No Dr. Krugman, a Treasury Crash Would Be Bad for the US Economy
This is my article today at The American Conservative. Let me just quote what Krugman is saying, to entice you to read my response. There’s a bit of a plot twist in the article, so I don’t want to spoil the fun by quoting it here. Anyway here’s Krugman:
[Krugman writing:] We know what a loss of faith in Greek bonds looked like: interest rates soared, with negative consequences for the Greek economy. But Greece didn’t have its own currency, and therefore didn’t have its own monetary policy or its own exchange rate. We do. So what would an attack by invisible bond vigilantes look like for the United States… ?
…
[W]hat happens if there’s a loss of confidence, causing the risk premium [on US government debt] to rise? The answer is that the currency depreciates for any given domestic interest rate, increasing demand…That is, the effect on the economy is expansionary.Think about is this way: with the Fed setting interest rates, any loss of confidence in US bonds would cause not a rise in rates but a fall in the dollar—and a fall in the dollar would be a good thing, helping make US industry more competitive.
So if you want to see me pick apart the above, click here.
Carbon “Tax Swap” Deals: A Review and Critique
In case you’re wondering what I mean when I talk about my “day job” stuff, here’s a good example: Today IER is releasing my new study [.pdf] with the above title. Here are excerpts from the Executive Summary:
A growing number of academics and policymakers have recommended a revenue-neutral carbon “tax swap” deal, under which the revenues from a new carbon tax would be used to reduce pre-existing taxes, dollar for dollar. Conservative proponents argue that such a proposal would not only mitigate potential environmental damage down the road, but would provide immediate relief to Americans by reducing the inefficiency of the tax code. By “taxing bads not goods,” these conservatives believe, a revenue-neutral carbon tax swap would lead to more economic growth immediately, and would reduce future climate change damages as a bonus. Unfortunately, there are many problems with this conservative claim, including both technical and pragmatic flaws in the position.
Technical Flaws
Even taking the standard textbook framework of the economics of climate change on its own terms, there are four technical problems with the conservative case for a revenue-neutral carbon tax swap:
==> The best literature on the topic actually argues that a revenue-neutral carbon tax swap would make the tax code more inefficient and would hinder (conventional) economic growth, because a carbon tax has a narrower base than a conventional income tax. Indeed, some empirical estimates suggest that this “tax interaction effect” is so powerful that, even if carbon emissions caused $50/ton in environmental damages, the “optimal” carbon tax would be $0 if the revenues were distributed lump-sum back to citizens, and would be only $27/ton even if the carbon tax revenues were used dollar-for-dollar to reduce other taxes. This is an initially surprising result, but it is standard in the environmental economics literature and shows that the intuition behind a carbon “tax swap” deal may have things backwards. A carbon tax will likely distort economic behavior more than an income tax raising the same amount of revenue, meaning that even on purely technical grounds a carbon “tax swap” deal is less desirable than the standard textbook treatment would suggest.
==> The “social cost of carbon” is not the proper benchmark to use when calibrating a carbon tax implemented unilaterally by the U.S. government because of the problem of “leakage.”…William Nordhaus’s respected computer model estimated (in 2007) that if only half of the world’s governments implement the “optimal carbon tax,” then the economic cost of achieving a desired environmental objective will increase by 250 percent.
==> Federal and state governments already have in place many policies that discourage carbon-intensive activities and encourage alternatives. Some of these policies are: gasoline taxes, CAFE standards, special tax advantages and loan guarantees to promote renewable energy use, ethanol mandates, and renewable portfolio standards. Because these government policies already discourage carbon emissions, a new carbon tax should be smaller than proponents typically suggest.
==> The fourth and final technical objection is that an overly aggressive carbon tax can be a cure worse than the disease. For example, in the 2007 runs of William Nordhaus’s “DICE” (Dynamic Integrated Climate-Economy) model, he estimated that a theoretically perfect carbon tax, implemented by all governments around the world and for many decades into the future, would provide net benefits of $3 trillion. In contrast, Nordhaus estimated that had world leaders heeded the recommendations of the famous 2007 Stern Review by implementing a much steeper carbon tax, then the world would be $14 trillion poorer compared to the baseline case under which governments did nothing to halt climate change.
