Update on Light Bulb Bans

For more than a decade we have all been lectured on the virtues of changing lighting technology.  The standard, tungsten (incandescent) lighting has been challenged by compact fluorescent lights (CFLs) and bulbs based on light emitting diodes (LEDs). Here is a typical, effusive projection:

CFLs are four times more efficient than standard, incandescent bulbs and last nine to thirteen times as long. If everyone bought just one CFL and replaced their old standard bulb, America would save $8 billion in energy costs, prevent the burning of 30 million pounds of coal, and save greenhouse gas emissions equal to two million cars. Convert all the bulbs and the savings would be in the tens of billions of dollars.

The US government Energy Star program makes similar claims:  

ENERGY STAR estimates that if efficient lighting were used throughout the country, the nation's annual demand for electricity would be cut by more than 10%. This would save ratepayers nearly $17 billion in utility bills.

Sounds good, but should there be a comprehensive ban on incandescent lighting?  The short answer is, "not necessarily". In fact, they make little sense in a cool climate, either from an energy conservation, environmental or consumer cost standpoint.  Ironically, the movement to ban incandescent bulbs is, in fact, in limbo as this is being written. The restrictions were to go into effect for all US states on January 1, 2020.  

But in October 2019, the US Department on Energy (USDOE) decided that the regulatory target--a so-called General Service Lamp (GSL)-- was not clearly-enough defined and, in effect, stopped the federal ban on incandescent bulbs.  State and local regulation of the GSLs is in limbo, with some states already restricting incandescents and others still planing to do so.  Some of these parties sued the USDOE, and the case is currently in the Second Circuit Court. This makes this update timely.  

The Forgotten Physics

A 60 watt incandescent bulb does, indeed, use about four times the energy to produce roughly equivalent illumination, in lumens, of a compact fluorescent (CFL) or an LED bulb. As the table below indicates, the lumens per watt of household size bulbs shows that a CFL provides about 40 more lumens and an LED 50 more lumens per watt.  Put differently, approximately 75 percent of the power consumed by the incandescent bulb does not produce light, relative to the two other bulb technologies.

In addition, relying on incandescent bulbs over time requires more bulb replacement.  A normal incandescent bulb is currently about a fifteenth the life of an LED, given the total lumen-hours of the respective technologies.  This means that one can save three quarters of one’s lighting energy budget by switching to LED lighting.  

However, contrary to the simplistic logic that energy that does not provide lighting is “wasted”, physics tells us that energy is conserved and does not simply disappear.  In particular, virtually all of the “extra energy” that is used by an incandescent bulb is dissipated as infrared radiation or convection heat. 

In other words, the incandescent light bulb is heating--as well as lighting-- the room.  Thus, if the lighting is in a space that must be heated, whether or not this energy lost is a "waste" or not depends upon the climate and heating conditions. If the house is heated, by a gas or electric furnace, the excess heat produced by the light bulb reduces the net demand on these heating systems. This is called the Heat Replacement Effect.  

Since three quarters of the energy of an incandescent bulb is available to replace the central heating energy, the economics of this effect can be large, even considering the higher number of incandescent bulbs required over the LEDs.  Over the 25,000 hour life of an alternate, cold LED lighting system, for example, the heat energy produced by the incandescent bulb (45 watts per hour) has a value of about $170 at 15 cents per kilowatt hour (assuming that to be the cost of space heating energy.  This is more than enough to eliminate the higher total cost of the incandescent.  

Thus, in cold and mild climates, at least, there may be no effect on either the cost of electricity to the consumer, or the amount of greenhouse gasses emitted in the production of the electricity used.  Indeed, since high latitude climates also are darker and require lighting, the incandescent bulb may be an effective way to deliver warmth closer to the user of the lighting system.  

On balance, in cool climates where buildings are heated during low-light seasons of the year, it is not at all obvious that a blanket policy of banning incandescent bulbs makes either economic or environmental sense. They may make sense in regions where additional air conditioning load would be required to offset the incandescent bulbs' heat, but those of us in the coastal northwest should think twice.  

