An interview with ChatGPT’s “Assistant” about environmental health and carbon pricing

I’ll admit: I hadn’t really been hit by the full weight of the current conversation about artificial intelligence until I tried out the new ChatGPT app. While people have told me about the range of work that can be automated, asking this app to do things like write blog posts, scripts, and poetry showed the range of functionality of artificial intelligence.

There are still kinks to be worked out, but the technology is already impressive enough to generate some interesting insights. Below I will share with you an interview I had with “Assistant,” the ChatGPT Artificial Intelligence bot, on the impacts of the environment on health.

Rob: Hello, “Assistant,” and thanks for sitting down to talk with me today. I'd like to ask you a few questions about the interactions between environment and health for my blog. Are you game?

“Assistant”: Sure, I'd be happy to help. Can you provide more specific questions for me to address?

Rob: Yes! What are some ways the environment impacts health?

“Assistant”: There are many ways in which the environment can impact health. Some examples include:

1. Pollution: Exposure to air, water, and soil pollution can lead to respiratory problems, cardiovascular disease, and other health issues.

2. Climate change: Extreme weather events and changes in temperature can lead to heatstroke, dehydration, and other health problems.

3. Access to clean water: Lack of access to clean water can lead to waterborne diseases such as cholera and typhoid.

4. Access to nutritious food: Lack of access to nutritious food can lead to malnutrition and other health problems.

5. Access to healthcare: Inadequate access to healthcare can lead to poor health outcomes.

6. Access to safe housing: Poor quality housing or living in areas with high levels of crime can lead to physical and mental health problems.

7. Noise pollution: Constant exposure to loud noises can lead to hearing loss and other health issues.

These are just a few examples of the many ways in which the environment can impact health.

Rob: Let's talk about climate change. One thing policymakers talk about on this front is the difference between mitigation of climate change impacts (slowing climate change) and adaptation to climate change (things we do to deal with climate change's effects). What are some key policy options for mitigating climate change?

“Assistant”: There are several key policy options for mitigating climate change, including:

1. Reducing greenhouse gas emissions: This can be achieved through various methods such as increasing the use of renewable energy sources, promoting energy efficiency, and implementing carbon pricing systems.

2. Protecting and restoring forests: Forests absorb and store carbon dioxide, so protecting and restoring forests can help mitigate climate change.

3. Promoting sustainable agriculture: By adopting sustainable agriculture practices, we can reduce greenhouse gas emissions from the agricultural sector and also improve soil health.

4. Promoting sustainable transportation: This can be achieved through measures such as increasing the use of public transportation, promoting carpooling, and encouraging the use of electric vehicles.

5. Reducing waste: By reducing waste, we can decrease the amount of greenhouse gases emitted through waste management processes.

6. Promoting energy-efficient buildings: By improving the energy efficiency of buildings, we can reduce energy consumption and greenhouse gas emissions.

Overall, it is important for policymakers to consider a range of approaches when developing climate change mitigation strategies.

Rob: Wow, there are so many tools policymakers have to stave off climate change! One option you mentioned was carbon pricing: where are policymakers implementing carbon pricing in the United States?

“Assistant”: There are currently several states in the United States that have implemented carbon pricing systems, including:

1. California: California has a cap-and-trade program, which sets a limit on the amount of greenhouse gases that can be emitted and allows companies to buy and sell allowances to meet those limits.

2. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont: These states have all joined the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program that covers the electricity sector in these states.

3. Illinois: Illinois has a voluntary carbon pricing program called the Illinois Carbon Market, which allows companies to offset their greenhouse gas emissions by purchasing credits from approved projects.

4. Minnesota: Minnesota has implemented a carbon pricing program called the Next Generation Energy Act, which puts a price on carbon dioxide emissions from large emitters.

5. Washington: Washington has a carbon pricing program called the Washington Carbon Emissions Reduction Taskforce, which sets a price on carbon dioxide emissions from large emitters.

Overall, while carbon pricing has not yet been implemented on a national level in the United States, several states have taken steps to implement their own carbon pricing programs.

