CBO Testimony Misleads on Cost of Cap-and-Trade
A team effort but I had a lot to do with this new IER blog post, regarding CBO Director Elmendorf’s recent testimony on the economic impacts of carbon dioxide legislation.
Some of the points will be familiar to long-time readers, but one new thing I verified–after emailing with a CBO economist–is that the distinction between “household purchasing power” and “GDP” is very slippery:
After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:
In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.
This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.
Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”
Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.