Sources:

Shahzad, K. et al., (2015). Comparative Life Cycle Analysis of Different Lighting Devices, Chemical Engineeering Transactions, VOL. 45l

The Heat Replacement Effect, UK Market Transformation Programme, BNX05, Updated: 19/09/2007, www.mtprog.com 

Scott Anderson,  A state by state look at light bulb bans as of 6/30/21.  https://insights.regencylighting.com/state-light-bulb-bans

Women's Wages Redux

It is a widely held view that women are discriminated against in wages and employment in the marketplace. When I first published research on this subject in 1984, the statistic often cited was that women earned on average less than two-thirds of what their male counterparts earned. In addition, other statistics showed that women were not evenly represented in all occupations. For example, women held over 95 percent of nursing and secretarial positions, but less than a third of the jobs in engineering, construction and the technical professions.   

Such statistics were commonly used as evidence of widespread discrimination against women in the marketplace.  Now, nearly 40 years later, gender disparity in wages (the “gender gap”) is still seen as a phenomenon of discrimination.  The US Census, in 2019, measured the female wage at 84 percent of the male wage—up significantly from the 66 percent of 40 years ago..   

Figure 1:  Trends in Male and Female Wages

This was mostly a consequence of the increase in female labor force participation in this period.  Nonetheless, the mantra remains in vogue that wage discrimination is the cause of the remaining gender gap in wages. Indeed, a 2017 Pew Research Center survey reported that 42 percent of working women said they had “experienced gender discrimination at work” and “one-in-four employed women said they had earned less than a man” doing the same job.  US Census staff, in a 2020 survey study, seem to attribute the gap to biases in occupation.  This blog argues that true discrimination was an overstated cause of the wage gap 40 year ago when I first studied it, and remains so today.  This blog is not about wage differences.  It is about true discrimination, which involves employers who are biased to the point they are willing to sacrifice productivity and profits by overpaying men or failing to hire qualified women.  

The reasons that I am dubious about the role of discrimination is simple.  First, in a competitive labor and product market, competition exerts strong forces to punish such discrimination. If a firm truly could hire females who were exactly as productive as males and save 15 to 40 percent of its wage costs in doing so, that firm would have a serious cost advantage over its competitors.  According to the NYU Stern database of 7,000 US firms, the median rate of profit is just 6 percent.  Prejudiced employers, by failing to economize on labor, would be driven out of the marketplace by more profitable, unprejudiced employers.  

Second, gender differences in pay can also arise, of course, because of readily measurable, objective differences in factors that make males and females differentially productive.   Such factors include education, specific job experience, specific training, tenure in the work force, and other so-called human capital characteristics.  Numerous studies have found that such differences in human capital endowments explain much of the Census-defined gender wage gap.  The study by Blau and Kahn is one of many such recent studies.  

The third factor is that the wage gap is the consequence of voluntary choices.  I believe it is unreasonable to expect that wages, labor force participation, and the complexion of careers are unaffected by voluntary behavioral differences of the the genders.  Ofek and Haim and this author demonstrated decades ago that the interruption of employment (by either males or females) results in a depression of wage rates by 5 to 10 percent, for each year of interruption.  Interrupting paid employment to have and raise children is a voluntary behavior that is particularly important to women, and bound to influence wages and careers.

Voluntary Behavior:  Is this the Last Word in the Wage Gap Debate?

In 2018, Bolotnyy and Emanuel, obtained confidential data on the activities and time billings of male and female transit drivers at the Massachusetts Bay Transportation Authority (MBTA).  The MBTA’s transit operators are all covered by the same employment agreement. The seniority of the genders is the sole determinant of work opportunities.  Thus, men and women face the same choices among “schedules, routes, vacation days, and overtime hours, among other amenities.” In other words, there is virtually no opportunity for management to discriminate in favor of one gender over the other.

Nevertheless, a weekly earning gap persists.  Specifically, female operators earn only 89 percent of that of the male operators.  This wage gap is eerily close to the wage gap found by others in more complex and discretionary settings after controlling for human capital and work interruption differences. Detailed examination of the causes for the persistence of the wage gap suggest that women have different preferences.  Relatively speaking, women appear to dislike working weekends, holidays, and split shifts more than men. Women also trade off the desirable routes against desirable schedules in different ways.  All of these and other behaviors have a link to operator compensation and, thus, to the appearance of a wage gap.  

