Floods, Nuclear Power, and Wages (with Peter Van Doren)

[music]

0:00:08.0 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus. Joining me today is Peter Van Doren. Senior Fellow with the Cato Institute and Editor-​in-​Chief of Regulation Magazine. Welcome back to the show, Peter. This is our first solo, or my first solo interview with you without Aaron Ross Powell. So hopefully, we can have a good conversation.

0:00:31.8 Peter Van Doren: I agree, I hope we don’t flail in bad ways, [laughter] ’cause without Aaron…

0:00:38.1 Trevor Burrus: Well, I am stupider than Aaron, so well, I’ll do my best. So, today we… Something you’ve written about for quite a while, and it’s in the news as it comes, as it happens often in September of many years, is flood insurance. And as that pertains, of course, to natural disasters like the recent extremely bad hurricane in Florida, Hurricane Ian. So before getting into the data of what’s happening in terms of rebuilding Florida because of the flood insurance, can you give us a lay of the land about the way flood insurance works in these areas, and the economic problems associated with it?

0:01:18.8 Peter Van Doren: So I wrote a Cato PA in 2021, and I reviewed the history of, not only flood insurance, but the whole natural disaster policy. And to put it in a larger context, I invoked a famous paper in the literature called “The Samaritan’s Dilemma,” which James Buchanan wrote in 1975. And “The Samaritan’s Dilemma” is the following, which is after disasters occur it’s very difficult to withhold aid. So you need to pre-​commit not to aid people after the fact in order to induce them ahead of the fact to, in fact, take precautions. Either don’t live there, or make it structurally possible to live there, or… And we could go on, but after the fact, the ability of anyone to say no, or any elected official to say no, is low. And I recount the history of even in the… Since Cato tends to divide American history into the good old days before the new deal, and then the bad old days since then, the Congress appropriated disaster aid to flood victims right from the start of the Republic. And some Presidents vetoed things but, basically, there are 140, I think, I probably get the number wrong, but hundreds of post-​disaster congressional appropriations to help people. They weren’t hurricane-​related, because people didn’t live on the coast. Tourism… They were river-​related. In fact, the Mississippi River was a big deal. And the Mississippi…

0:03:20.8 Trevor Burrus: It still is, but the flooding of it in 1927, for example, were really big deals.

0:03:25.3 Peter Van Doren: Was a big deal. And in ’93, and commerce depends on the Mississippi River. Lots of businesses are located on the Mississippi River. So the kind of Libertarian notion of people took care of themselves prior to 1930, whatever, not really true. The Red Cross played a large role, a much larger role than it does now, but there were business interests that lobbied extensively for river flood aid, and the river flood projects, the levees, and the… All the stuff we associate with the Army Corp of Engineers was not just random constituent demands, it was business interests that really wanted this river to work for them, because it was that, it was the river. It was a railroad along with railroads. And so anyway, so post-​World War II, ad-​hoc disaster aid got more extensive, because people started to live in Florida, and in Texas along the coast, and tourism was picking up. And so there were larger and larger congressional expenditures, and 1965 was sort of a high point for that following a set of hurricanes. And then ironically, the Congress tried… Well, they created a commission and then the report back said, “Let’s try to use flood insurance as a commitment device.” Well, Cato now criticizes as a subsidized disaster was in fact a congressional attempt to get around, or to commit against giving ad hoc post-​disaster aid that was appropriated.

0:05:20.7 Trevor Burrus: So the idea was that before this even happens, you’ll know what you get, kind of. Not that you could just bet on the heartstrings of voters.

0:05:29.6 Peter Van Doren: And you have to contribute. Again, there were premiums. They may have been subsidized, and they still are to a certain extent, although the subsidies, we can talk about that. They’ve been reduced and they’ve come back in different ways. But I’ve read the hearings, I’ve read all the literature surrounding the 1968 Flood Insurance Act. And Congress is really as serious as it gets about saying, it knew what the problem was, and that it tried to create a commitment device that it couldn’t violate, by setting out a program and then premiums, and the subsidies would go away, they used grandfather-​ing, they said, “Only existing structures.” They thought all those structures would wash away.

0:06:15.7 Peter Van Doren: It turns out they didn’t. And so anyway, the irony is, that what we see now, in Florida is, again, the Samaritan’s Dilemma, which is, it’s happened and now there’s gonna be overwhelming public and probably public sector support to help them out. And then the question looking backwards is, how well were they, did they buy flood insurance? Did they in effect comply with the congressional vision of, you ought to do something for yourself because the notion of hurricanes hitting Florida coast is, in fact, predictable and therefore we should try to reduce the taxpayers in the rest of the country having to support this. And that was the vision. But…

0:07:11.8 Trevor Burrus: Well, that raises questions, well, ’cause we take a step back. I’m the philosopher here, and not the economist, although we always have to remind people, Peter, actually, his PhD is in Political Science. He just plays a very convincing economist. The question that we like to ask in the Libertarian world is, are there too many people living in Florida due to an artificial subsidy? But it also doesn’t seem to me that Florida is like economically viable due to hurricanes. There would be some way to pay for this in some efficient economic allocation. People want to go to the beach, even though it might get hit by hurricanes, they want to own beachfront property, and maybe to the point that they carry the flood insurance that it would require for the periodic destruction of their properties. I don’t feel like it would be the most efficient thing for Florida to be empty. But we don’t actually know, right?

