an increasingly larger share of new mandates.
It is ironic that this cost shifting persists while at the same time official government policy underscores the value of its partnership with research universities. As the nation faces challenges to its health, economy, and national security, the government relies on university research more than ever. The current system for negotiation of research support infrastructure includes the negotiation of rates for facilities and administrative costs (F&A), which in theory provide for full recovery of these costs. Although complex, the system is based on mutually agreed-on principles of accountability, allowability, and reasonableness. Yet the universities in our membership typically are not reimbursed to the full extent of their negotiated rates. Many of the dire consequences cited in Bienenstock’s article would be eliminated if official government policy for full cost recovery of negotiated rates were followed by federal agencies. In cooperation with the Association of American Universities, COGR is currently engaged in an intensive dialogue with several federal agencies on this subject, including the National Institutes of Health (NIH), National Science Foundation, Department of Agriculture, and Department of Education.
Of special concern is the support of research facilities. The doubling of the NIH budget for extramural research underscores the concern about suitable facilities. Although the cited need for an additional 9 million in net assignable square feet of space for biomedical research is dramatic, it does not tell the entire story. Research laboratories incur higher utility costs than other comparable university space. COGR has the support of the Department of Health and Human Services and the Office of Naval Research, the major agencies that negotiate F&A rates, in arguing that the Office of Management and Budget (OMB) should lift its restriction on the recovery of utility costs.
We believe that OMB’s fiscal strategy to stay revenue-neutral distorts the government’s obligation under its own negotiated rate structures and may in the long run undermine the growth of the research enterprise. Universities are prepared to support buildings and infrastructure to provide the first-class research that the taxpayer expects. It is the government’s responsibility to fully fund that research. Denial of the fact of creeping cost shifting from the government to research universities must stop. Bienenstock, an eminent researcher as well as a policy expert, has provided an important warning. His advice should be heeded.
In highlighting the overlooked findings of the Office of Science and Technology Policy-commissioned RAND study on the indirect costs associated with the conduct of federally sponsored research at universities, Arthur Bienenstock quite rightly calls for “A Fair Deal for Federal Research at Universities.” Ensuring a hearing for this case with decisionmakers in Washington in an atmosphere in which terrorism, war, tax cuts, budget cuts, and deficits are paramount will require a fresh perspective on the RAND study’s facts. The consequences of underfunding research, particularly the infrastructure of research, must be framed with the current concerns of elected and appointed officials in mind. That means connecting the dots between government support for the research that determines this nation’s global preeminence in science and the economic growth based on that preeminence. It also means connecting the dots between a robust research enterprise and enhanced national security, and between federally supported research and local economic prosperity in communities across the nation.
Effectively making the case to policymakers about the importance of having the federal government pay the full costs of research also requires a united front by university administrators, faculty, and agency officials. Rather than assume that it is policymakers’ willful ignorance or the public’s lack of interest that stymie a fair deal for research, the university community would do well to begin making the case at home. Many science faculty (not to speak of arts and humanities faculty) simply do not credit arguments that universities are losing money on federally supported research. The forests of building cranes on university campuses are there for everyone to see. Less visible, but as Bienenstock notes, no better understood, are research faculty forced to engage in clerical duties necessitated by mandated limits on support staff. Can the faculty and administration agree to make the case for fair reimbursement of facilities and staff costs?
I recommend implementing more transparency in university governance, including transparency about financing. My experience as CEO of a research institute is that the more financial information shared with faculty and staff, the more opportunity to build commitment to shared goals. Conducting peer reviews of administrative functions is one way to throw light on the subject. In addition, the university and its faculty must reach out to the immediate community and do more “friend”–in addition to “fund”–raising. Public opinion poll data show that despite overwhelming support for research itself, only about half the adult population can identify a single place where research is conducted. If taxpayers aren’t aware of research close to home, they aren’t likely to be its advocates. If elected officials are not hearing from many constituents on a regular basis that their local university needs more resources to conduct research, these same officials will direct their time and energy to issues that they perceive as having more relevance to their constituents.