On balance, the authors explain the persistence of a wage gap by the fact that women appear to value time and flexibility more than men.  Both of these aspects of voluntary behavior could be common to many job settings.  Additionally, because promotion is based on tenure only in the MBTA setting, the study fails to support the common view that the female wage gap exists because managers apply differential and discriminatory promotion standards to men and women.  Indeed, if voluntary behavior has such a significant effect on relative male-female wages in the MBTA setting, the common assertion that such wage gaps observed elsewhere are due to discrimination deserves serious reconsideration.    

Sources:

Mincer, Jacob, and Iliam Ofek, 1982. “Interrupted Work Careers: Depreciation and Restoration of Human Capital,”  The Journal of Human Resources, Vol. 17, No. 1, pp. 3-24.  

Pozdena, Randall. 1984. “Women’s Wages” Weekly Letter, Federal Reserve Bank of San Francisco, June 8, 1984.

Blau, Francine D., and Lawrence M. Kahn. 2017. "The Gender Wage Gap: Extent, Trends, and Explanations." Journal of Economic Literature, 55 (3): 789-865  

Pew Online Survey, Gender discrimination comes in many forms for today’s working women, December 14, 2017 https://www.pewresearch.org/fact-tank/2017/12/14/gender-discrimination-comes-in-many-forms-for-todays-working-women/

Bolotnyy V, Emanuel N. (2020). Why Do Women Earn Less Than Men? Evidence from Bus and Train Operators. Harvard University Working Paper, 

Foster, Thomas B., Marta Murray-Close, and Lean Christin Landivar. 2020.   “An Evaluation of the Gender Wage Gap Using Linked Survey and Administrative Data,” US Census Bureau for Bureau of Labor Statistics, November, 2020.  

Gender pay gap in U.S. held steady in 2020 | Pew Research Center, accessed 5/31/21. 

Capitalism and the Climate

It is a commonly repeated urban myth that our capitalist system is to blame for the accumulation of carbon dioxide in the atmosphere.  Some environmentalists believe this is justification for creating an omnipotent system of regulation to deal with atmospheric carbon accumulation.  This is argued to be a more direct way of reducing carbon accumulation than relying on the market.    

In reality, of course, that belief is based on erroneous premises.  First, no one seeks to use energy just to be wasteful.  Energy is not used for its own sake.  That is, energy is not a consumption good that provides users with benefits directly.  Rather, it provides users mobility, light, heat, etc. for our homes, transportation, and industrial and agricultural activities—the things that a society wants.  In the end, these activities power the economy and yield the gross domestic product that represents the aggregate improvement in well-being that Americans are seeking.  Hence, no private sector party actually wants to use energy and emit carbon at all, let alone excessively.  

Second, the market economy demonstrably does an exquisite job in rationing the use of energy.  A simple look at the trends in economic activity, energy use, and carbon emissions has been very effective in using energy efficiently.  In the figure below, we can easily see the evidence of the market’s ability to spare the use of energy in the economy, and with it, produce less and less carbon emissions as it does so.  The graphic presents data from the 72 year period from 1949 to 2021.  In that time, total GDP in real terms has increased by a factor of 9 times, while the use of energy in the economy has increased by a factor of only 3 times.  

Figure 1.  Trends in GDP, Energy and CO2

Mathematically, that implies an increase in economic growth of 3 percent per annum on a continuous, compounded basis, versus an increase in energy use of only 1.5 percent per annum.  Hence, the energy efficiency of US GDP production has grown in real terms by 1.2 percent per annum, continuously over 70 years.   

Meanwhile, the economy has been increasingly sparing of carbon emissions.  The so-called energy intensity of the US economy has fallen by a factor of 4 over that same 70 period. 

Thus, the tonnage of carbon emissions per dollar of US GDP has fallen by 2 percent per annum on a continuous, compound basis since 1949.  It has done this, almost exclusively on its own by economizing on use of carbonaceous fuels and shifting away from more emissive economic sectors.  

By implication, any premature acceleration in energy use—beyond the rate at which efficient opportunities are available—would likely reduce GDP.  If better efficiency opportunities were available, the profit oriented market would have taken advantage of it.  That is, profit seeking would have accelerated even more had doing so not led to the reduction of economic output.  Conversely, forcing the reduction in energy use prematurely would have reduced profit and/or output.  This is a complex and subtle calculation that only a crowd of private million market participants can make successfully.  Government has yet to prove emulate market efficiency through administrative means.  