Rob: When we talk about carbon pricing, we usually are talking about two different approaches: carbon taxation, which puts a price on carbon emitted to be paid to the government, and cap-and-trade, which requires firms to buy allotments from the government to pollute. What are some tradeoffs between these two systems?

“Assistant”: There are several key tradeoffs between carbon taxation and cap-and-trade systems:

1. Predictability vs flexibility: Carbon taxation is generally more predictable as it sets a fixed price on carbon emissions, while cap-and-trade systems can be more flexible as the price of allowances fluctuates based on supply and demand.

2. Simplicity vs complexity: Carbon taxation is generally simpler as it involves a single tax on carbon emissions, while cap-and-trade systems are more complex as they involve a market for allowances and the ability to buy and sell those allowances.

3. Political feasibility: Carbon taxation may be more politically feasible in some cases as it is a direct tax that can be used to fund government programs. Cap-and-trade systems may be perceived as more complex and may be less politically feasible in some cases.

4. Economic efficiency: Both carbon taxation and cap-and-trade systems can be economically efficient in reducing greenhouse gas emissions, but the specific design of the system can impact its efficiency.

Overall, policymakers must consider these tradeoffs when deciding between carbon taxation and cap-and-trade systems as part of their climate change mitigation strategies.

Rob: If cap-and-trade may be perceived as more complex and thus less politically feasible, why are most carbon pricing systems in the United States cap-and-trade systems rather than carbon tax systems?

“Assistant”: There are several reasons why most carbon pricing systems in the United States are cap-and-trade systems rather than carbon tax systems:

1. History: Cap-and-trade systems have a longer history in the United States, with the first system implemented in 1990 for sulfur dioxide emissions. Carbon taxation has not yet been implemented on a national level in the United States.

2. Political feasibility: Cap-and-trade systems may be perceived as more politically feasible in the United States as they allow for the creation of a market for allowances, which can generate revenue for the government. Carbon taxation may be perceived as a more direct tax and may be less politically feasible in some cases.

3. Economic efficiency: Cap-and-trade systems can be more economically efficient in reducing greenhouse gas emissions as they allow for the creation of a market for allowances, which can help drive down the price of allowances and encourage emission reductions.

4. International precedent: Most international carbon pricing systems are cap-and-trade systems, which may also influence the preference for cap-and-trade systems in the United States.

Overall, these factors may contribute to the prevalence of cap-and-trade systems in the United States.

Rob: Well, Assistant, this has been enlightening. Thank you so much for your insight and I look forward to speaking with you again soon.

“Assistant”: You're welcome! I'm glad I could help. If you have any more questions, don't hesitate to reach out.

As you can see, “Assistant” loves to speak in lists, though that was partially because of the prompting I gave it. And the content was impressive–the bot was able to get to the heart of each question I asked and was able to answer the questions with the same quality as a well-informed state advocate would be able to.

What I find especially impressive about it, though, is the ease with which the bot compiles basic information and the clarity with which it communicates this information. This makes me think that AI has the potential to automate a lot of jobs that we never could have imagined would have been possible to automate.

Four important economics stories in 2022 that you may have overlooked

As a midterm year, election coverage dominated our newspapers for much of the year. That being said, 2022 was also a year full of stories about the U.S. economy. As the world clawed its way out of the pandemic, new trends emerged that revealed how our lives had changed since.

Below are four economics stories that are, in my estimation, among the most important stories of 2022. While we spent a lot of time reading about inflation, a sluggish stock market, and a certain multibillionaire purchasing a specific social media platform, the stories below are about trends that may have an impact years down the road.

U.S. poverty hit its lowest rate on record in 2021

When Congress failed to reauthorize the pandemic expansion of the Child Tax Credit in 2021, we knew low-income households would be in trouble. What we didn’t yet know, though, was how much the child tax credit expansion was helping low-income households. A September data release by the Census Bureau confirmed that the Supplemental Poverty Rate had fallen to 7.8% in 2021, 1.4 percentage points below the 2020 rate.

Government assistance had a large hand in reducing poverty in 2021. The Census Bureau estimates 45.4 million fewer people were in poverty because of government assistance that year than there would have been otherwise. Next year we will have data from 2022 to see what has happened in the face of reductions in assistance for children.