Arthur Bienenstock makes it clear that little has changed since I was involved with the issue of indirect cost recovery as president of the Association of American Universities from 1983 to 1993. It is still the case that federal policymakers–politicians and bureaucrats alike–are dazzled by the fruits of research but are uninterested in paying a fair share of the costs of tending the orchard.
Congressional interest in the subject begins and ends with periodic instructions to agencies to reduce the costs of doing research, by which they mean the indirect costs. The executive branch, led by the Office of Management and Budget (OMB), is happy to comply, since appearing to get more research for less money satisfies the twin political imperatives of supporting science and being what passes in Washington for fiscally responsible.
It makes no difference which party controls the presidency or the Congress; the attractions of spending on the direct rather than the indirect costs of research lead both in the same direction. The result, as Bienenstock shows, is that even in a period of rapidly rising appropriations for research, universities are pressed to spend more of their own money to provide and maintain the infrastructure from which it comes.
Bienenstock correctly identifies administrative costs and facilities construction and renovation as the core of the problem for universities. What may have been forgotten by now is that after a year of intensive study and discussion involving universities, scientific societies, and officials of OMB and the Office of Science and Technology Policy that took place in 1991-1992, an agreement was reached that made sense then and still makes sense. Universities, realizing that administrative costs were hard to defend publicly, agreed to a 26 percent cap on them. The government, for its part, recognized that the cost of research facilities would inevitably rise as research became more complex, and so its representatives agreed to a more realistic treatment of facilities costs within the indirect cost formula.
That agreement was in the process of being translated into policy when an election campaign took place. Candidate Bill Clinton, in an unnecessary and ill-advised effort to appease the community of principal investigators, promised that, if elected, he would put more money onto the laboratory bench and less into the mysterious maw of the university. Clinton’s election doomed the agreement. The cap on administrative costs took effect, the direct costing of clerical salaries was eliminated, and the reimbursement of facilities costs was unchanged. The result is the one that Bienenstock has graphically described.
It has long been clear that the universities’ “partner” in the research enterprise has reneged on the obligations of a true partner. Perhaps Bienenstock’s contribution can help move the otherwise sensible people involved to a clearer view of where their, and the public’s, interests lie.
Developing world transportation
In “The Developing World’s Motorization Challenge ” (Issues, Fall 2002), Daniel Sperling and Eileen Claussen do an excellent job of exposing the looming threat of global motorization for the countries involved and for the entire planet. They also explain why technology alone can’t save us. Massive shifts in behavior and land use are needed, but that requires firm policies and strong financial signals rewarding transportation efficiency and punishing profligacy. But how can the United States, the undisputed world champion of conspicuous transportation consumption, publicly promote such a goal to a skeptical world?
In the 1930s, cars started pushing trolleys, buses, and nonmotorized travel off our streets and roads. More cars required more roads and, by the 1960s, road building had destroyed more housing than was constructed by our entire national public housing program. Today, transportation consumes, on average, 19 percent of household budgets–more than food and three times average household medical costs. It also represents 65 percent of all U.S. oil consumption (50 percent of which is imported) and is both the largest source of domestic greenhouse gas (GHG) emissions (33 percent) and the fastest growing. Yet the U.S. Department of Transportation (USDOT) has the smallest policy staff of any federal cabinet agency, spends just $800,000 annually on global climate change research, and is actively promoting our car culture abroad.
The first rule of holes is: If you are in one, stop digging. We must stop exporting our bad behavior. We know that our transportation program is unsustainable, yet USDOT’s international outreach program is all about road building. The U.S. Agency for International Development is helping to establish a highway lobby in Russia. Our international trade agencies are helping automakers gain market share around the world. Yes, a key purpose of our international outreach program is to support U.S. economic interests. But we are doing so in a policy vacuum, oblivious to the threats so abundantly documented in this article. Meanwhile, the hole gets deeper.
We need strong policy guiding our international transportation outreach. We have a story to tell: that of a penitent sinner. We now know how to access places without destroying them. We can model how transportation drives land use and plan accordingly. We know the importance of strong regional governance and of citizen-based planning. We ask: Who benefits from public transportation investments, and who pays?” and exposing some gaping equity issues. We are looking at transportation and public health. Slowly, we are inviting transit, including bus rapid transit, rail, and nonmotorized users, back onto our public ways. It is this knowledge, not our technology, that we must export. If not, as the authors predict, “disaster looms for cities of the developing world–disaster from which the industrialized countries cannot be isolated.”