Figure 2.  US Energy Efficiency Trend, 1949-2049 

Climate scientists are urging that reduction in carbonaceous energy use be accelerated.  This is to avoid pushing the natural systems that regulate the earth’s temperature beyond a tipping point leaves natural systems in an unstable state.  This is a possibility, of course, because the atmospheric temperature is not directly part of the calculus that the private market uses to make its calculations.  However, it is interesting to note that admittedly simple projections of tons of CO2 per dollars of real GDP in the future below suggest that the US can reach near zero net carbon before 2050 without government intervention.  

 

Indeed, the historic trend suggests that on that track today on its own.  Even if that 70-year trend is a statistical artifact, a simple market-oriented nudge by a revenue-neutral carbon tax could be used to accelerate the reduction in use of carbonaceous fuels at least impact to the economy.  A recent study by economists at Columbia University confirms that conclusion.  Specifically, the use of a revenue neutral carbon tax has the virtue of using the tools of the engine of capitalism—pricing and profit, but without heavy-handed government intervention.  Rather, the return of the revenue to the general public in a tax-revenue dividend leaves the wealth of the payers of tax largely undiminished and thus the economy relatively undistorted.  Such a tax is in place in British Columbia and has been proposed in the US Congress. 

Sources:

Noah Kaufman, et al., An Assessment of the Energy, Innovation and Carbon Dividend Act, Columbia Energy Policy Center, November  6, 2019, https://www.energypolicy.columbia.edu/research/report/assessment-energy-innovation-and-carbon-dividend-act

https://www.un.org/sg/en/content/sg/articles/2020-12-11/carbon-neutrality-2050-theworld’s-most-urgent-mission

 

Yes, Mr. Biden, Debt does Matter

On May 28, 2021, the Biden administration proposed its $6 billion budget.  This is a level of federal spending that has not been seen since WWII years.  As was widely expected, the expansion of the budget involves a significant expansion of the nation’s safety net programs.  They are incorporated in Biden’s American Jobs Plan and American Families Plan.  The budget proposal assumes that these social programs will be funded by new taxes on high, personal incomes and corporations.   

Other elements involve spending on “infrastructure”, which the Administration has defined so broadly that it is not clear exactly what spending in this area will comprise.  It includes conventional notions of infrastructure, such as roads and other transportation capital expenditures, but also includes such programs as child care, universal pre-school education, free community college and national, paid leave programs.  His administration has already embraced subsidizing the purchase of electric vehicles, expanding broadband internet coverage, building a network of EV charging stations, and subsidizing other climate-change initiatives.  

Some of Biden’s advisors embrace the tenets of the controversial Modern Monetary Theory (MMT).  The MMT argues that a country with its own currency need not concern itself with excessive deficit spending and accumulation of debt.  Rather, it argues that by issuing debt in its own currency, there is little to worry about.  The associated expenditures will grow the economy fast enough to be able to afford the cost of carrying this debt.  Few economists subscribe to the notion that one can grow an economy that is financed by debt alone.  

There is no explicit mention of the adoption of the MMT notions in financing this budget.   However, Biden's own budget proposal assumes that approximately $14.5 trillion in additional debt will be accumulated in the first decade alone.  Thus, it is important to know what the effect of increased debt will be.  

The amount of debt is conventionally measured as the debt-to-GDP ratio to account for a country's borrowing capacity.  In the figure below, I have plotted the OECD’s measure of the ratio of debt to GDP for 33 OECD countries. To avoid potential distorting effects of the Covid-19 pandemic, I use the 2018 measure of the debt measure.  In 2018, the US debt-to-GDP ratio was 136.2 percent.  I have plotted the cross section of these ratios against the corresponding, compound annual growth rate of each of the countries’ economies. 

Figure 1.  Excessive Debt Slows Economic Growth

The data and the exponential trend line fit to the data reveal a strong negative relationship between higher debt-to-GDP ratios and the growth rate of the economy.  (The simple trend explains almost 70 percent of the variation among the countries.)  If this statistical link between the debt measure and GDP growth is accurate, the US economy will be slowed by the addition of $1.4 trillion in debt each year for the next decade.  