Nationwide math scores down after COVID

An October report from the National Assessment of Educational Progress, the first national report card since 2019, showed a drop in math scores nationwide among elementary and middle school students. Math scores showed the unraveling of decades of progress in math among U.S. youth, with fourth-grade scores dropping to their lowest levels since 2005 and eighth-grade scores dropping to their lowest levels since 2003.

Reading scores dipped in 2022 as well, though not as dramatically as math scores did. Peggy Carr, commissioner for the National Center for Education Statistics (NCES), which administers the survey, said that the disruption in teaching caused by the pandemic was bound to hurt math scores more than reading scores. This is because reading is easier to practice at home while math usually needs more hands-on instruction to improve with. Hopefully returning to the classroom will help reverse this trend, though the scars of the pandemic on student learning will likely be felt for decades to come.

Most white Americans now live in mixed-race neighborhoods

In 1990, 78% of white Americans lived in neighborhoods where at least four out of five of their neighbors were white. As of the 2020 census, only 44% did. A November analysis by the Washington Post laid these statistics bare, showing that the percentage of Black Americans living in predominantly Black neighborhoods had also fallen over that period.

A driver of this shift is the migration of Black and Hispanic residents to suburban neighborhoods. Another factor is that America’s white population is shrinking. So the total population is becoming more diverse and neighborhoods are also becoming less segregated. A total of 56% of Americans now live in mixed-race neighborhoods.

US Happiness Report: happiest states in Southeast, least happy in Pacific Northwest

In November, Gross National Happiness USA released the first U.S. Happiness Report, the results of a 50-state survey that asked 5,000 Americans questions about life satisfaction, happiness, anxiety, and the extent to which the things they did in life were worthwhile.

The five highest-ranking states on the life satisfaction measure were Delaware, Georgia, South Carolina, Florida, and South Dakota. The five lowest-ranking states were Oregon, Oklahoma, Washington, Rhode Island, and West Virginia. By analyzing state-level well-being, we can start to figure out which policies contribute to happiness and promote policies that help people live better lives.

These were just four stories from 2022. Let’s hope in 2023 that we see progress in poverty, learning, equity, and well-being.

Ohio economists think mental health spending will be good for the state economy

In a survey published this morning by Scioto Analysis, 18 out of 22 economists agreed that increasing state spending on mental health services, research, and job development will provide net social benefits greater than net social costs. Only one economist disagreed with the statement.

Among those who agreed, many pointed out that the specifics of how spending was increased would determine how efficient any new programs would be. There was consensus among economists that mental health resources are currently underfunded and increasing spending on them will be good for Ohio.

Additionally, 18 of 22 respondents agreed that increased mental health spending would improve equity and inequality conditions in Ohio. One economist pointed to the fact that without additional funding, mental health resources are more easily accessed by the well-off. Reducing the barriers to these services should reduce inequality as a result.

Last month, governor DeWine announced a proposal that would increase state spending on mental health services, research, and job development. These changes would be incorporated as part of Ohio's next two-year state budget plan.

The Ohio Economic Experts Panel is a panel of over 40 Ohio Economists from over 30 Ohio higher educational institutions conducted by Scioto Analysis. The goal of the Ohio Economic Experts Panel is to promote better policy outcomes by providing policymakers, policy influencers, and the public with the informed opinions of Ohio’s leading economists.

Four ways to help people with disabilities get work

A bill currently in the Ohio General Assembly would eliminate the subminimum wage for people with disabilities.

Currently, companies in Ohio are allowed to apply for a waiver from the state minimum wage to hire people with disabilities. The goal of this program is to make it easier for companies to hire people with disabilities and therefore to give more people with disabilities jobs.

I was talking to Michael Hartnett, a policy analyst I work with at Scioto Analysis about this problem earlier today. He brought up a few options for the state to increase employment of people with disabilities without paying them less.

Job training

Providing more funding for job training programs for people with disabilities can help give people with disabilities skills that are valuable for employers. The federal Employment and Training Administration provides funds for training people with disabilities.