This is not about cars; global motorization is, of course, inevitable. However, as pointed out in this article, hugely important choices exist over the “timing, extent, and form of motorization.” The United States has just 5 percent of the world’s population and 16 percent of its land area, but 52 percent of its paved roads. We now have 769 cars per thousand of population, or more than one per licensed driver. But China has only eight. There is yet time for the developing world to avoid our fate, but not much. We can, and must, help in this effort.
China’s rapid economic growth is accelerating the country’s rate of motorization. Having learned from the experience of the developed countries that motorized transportation is essential to building productivity and prosperity, China recently adopted a policy to encourage families to purchase cars. Even though China has only 5 million cars (four cars for every 1,000 persons, compared to a global average of 100 cars per 1,000 persons), the problems of air pollution, traffic congestion, and vehicle accidents have already appeared in the country’s large cities. We are eager to learn lessons from other countries that will help China begin at this early stage of motorization to alleviate the associated problems.
One often-mentioned strategy is to improve technologies and strengthen the institutions for financing, planning, developing, and managing public transit. To do this, China will need technological and financial assistance from other countries. I therefore appreciate Sperling and Claussen’s Clean Development Mechanism (CDM) proposals, which would facilitate cooperation between the developing and the developed countries in the effort to control greenhouse gas emissions. Near-term CDM projects might include enhancement of diesel engines used in agricultural vehicles, improved refining processes for producing low-sulfur petroleum fuels, and development of better traffic management systems. Mid- and long-term projects might include development of batteries, fuel cells, and coal-based liquid fuels.
The CDM, as described in the Kyoto Protocol on Climate Change, is much better than the earlier International Green House Gas Reduction Activities Implemented Jointly Program (an earlier pilot phase in which projects did not earn credits), which was restricted to bilateral and multilateral lending among governments. With its trading flexibility and opportunities to work with private enterprises, the CDM is likely to function more smoothly and effectively.
Even though the US has decided not to endorse the Kyoto Protocol, it has expressed its desire to work with other nations to deal with the problem of growing greenhouse gas emissions. In fact, the United States has taken steps to reduce use of fossil fuels through fuel economy standards for auto fleets, the gas guzzler tax, and the Partnership for the Next Generation of Vehicles research program. The time has come for the United States to take the next step by establishing a quota system of greenhouse gas emissions and a mechanism for emissions trading. This would unleash the entrepreneurial spirit that has proven so successful in generating innovation in other sectors of the U.S. economy.
Congestion relief
It is quite true, as Martin Wachs points out in “Fighting Traffic Congestion with Information Technology” (Issues, Fall 2002), that the use of information technology (IT) in areas such as congestion pricing or charging users on a per-mile basis could resolve the congestion issue. However, it is also likely true that developing the political will to accomplish this will be impossible for a variety of practical reasons.
Studies have shown that connecting all traffic signals in an arterial system can provide at least a 20 percent improvement in travel times in urban areas. But an individual driver does not really realize that such an improvement has taken place, because he or she will still occasionally be stopped by red lights. For an individual, there is no connection between large costs and benefits received.
As you move toward the use of more advanced technologies, such as in-vehicle audio and visual dashboard instruction, it will be interesting to observe the interaction between an increasingly older driver population, which has great difficulty programming a VCR, and the “gee-whiz” effect of the latest technologies. On high-speed rural expressways, it is difficult to ensure that older drivers at crossroads even see stop signs!
If we move to more sophisticated systems such as user fees paid by credit card along with congestion pricing, some other difficulties come up. Should an 80,000-pound vehicle be assessed at a different per-mile use rate than an automobile? If congestion pricing is used, will the people in urban areas be willing to see their user fees shared across rural areas of the country, which have low population densities and hence low vehicle miles traveled but need widely dispersed systems for the production of grains, meats, and produce on which the urban areas depend? This could give new emphasis to the donor-donee arguments that seem to accompany each new federal-aid highway and transit reauthorization.
