Two More on Climate Change Policy
==> At IER I have a response to Jerry Taylor. An excerpt:
Again, I realize some readers may tire of reading two narcissists trading jabs on the Internet, but I walked through this particular aspect of the dispute in great detail because it’s crucial: Jerry Taylor has been assuring conservatives to trust him, that he knows better than those ideological know-nothings who reject taxes on principle, and that Taylor can work with reasonable Democrats to come up with a win-win revenue-neutral proposal. But when you actually click on the hyperlink and read the proposal Taylor promoted, you see it contains a huge tax increase. Rather than owning up to this amazing goof, Taylor obfuscates once again. Conservatives simply should not trust anything this guy tells them about a carbon tax swap deal.
==> At FEE I point out an interesting difference in tone between two Noah Smith columns at Bloomberg. When Smith is talking about a trade deal that DeLong estimated would make humanity $3 trillion richer, Smith thought that it was worth pursuing but not a big deal in the grand scheme. Yet when talks of climate change policy, Smith literally uses the phrase “saving the planet” and without explicit irony. What’s interesting is that when I really studied William Nordhaus’ DICE model (2008 calibration), he estimated that relative to doing nothing, if all governments around the world implemented a textbook-perfect carbon tax, then humanity would be $3.07 trillion richer.
Nonsense Bob! 3 vs. 3.07? I’m sure it’s just that we’ve identified what margin Noah is sitting on and the gradient of his utility function is very steep..
#revealedpreference
Wait!
Didn’t Pres. Obama just blame his daughter’s asthma on climate change? Isn’t that proof enough for you? We have to stop climate change now.
You say “even on paper, the only possible way you can get a new carbon tax to “boost the economy” is if you devote the new revenues to tax breaks for capitalists—as the Niskanen Center’s own analysis indirectly reveals.”
Yet the study says:
“Another set of simulations addresses the prospect of using the CO2 revenues to reduce the deficit…The general pattern of results among the options is similar to the revenue-neutral case.”
This says that deficit reduction is not revenue neutral, as you point out. It seems Taylor has made a mistake. Yet the outcomes are pretty similar to the revenue neutral case. In fact conclusions state: “The results are quite striking: The CO2 tax is consistently better for economic efficiency in this down-payment case than it is in the revenue-neutral case”
From the above, it seems that using the revenue for deficit reduction, although not revenue neutral, is another way to “boost the economy”.
So whilst you are correct that the proposal Taylor highlights is not revenue neutral, it could possibly still lead to the economic boost.
It seems to be based on the fact that if the deficit is to be reduced, then the money to do so must come from taxes. If we reduce the deficit early with carbon taxes, these future taxes need to be smaller than they otherwise would have been. Sort of indirectly revenue neutral.
So have you caught Taylor on a technicality, but he could still be correct in broad terms, or are the Taylor and RFF deficit reduction plans different in some way?
It’s long term revenue neutral, if spending remains constant. Basically everything that is spent must come from revenue, just a matter of sooner or later. Deficit / Surplus is simply the buffer between “the sooner” and “the later”.
Since the deficit also imposes an interest rate penalty, paying it sooner somewhat reduces the long run total revenue (but that’s arguable because most government debt get monetized by the Fed these days, which pays the interest back to government anyhow… mostly smoke and mirrors).
I’m aware that Keynesians don’t believe in “the long run” but they also seem to worry about the average temperature of the Earth’s surface in 2100AD which is kind of longish run.
“It’s long term revenue neutral”
OK, but if this is the case, could we say the proposal Taylor points to is long term revenue neutral, even if it is not “technically” revenue neutral?
Not trying to be awkward here, but has Murphy got Taylor on a $695 billion technicality i.e. that deficit reduction is not technically revenue neutral, although many would consider it long term revenue neutral?
The crux seems to be where Murphy says “So clearly if a plan like Adele Morris’ devotes (at least) $695 billion of new carbon tax revenue to deficit reduction, then it is not revenue neutral…”
So far so good – this seems indisputable using the normal definitions. But then:
“…and it certainly won’t promote economic growth under any of the standard models. This undercuts Taylor’s whole case…”
I am not sure whether NFF study uses a standard model, but Murphy said of it: “As always with such models, one must make many heroic assumptions to get anywhere with the analysis, but this particular model is fine as far as it goes.” I would take that as agreeing that it is a standard model. In this model, deficit reduction can boost economic growth, so Taylor’s genuine error does not seem to undercut the whole case.
“…and at the very least is a major goof.”
Certainly it does seem to be a major goof.
Technicalities are important – otherwise we cannot know what what people mean by what they say. Taylor has ignored this point in his response, which seems lax. One interpretation of his ignoring this objection is that he sees it as unimportant, and not undermining his position at all. Have I missed something here? It wouldn’t be the first time.
There’s a surprising number of people who simply will not believe that long run government spending must equal long run government revenue.
Of course, government can print money (via a complicated process) but that’s a tax by stealth so it effectively increases revenue (difficult to figure out who paid). Government can stick the bondholders (although they don’t like to do that) but that’s also a type of tax. It’s hard to make accounting not balance.
There’s also a number of psychological effects happening. If governments realize they have a lovely new revenue stream, they just spend more by reflex. They can’t help themselves. The spending happens even faster than the conscious mind is engaged.