The state of Ohio even has an office called the Bureau of Vocational Rehabilitation. The Bureau specifically focused on providing individuals with disabilities the services and support necessary to help them attain and maintain employment. More funding for training programs referred through the Bureau could increase employment of people with disabilities.

Grants for making workplaces accessible

One reason it is hard to hire people with disabilities is because employers may have trouble accommodating workers with disabilities in traditional workplaces. For instance, if a job traditionally requires typing, people with limited dexterity would typically not be a candidate. A grant for a job that requires some typing could allow a company to hire a scribe part- or full-time to type for that person.

One example of this type of program is the Retaining Employment and Talent after Injury/Illness Network (RETAIN) Initiative, a federal program that Ohio takes part in. Eight state teams received competitive awards to develop and run pilot programs aimed at helping workers stay at or return to the workforce following an illness or injury. A similar program could be developed for counties and cities if this program is successful.

Subsidizing wages for people with disabilities

The Earned Income Tax Credit is a popular wage subsidy aimed at bringing low-wage people into the labor force. A weakness of the Earned Income Tax Credit is that it is targeted at families, so people without children often have a small credit. Having a larger credit for people with disabilities or making the state earned income tax credit refundable for people with disabilities are two policy levers policymakers have for making it easier for people with disabilities to go to work.

Mandates for accommodation

A final option is to just tell employers they need to accommodate. The Americans with Disabilities Act requires employers to reasonably accommodate workers with disabilities. Strengthening state law around accommodations could require employers in Ohio to work harder to accommodate people with disabilities.

A 2018 study estimated that making it easier for people with disabilities to work would bring 10.7 million people into the U.S. workforce and would increase national GDP by $25 billion. If this is the case, that means more people with disabilities in Ohio’s workforce would mean hundreds of thousands of new workers and hundreds of millions of more dollars in the state economy. This looks like a win for everyone.

Economic costs we don't talk about

At Scioto Analysis, we love talking about new ways for policymakers to think about the economy. When we talk about strengthening the economy through the narrow lens of GDP growth, we’re often talking about people getting more things they want. If “the economy” is the total value of things people want, then this makes sense to an extent. 

But the economy isn’t just the sum total of things people have that they want, it’s also offset by the cost of things people don’t want. Below is a simplified model of the economy factoring in this insight.

“The Economy” = The Total Value of Stuff People Want - The Total Cost of Stuff People Don’t Want

Just as an economy grows as it adds jobs (something people want), it also grows as it reduces car crashes (something people don’t want). 

Below are three economic costs that further illustrate this point.

Underemployment

When we talk about the current conditions in the labor market, we often focus on unemployment as the main indicator. Unemployment is certainly very important, but the official U3 unemployment measure doesn’t include underemployment. We know it is bad when someone wants to be able to work but can’t find a job, but it is also bad when someone can’t find enough work. 

If during an economic downturn, an employer chooses to reduce hours rather than lay off employees, the unemployment rate doesn’t change. Including underemployment as part of the discussion paints a much more complete picture of conditions in the labor market. 

Homelessness/Houselessness

People who don’t have somewhere consistent to spend the night regularly fall through the cracks when it comes to provision of public services and in discussions about the economy. 

Consider what happens if a houseless person has to go to the emergency room because of the cold. First and foremost, there is a social cost (e.g. hypothermia) that goes unmeasured by GDP. Then, because a healthcare provider ends up providing a service that has to be paid for, GDP actually grows slightly. If the goal of economic indicators is to show us where we can enact policy to help make people more well off, then including houselessness in that discussion is very important.

Defensive Expenditures

Defensive expenditures refers to personal spending on things that do not increase welfare or are used to prevent a loss in welfare. Take home security for example. If people didn’t have to spend anything on home security, they’d be able to use those resources on things they actually wanted. A neighborhood without crime would have less spending on home security systems, which would be a good thing for families.