Some of the facilities in some urban areas are just flat worn out and no amount of IT will avoid major capital improvement costs, such as on I-15 in Salt Lake City or I-80 in Omaha. Replacement of existing facilities that includes the necessary IT will still be required in many jurisdictions, and the funding to do that along with enhanced IT will be a daunting challenge.
Wachs has shown that it is technically possible to solve the congestion problem with IT. However, privacy rights, funding issues, and the perception of congestion will make it difficult to make rapid and uniform progress. The best hope for alleviating congestion is with a balanced approach, including accelerating the application of IT, reconstruction of worn-out facilities, and occasional new construction where warranted. It will not be cheap.
I always enjoy the latest offering from Martin Wachs, one of our most clear-headed thinkers about the challenges of improving urban mobility. His article was worth reading if only for the long-overdue debunking of two persistent bromides in recent commentary about traffic congestion: (1) that traffic delay costs our economy billions of dollars in lost productivity, when many truckers avoid peak hours like the plague and many commuters stuck in peak traffic are quite productively occupied in making calls on their cell phones or reviewing email on their laptops; and (2) that the dense mixed-use development characteristic of “smart growth” will reduce traffic congestion, when it is much more likely to increase it in the urban neighborhoods where such development occurs.
I wish that Wachs had spent more time outlining the obstacles to implementing his two chosen solutions to traffic congestion: information technology (IT) and road pricing. In my view, the biggest barrier to wider IT deployment in our transportation system is institutional, indeed, almost ideological. The public agencies that have grown up in the earlier interstate era and in the current rail transit boom are so dedicated to capital construction projects that managing the capacity once they’ve built it is still an afterthought. The same IT apathy is manifested by the environmental and community-based organizations that were formed to fight the highway lobby. Thus, IT is orphaned without a solid base of advocates in either camp.
As for congestion pricing, Wachs makes the case that road tolls may soon overtake the fuel tax as the transportation revenue mechanism of choice, because of the growing use of electric and fuel cell vehicles whose owners won’t pay the gas tax. The demise of the internal combustion engine has been predicted for decades, yet it keeps on chugging, especially in the fast-growing, gas-guzzling SUV market these days. And trend-setting California seems to be moving away from tolling. San Diego officials have removed the tolls from the Coronado Bridge, and the Orange County Transportation Authority just bought the SR 91 express lanes in order to decommission its variable pricing scheme and build more nearby free capacity.
In the end, I agree with Wachs’ conclusion that “the most significant determinants of the future of IT [and congestion pricing] for traffic control will be political rather than technical.” Some helpful advice on this vexing subject would be a fine topic for his next article.
Transit-oriented development
Transit-oriented development is an important tool in the construction of livable communities: places where our families and neighborhoods are safe, healthy, and economically secure. Livable communities offer residents a choice of where to work, where to shop, and where to play, along with a choice of how to get there.
“Countering Sprawl with Transit-Oriented Development ” by Dena Belzer and Gerald Autler (Issues, Fall 2002) makes a strong case for using transit-oriented development to provide Americans with real development and mobility choices. When each year the average American driver spends 443 hours–more than 18 sleepless days–behind the wheel, and more than 40,000 people die in auto accidents, transit-oriented and mixed-use development is about livability at its most basic: Giving people transportation options in full-service communities can add hours to their days and years to their lives.
The surest path to a livable community is meaningful public participation. But simply giving the citizens a forum in which to express their concerns about already-planned development is not enough. Elected leaders must encourage ongoing public participation as a community’s vision and goals are defined and implemented. Only when a community participates in every aspect of the planning process will development dollars have their maximum effect.
The federal government needs to be a constructive partner as communities develop and implement transit-supportive projects. In 2003, Congress will take up the reauthorization of the surface transportation bill, known currently as TEA-21. This bill will determine how much federal support will be available in the years to come and how communities can spend that transportation money. As a member of the House Transportation and Infrastructure Committee, my priority is to see that some of the most important provisions of the previous landmark transportation bills are preserved, including the ability of local jurisdictions to use federal funds for transit-oriented development and to “flex” funds between modes. By keeping funding flexible, we give local decisionmakers the power to make choices that make sense in their own communities.