Long-run and short-run revenue raising are the same in aggregate but quite different from an individual perspective: “Someone, someday is going to have to pay this bill,” as against, “You sir, today, are going to pay this bill and I’m here to make sure it happens.” There’s a different reaction, and different whole feel to it.
Whether those macroeconomic projections are based around these particular concepts, I really can’t say for sure but I guess not. Personally I don’t give a whole lot of credit to the chance any of those macro projections are correct, I have a sneaking suspicion Murphy doesn’t either. Catching the guy on a technicality is what it’s all about… demonstrating he hasn’t fully understood his own models. Should we play those games? I dunno, I don’t make rules for what Murphy does.
Quite so, they are important. Mind you there’s some solid conceptual points made as well, that have nothing to do with technicalities.
This idea has been expressed many times, I found a few links such as this one:
https://en.wikipedia.org/wiki/Iron_law_of_oligarchy
Every organization eventually ends up existing for its own benefit, regardless of what the original intent might have been. It’s remarkably consistent with Darwin’s theory. There’s a bunch of similar ideas linked at the bottom of the Wiki page.
Expressing it as the converse: no organization every decides for itself that it has outlived its usefulness (or at least, those that do are the ones no one ever hears about). That’s not a mere technicality, it’s a deep and fundamental comment about the universe and what we do here.
Slightly off topic and perhaps too cynical even by my standards, but I have to link to it, because of coolness factor.
http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-or-the-office-according-to-the-office/
An amusing article, but I found too much question begging to get me to believe it.
Some raving gun nut. Although he does seem astoundingly well acquainted with the EPA.
http://esr.ibiblio.org/?p=984
Harold read that RFF paper more carefully. They’re saying deficit reduction via carbon taxes promotes economic growth relative to a baseline of deficit reduction via other types of tax hikes, right?
Yes, that seems right. They have a comparison between deficit reduction using other taxes and deficit reduction using a carbon tax. We lack a comparison with no deficit reduction at all. I am not sure this matters.
You said in reference to David Frum:
“[one could argue that] Since deficits are effectively future taxes, whether we use carbon tax revenues to reduce income taxes today, or to reduce the budget deficit, either way they are being used to cut taxes–it’s just in the latter case, we’re using it to cut future taxes.”
If that’s what David had in mind, fair enough.”
http://consultingbyrpm.com/blog/2012/12/there-isnt-a-spending-category-called-deficit-reduction.html
You went on to explain that you believed Govt. spending would likely be higher if debt was successfully cut, as this would reduce a constraint on spending.
So while deficit reduction *could* be a means of reducing future taxes, you don’t think that is how it would work in practice. It would actually permit future spending.
However, I am not convinced that using the revenue for deficit reduction undercuts Taylors case if we can all agree that deficits are effectively future taxes. If we feed deficit reduction into the models *and keep spending the same*, we can reduce other taxes.
This is surely the same argument you have with the revenue neutral versions. You believe if we have a new source of revenue, then *spending will not remain the same* – either now or in the future.
So I don’t see the fact that the proposal is not revenue neutral makes very much difference to the argument as long as the spending is on deficit reduction.
Harold, I don’t think JT realized that the proposal had a net tax hike in it, using the everyday meaning of that term. I think he just blew it, and now is covering up. So yes if he were facing a 10-year prison sentence your defense arguments would be worth pursuing, but I think it’s clear that that’s not what he was thinking when he said the plan was revenue neutral. If that *had* been what he was thinking, he would have said so instead of distorting my position and saying, (paraphrase) “Well geez maybe we *could* get a truly revenue neutral plan through, if guys like Murphy would support it.”
The $3 trillion projected benefits from the ideal carbon tax, is that based on using the revenues to cut carbon taxes, or what?
That’s a good question Josiah I don’t remember off the top of my head what Nordhaus said about that.
I have just read your review “Rolling the Dice”. As far as I can see, there is no mention of what happens to the revenues.
In his book “A Question of Balance”, Nordhaus says: “Because taxes raise revenues (whereas allocations give the revenues to the recipient), the public revenues can be used to soften the economic impacts on lower-income households, to fund necessary research on low-carbon energy, and to help poor countries move away from high-carbon fuels.”
This suggests he has not modelled using the revenues to cut capital or other taxes.
He also says in the section “Tax Bads not Goods”: “Taxes on bads like CO2 are precisely the opposite; they serve to remove implicit subsidies on harmful or wasteful activities.” Suggesting that the TIE has not been included in the models.
What does this mean? If the revenues were used to reduce capital taxes, would we get better returns than DICE? If it were not spent on reducing other taxes, would we get worse?
Hey Harold,
Part of the difficulty here is that Nordhaus is modeling the entire world. So it would be difficult to say what the whole world would do with carbon tax revenues. E.g. they surely wouldn’t devote Earth’s carbon tax receipts to reducing the corporate income tax in the U.S. But since the tax codes differ from country to country… You see how complicated this would get.
Yes it is impossibly complex. Integrating the climate and economic models is surely quite an achievement in itself, without further complications of the economic models into complex sub-models.
But, in principle, could the models used to calculate the TIE be used within the DICE to finesse the results? Or are these different animals