If we don’t intentionally include defensive expenditures in the discussion, then most measures of the economy will take these pieces of economic activity and count them as positives. Separating consumer spending into categories is difficult, but an important nuance that helps us better understand how people are doing in the economy.
These three measures, underemployment, homelessness/houselessness, and defensive expenditures, are accounted for in the Genuine Progress Indicator (GPI). GPI is a “GDP+” measure that accounts for both sides of the ledger: economic benefits and economic costs. It also includes economic benefits such as home child care and volunteering not included in GDP. If we want to talk about the economy in a thoughtful way, we need to ensure we’re looking at a complete picture.

Defining a public policy problem: describe, then diagnose

One easy mistake to make as a policy analyst is to get ahead of yourself.

When analyzing a public policy problem, policymakers are often already bringing diagnoses of the problem to the table before the analysis has even begun. This is why problem definition is such a crucial step in the policy analysis process: it helps us strip away assumptions we bring to the table and analyze a public policy on the merits of its core goal. This keeps our problem definitions squarely rooted in our goal of advancing social values.

In Eugene Bardach’s A Practical Guide for Policy Analysis, the political scientist makes a distinction between two ways of thinking about problem definitions that is helpful here: problem definitions can be both descriptive and diagnostic. The more descriptive a problem definition is, the closer we can tie it to empirical evidence. The more diagnostic it is, the more we can construct concrete policy options to address the problem.

One way to think about problem definition is a type of criteria selection: we are describing what public problems policymakers care about. When we define a problem such as “the quality of air in the state of Michigan is too low,” we are laying the groundwork for us to construct certain types of policy options. We are also already implying one criteria: the effectiveness of a policy option in improving air quality.

Bardach talks about the treacherous line policy analysts walk when they define a problem. He uses the following example to show what a more diagnostic problem definition looks like:

One of the problems in the air pollution area is that states have not been willing to force motorists to keep their engines tuned up and their exhaust systems in proper order.

He says that on the one hand, this more diagnostic problem definition is useful. By more narrowly defining the problem, we can come up with more practical policy options to address this problem. “How can the public sector force motorists to maintain their vehicles?” is much more concrete than “how can the public sector improve air quality?”

On the other hand, such a strongly diagnostic problem definition can (a) limit the range of policy options to address the underlying problem, and (b) detract focus from larger causal factors to small causal factors for the underlying problem.

Policy analysis is an iterative process, and remembering this is an important way to figure out how to navigate the treacherous territory of description versus diagnosis in problem definition. Your first pass at problem definition will look different from your approach to problem definition in the eighth step when you are telling your story.

For this reason, I provide the following advice: describe, then diagnose. In the earliest phase of your policy analysis, focus on description. Make your problem definition abstract and idealistic: strip what your client wants down to its most naked connection to public interest. “The quality of air in the state of Michigan is too low” is an excellent first-pass problem definition.

Later, particularly after the second step of “assembling evidence,” diagnose. Say why air quality is low. Compare air quality in Michigan to that of other states. Talk about causal mechanisms. Build a model.

At this point, your problem definition can change. And the changes should be driven by (a) empirical evidence, and (b) client needs. This allows your problem definition to be both truthful and helpful.

If your problem definition starts out rooted in social values, then it can be further specified with empirical evidence and client needs. If you don’t start with social values, however, it can be a lot harder to add those in later in the policy analysis process.

5 Takeaways from Scioto Analysis's new Water Quality CBA

As Scioto Analysis’s newest member, I had the opportunity to conduct my first cost-benefit analysis about water quality in Ohio over the past few months. Here are five key takeaways from the project.

1: Ohio’s water quality is quite poor

For any policy analysis, it is important to begin by defining the problem we are trying to solve with policy. Using data made available by the University of Vermont, we can see that water pollution costs the average Ohio resident $219 compared to only $139 for a resident of the average state. These costs include lower property values, decreased recreation, and higher costs associated with water treatment. This means Ohioans have less recreational opportunities, lower property values, and higher water treatment costs than other states due to surface water degradation.

2: The H2Ohio program has helped reduce agricultural pollution

In their fiscal year 2022 report, the H2Ohio program reported that over 200,000 fewer pounds of phosphorus are loaded into the Western Lake Erie basin annually because of its programming. As the H2Ohio program continues to operate and grow, Ohioans could see fewer harmful algal blooms as a result. There is still a long way to go, but the H2Ohio program has been a first step in reducing phosphorus runoff into Ohio’s lakes and rivers. 