Practical Flaws
In addition to the above technical objections, there are four practical objections, showing that it is dangerous to rely on the academic framework used by the advocates of a carbon tax:
==> The promises of “revenue neutrality” are quite hollow, given U.S. history. The best historical precedent is the introduction of the federal income tax in 1913, which was supposed to promote tax efficiency and help poorer Americans by replacing the tariff structure. Yet just five years after implementation, the top income tax rate had gone from 7 percent in 1913 to 77 percent in 1918. Furthermore, the Smoot-Hawley Act in 1930 jacked up tariff rates so significantly that many economists cite it as a major explanation for the severity of the Great Depression…
==> The regressive nature of a carbon tax will make it very difficult politically to dedicate its revenues to income or other tax reductions. Conservative proponents of a revenue-neutral “tax swap” deal must realize that they are asking to make the U.S. federal tax code far more regressive—tax rates on wealthy individuals would go down, while electricity and gasoline prices would go up for poor households….
==> Any deal using a new carbon tax to offset existing payroll taxes would surely break down quickly, because the two taxes have specific and incompatible purposes. The textbook theory of a carbon tax argues that it should reflect the social cost of carbon, rising steadily over time with atmospheric concentrations of greenhouse gases. In contrast, to fulfill its official purpose, the payroll tax should reflect the changing demographics of Social Security and other social insurance programs. Whatever relationship initially existed between the new carbon tax and the correspondingly reduced payroll tax would soon break down as these underlying factors evolved.
…
In light of these technical and practical objections, it is clear that the case for a carbon “tax swap” deal is very weak indeed. Conservatives, who normally have a healthy distrust of new initiatives and tax schemes, should be very wary of any such proposal.
Jesus Conquers Facebook Too
A silly title but you’ll see where I’m going with this…
As I get older and observe more of human society, I realize just how clueless I was as a teenager, on all sorts of things. At the same time, since I became a born-again Christian and attend weekly church services in that tradition, I am learning that the “Christian worldview” actually solves the problems that would have throttled my younger (atheist) self. I’ll give you three quick examples, which are fresh in my mind because of the wretched hive of scum and villainy of my Facebook News Feed.
==> I have a few Facebook Friends who are over-the-top misogynist pigs, and actually have developed a comprehensive philosophy to this effect. They will make intentionally outrageous posts and then will bat away the objections of both women and men who find their views reprehensible. However, the funny thing is, I actually think they are usually right in what they are saying, it’s just that their conclusions would lead to immoral behavior. Yet the people who try to beat them on secular grounds, basically arguing that when it comes to dating, girls and guys are exactly the same blah blah blah, are simply fools. They get crushed in the debate, and everybody deep down knows it.
Yet the Bible-believing Christian wouldn’t be ruffled by this at all. He (or she!) can say, “Yes, the Bible establishes the man as the head of the household, and in that sense I agree that a family will be stable if the wife submits to her husband. However, this doesn’t give him license to do whatever he pleases, the way you clowns live your life. The husband must love his wife as Christ loved the church (i.e. be willing to die for her), and must view himself as a servant, nay a slave, to Christ.”
==> People are simply terrible. It is astonishing how much betrayal and cruelty occurs, and I’m not talking about genocide, I’m talking about people you know who are dating/married and then cheat etc. I totally understand how many great comedians–who really get people and that’s why they’re so funny–can move toward utter misanthropy during their careers. I can’t even imagine how cynical and disgusted with humanity I would be by the time I’m 70, except for the fact that there was one Man who was so good that He made up for the rest of us. Not only that, but He told us we were worthy of His love, and that we should likewise bestow it on each other. So even though I am prepared to throw in the towel on humanity, I defer to the superior wisdom of Jesus. If He could continue trying to help us even as we murdered Him, I can suck it up when I get a comment on Facebook from a “fan” that makes me bristle.