0:08:05.9 Peter Van Doren: Correct. And you’ve phrased the question absolutely correctly. And the… We don’t have to talk, but the paper I wrote last year talks about the subsidies and how much they were, and then how they’ve gone down over time. And then how in 2012 the Congress passed flood insurance reform that was going to really get tough about the ongoing subsidies and try… And then Hurricane Sandy hit in the fall of 2012 and New York and New Jersey were slammed and they’re important in the congressional scheme of things.

0:08:47.0 Trevor Burrus: Yeah. Suddenly New Jersey gets hit by a hurricane and suddenly they might have voted against flood insurance and now they’re all about it. So yeah, that changes the political economy a bit.

0:08:56.8 Peter Van Doren: So two years after the 2012 reform, in 2014, Congress retreated, and from the attempt to make all people pay what are called actuarily fair premiums, the subsidies to existing homes continue or were put back in place. I think most people may not be aware though, that homes that are rented out, in other words, non-​primary residence, and so all the Airbnb homes on the Jersey shore and things like that, they are not subsidized. And there may be little arbitrage games people play by saying it’s our house, but in fact they rent it out all the time. I’m not familiar with all the legal manoeuvres that one can undergo to sort of arbitrage across the status. But if you read the statutes, the subsidies are directed at primary homes where it’s your primary home and you live there and you were there before the 2012 reforms went into effect and blah, blah, blah.

0:10:18.5 Trevor Burrus: So is it just a case that it really, in a functioning market, and it’s kind of… We’ll get to this in a little bit, talking about nuclear power to some extent, but in a functioning market, no one would ensure some of these homes. Or it would be so unbelievably expensive that likely no one… Private insurer without a subsidy would ensure a home that might just get destroyed every 30 years.

0:10:38.5 Peter Van Doren: Well, no, they would do it… Again, the question is the people’s willingness to pay.

0:10:43.0 Trevor Burrus: Yeah, there’s some price, of course, but the price is actually so high. And also the insurance companies can be extremely endangered by mass disaster events if they don’t have a good loss accounting for their own, right? If they insured the entire Tampa Bay area and all they take is losses and they don’t have any good enough gains, they can go outta business themselves.

0:11:07.5 Peter Van Doren: So we can take those separately. First. If there’s a hundred per cent certainty that the known asset will be destroyed every 30 years on average, then you need to pay one 30th of the value of said thing, if you were saving yourself. Then the question is, all right, now think of insurance, which is, could we make you… Could you diversify the portfolio of losses by having houses in Switzerland and houses right all over the world in a diversified portfolio? And then would that… Then instead of everyone having to pay one 30th, but let’s say, see again if the only… If people in beaches everywhere, think of typhoons in the far East and think of India, and so if, again, the frequency of disasters in rivers and on shores is such that around the world, there’s some diversification. But in fact, if you’re only, it’s diversifying among which kinds of structures.

0:12:22.3 Peter Van Doren: Let’s say we limit the portfolio just to things on the water, then you may not get much better than one 30th, if you see what I’m saying. The paper actually goes through, some of what are called fat-​tailed worries and the distribution of losses. And I think some of the worst scenarios in which private insurance is alleged, it’s not possible by some RFF in particular, the Resources For the Future had a paper there. So there’s some intellectuals who argue private markets for flood insurance can’t possibly exist. I push back against that in the paper and argue, I think those worst case scenarios are not true, and in fact it’s… The great joke in economics is that there’s… Things exist, but we have to prove it in theory. And so this is the same thing that…

0:13:21.6 Trevor Burrus: Yes. One of my favourite quotes. Yes.

0:13:24.0 Peter Van Doren: There actually are flood reinsurance markets. And in fact, FEMA uses them. Believe it not, the US flood insurance program itself actually does some reinsurance through Lloyd’s of London and things like that, to deal with some of the risks. So there are private markets for this stuff. But it turns out people don’t wanna pay what it costs.

0:13:48.6 Trevor Burrus: What it actually costs. Which is a lot of what political economy is, is a lot of people don’t wanna pay what things actually cost.

0:13:55.3 Peter Van Doren: Yeah. And…

0:13:55.9 Trevor Burrus: And they try and get cross subsidies to fix that, yeah.