Specifically, if the market perceives that the $14.5 trillion in additional debt were added all at once (or to an economy growing slowly) the result would be a reduction in the GDP growth rate that is lower than current growth by 3.7 percent of today's growth rate. As the Japanese case illustrates, even an economy that has a 250 debt-to-GDP ratio ekes out some growth.  However, the addition of too much indebtedness can start a vicious cycle whereby the higher debt handicaps economic growth which, in turn, amplifies the burden of debt.  In this scenario the US, like Japan,  could suffer a long period of weak or zero real growth.  

Data source:

OECD (2021), Gross domestic product (GDP) indicator. doi: 10.1787/dc2f7aec-en (Accessed on 25 May 2021)

Workers in Countries with High Taxes Provide Less Labor

The Biden administration’s social spending plans are not fully articulated, but constitute a major addition to the $2.2 trillion Covid-19 pandemic relief package supported by the Trump administration a year ago.  The American Rescue Plan passed win March 2021 has already added $1.9 trillion to that total.  It provided relief funds for states, local governments, tribes and US territories.  It also provided helicopter cash to individual Americans, enlarged unemployment insurance benefits and enlarged federal housing subsidies. 

A second and third plan are in the wings waiting to be fully articulated.  The second is the American Jobs Plan, focused on a very generously-defined concept of infrastructure spending.  This plan has an estimated price tag of $2.3 trillion.  Biden has rejected the use of user charges to finance even the genuine, infrastructure projects. At the moment, his aim is to finance this catch-all program with through increased taxation of domestic and multi-national corporations.  

The third plan is the American Families Plan, with an estimated price tag of $1.8 trillion.  One trillion is direct spending and the rest likely will take the form of targeted tax credits and enlargement of the IRS.  The list of programs supported by this plan is huge, including subsidized child care, medical and family leave programs. health insurance assistance, free universal pre-school, free community college education to immigrants as well as citizens.  These would be paid for by redistributive tax levies on those with high incomes and capital gains.  

The Biden plans thus represent an increase in spending of $6 trillion   A long literature on taxes and labor supply suggests that there will be a reaction of workers to any tax levies needed to fund these plans.  However, these studies do not roll up the impact of higher taxes to the national level.  

The purpose of this post is to present an examination of the impact of higher taxes nationwide.  It uses a cross section of national data developed by the Organization for Economic Cooperation and Development (OECD).  The OECD membership is comprised of most of the major, western countries.  We use OECD data in this study to measure the national impact of increased taxation.  

Specifically, the OECD periodically measures the tax burden on the typical worker by constructing the so-called Tax Wedge—the percentage of the typical worker’s income that is usurped by government levies.  The OECD measure is based on the percentage tax exposure of a household comprised of a single individual, without children, at the income level of the average worker.  In 2011, the tax wedge ranged from 7 to 55 percent across the 33 countries for whom data is available.  

The microeconomic theory of policy impacts on individual workers postulates that the worker will withhold supplying labor services if taxed on these services. The graphic below plots, by the size of the tax wedge, the annual average number of hours that the workers will spend working.  The data used is the 2011 tax wedge and the 2018 labor hours supplied, by country. 

Figure 1.  Taxes Reduce Workers' Willingess to Supply Labor

The choice of 2018 for the work-hours data is not critical.  In general, tax policy evolves sufficiently slowly that all we need is data that is later than the year in which the tax wedge is measured.  Use of earlier years does not change the findings.  There is considerable variability in the data.  However, as the figure reveals, in general, the higher the tax wedge, the lower is the number of hours that workers offer the economy.  The experience of countries with large spending programs is that the ultimate incidence of the tax burden ends up being borne significantly by the average worker.  

The countries with the largest tax wedges tend to be European social-democratic countries.  Across all of the countries, the average annual hours worked varies dramatically.  The US worker, at 1800 hours per year, works  approximately 30 percent more that workers in the most highly taxed countries.  Statistically, for a given percentage increase in the tax wedge, hours worked decline by 20 percent of of that increase.   

Capital Gains Tax Increase: Another Bad Biden Idea, Part 2

It appears that the Biden administration has three goals in raising the US capital gains tax rate from 20 to 43 percent.  The first, of course is to punish successful people who are clever enough to acquire assets that appreciate.  As his old boss, Barack Obama once argued, it is better that everyone be poor than tolerate a policy that allows differences in standards of living, even if everyone is better off.  The goal is not to raise revenue, because his advisors, at least, know the facts that I set out in Part 1.  Raising capital gains tax rates does not generate more income.  It almost certainly generates less, especially in settings, iike the US, where individuals and firms are already paying taxes on other forms of income.  