3: The social benefits of improved water quality are significant

Strong economies are able to give people access to the things they want despite the fact that resources are limited. Clean water is an extremely valuable resource that often gets overlooked in a country where drinking water is often easily accessible. Research on the willingness to pay to prevent water pollution has shown that one excess kilogram of phosphorus due to runoff from livestock waste causes nearly $75 of economic losses. 

4: Expanding successful programs is difficult

We’ve talked in the past about the problems associated with scaling programs, and H2Ohio is no exception. In this cost-benefit analysis, we chose to model these diminishing returns by assuming that future reductions in phosphorus would be as much as 50% lower. Fortunately, even with this conservative assumption, the program still has positive net benefits the majority of the time.

5: Subsidies are effective at fixing market failures

One of the most well-known drawbacks of classical economic markets is that they often have external costs levied on people not involved in a given market transaction. However, if policymakers understand these externalities, they can use their ability to levy taxes and increase spending on subsidies to push markets towards more efficient outcomes. Taxes and subsidies are often the simplest tool policymakers wield for correcting market failures.

Scioto Analysis releases cost-benefit analysis of Ohio water quality program

Scioto Analysis released a cost-benefit analysis analyzing the effectiveness of the H2Ohio water quality program this morning.

Analysts found that under its current expansion to ten new counties, the H2Ohio voluntary nutrient management program could provide net social benefits exceeding $2 million. Assuming reductions in phosphorus runoff remain high, expanding the voluntary nutrient management program to the entire state could generate nearly $13 million in net social benefits. 

Economic benefits of improving Ohio’s water quality include increased property values, increased access to recreation, and decreased costs associated with water treatment.

“We found that the H2Ohio program has been successful in reducing nutrient load in a cost-effective manner,” said analyst Michael Hartnett. “Assuming farmers across the state apply nutrients in similar ways and that reductions would be comparable, offering the same subsidy to farmers in every county could provide millions of dollars worth of benefits to Ohioans.”

Due to nutrient runoff from agricultural practices and industrial waste, Ohioans on average incur higher costs from water quality problems than 46 other states.

“The average Ohioan incurs over $200 a year in costs from low quality water in the form of lower property values, decreased access to recreation, and higher costs for water treatment,” said Scioto Analysis Principal Rob Moore. “Programs like nutrient management can reduce fertilizer runoff and improve the water of Ohio’s rivers and lakes, which will lead to health, environmental, and economic gains for Ohio.”

This study is the most recent cost-benefit analysis conducted by Scioto Analysis. Previous cost-benefit analyses include research on municipal tree planting, reductions of carbon emissions, and Covid-19 school closures.

What will happen if Ohio abolishes its income tax?

For years, legislators in the Ohio General Assembly have been working to abolish the state income tax. Republicans now command historic majorities after the 2022 midterm elections. Because of this, Cleveland.com politics reporter Jeremy Pelzer is saying income tax abolition is now closer than ever.

The caveman argument for abolition of the income tax is “tax bad.” I don’t have much to say about this: taxes can distort the economy but they also fund important public services, can help reduce inequality, and even fix distortions in the economy when deployed correctly.

The more nuanced argument being made by some policymakers is that income tax is more distortionary than sales tax. This is because it is easier to change how much you work than how much you consume. This means that income taxes theoretically drag the state economy more than sales taxes do.

Cutting income taxes on its own is unlikely to generate enough new revenue to pay for itself, as Kansas painfully demonstrated a few years ago. Due to Ohio’s balanced budget mandate, abolishing the income tax would require either steep reductions in spending (with cuts in education spending being the only likely path) or an increase in the state sales tax.

Abolishing Ohio’s income tax would not be unprecedented among states. Eight southern and western states currently have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Some of these states are able to take this approach because they either have alternate sources of revenue (oil in Alaska, Texas, and Wyoming, gaming in Nevada) or have a relatively small income tax base due to a high retiree population like Florida. Ohio has none of these luxuries. Zach Schiller from Policy Matters Ohio argues Ohio would need to raise sales taxes higher than any other state to make up for the lost revenue from income tax abolition.

