Neoconomics

FLIGHT IS A PRIVILEGE, NOT A RIGHT:

Air Traffic Control Privatization Is Long Overdue (Chris Edwards, 12/03/25, NH JHournal)

Canada’s ATC is an excellent model of reform. The country privatized its system in 1996, establishing it as a self-funded nonprofit corporation. “Nav Canada” has become a leader in ATC innovation and has won international awards for its top-class performance. That success has drawn the attention of Congress, and in 2016, the House Transportation Committee passed an FAA restructuring bill based on the Canadian nonprofit model.

Congress should revive this reform plan, which the first Trump administration supported. The advantage would be not just avoiding political disruptions but also fixing years of labor and technology mismanagement by the FAA and Congress.

As one example, shortages of air traffic controllers have been causing flight delays for years. The FAA has not had the hiring flexibility to solve the problem that a private ATC system would. Also, the FAA is micromanaged by Congress, which nixed the creation of an additional training academy for controllers.

As for technology, the FAA has struggled with its “NextGen” modernization effort, according to a recent report by the agency’s inspector general. After two decades, the multi-billion dollar upgrade has achieved only 16 percent of its intended benefits, and “many key programs and capabilities are over budget and delayed until 2030 or beyond.”

PAYING FOR THE COSTS YOU IMPOSE:

What, Exactly, Are Negative Externalities? (Donald J. Boudreaux, 2/5/25, AIER)

By far, the market imperfection believed, at least by economists, to be most common is that of externalities. An externality, as defined by the Nobel-laureate economist George Stigler, “is an effect, whether beneficial or harmful, upon a person who was not a party to the decision.” Consult almost any economics textbook and you discover a similar definition of externality. Because harmful effects of this sort (“negative externalities”) generally get more attention than do beneficial effects (“positive externalities”), the discussion in this Explainer will be confined to negative externalities, although most of the points I make apply also to positive externalities.

A classic example of a negative externality is a railroad that builds a line next to farmland and, when it runs its trains, throws sparks onto the farmland, occasionally burning the farmer’s crops. The farmer suffers damage that he did not bargain for. If the railroad doesn’t pay for this damage, it does not cover all of its operating costs, which include doing damage to crops. Because incurring costs restrains the actions that generate the costs, not having to pay all of its costs leads the railroad to run too many trains. And when the railroad runs too many trains, the farmer winds up supplying too few crops.

To induce the railroad to produce the optimal amount of railroad services, it must somehow be obliged to pay not just for some of its costs of doing business—to pay not just wages to compensate its workers, and prices to compensate its suppliers of fuel—but to pay for all of its costs, including whatever damage it causes to farmers and other parties who suffer incidental losses as a result of the railroad’s operation.

A.C. Pigou and Ronald Coase

The government can “correct” this market imperfection by imposing on the railroad a tax equal to the value of the crops damaged by its trains. This tax—called by economists a “Pigouvian tax” (after the British economist A.C. Pigou)—“internalizes” on the railroad the cost that it once imposed on the farmer. A cost that was previously external to the railroad’s decision-making processes is now internal to it given that the railroad must pay the tax. With this cost “internalized” on the railroad, it will now produce the economically optimal amount of railroad services, and allow the farmer to supply the optimal amount of crops.

UNIVERSAL BASIC INVESTMENT:

11 Charts Showing Why You Should Invest Today: Why start investing now? Because the stock market rewards the faithful. (Coryanne Hicks, 8/26/24, US News)

An investor who put $15 a day into the stock market could grow their portfolio to more than $1.2 million in 40 years. If they kept investing $15 a day for 50 years, they could amass almost $2.5 million. It makes you realize how early frugality in life can really set yourself up for comfort in your later years.

Do it for people starting at birth.

TAX WHAT YOU DON’T WANT, DON’T SUBSIDIZE WHAT YOU THINK YOU DO:

The Case for a Carbon Tax: My Long-Read Q&A with Kyle & Shuting Pomerleau (James Pethokoukis | Kyle Pomerleau | Shuting Pomerleau, August 06, 2024, AEIdeas)

Why do economists get excited about the notion of a carbon tax? Why is that a policy that always comes up as an efficient policy if you’re concerned about climate change? What is the selling point, the elevator pitch, for a carbon tax, generally?

Shuting: That’s an excellent question, I think generally economists are very supportive of a carbon tax as a quote-unquote “stick approach,” as opposed to a carrot, like the expensive provisions, clean energy credits in the Inflation Reduction Act [IRA].

Right now we’re all carrot. We seem to be doing a lot of carrots.