0:13:58.1 Peter Van Doren: Right. Premiums were at $600 and $700 a year, right? Which is what I pay for normal homeowner’s insurance.

0:14:06.3 Trevor Burrus: Not in a floodplain.

0:14:07.7 Peter Van Doren: Not in a floodplain. [laughter] So after the 2012 reforms, people on the Long Island and New Jersey, were gonna be hit with bills of $4000 a year, and people went nuts. They said that’s…

0:14:24.4 Trevor Burrus: Went whining to the government. Yeah. In that spunky can do American way.

0:14:30.3 Peter Van Doren: And so we’re back to, there are distributional issues, and the politician said, “Well, should the shore only be for the rich?” And the economic answer is probably, ’cause they’re the only ones who actually can afford to deal with this…

0:14:48.4 Trevor Burrus: The real price. Yeah. But that’s not the political answer.

0:14:54.5 Peter Van Doren: So far the answer is no.

0:14:57.0 Trevor Burrus: So what we’ve seen in this article you sent me about the rates of flood insurance in Florida, because it was… Hurricane Ian was so big that it seems like we’re gonna have an… Outside of the major floodplains, which is 47.3% of homes had flood insurance, but areas outside of those floodplains, which still incurred a lot of damage, only 9.4% had flood coverage, which seems like a bad risk analysis of those homeowners.

0:15:27.7 Peter Van Doren: Well, given the storm surge of 8 to 15 feet combined with how flat Florida is, that pushed water… The New York Times had a great map, and they interviewed people, and they said they had never thought the ocean could get here. And of course… But you’re four feet above sea level, but you’re two miles inland. So they only think about the two miles. They’re two miles inland, but the storm surge was 12 feet… So you gotta find some place that’s more than 12 feet high near the Florida coast, which turns out there’s not many places.

0:16:10.2 Trevor Burrus: And then it would… It might be a good supposition that Florida itself is a very important state in electoral politics and…

0:16:18.8 Peter Van Doren: Oh my goodness. It’s pivotal. It is…

0:16:22.2 Trevor Burrus: Yeah. I was understating the case a bit. [laughter] We live in a world dominated by Florida and Ohio, let’s be honest, and sometimes Pennsylvania. But that’s what decides the fate of America. So in this, we could probably say that this will affect the way politicians maybe give something back to these people who did not have flood insurance and found the water in their living room.

0:16:44.7 Peter Van Doren: It’ll be… I’m sad, it’s a sad event, but I… So I’m using terminology, I shouldn’t, but I’m looking forward to watching Biden interact with DeSantis in terms of what happens in the game, given that it’s midterm elections and all of that. It’s very sad that it happened, but we will learn a lot about politics, political economy, and subsidies. Now, I do wanna emphasize though, even though there will be aid from FEMA, it’s not very much and it’s not very… It doesn’t come fast. In other words, if you don’t have a flood insurance policy, then the largest grant that one can get is $40,000 to help with repairs, which comes from emergency appropriations that Congress may enact. And if you’ve seen pictures, the Lake Charles area in Louisiana, that was hit, what… Was it a year ago or two years? It was a year ago. Right?

0:17:50.2 Trevor Burrus: Yeah, a year ago.

0:17:51.6 Peter Van Doren: And they still have blue tarps on their roofs. The responsiveness of FEMA to shelling out money in the appropriated sense is absolutely… Even Cato folks, we’re sort of opposed to government doing things, but if you have a program, it ought to work well. And so it’s like, if you rely on FEMA for post-​hoc disaster aid, you’re in deep doo doo. If you have flood insurance, they actually do, that works in the sense of, yes, your subsidized, but yes, they act upon it and yes, you will get the money. And it will be sooner rather than later. But if you’re the large number of people that we talked about that are affected but don’t rely on this post-​hoc disaster aid, it does not work very well and people will be shocked. And then the question is, given the elections and given Florida will, the political system change the rules on this appropriated disaster aid afterwards so that it will work better and be more. It’ll be interesting to see.

0:19:05.6 Peter Van Doren: Oh, before we go on, just one sad thing from our perspective is something called FEMA 2.0 went into effect in April, which is a re-​pricing of the flood insurance policies to try to make them much closer to actuarially fair. I thought Senator Schumer and the New Jersey delegation, Menendez is on the relevant committee, Senator Menendez from Jersey. I predicted in my paper last year that this thing would never happen. It had been supposedly going into effect for a long time, but it got postponed by Trump for political reasons. And I said, “Oh, it’s gonna be postponed again.” Well, it wasn’t. April 1st, 2022 FEMA 2.0 went into effect. And it’s increased premiums, but sadly, from our point of view, guess what’s happened? A lot of people have dropped their policies. So there’s a… Since April 165,000 fewer homes nationwide. That’s 3% of those who had flood insurance have dropped their policies because of price increases.

