About the author: Clifford Winston He is a senior fellow at the Brookings Institution.
With the House passing the Rebuilding Better Act, all eyes turned to Democratic Senators Joe Manchin and Kirsten Senema. They have expressed concerns about the bill’s cost, and Democrats cannot pass the bill without their support. But there’s an upside: If cost is really a concern for Mansion and Cinema, there are straight paths for Democrats to reach consensus and pass the bill.
The two senators say they agree that American society should invest in both its children and clean energy, in addition to strengthening the middle class. This suggests that Democrats should focus on identifying specific policies that will enable the bill to achieve its goals more efficiently and bring its $1.75 trillion price tag down. Some of these policies are based on market forces, while others produce market-type responses.
The government initiates two types of policies that can improve market performance. The first addresses economic inefficiencies resulting from market failures, such as monopoly, imperfect information, and external factors such as pollution. As an ideal, government policies to correct market failures should maximize the difference between their benefits and costs, or, in practice, achieve benefits beyond costs. For example, taxing production plants because of the air pollution they emit will yield benefits by encouraging plants to reduce their pollution, resulting in cleaner air. The tax will also increase costs for companies, which will be partially passed on to consumers. Thus, a tax improves social welfare if it increases, or at least returns, to net positive benefits.
The second redistributes resources to achieve a goal that society deems desirable. For example, firms may set effective wages that reflect the value of their workers’ contribution to the firms’ production, but wages may not enable workers to afford adequate health insurance. Thus, the government can initiate policy, such as subsidizing health insurance for workers, to achieve this goal. However, since the cost of the policy will ultimately be borne by the taxpayer, the ideal criterion is whether the policy achieves its objective with the lowest social cost, or, in practice, is the most cost-effective policy to be adopted.
By identifying the specific policies that are likely to produce benefits beyond costs or are most cost-effective to adopt, Democrats can better reduce the cost of the Rebuilding Act and respond to Mansion and Cinemaa’s concerns. Or senators can elaborate the terms of their support.
The current law calls for $555 billion to be spent to invest in clean energy and combat climate change. Yet decades of scientific evidence of government efforts to improve the environment has found government spending, at best, costly successes. Economists have repeatedly pointed out that compared to large government expenditures, effective environmental external taxes can lead to greater improvements in the environment at lower cost. For example, Nobel laureate William Nordhaus estimated that a reasonable tax on carbon dioxide to reduce its emissions to a sustainable level could produce enormous benefits by avoiding the potentially huge costs of significant climate change. Gilbert Metcalfe provides evidence that such a tax need not impose significant costs on the economy.
More than $400 billion in proposed spending seeks to provide preschool education, child care, and an expanded tax credit for children. Researchers have found that the benefits of spending on children in their early lives greatly outweigh the costs. Children pay the initial cost as adults who earn money with additional tax returns and reduced transfer payments. However, it is likely that Congress could lower the cost of government expenditures for the per-child bill by incentivizing the private sector to expand its ability to provide preschool and childcare benefits as part of the Enhanced Employment Package.
Nearly $200 billion will be spent to make housing affordable and expand access to education after high school. These expenditures can be reduced if the government removes its shackles from market forces. The dominance of Fannie Mae and Freddie Mac limits the competition offered by the private mortgage market, which can increase home ownership and diversify risk. The Department of Education’s near monopoly on student loans is crowding out the potentially vibrant private student loan market, which can help reduce student loan defaults, lower loan interest rates, and even lower or at least stabilize college tuition.
Policy deficiencies that undermine the bill’s objectives must be fixed. As I mentioned in earn land: Markets help the governmentAnd Occupational licensing and labor market systems increase unemployment and negatively affect children by harming family life. It also weakens the middle class. Land use regulations increase prices and reduce housing availability.
Americans should focus not on the cost of rebuilding better but on its contents. But it is important to realize the contents of the bill, so the gap between its benefits and costs is as large as politically possible. Manchin, Cinema, and their fellow Democrats can increase this gap and reach political consensus by efficiently rebuilding.
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