Scott Sumner Sweepstakes
OK, before I post these links, you have to know the context: When I’m traveling, I basically read the whole internet on my phone. And when I see something that I want to comment on, I save that page.
Since I read EconLog and TheMoneyIllusion, I end up accumulating things from Scott Sumner. The reason I pick on him, rather than, say, Robert Reich, is that everybody who’s free market knows the problems with Reich. In contrast, Scott is very influential in libertarian and even some Austrian circles, and so when he writes things that jump out at me, I feel it’s my duty to flag them. Sort of like, “OK kids, if I can’t convince you that the Fed didn’t have a super-tight monetary policy in 2009 the way Scott claims, just by appealing to charts, what if instead I show you his reasoning in other areas?”
(To be sure, Scott could in response tell people I like Intelligent Design theory. Fair enough.)
==> Way back in December, Scott had a post on the claim that China was stealing intellectual property, and along the way he dealt with the trendy catchphrase, “Taxation is theft.” Now, there are plenty of ways one could go in this discussion, but the one thing I wasn’t expecting from Scott was this:
As an analogy, some people argue that “taxation is theft”. My response is “so what”? That doesn’t make taxation bad; you’d want to evaluate taxes on a case-by-case basis, on utilitarian grounds. Is it good theft or bad theft? Don’t let words do the thinking; look past them to the underlying concepts.
==> I bookmarked this Sumner post on “In search of monetary equilibrium,” and I think it was because I liked it. Or at least, Scott made me think through some new things because of it. (So I’m tough, but fair, like the drill sergeant in Full Metal Jacket.)
==> In March Scott had a post entitled “Who’s Afraid of Taxing the Rich?” Uh oh. As bad as you think it might be, it’s worse. He writes:
The fallacy that “taxing the rich” is about getting rich people to write checks to the government, rather than reducing the consumption of the rich. Any tax that does not reduce consumption by rich people is not taxing the rich. If Warren Buffett writes a big check to the Treasury and reduces his charitable giving rather than his consumption, then you have not taxed Warren Buffett…
There are much worse things than countries that bend over backwards to favor the rich, as we currently see in Venezuela. So I don’t regard the lack of luxury taxes as a huge problem for America, in and of itself.
My biggest complaint is that our failure to tax the rich in a reasonably sensible way (by taxing high levels of consumption) will lead us to attempt to tax the rich in a highly inefficient and destructive fashion, say with a tax on capital income, and not even succeed in our objective.
==> I liked this Sumner post on “how to sell a new idea in macroeconomics.”
==> Oh boy, this Sumner post on utilitarianism was a doozy. After he kinda sorta takes a swipe at the Sermon on the Mount, Sumner argues:
Critic: Utilitarianism implies people should do X in situation Y. That would lead to a nightmarish society.
Me: You are not thinking holistically enough. You need to go beyond the direct effect of doing X, and consider the broader ramifications on society. Activities that create a “nightmarish society” are almost certainly not creating a happier society. For instance, if hedonism leaves one with a sickness in one’s soul, then it’s not making you happy, is it? So stop blaming utilitarianism for bad ideas.
This is almost literally the reductio ad absurdum that I said Leland Yeager flirted with, in my review of his book on utilitarianism. But back then, I knew Yeager wouldn’t have actually written out the absurdity; my point was, his actual argument was pretty close to it, and hence suspect.
So back to Sumner: No, if someone argues that a straightforward application of utilitarianism would lead to horror, you can’t merely say, “People don’t like horror, so actually, utilitarianism doesn’t lead to that.” That’s a terrible argument. Bernie Sanders could just as easily say, “It’s not very ‘social’ if people don’t get universal access to high-quality health care and food, so stop pointing at Venezuela as if that proves something.”
(There are other problems with Sumner’s arguments, which commenters pointed out at his post. It was borderline nightmarish to watch.)
“Intellectual property is intellectual theft.”
Scott’s a big fan of tautology club.
Amen! Remember his old reasoning about:
“Income is a meaningless concept!”
‘Then how are investors supposed to value stocks?’
“Look at the market price.”
(I can look this up if necessary.)
On Coase. You contrast the Pigovian approach to the Coasian one. You say the Pigovian solution is to impose all the social cost on the factory. You then say that Coase approach is to look for the cheapest solution. Maybe there are only a few households, so the total cost of buying them out voluntarily is small.
However, does that not mean that the true social cost is also small? The social cost, properly assessed, would be the same.