Second, Biden seems to have a desire to simply be remembered as an extremist along the lines of FDR.  This involves doing dumb things that make him appear a big, important man in policy, and hopefully, history.  I say this with some confidence because the country with the highest capital tax in modern times has been Denmark, at 42 percent.  Thus, Biden’s odd choice of 43 percent is simply an infantile effort to stand out.  What a man.  

Third, his administration has plans, as his Secretary of the Treasury has stated, to try to create a worldwide tax cartel among other countries.  The idea is to talk them into fixing a high, minimum rate so that there cannot be “a race to the bottom” through competition in the rate levied.  In economics terms, of course, trying to fix the capital gains tax worldwide at a higher rate is actually a race to the bottom of capital investment and growth.  

Sending Secretary Yellen around the world on such a goofy mission is unlikely to be successful.  The 28 large OECD economies has a wide range of rates.  The mean rate is around 14 percent, less even than our current 20 percent.  This is due in part to the fact that nine of the countries have a zero rate.  Belgium, the Czech Republic, Korea, Luxembourg, Netherlands, New Zealand, Slovenia, Switzerland and Turkey have had zero rates in modern times.  Another 60 percent of the countries have a rate of 28 percent or lower, and only 5 are in excess of that rate.  Denmark, France, Finland, Ireland and Sweden make up this group, but if one looks closer, some of them have lower tax rates on other sources of income.  France is one country that is in the midst of tax reform and unlikely to sign on to Biden and Yellen's tax cartel.  That kind of accommodation to avoid suppression of jobs and capital appears nowhere in Biden’s plans.  

Capital Gains Tax Increase: Another Bad Biden Idea, Part 1

It was announced today that the Biden administration wants to raise the capital gains tax to 40 percent from its current, 20 percent at the federal level.  As you can imagine, he is on a hunt for a way to pay for the Sanders/D.O.C. socialist promise bomb to which he has strapped himself.  He could just have Janet Yellen (US Treasurer) and Fed chief Powell get money in the new (unproven and dangerous) Modern Monetary Theory (MMT) way.  But that would not accomplish the goals of his keepers.  

He also has to find some way to hurt those darn successful folks by getting his hands on their income.  After, who do they think they are?  Just because they work hard running businesses and pay most of everyone else’s taxes, doesn’t mean that there isn’t another way to wave the equality flag.  So, he or some of his keepers resurrected the nearly decennial idea of raising the capital gains rate.  

As you know, the capital gains tax is applied to realized capital gains that may be lurking in your investment portfolio, or real estate, or other assets else that grows in value, free of exposure to the tax.  When you sell the assets, as many retired people are doing today with the accumulated conventional IRA balances, or when they die, the Tax Man wants his taste.  It annoys whose who think they deserve to spread your wealth around to their friends, that you get to choose when the gains are realized when sold.  No matter that much of the gains may be purely embedded inflation, or that you may also have financed and managed a business.  

No matter, also, that even 25 years ago, it was known that it is not just rich that invest.  Indeed, a NASDAQ exchange survey found just those that held stock were very driverse:  43 percent of the adult population did so; 47 percent of women did so;  55 percent of those younger that 50 did so; and 50 percent weren’t even college graduates.  You know the demographics today are even more diverse.  Old gray-beards don’t try putting the short-squeeze on trades in their a compupter game stock.  The important thing is that a capital gains transaction put folks money in play, and affords Joe the opportunity to snatch-and-grab some of that.  

So, the economists Sarin, Summers, Zidar, and Zwick in 2021, crafted a paper (unrefereed) that asserts that the scoring of the revenue potential of such a move could be more remunerative than others had found.  Scoring is the review by the OMB of such aspects of fiscal efforts.  They did not report that the OMB’s revenue scoring in the 1990s, in practice, was off by a factor of 2 every year.  In this case, they had scored the effect of cutting the capital gains tax.  However, the fact that cutting the capital gains tax underestimated revenues strongly suggests that an increase in the rate is likely to have the reverse experience, and underproduce revenue and throttle investment.