The big problem with a shift from income tax to sales taxes is the impact the shift would have on poverty and inequality. Income taxes are higher for workers who earn more and increase in rates for higher levels of income. 

Sales taxes are flat and end up taking up a larger percentage of low-income earners’ budgets relative to high-income earners’ budgets. A high-sales-tax regime will, all things being equal, lead to higher poverty and inequality than a high-income-tax regime.

Is there a way to shift from income to sales taxes while addressing the equity problems caused by such a shift? Yes, theoretically. By increasing the sales tax enough to fund an expanded earned income tax credit, child tax credit, or other antipoverty program, Ohio can theoretically offset the equity impacts of the tax shift with new antipoverty spending.

This type of change happened in 2019 when Ohio increased its gas tax (a specialized sales tax) and expanded the state earned income tax credit at the same time. The earned income tax credit increase was used as a way to offset the regressive elements of a gas tax increase.

Moving to a sales tax regime with heavy investment in pro-poor programs would actually make Ohio’s public finance look a lot more like Europe’s. The U.S. relies less on consumption taxes than any other OECD country, instead using income taxes to finance its public spending.

It would take a bit of spending to make a significant dent in poverty — my firm estimates there are over a million Ohioans living in poverty, so a $1,000 rebate only targeted at those in poverty would cost over a billion dollars. A four percentage-point increase to the cost of all sales would put a family spending $24,000 at nearly that much on its own, so it would make this policy a breakeven policy for poverty.

An alternative would be an increase in the earned income tax credit. An analysis we did on earned income tax credit expansion a few years ago estimated a robust earned income tax credit expansion would cost the state about $760 million. This would also provide about $1,000 each to those in poverty according to our estimates, only making these families break even after new costs. This means larger programs might be needed to reduce poverty depending on what is exempted from sales tax.

In the scheme of a $10-billion-odd tax reform, a billion or two focused on poverty does not seem like a difficult lift. Unfortunately, the politics of a couple billion dollars for the poor can be more sticky than the politics of $10 billion for the rich. 

Conducting tax reform that promotes efficiency and equity is not impossible. It will, however, require policymakers to be as committed to the latter as they are to the former.

This commentary first appeared in the Ohio Capital Journal.

8 Overrated and Underrated Economic Indicators

According to a survey conducted by Pew Research, the state of the economy was the most important concern voters had before this year’s midterms. Because the economy is so important, we should be able to understand whether or not it is doing well, right? 

Unfortunately, “the economy” is a nebulous phrase and there is no definitive way to measure how it is doing. There are a variety of metrics and statistics that policymakers can look at to see how the economy is faring, and in today’s blog we are going to talk about a few of them that are overrated or underrated. 

We should mention that these are just our thoughts on this issue. Certainly there is room for discussion and disagreement, but we hope this offers some new ways of thinking about the economy. 

Overrated - GDP

If you ask a friend how they are doing, you probably wouldn’t expect them to respond by telling you how much stuff they have. While it is generally true that having more things often means that an individual has more access to resources, this is not the whole story of wellbeing. Similarly, because GDP only measures how much stuff is in an economy, it can sometimes miss the bigger picture of how people are doing in the economy. 

Imagine two countries that each have the exact same GDP. Country A has high levels of poverty and extreme levels of pollution. Country B has low levels of poverty, and generates its production without the need for pollution. Clearly country B has a more sustainable economy, but GDP just doesn’t capture that. 

Underrated - GPI

The Genuine Progress Indicator (GPI) is a relatively new alternative to GDP. GPI serves much of the same purpose as GDP, trying to measure how much economic activity is in a country, state, or local area, but it also takes into account things like how sustainable an economy is, or how educated the population is, recognizing that these have economic impacts that are not traded on formal markets.

One of GPI’s biggest advantages over GDP is that it measures the value of non-market activity such as at-home childcare and volunteering. There are lots of extremely valuable ways for people to spend their time that improve the economy even though no dollars change hands to make it happen. 