My thinking about Coase is that he said we should not look at who is at fault, but what is the most efficient solution. Without friction, the efficient solution would be arrived at through voluntary trade.
In your TV example, the efficient solution was to carry on emitting the pollution and move people out of the way. There is an important distinction with the CO2 case. The efficient solution suggested is not to move people out of the way, but to absorb the same CO2 that was emitted. This is much more like installing pollution reduction measures at the factory. The social cost of the pollution remains exactly the same, but we are emitting less of it in total.
Applying this to the TV factory, it is as if we now have a third solution: the factory installs something to soak up the pollution before it reaches the people. A reed-bed, for example, to keep it in the examples similar. If this is cheaper than buying out the people, then this is what would happen in a frictionless world.
Power plants emit CO2, trees absorb CO2. We are only concerned about the net total – emissions minus absorbtion. If we view this as a total emission problem, we can use trees to offset the emissions. The power plant can plant the trees, reduce its emissions and therefore pay less tax. This may be most easily done through a cap-and-trade rather than a straight tax, or a tax credit for tree planting. If it is indeed the case that planting trees is so easy and cheap, the emitters will quickly use this as way to reduce their emissions. The social cost of carbon remains the same: each tonne still causes the same damage, but we have less of it in the atmosphere.
The most efficient way would have been found through voluntary exchanges.
However, this is based on a scientific paper assessing the total land that could potentially bear trees. This is not an economic assessment of the real costs of putting trees there. I have a strong feeling the real costs would be much higher. It seems the best way to find this out is tax the carbon emissions and let the market work out is this is really a cheap solution.
Harold wrote: “The social cost of the pollution remains exactly the same, but we are emitting less of it in total.”
Yep, good point, and I wondered if I should get into that. It might “fix” the Pigovian approach if you also included a huge subsidy for tree planting, in which case (in the new equilibrium once everyone re-optimized) the conventionally-measured SCC would be lower, and so the “naive” carbon tax based on the SCC would also be lower.
Either way, it is still true that the current approach, and estimated size of the SCC, is totally wrong and causes way more economic damage than necessary, but you’re right, I glossed over some of the technical details that I would’ve been more anal about, if I were teaching this in a class, say.
I’m not quite getting why the tree idea , even if implemented via a subsidy on tree planting , would reduce the social cost of carbon. Is there a simple explanation for that ?
I think the overall point is good though – how do know that a Pigovian tax (even is set to the correct level) is the most efficient way of dealing with carbon emissions? Coarse’s insights probably do indicate the likelihood of a optimal non-Pigovian solution.
Random thought (based on Harold’s comment): – if the carbon tax is set at a certain amount per ton but it then turns out that tree planting (or other stuff) can eliminate carbon at a a price significantly less than that – then if carbon emitters were allowed to buy tax credits from tree planters (or others technologies that eliminate carbon) then we would have the possibility of a (somewhat) market based (and Coarsion?) approach to carbon emissions.
Transformer: “then if carbon emitters were allowed to buy tax credits from tree planters (or others technologies that eliminate carbon) then we would have the possibility of a (somewhat) market based (and Coarsion?) approach to carbon emissions.”
That was pretty much my point.
Bob
“and estimated size of the SCC, is totally wrong”
Is that the case? I am suggesting that say 1 tonne of CO2 will result in say $40 social cost. That may remain constant with tree planting. But emitters have a choice to soak up 1 tonne of Co2 by planting trees, so their net emissions are zero. The social cost remains the same, but the producer can avoid any cost by removing an equal amount of CO2
As in the factory polluting a stream, if the factory soaks up that pollution before it encounters anyone else, there is no net pollution. Yet the social cost of said pollution would be the same, had it been emitted.
” in which case (in the new equilibrium once everyone re-optimized) the conventionally-measured SCC would be lower, ”
This is what I don’t see. In the “classic” case, the social cost is the same, but we are simply implementing the cheapest way to reduce the total amount of emissions. It doesn’t matter if the factory removes the pollution on its own premises or elsewhere. We wouldn’t say (I don’t think) that a factory introducing a waste stream clean-up before emitting a pollutant would be lowering the social cost of that pollution.
To be clearer, if the factory removes a tonne of pollution before it is released into the environment, then the total social cost of pollution is of course reduced. It does not reduce the social cost of a hypothetical tonne of pollution. That will remain the same.
If the factory has a choice of paying a tax (based on the social cost) on the tonne of pollution, or not emitting it, then the producer will opt for the cheapest method. It may be that reducing emissions is much cheaper than paying the real cost of emitting it.