0:20:20.1 Trevor Burrus: Was that part of the point though, did they want some of them to drop their policies?

0:20:23.9 Peter Van Doren: No. We want them to pay what it really costs. You see what I… So ironically from Cato’s point of view, my paper recommended what happened, and guess what happened? It went into effect and people have dropped their policies. So the data for Florida, 4000 fewer households per month have… 4000 households per month since April have dropped in Florida, which is not what you… You see what I… So we’re back to, “Alright, we’re gonna have to subsidise them.” Do you see what I… We kind of go through this endless…

0:20:58.1 Trevor Burrus: Oh, yeah. Yeah, so you try and get them to pay something closer to the real and they don’t wanna actually pay it. ‘Cause people are pretty bad at risk assessment in a variety of ways, and they don’t think that there are serious risks or they are very unlikely. And then it happens and then we have to do something about it, and it’s tragic. It’s difficult to design a system though that gets people to pay more and to keep the coverage at the same level.

0:21:20.1 Peter Van Doren: That’s my point. Yeah, the Samaritan’s deal. And then do we pre-​commit not to help them now, given that they dropped? Do you see what… It’s very… Even if Cato… Even if Trevor were elected to Congress and you went back to this Fort Myers District, what would you do? What would you do?

0:21:38.9 Trevor Burrus: Oh yeah. Yeah, no. I couldn’t look him in the face, and I would hope that we could design a system, a better system going forward, but I couldn’t have looked him in the face, not even as a politician, but as a human being and say, “Tough luck, you lost your entire life savings, and that’s how this is gonna be.” That would be very difficult.

0:21:56.9 Peter Van Doren: And ironically, that’s the stare… People think of us as, that’s exactly the way we are, and yet when push comes to shove, at least there’s some of us who are… It’s tough to be tough, and certainly tough to be tough and elected.

[laughter]

0:22:12.9 Trevor Burrus: Definitely that too. Alright, so nuclear. We talked about this a few months ago, we talked about some of the stuff you were thinking about. This is… It’s thematic. We talk a lot about risk and what sort of risks are coming in both the nuclear plants with climate change. But you now have at least a calculation under some things of whether or not nuclear power plants are worth it. And including things like climate change or just the cost of energy in general, and whether or not in most instances, now nuclear power plants are worth it. And even though everyone likes to say, and it’s good to hear more people who are on the environmental activist side to say, “We at least have to look at nuclear,” we can’t just say, “Well, nuclear is obviously better and it’s costless and there’s no emissions, and so therefore we just have to build a bunch of nuclear power plants.” It’s not that easy.

0:23:06.4 Peter Van Doren: Correct. So I think the last time we talked, I said, my research assistant and I were working on trying to figure out the answer of what… The following interesting question that we hadn’t seen anyone address, which is, how high would a carbon tax have to be on the emissions of natural gas and coal-​fired electricity generators, in order for private investors who had a Cato point of view, to feel that well, given the tax on the conventional plants, at some point, if the tax is high enough, we will privately, without government help, we’ll build nuclear power plants. Because then we’ve, in effect, broken even. What we did in this paper is calculate how high would the carbon tax have to be before an investor over the lifetime of all three kinds of plants, how would an investor be indifferent, to use the technical term, between owning the three kinds of generation facilities? And the answer was, pretty high. [chuckle] But we had to talk about estimates of low versus moderate versus high natural gas costs in the future, we had to do the same thing for nuclear power plant construction costs.

0:24:31.4 Peter Van Doren: And as most of our listeners know, that’s the basic problem with nuclear is, it’s always been very expensive to build, even though once you got it going, the operating costs were actually not that high. So we did what’s called the levelized cost of electricity analysis. It’s basically just a present value analysis of all the capital investments and the fuel flows every year for the lifetimes of these plants, 60 years for nukes, 40 for coal, 30 for natural gas. And then said, what are the levelised cost of electricity of these three types of generation, given what we know about their costs currently. And the answer was… The answers were, for low construction costs for nuclear came out at 7.9 cents per kilowatt hour over its lifetime. For middle 11.4 and for high 14.4. Coal was 7.9. And then natural gas has low capital cost, so the… It hinges on guesses about nuclear, sorry, natural gas prices. And for low natural gas prices, the levelised costs are 3.8, middle 4.2 and high 5.5. So without a carbon tax, people will just build natural gas plants. They won’t build coal, they won’t build nukes. They are all too expensive.