==> Finally, I’ve seen a lot of debates among libertarian types on Facebook about the existence of natural rights. Lots of the “tough guys” boast about “might makes right” and how rights don’t exist, etc. “Hey, unless I go get me a gun and shoot those NATO soldiers, I don’t own my house!” That type of stuff. The thing is, the atheist libertarians who try to reason with them, don’t have much of a leg to stand on. If you’re faced with someone who actually sees no difference between the law of the jungle and human society, and who is demanding that you “rationally” explain why he should refrain from exploiting a weaker person if it benefits him, then there’s nothing you can quote from Ayn Rand that will prove him wrong. In this context, then, it would certainly be worth bringing up the possibility that there exists an omnipotent Being who has serious issues about immorality, and who spelled out quite specifically what He thought the rules are.
In closing, one (futile) plea: If you are an atheist/agnostic reading this, please do NOT say to me, “Oh I get it, Bob believes in his magic man in the sky because it helps him deal with his emotional weakness. I don’t need that kind of crutch.” This is NOT what I’m saying. The case for the existence of God obviously doesn’t depend on whether it would be convenient in these other disputes. All I’m saying is, since I came to believe in the God of the Christian Bible for other reasons, as a happy offshoot I can easily dispose of the problems above–problems that are quite thorny for the atheist libertarian who believes in rights and thinks girls should be placed on a pedestal.
A Qualified Defense of Big Bird
Steve Landsburg (over email) did not agree with me that Krugman was wrong in the Great Debt Debate, allowing Ken B. and Gene Callahan to run victory laps. As punishment for this stance, I must now criticize a recent Landsburg blog post. (Sorry Steve but actions have consequences, as you should know by now.)
Anyway in a post with the clever title, “Can a Million Puppets All Be Wrong?” Steve writes:
The million-puppet march on Washington is advertised as a demonstration in favor of public broadcasting, but of course that’s not exactly what it is.
What it is, exactly, is a demonstration in favor of the current level of funding for public broadcasting.
Now: Just how many of those puppets — or how many of their human fellow marchers — do you imagine would be able to tell you what the current level of funding for public broadcasting is?
And insofar as these humans are out there marching and chanting without pausing to inquire into what they’re marching and supporting — well, I guess that explains their affinity for puppets. [Bold original.]
At first this sounds devastating, but actually I don’t think it works at all. Suppose I hear that my local government is going to raise property taxes. Am I allowed to object to that, even if I can’t tell you exactly how much I currently pay? I think that is totally fine.
For the people protesting–if they were coached by an economist on vocabularly but not given any information about current funding levels–presumably would say something like, “If they cut the budget for public broadcasting by $x million, then we will get less of the programming we love. In exchange, we’ll get a slightly smaller deficit or lower taxes on rich people, or more spending on bombs. I would rather keep things the way they are, than make those changes on the margin.”
What’s wrong with that, besides the fact that they want government funds at all? Steve was saying they are committing some kind of basic mistake, but I don’t see it.
Tom Woods Takes Chicago By Storm
I have never heard Tom get as giddy about liberty as he does about Jethro Tull in the beginning of this clip:
Also Tom has some very nice remarks about the Murphy-Krugman Debate midway through. If you’ve never heard Tom talk about his naughty teen years, you might want to watch this one. He broke the law, for real.
If I Know Anything About the Blogging Structure of Keynesian Economists, Brad DeLong Invents 20% of His “Facts”
Every now and again I like to check in on Brad DeLong to see what trouble he’s getting himself into. Today he has a post entitled, “KARL ROVE AND COMPANY GOT $80 MILLION AND REPUBLICAN DONORS GOT?” DeLong writes:
Memo to Republican billionaires: Rupert Murdoch is not your friend. John Roberts is not your friend. Karl Rove is not your friend.