Shuting: Yes, a lot of it, and I think one major reason that stands out is the efficiency argument, that it’s efficiently incentivizing consumers and businesses to find the most flexible and least-costly ways to decarbonize. You just have to determine the price per ton of emissions and you’re pricing emissions directly. It’s up to the businesses to find the easiest and least costly way to decarbonize, as opposed to the clean energy tax credits, in the Inflation Reduction Act. A lot of work needs to be done on the regulator side. It might need to be done sector by sector, the technology types that are used to requalify for certain tax credits, or to look at the performance standards that would incentivize businesses to improve their decarbonizaion efforts. So it’s much more direct than tax credits, than carrots. Also, it can move really fast economy-wide. Compared to the tax credits, you really have to do it sector by sector and be very prescriptive.

With the passage of the Inflation Reduction Act, a lot of time was spent figuring out which technologies, are they going to favor these technologies, is this tax credit going to be technology-neutral, which lends it to the criticism that, ultimately, you’re having legislators, and staffers, and bureaucrats figuring out which are the “good” technologies, which are the “bad” technologies, where, under this system, it’s “may the most efficient technological fix win.”

Shuting: You hit a really, really important point, Jim. The technology-neutral is a key part of why a lot of economists are so fond of a carbon tax, as opposed to tax credits, because when you’re pricing per ton of emissions directly, regardless of the way—it could be hydrogen, it could carbon capture, it could nuclear, as long as you get there, it makes sense for businesses’ long-term investment plan, you can do it; versus the tax credits, it’s basically regulators cherry picking winners and losers, deciding, “Oh, this technology, we think it’s more promising than the other ones.

ONLY TAX CONSUMPTION:

8 things that we could change about Tax Day forever (John Linder, 4/19/24, Fox News)

Every family that is legally resident in the U.S. would receive a monthly cash advance — a prebate — that would totally cover the tax costs of spending up to the poverty line for that family. Poverty level spending is defined each year by the government to be that spending necessary to buy essentials. The prebate for a family of four would cover the tax costs on spending of $40,880.

We want to encourage wealth creation and investment, yet we tax them?

TAX WHAT YOU DON’T WANT, NOT WHAT YOU DO:

It’s Time the US Abolished the Income Tax: Bring on the consumption tax. (John H. Cochrane, February 12, 2024, CBR)

Here there is an awkward truth of taxation. Unexpected, “just this once and we’ll never do it again” wealth taxes are economically efficient. The problem of taxation is disincentives. If you announce a wealth tax in the future, people respond by not accumulating wealth. They go on round-the-world private jet tours instead of investing and building companies. But if you tax existing wealth, and nobody knew it was coming, there is no disincentive.

This is, however, one of the most misused propositions in economics. That “just this once and never again” promise isn’t credible: if the government did it once, why not again? And it feels horribly unfair, doesn’t it, grabbing wealth willy-nilly? Unpredictability is not something responsive, rule-of-law democracies can or should do.

In any case, as with corporate income, taxing investment income also makes no sense. You earn money, pay taxes on it, and invest it. If you choose to consume later rather than now, why pay additional tax on it? One of the main don’t-distort-the-economy propositions is that we should give people the full incentive to save by refraining from taxing investment income.

So why do we tax investment income? Again, because once you tax income, you have to start plugging holes. Many people can shift labor income to investment income. If you run a business, don’t take a salary but pay yourself a dividend. If you’re a consultant, incorporate yourself and call it all business income. In the 1980s, even cab drivers incorporated to get lower tax rates.

The income tax is the original sin. Taxing income made no sense on an economic basis. The government only did it because it was easy to measure and grab, at least before people started inventing a century’s worth of clever schemes to redefine “income.” It has led inescapably to more sins, such as the corporate tax and the tax on investment income. And now the repatriation tax on accumulated foreign earnings.

What’s the solution? Well, duh. Tax consumption, not income or wealth. Get the rich down at the Porsche dealer. Leave alone any money reinvested in a company that is employing people and producing products. Now we can do it. And we can then throw out the income tax, corporate tax, and estate tax.

AMERICAN GENEROSITY:

How Progressive is the U.S. Tax System? (Thomas Coleman & David A. Weisbach, November 20, 2023, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. #991)

Notwithstanding some headline results to the contrary, all three datasets show that the tax system has become more progressive and more redistributive over the last several decades, with much of that change occurring in recent years. This increase in redistribution is driven primarily by an increase in transfers to households in the bottom half of the income distribution which is missed by a focus on the top 1%.

THE SOLUTION TO POVERTY IS WEALTH:

$750 a month, no questions asked, improved the lives of homeless people (Doug Smith, Dec. 19, 2023, LA Times)

The results were so promising that the researchers decided to publish results after only six months. The answer: food, 36.6%; housing, 19.5%; transportation, 12.7%; clothing, 11.5%; and healthcare, 6.2%, leaving only 13.6% uncategorized.

Those who got the stipend were less likely to be unsheltered after six months and able to meet more of their basic needs than a control group that got no money, and half as likely as the control group to have an episode of being unsheltered.

“I felt there was enough interest and the initial findings were compelling enough that it was important to get those results out,” said Benjamin Henwood, director of the Center for Homelessness, Housing and Health Equity Research at the Dworak-Peck School, who led the study.