0:26:01.9 Trevor Burrus: Now, what about… Obviously, when you say a carbon tax, is that presupposing a well-​priced carbon tax that takes in the damage of climate change that…

0:26:12.6 Peter Van Doren: Yeah, so we then… To avoid making the paper longer than it was, it’s 90 pages as it is, [chuckle] we did not get into the entire debate about what the price of carbon ought to be. We instead just said, academics and the government, the energy administration or the Department of Energy basically talk about somewhere between 20 something and 70 something dollars per metric ton of carbon emissions. So we said, “All right.” So if our number, if the number we calculate is sort of in that ballpark, then we would agree that a carbon tax of that level, which is what academics and the government sort of agree on, if that were the number we calculated, then you could say it’d be difficult to enact politically. We don’t seem to be inclined to do that, but if we properly took what the people have suggested the carbon tax ought to be, and we enacted said tax, then in fact, even from a Cato perspective with investors wanting to earn a 7% return like the stock market on their investment, yet under those circumstances, yes, they would invest in nukes. If our calculation turned out you need $200 or $300 or $400 a ton, then no, you see, we’re kind of order of magnitude… Not order of magnitude, but two or three times of the level that anyone recommends is what would be required to get an investor to be interested in nukes.

0:27:55.2 Trevor Burrus: Well, I think that someone would be listening and saying, “The problem here, Peter, is that you’re trying to price out what could be a catastrophic end of human existence via climate change. And you’re trying to say, “Well, good thing is that the people who are extremely afraid, the world… ” What was the line from AOC? If we don’t fix this by 2030, then humanity will be in a very bad way and we’ll be only able to carry maybe a billion people on the planet, and all these kind of ideas. Well then, the costs would be astronomical. We could include hurricanes, debatable proposition, natural disasters, the inability to farm different parts of the planet. So the real cost of carbon should be much higher than it actually is, which I guess you could run the paper and just imagine even higher carbon costs at the catastrophic level.

0:28:55.8 Peter Van Doren: We take an agnostic position for the purposes of the paper of what the real price of carbon ought to be, right? And people vary in their risk aversion, people vary in their view of the accuracy of the various scientific models that try to make estimates, not about, let’s call something called normal climate change, whatever we might call that. But then the disaster, the Greenland ice sheet melting or the Gulf Stream changing its direction so that Northern Europe is now… Is like Labrador rather than as pleasant as it is now. So we don’t… But what our paper does allow the reader to do is that if you believe the worst case scenarios and you want nuclear power rather than natural gas fired electric generation, in effect you’re saying you believe that the carbon tax needs to be the kind of numbers that we calculate. Again, it’s an if then proposition. And what we come up with is, numbers like that basically in the $200 and $300 a ton range, if capital costs of nuclear power remain as high as they are, I mean, that’s the real problem. So in order to get nuclear power to work from any carbon tax level that people currently recommend, again, let’s say in the 70 range, you’d have to have nuclear power plant construction costs go down by about 65% from where they are now in the United States.

0:30:51.2 Trevor Burrus: And there’s no indication that they’re going down at all, right? I mean, they’re probably gonna go up about 65%. [chuckle]

0:30:56.4 Peter Van Doren: Well, no. In fact, the opposites, yeah.

0:31:00.9 Trevor Burrus: Yeah, yeah.

[chuckle]

0:31:03.4 Peter Van Doren: And you’d have to assume natural gas prices are at the level they are now for the next 30 years. The kind of post Putin natural gas spike we’re in now because of the Ukraine issues and people worried about that, and the inability of ramping up natural gas production post pandemic, it’s been slower. Well, it hasn’t actually been slower than we thought. It’s actually just… There’s now just demand from Europe that we’re filling, we’re exporting that we didn’t think we’d have to deal with. So if nuclear power plant costs are lower than they’ve ever been, and natural gas prices are higher than they ever been for the next 30 years, then we’ll build nukes. You see what I’m saying?

0:31:55.9 Trevor Burrus: You should build… It would be economically rational without a subsidy, without something to…

0:32:00.9 Peter Van Doren: Correct.

0:32:01.0 Trevor Burrus: For an investor to build a nuclear plant. So in other words, the punchline here is even under some fairly generous assumptions, not even assuming the worst case scenario, assuming things that are probably not gonna happen, it would take a lot to make it worthwhile to build a nuclear power plant under current trends.

0:32:22.4 Peter Van Doren: Correct. And then again, in the paper, we deal with the so-​called new nuclear possibilities. There’s small nuclear reactors. If you’re a nuclear power advocate, the future has always looked better than the present. And I’ve been studying this for 40 years and I mean, back in the ’70s and graduate school all continuing through now, there’s always been nuclear power advocates, and they’ve always said… There’s famous quotes from the ’50s that it’s gonna be too cheap to meter. [chuckle] And well, even there’s now a version of that now. And there are investors, there are companies. There are Cato donors who are very prominently in favour of believing that the nuclear renaissance is just around the corner, and that it involves…

0:33:21.5 Trevor Burrus: There’s some sort of new innovation, something that will come like a pebble-​bed reactor or small things.