Rupert Murdoch is not in the business of providing news, or advancing right-wing causes. Rupert Murdoch is in the business of selling eyeballs to advertisers. As he said lo more than a decade ago: “There is no news channel catering to the very large right-wing segment of the American market. And that is a definite market opportunity”. That’s what determines the content on Fox News. But do not confuse the fact that Rupert Murdoch wants to keep your eyes glued to the screen with the idea that Rupert Murdoch is your friend. He is not. You are his mark.
Stop right there. What would Murdoch have needed to say, in order for DeLong to believe that Murdoch was a friend of conservatives who was in the business of providing news to them? Would we need a quote saying, “I will lose money setting up a network catering to right-wingers, but my conscience tells me it’s the right thing to do”?
Suppose a guy plants apples because he sees a market opportunity. Is he not really in the business of providing apples to people who like apples?
Anyway, those are minor quibbles. On to the good stuff when DeLong writes:
Karl Rove is not your friend. Karl Rove took $400 million of your money this cycle and, if I know anything about the fee structure of Republican political consulting, kept $80 million for himself and his faction and wasted the rest. That Karl Rove promises he will deploy the $400 million to make sure high-bracket income taxes and estate taxes remain low does not mean that he knows how to do so. And his first and highest priority is to skim off the $80 million for himself and his faction.
Go read DeLong’s entire blog post. He cites the $400 million figure for donations to Rove-controlled SuperPACs etc., but there is nothing in there to justify the $80 million figure, except for the phrase I put in bold above. As far as I can tell, Brad DeLong pulled a number out of the clear blue sky and made it the title of his post.
Hurricane Sandy and Gas Lines
It’s a multimedia blitz today at ConsultingByRPM:
(BTW my sound is fine, the hair salon next door was having a party.)
Dr. Freud, Dr. Krugman. Dr. Krugman, Dr. Freud
Earlier today I was fascinated by the blatant contradiction in this post from Krugman:
There are many lists now circulating of the biggest winners and losers from the election; oddly, however, none of the lists I’ve seen mentions just how bad this result is for Wall Street’s Masters of the Universe.
The story, as you may recall, is that the financial industry — having brought both itself and the rest of the world to the edge of disaster — was bailed out by taxpayers. Yet far from being grateful, top financial types were furious at Obama for occasionally hinting that some of them might have misbehaved a bit. And investment bankers — who normally lean Democratic — went overwhelmingly to the other side, pouring cash into Mitt Romney’s coffers in the no doubt correct expectation that a Romney administration would dismantle financial reform and treat their wealth with the adulation they believe to be their birthright.
But Romney lost and Obama won. The limits of their power have been cruelly exposed, and the reelected president now owes them nothing. Did I mention that Elizabeth Warren is going to the Senate — a Senate that will be substantially more progressive and less Wall Street friendly than before?
Bad move, guys.
Do you see the contradiction? Krugman is simultaneously ridiculing Wall Street guys for pouting just because Obama doesn’t fawn over them–in other posts he calls it “hey ma he’s looking at me funny!”–and then goes on to say that because Obama won, these rich Wall Street guys are going to get hit. So how was their support for Romney a “bad move”? Try going through Krugman’s post, switching Obama and Romney, and replacing “Masters of the Universe” with “poor seniors dependent on Medicare.” Oh, you fools supported Obama because you were afraid of draconian cuts to entitlements?! Ha ha, now we’re unleashing Paul Ryan on you. Bad move, gramps.
Yet my fascination was compounded when I read Krugman’s next post, in which he psychoanalyzed Republicans in this way:
I’ll try to present some more coherent thoughts on a later occasion, but here’s my quick take: what we’ve just seen is a peek into the modern right-wing psyche, which is obsessed — more than anything else — with power. Policy is one thing; but equally or even more important is the sense of being with the winners, of being part of the team that will stamp its boots on the faces of the other guys.
Seriously, reading Krugman lately gives me the willies. Bad post, guy.
(If you don’t “get” what I’m saying, re-read Krugman’s discussion of the manhandling Wall Street is in for, because they had the audacity to support the loser in the election. Then read his psychoanalysis of Republicans. It’s creepy.)
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