The work of Belzer and Autler goes a long way toward clarifying what we mean by transit-oriented development and how we can make it work. By encouraging livable communities that encompass a variety of transportation options, we can make transit a catalyst for strengthening communities throughout the country. Our role in Congress is to provide the sound, flexible policy to make it happen.
Terror in transportation
“Countering Terrorism in Transportation” (Issues, Summer 2002) by Mortimer L. Downey and Thomas R. Menzies concludes that the inherently open, accessible nature of public transportation makes a “piecemeal” approach to security that focus on sealing off discrete points of vulnerability in a transit system a less than optimal strategy. The Federal Transit Administration (FTA) agrees strongly with the authors’ overall recommendation that “transportation security will have to be undertaken collaboratively” and involve a variety of public and private entities.
Immediately after September 11, FTA launched a five-part security program that emphasizes assessment, planning, training, testing, and technology. This initiative puts into practice many of the authors’ recommendations. For example, Downey and Menzies call for a broader and more sophisticated approach to transit security that considers each system as a whole. Many public transportation hubs involve assets that are owned and overseen by both public and private entities, as well as multiple modes of transportation, ranging from rail to air to bus. FTA’s security assessments of the nation’s largest transit systems have adopted a holistic “systems analysis” approach to these complex security environments.
I am especially pleased that FTA is helping transit officials develop collaborative region-wide relationships through its innovative “Connecting Communities” forums. These two-day forums, which kicked off in Orlando on May 22, 2002, and are scheduled for 17 locales nationwide, bring together transit officials with police, fire, and other emergency responders to discuss and strengthen plans for a regional response to terrorist attacks. A terrorist attack on a transit system affects not just one asset or sector. Therefore, it requires a coherent regional response. These forums help build the collaborative approach to security that transit officials will require in order to meet the challenges of the post-September 11 world. FTA has awarded more than $3.3 million to 80 of the largest transit agencies to conduct emergency response drills with all responders in their region.
Collaboration also applies to the sharing of information and technology. Downey and Menzies recommend a technology clearinghouse that will help guide transportation system owners. FTA is currently identifying security technology that is deployable in transit environments and is accelerating the development of Project PROTECT, a chemical detection system that is being prototyped in the Washington, D.C., subway system. We must continue to work with the Transportation Security Administration and our federal partners to leverage the benefits of research being conducted in other sectors that might be applicable to transit and vice versa. FTA, working with the transit industry and others, intends to serve as a security resource clearinghouse to the entire transit industry, making available the most up-to-date information on new technologies and security protocols.
FTA’s security initiative is shaped by lessons learned from the tragedy of September 11, many of which confirm the authors’ recommendations. New York City transit officials credit their success in evacuating public transportation systems that day, without a single fatality or injury, to the cooperative and trusting relationships that they had developed with New York’s first responders and to the presence of realistic emergency plans that had been repeatedly tested and drilled. Keywords for transit security, as New York City illustrated on September 11, are collaboration, planning, and a coherent system-wide approach. FTA’s security program puts these ideals into practice.
Market-based regulation
In “Are All Market-Based Environmental Regulations Equal?” (Issues, Fall 2002), Ian W. H. Parry describes how policies that generate revenue (such as taxes or auctioned tradable permits) can have lower economic costs than policies that do not (such as tradable permits that are distributed for free). That is because the government can use the revenue to offset existing taxes that dampen economic activity by discouraging people from working and investing. Parry also points out that two policies that are designed to achieve the same level of environmental benefits can have very different distributional effects.
What Parry is somewhat unclear about, however, is how to balance the competing objectives of minimizing economic costs and preventing further increases in income inequality. First, he states that, “Pollution control measures should be evaluated mainly by weighing their environmental benefits against their economic costs for society as a whole. Distributional objectives are much better addressed by altering the income tax system or providing a safety net through the benefit system.” But next, he claims that, “It still makes sense, however, to avoid environmental policies that increase income inequality.”