0:33:25.1 Peter Van Doren: Well, small nukes that you can make in an industrial way. In other words, a mass production solution to the cost of construction problem. If we built… Think of Italian cars built by hand, they’re… Ferraris and Lamborghinis are expensive and… [chuckle]

0:33:41.7 Trevor Burrus: For a reason, and that’s pretty much what we do with nuclear plants. We build them by hand.

0:33:45.1 Peter Van Doren: Pretty much. Pretty much.

0:33:46.3 Trevor Burrus: Yeah, yeah.

0:33:47.3 Peter Van Doren: And so, again, the paper talks about the current Georgia Plant, the Vogtle Plant that’s being built in Georgia was supposed to have, and does have, components built in factories, and that was supposed to reduce its costs. Well, it hasn’t. In fact, they’re…

0:34:09.9 Trevor Burrus: It’s comically overrun, if I remember correctly.

0:34:11.4 Peter Van Doren: It’s beyond… It’s like Fort Knox, only it’s being rebuilt in Georgia and it’s called a nuclear plant. You might as well just stuff it with gold bars. So again, people who favour nuclear will think I’m biased, but I’m not. I’m just saying the costs have to come down by the amount we specify in order to get this to work, and the new small nuclear modular folks believe that that’s going to happen. And then if it doesn’t happen, then I will… I’ll say that’s fine. I didn’t, I don’t… Nothing in the past suggest it’s going to happen, but it may happen.

0:34:56.6 Trevor Burrus: It could, yeah.

0:34:57.6 Peter Van Doren: I’m not precluding it. Some of our listeners may worry about, “Isn’t it the safety issue? Isn’t it nuclear regulated too much?” But again, the cost overruns are across the world under such a variety of regimes. Even China, the same kind of nukes that are being built in Georgia, the versions of the AP1000 that Westinghouse designed and went bankrupt over, by the way, they were the one… China’s using them too. But China has given up the ghost. They don’t want them either. So there is a plant being built in the Middle East, and it looks like it may be equal to the $4000 a kilowatt of capacity that we use as our… That’s our low estimate of possible costs in our analysis, and because it’s the lowest numbers we’ve seen in the world. But there’s a plant in Finland and there’s a plant in France. France is very pro nuke. There’s a plant in England. So across regimes in the Western world, there’s nothing lower than… These plants are now… They’re not 11,000 per kilowatt of capacity like Georgia. They’re close to 9000. They’re the high eights, and that’s our middle. So that’s the value we use in the middle of our analysis. And then the low is the 4000 that we get from this plant that’s being…

0:36:21.0 Trevor Burrus: We’ll see if that happens.

0:36:23.8 Peter Van Doren: Correct. It certainly doesn’t look like it’s gonna happen in the Western world, but… So that would have to be true, and then you’d have to want a carbon tax in the 70s, and then you’d be fine.

0:36:37.1 Trevor Burrus: Alright, well…

0:36:38.6 Peter Van Doren: So we then, in a blog post, we go on and say, “Well, the US doesn’t enact a carbon tax,” but instead under the Biden Inflation Reduction Act, there’s some subsidies, some tax subsidies that now go for nukes. So we’ve calculated their carbon tax equivalent. And again, they work out to the same thing, which is if you have very low construction costs and you have high natural gas prices, then the Biden Tax Credit, even though it’s only by law, it can last 10 years under the reconciliation rules. Assume it goes on forever, assume it’s permanent, that would be sufficient to make an investor be willing to go into a natural gas. Or, sorry, a nuclear plant.

0:37:26.0 Trevor Burrus: Alright. So we’re changing gears one more time in the wild and crazy world of Peter Van Doren’s mind, the always illuminating. We’re gonna talk a little bit about minimum wage. Before we get into the paper you sent me about trying to track how much minimum wage increases actually increase people’s wages. Can you set the scene a little bit about, insofar as you’re able, that is not totally your specialty, but the course of minimum wage studies, where there have been a lot of recent studies, but there’s the really famous one by… His name escapes me. He recently died.

0:38:02.9 Peter Van Doren: Is this from the ’90s, that you’re…

0:38:04.5 Trevor Burrus: Yeah, yeah, that one. Yeah.

0:38:06.9 Peter Van Doren: Was it David Card…

0:38:08.4 Trevor Burrus: Card and Krueger. And Krueger paper. That’s it, yeah.