Overrated - Stock Market

The stock market doesn’t get used as a signal for how the economy is doing as much as it used to, but the past two presidents have both mentioned it so it deserves some discussion here.  

The main difference between the stock market as an indicator and an alternative like the yield curve is that the stock market doesn’t have a neat cutoff point where we can see something is wrong. If the yield curve is inverted, we know that people think the short term is riskier than the long term. If there is a 50% rise or fall in the stock market, that just means there was a change in the prices of stocks. Maybe it was due to variance, maybe it was due to fundamental shifts in the economy, but there is usually no way to know until much later. 

Underrated - Yield Curve

The yield curve is often touted as one of the best recession indicators we have, but since we just talked about GDP being overrated we want to talk more generally about how the yield curve is beneficial outside that context.

The yield curve is the difference between the interest rates for 10-year treasury bonds and 2-year treasury bonds. In normal conditions, we should expect 10-year bonds to have higher interest rates, since it is riskier to hold bonds for longer periods of time where there is more uncertainty. 

When the yield curve is inverted, 2-year bonds have higher interest rates than 10-year bonds, meaning the people who are buying and selling bonds are more nervous about short term economic trends than they are about long term trends. It becomes safer to hold money for 10 years rather than 2. It is always a bad sign when people are more nervous about the short term in the economy than the long term. 

Overrated - U-3 Unemployment

The bureau of labor statistics reports six different unemployment measurements that each include different categories of people in the labor market. U-1 is the most optimistic, only accounting for people in the labor force who have been unemployed for at least 15 weeks. 

In the middle of the spectrum is U-3 unemployment, what is considered the official unemployment rate. U-3 is the most straightforward measure of unemployment, calculating the percentage of the labor force that do not currently have a job. 

U-3 is a useful unemployment measure, but it misses one crucial point that is critical to understanding the state of the labor force, underemployment. 

Underrated - U-6 Unemployment

On the other end of the unemployment measure spectrum is U-6 unemployment. U-6 is often a more useful measure of unemployment than U-3 because it actually does account for underemployment. 

If there is an economic downturn, employers are often faced with the need to cut costs. If they choose to cut costs by reducing the hours people work without laying them off, then other unemployment measures won’t capture the lost economic activity. 

Overrated - Official Poverty Rate

The official poverty rate was created in the mid 1960s by economist Mollie Orshansky as a tool to measure progress in the War on Poverty. At the time, the average family in the United States spent a third of their income on food, so the poverty line was set at three times the cost of a “thrifty food plan” for minimum nutritional intake in the United States and adjusted to family size. This measure is updated every year by the Census Bureau to adjust for inflation.

The Official Poverty Rate has a lot of problems. One is that family budgets have changed significantly over the past half century since the Official Poverty Measure was first adopted. While food cost a third of a family budget in the mid 1960s, agricultural and supply chain advances have dropped that number to about an eighth today. Meanwhile, costs of housing and health care have increased precipitously. Add this to the fact that the Official Poverty Measure does not make geographic adjustments for cost of living and we have a potential for overestimating poverty in some parts of the country and underestimating it in other parts of the country.

Underrated - Supplemental Poverty Rate

Since 2010, the Census Bureau has been calculating an alternative poverty indicator called the Supplemental Poverty Rate. Starting from a basis of two-thirds of average spending, the Supplemental Poverty Rate then counts total income (including both wage income and public benefits) and makes adjustments for geography and work expenses. The Supplemental Poverty Measure gives us a more accurate picture of what poverty looks like in the United States over a half century after the War on Poverty.

Scioto Analysis calculates the Ohio Poverty Measure using a similar methodology to the Supplemental Poverty Measure, but using a larger dataset to allow for more geographic precision.

There is no perfect measure for how well the economy is “doing.” But a dashboard of GPI, the yield curve, U-6 unemployment, and the Supplemental Poverty Rate will give you a more accurate picture of what the economy looks like than a dashboard of GDP, the S&P 500, U-3 Unemployment, and the Official Poverty Measure. So next time when someone talks about “the economy,” don’t be afraid to ask “what do you mean?”