Muck and Mystery
   Loitering With Intent
blog - at - crumbtrail.org
September 16, 2007
Fantasy Land

Politics isn't about reality, it is peurile struggles between interest groups.

IN the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”

Neither taxes nor trading systems will fix this problem. The amount of emissions reductions are trivial, far too little to have any effect at all on climate. The author, Greg Mankiw, blithely skips over that bit and mounts a defense of his favored senseless political wheeze.
Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word “tax” only if followed immediately by the word “cut.” Democratic consultants recommend the word “tax” be followed by “on the rich.”

Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

Even worse. These proposed taxes, while accomplishing nothing relevant to their stated purpose, would, even if diddled to be revenue neutral for the government, make life harder for the poorest among us. In reality the poor escape the dead hand of taxation to a significant degree because they are not on any payroll. They live in the "black economy", the one that the wonks don't have good ways to abuse. A carbon tax would reach them and so make their already hard lives harder still.
enhancing fuel efficiency by itself is not the best way to reduce energy consumption. Fuel use depends not only on the efficiency of the car fleet but also on the daily decisions that people make — how far from work they choose to live and how often they carpool or use public transportation.

A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.

Poor people who are not on payrolls don't go to a fixed job site. They go where they can get work, and that changes often. The cost of fuel to get there is a major concern now.

This whole argument of Mankiw's is totally disconnected from reality. He either doesn't know how the real economy works, doesn't care, or both. It's scary that people like this advise politicians and are quoted with approval by other tower dwellers. This isn't just a compassion deficit, a lack of concern for poor people, it is bad advice that will not achieve its stated goals to affect climate change or rationalize taxation. It is wrong in every way. Perhaps the true objectives are unstated: to drive the poor out of the entrepreneurial black economy into the official welfare economy. Let them get government support rather than supporting themselves as they can on the streets.

If so, this is a mistake. The black economy is a way for poor people to bootstrap themselves into the formal economy. The skills and means they accumulate are leveraged to allow them to raise their profiles and become participants in the formal economy, even though they are bled by taxes and fees, because they net even more than they did in the underground economy.

This isn't new. There is no excuse for muddled thinking like Mankiw's. Policy proposals must deal with the real economy and real people to achieve useful ends. Economists are increasingly scorned for their propensity to engage in sterile debates about textbook fantasy worlds. For them the poorest among us may be too small to matter, just noise in the data. This may be correct when the debate is bounded in a way that also ignores the longer term impact on the dynamics of the economy, but we will regret further erosion of economic mobility. There are still a lot of poor people here, and more are coming from abroad whether we like it or not. No sensible economic policy can fail to consider their effects on the economy over time.

Besides, it's efficient, a cheap way to assist the poor. There's no need to have programs to seize wealth and then dole it out again, just don't squeeze the pips out of society in the first place. Leave some slack, some room to move beneath the baleful gaze of bureaucrats, and the poor will help themselves while raising themselves. Churn is good. There may always be some in the dark, but it isn't the same people forever.

As for emissions, the excuse used to justify this dumb idea, do something that will actually matter, like streamlining the new nuclear build.

Could it be that nuclear energy, risks and all, is now seen as preferable to the uncertainties of global warming?

France, which generates nearly 80 percent of its electricity by nuclear power, seems to think so. So do Belgium (56 percent), Sweden (47 percent) and more than a dozen other countries that generate at least one-fourth of their electricity by nuclear power. And who is the world’s single largest producer of nuclear energy?

Improbably enough, that would be . . . the United States. Even though the development of new nuclear plants stalled by the early 1980s, the country’s 104 reactors today produce nearly 20 percent of the electricity the nation consumes. This share has actually grown over the years along with our consumption, since nuclear technology has become more efficient. While the fixed costs of a new nuclear plant are higher than those of a coal or natural-gas plant, the energy is cheaper to create: Exelon, the largest nuclear company in the United States, claims to produce electricity at 1.3 cents per kilowatt-hour, compared with 2.2 cents for coal.

Cheap, abundant, emissions free electricity is a fuel for transportation as well as home and industry. It addresses several problems and has legs: as battery technology continues to improve an ever greater amount of personal transportation will be all electric. It's good now, and gets better over time. Instead of engaging in convoluted hacks of the tax system, do something direct and effective. Even if there is "a long history . . . of using taxes to fix problems, rather than merely raise government revenue", it is a sordid history of waste, fraud and failure to ever actually fix the problems.

These economists need to start using their heads for something besides hat racks.

Posted by back40 at 08:59 AM | Energy

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Comments

You raise some interesting points but I find your ideas blurred and lacking clarity. Are you saying that part of answer lies with nuclear?

Posted by: wattwatter at September 18, 2007 05:39 AM

Yes, nuclear is important already in the world and will become more so. That's pretty obvious I think, except perhaps to some in fantasy land. Given that it already accounts for 25% of the world's electricity, and has been suppressed for decades due to misguided and politicized nonsense, and many emerging economies look on it favorably, nuclear is now, and will increasingly be, important.

As for clarity, it's a weblog post, a snippet of verbiage embedded in a series of such snippets, like one sheet of toilet paper in a roll, and depends on context for a great deal of its meaning. Cannon balling into a weblog without that context is seldom as rewarding as it might be with extended attention. It's like seeing one show in a TV series. Much of the meaning is opaque and the allusions are meaningless.

I'm half satisfied. This ain't half bad for an indifferently educated grass farmer. Perhaps you can be charitable and appreciate it for what it is, while forgiving what it isn't.

Check out the links to my betters for, ummm, better stuff.

Posted by: back40 at September 18, 2007 08:06 AM

I live in the inner city, where the underground economy is most visible. There is a gas station near me where half their total sales are food stamp items and cigars for building marijuana blunts from. Many of the gasoline sales are "give me this much" for a handful of money. The manager has confirmed to me that an uptick in price means a downtick in sales. One result of this is that the scavenger trucks collecting scrap metal from the alleys (a "green good" I suppose) are coming around less often.

Posted by: triticale at September 20, 2007 01:07 PM
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