0:38:10.1 Peter Van Doren: David Card and Alan Krueger threw a bombshell into economics in the early ’90s when they… They both taught at Princeton, and they conducted an experiment because New Jersey was raising its minimum wage and Pennsylvania was not. And so they started what are now called “Border Discontinuity Studies”, and you say, “Well, let’s look at the employment levels and prices and things like that for fast food franchises on one side of the state border that had a minimum wage increase, versus what happened to franchises in the state that did not raise the minimum wage.” And they were all so different for economists in that they used a survey. They called up those franchises and said, “What are you doing? Are you laying people off? Are you hiring? Are the hours increased… ” They just asked a sign of some basic, “Are you raising the pay? What’s… ” Or, sorry, “Raising your prices?” But also mostly just employment. “Does increasing the wage decrease the number of folks in your restaurant establishment?” Their conclusion was that it had no effect, that there was no difference across the state boundaries in the effect of the minimum wage increase in one state. Well, this was a bombshell, this… So there’s that. There’s been…

0:39:43.8 Trevor Burrus: Seems contrary to basic wisdom.

0:39:46.7 Peter Van Doren: Yeah, sort of Econ 101. And then there’s been so much, there’s just back and forth and back and forth. And the pages of regulation, we’ve covered this a number of times. I’ve covered it so many times, my head hurts. It is… Again, I’m neoclassically-​oriented, I believe that the things we teach freshmen in Econ 101 are true. But it is amazing, if you’re a skeptic, and that you think you can do things with a minimum wage, it has taken a lot, a lot of econometric effort to find effects. And it doesn’t show up in lots of simple…

0:40:34.7 Trevor Burrus: You mean either negative or positive effects? This one was kind of about positive.

0:40:37.7 Peter Van Doren: No, to find negative effects.

0:40:39.5 Trevor Burrus: Negative effects, okay.

0:40:39.7 Peter Van Doren: To find negative employment effects. So now, there’s the most… Well, not the recent. Again… The Meer-​West paper, I can’t remember its date. But they said, “Don’t look at levels, look at growth rates.” So then there’s a whole literature on, “Ah, it’s employment growth that’s affected. It takes a while for McDonald’s to put in machines and replace people, and it’s not the levels, it’s the growth rate.” That, actually, I find pretty persuasive. But anyway, this paper that I sent to you that we might talk about today is refreshing only in that, it’s different in that it asks a different question. It says, alright, let’s assume minimum wage increases really are good things, and let’s think of the state as helping people that are low-​income. Let’s assume you’re the congresswoman from the Bronx, and you believe in this stuff.

0:41:40.3 Trevor Burrus: AOC, yes.

0:41:41.1 Peter Van Doren: AOC. And the question is then, “Can we figure out how much the market does or doesn’t help low-​wage workers, versus a government effort to increase their wage?” And I’ve never seen… This is a different research take, and that’s why we’re talking about it. And so the numbers… So they… Let me get my notes here.

0:42:09.2 Trevor Burrus: Let’s just clarify. I just wanna clarify for our listeners. ‘Cause most… Even people who are proponents of the minimum wage, I think, would say that, most wage increases do not occur because of a statutory minimum that comes in, you’d have to be a very special type of worker who’s maybe helped out by a minimum wage increase via law, but most people’s wages go up over time, regardless of whether there’s a law pushing them from the bottom, so to speak. If you say, this is a person who made minimum wage in 2020, and then they’re… What are they making in 2021? And how much of that is because of the law, and how much of it is because of natural market forces? That’s basically the question they ask, right?

0:42:54.6 Peter Van Doren: Correct. That is the focus of this paper. And I guess my priors, I don’t know what I would have… I actually don’t have priors on this question, but that’s what I should have, but I don’t. And I guess, reading the paper a lot, I think there are a lot of people who don’t make much money, and I would have maybe said the market doesn’t help, it’s not gonna… They’ll increase their wage by changing what they do, not by the market rewarding them by staying with an employer, but still working in what we might call a low-​wage service job of one sort or another. These data are interesting. They use the Current Population Survey, which interviews people, and every year. And people who are in it, you’re in it for a year, and so they can figure out where you were at the start and then see where you are at the end. And then, this analysis confines the discussion to assume that we’re only talking about all those workers whose wages were within 50 cents of the minimum during the first interview. And this is from 2010 to 2019. They concluded that more than 70% of those employed 12 months later had a higher wage. For those who received an increase, their wages rose $2.05 an hour, which I thought was…

0:44:31.9 Trevor Burrus: That’s a lot for someone making minimum wage, yeah.

0:44:34.5 Peter Van Doren: Yeah. And they found that the large majority of low-​wage workers, therefore, cannot be plausibly described as career minimum wage workers, which ironically was my… I had my own misperception, that in fact… Even though Cato, we argue in print that you need a training wage when people start out, and once employers figure out who can do stuff and which can’t, they’re rewarded, because it is hard to find reliable good workers, and no one’s stuck at the bottom forever, blah blah blah.