Unfortunately, I don’t think that it is possible to support both points of view. What Parry fails to note is that policies that minimize economic costs also add to income inequality. For example, suppose the government wanted to cut carbon emissions by 15 percent. Diane Rogers and I found that the economic cost of achieving that goal would be minimized with a system of auctioned permits, in which the revenue was used to decrease corporate taxes (reported in the June 2002 issue of National Tax Journal). Such a policy, however, would be regressive. If one estimates the distributional effects, using reported income and expenditure data, such a policy would lower real income for households in the lowest income quintile by 6 percent while raising real income for households in the highest quintile by 1.5 percent. In contrast, if policymakers used the auction revenue to provide equal lump-sum payments to all households, the policy would have a progressive distributional effect, but the cost to the economy would be more than six times as high as with auctioned permits and a cut in corporate taxes.
Given that we can’t simultaneously choose the most cost-effective policies and avoid policies that increase income inequality, which criterion do we use? I think that Parry had it right the first time. We must choose policies that minimize economic costs (and hopefully are justified by environmental benefits) and then address distributional objectives using other policy tools. That does not mean, of course, that we can ignore the distributional consequences of environmental policies. Legislators should be aware of them and indeed may choose to implement other policy changes that would offset them. But avoiding environmental policies that increase income inequality could mean shrinking the economic pie that we have to slice up.
Finally, I think it is important to note that the real problem with grandfathering carbon permits–a policy that Parry rightly criticizes–is not simply that it increases income inequality but that it does so without producing offsetting economic gains. Rogers and I found that an auction combined with a cut in corporate taxes would be roughly as regressive as grandfathered permits, but would cost the economy far less (approximately $5 billion annually, as opposed to $31 billion). Thus, I would rephrase Parry’s second assertion to state that we should avoid policies that would increase income inequality without also increasing aggregate wealth.
Paying for invasive species damage
In “Paying for Protection from Invasive Species ” (Issues, Fall 2002), Peter T. Jenkins proposes a logical and reasonable source of funds for addressing issues related to harmful and invasive alien species. What could be more appropriate than for those who, intentionally or inadvertently, move harmful living taxa from where they are to where they are not wanted, to bear residual liability for undesirable consequences.
The issue of the irresponsible movement of living organisms that results in biological pollution of our environment warrants far more concern and attention than it is now given. Unlike most chemical pollutants, which break down over time, biological pollutants grow, adapt, multiply, and spread forever, unless mitigated. Non-native invasive species of plants, insects, diseases, and vertebrates now do vast harm, and other species pose a threat to our agricultural and managed and natural ecosystems, and to society, which depends on ecosystem sustainability. Biological pollution needs be addressed with the same or perhaps greater concern than that given chemical pollution. The bold article by Jenkins does just that.
The economic and environmental threat from invasive species is a bipartisan issue. There is broad agreement that new management actions are needed to reduce its impact. Agreement on the severity of the problem is the easy part. Many federal and state plans exist, with well-thought-out and practical management ideas. If implemented, such plans could save our nation a great deal of financial and environmental loss. However, reaching agreement on who will pay for these new prevention and control programs will be anything but easy.
When asked who should pay for a new service, our response is often “anyone but me.” Our federal and state governments are sliding deeper into debt and looking for new cuts, not new spending. U.S. private industry is facing increased global competition. New fees and taxes are said to decrease the ability of U.S. corporations to compete in the global market. Private citizens delight in waving the flag of patriotism while lamenting every dime of taxes paid to keep our nation strong and quality of life high. Increasing the federal debt to pay for invasive species management is always an option; just let the kids worry about paying the tab.
Peter T. Jenkins offers a very reasonable and responsible solution to paying for invasive species management programs that could, in the long run, save us money and improve our quality of life. His solution spreads the cost over a broad range of global traders and travelers, minimizing the cost to any one group and focusing on those who present the greatest risk of introducing new invasive species.
Will those at the highest risk of affecting our society with new invasive species accept a small fee to prevent or control their impact? I hope so. Then again, we can just let the kids worry about it.