0:45:11.5 Trevor Burrus: In general specialization… Adam Smith, if you work in the pin factory and after a year, hopefully you’re better at just doing the specialization stuff than you are at the beginning of that time in terms of how many pins you can produce because of how many times you’ve done it.

0:45:26.1 Peter Van Doren: So even though we’ve argued that theologically over time, we didn’t have… I couldn’t cite papers that said, “Oh, that’s true.” And I suppose if I were honest, I’d say my own priors was that I wasn’t sure it was true. [chuckle] And what’s interesting about this paper is, it says it’s true. In addition, what the paper does is go on to compare the wage increases of those in states that increased their minimum wage during the time period, versus those in states that did not, to compare how much of increased low-​wage worker increases were the result of public policy rather than market forces. So they found that 71% of minimum wage workers in states that did not increase their wage at any point, 2013 to 2018, did get a raise in any given year. 79% of minimum wage workers in states that did increase their minimum wage also got raises in any given year. So the difference was only 8%. Of the population of workers around the… Within 50%… 50 cents of the minimum wage over this time period. The overwhelming majority of people who got increases during that period, even in states that increased their minimum, were the result of market forces. And I thought that was an interesting result, which reinforces the notion that minimum wage increases by states are endogenous to the possibility that in fact they won’t have much effect.

0:47:05.2 Trevor Burrus: Well… Yeah, you can see it in the politics of it. It’s a frustrating issue for me, because it is the data that is, I would say fairly uncontroversial about how many people are on minimum wage and what kind of workers they are, it varies. If you’re a real big redistributionist and you wanna help out the poorest people, minimum wage is not the first lever you should pull in your toolkit, right?

0:47:30.4 Peter Van Doren: Correct. Correct.

0:47:32.7 Trevor Burrus: Just mass redistribution. There’s a lot of other things to do rather than just doing the wage, but it seems to mean something to people in a political rhetorical way, more than other types of things. And so we spend a lot of time talking about minimum wage increases, and as you said, sometimes in the politics of it, you see the weirdness of rolling out a minimum wage, which just implies that they understand that it will cause a ton of damage if you raise the minimum wage very quickly. They’re acknowledging the economic reality of this, and say, “Well, we’re not gonna give everyone a raise immediately, even though we said that what this is all about, ’cause that would hurt businesses and employment.” It’s like, “Okay, so that’s what you’ve been saying the whole time.” And usually the minimum wage also sits right around where the market wage is. That’s what you’ve been… Endogenous. It’s not usually, “Oh, let’s go from $12 an hour to 30.” That’s not usually what people [chuckle] are supporting when they come to minimum wage, and then we would see some real… The effects that economists would predict if you ever raised the wage, tripled the wage overnight, presumably.

0:48:36.6 Peter Van Doren: Correct. Yeah. No, it’s… So anyway, this study is in the summer issue of Regulation as a discussion of this paper for those who wanna… To read the print version.

0:48:51.1 Trevor Burrus: So do we have a moral for today’s conversation, Peter? Can we tie all these together for your parting thoughts about thinking of costs and benefits, and give us a window in your…

0:49:00.9 Peter Van Doren: Well, I’d say the emotion, the… We talked about trying to… Well, Cato and other academics have talked about the negative effects of minimum wage forever, and we will continue to do so, and that will have no effect on anything, I suspect. And the same thing about flood, right? Trying to be elected and be against something that the public likes, I.e. The minimum wage, you won’t get elected. It would take a special district to elect someone who looks like they’re against people, and the lowest wage occupation somehow getting more. And the emotional, the… Just interview ordinary people. It’s, we don’t give a… We shouldn’t give a whole lot of money to people who don’t work, but by golly, if you do work and you show up everyday, it ought to be enough to do blah, like rent an apartment… Fill in the blank. It ought to be enough. And even I had… Fighting that emotional reaction with analysis, which is what I’ve spent my life doing, probably hasn’t affected a whole lot of people.

0:50:19.6 Peter Van Doren: And there are many, many economists who also think the minimum age actually doesn’t have the large negative effects that many people like me think it does. And as I said, the evidence is very hard. It’s taken enormous amount of econometric fire power to find affects, and if it’s as obvious and easy as we claim, it should be easier. And the same thing with flood insurance, right? My paper said, “We ought to increase rates,” and we have, and then people draw flood insurance. Well, now that’s… [laughter] Now what? We then have to pre-​commit not to help them after events like Hurricane Ian, and that’s really hard. Same thing with not helping poor people, it’s not electorally compatible. And the purpose of think tanks is to remind people of the truth of intellectual ideas, but we also… Our political officials have to be elected, and implementing many of our views is difficult.

[music]

0:51:36.6 Trevor Burrus: Thanks for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts, or in your favourite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about Libertarianism, visit us on the web at lib​er​tar​i​an​ism​.org.

[music]