Mankiw on Carbon Taxes

The drumbeat for carbon taxes has begun in earnest, and if we don’t pay attention we may wake up one morning a year from now and find the issue has been settled and a rare opportunity has been lost.

Mankiw has a piece in today’s New York Times that says the intellectual battles are over, and now it’s time for a grand coalition to put a tax on carbon. He gives these arguments:



1. Carbon taxes use a tried-and-true method for curtailing something we don’t like, in this case pumping carbon into the atmosphere.

2. We can use the revenue to cut other taxes, like the income tax. The taxes we cut have harmful effects on the economy, so we reap a double bonus: less bad stuff (carbon emissions), more good stuff (economic growth).

3. The only alternative to taxes is cap-and-trade. This opens the door to giving away carbon permits (bad), and if we somehow manage to auction them the result is identical to a carbon tax.

4. Each nation can set its own carbon tax, so we don’t have to worry about coordination. A global permit system would enable polluters in the US to buy carbon offsets in China.

In each case Mankiw is wrong, in some a little, in others a lot. It all adds up to a questionable sell job.

1. Yes, putting taxes on things we want to discourage is an old, time-tested idea. (Incidentally, it long predates Pigou. Do you remember a harbor fracas just before the American Revolution?) But so is issuing permits. We have permits for hunting and fishing, also for marriage. (One to a customer.) Neither involves reinventing the wheel.

2. Mankiw makes this argument because he believes that income, corporate profit and other taxes prevent the economy from reaching the free-market bliss it could otherwise attain, He knows government has to raise money, but he thinks it causes wicked distortions when it siphons off some of the earnings stream. This is faith-based economics, however. There is no systematic evidence that the income tax leads people to work less, and even if it did, it may just be the case that many of us should work less. If Mankiw’s travels take him to Cornell, he should have a Frank discussion on this topic.

But relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.

3. Cap-and-trade and cap-and-auction are two entirely different animals. The first gives away the permits to historic polluters, the second asserts the public’s ownership of the commons and charges a price for its use. It is true that the dominance of wealth over our political system often leads to giveaways like cap-and-trade, but that’s a fight we can’t avoid in any case.

The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.

4. Both taxes and permits create the same problem. If one country takes stringent action of either sort and another doesn’t, producers in the less-green country get a competitive advantage. If you have a permit system, they don’t have to pay for the permits; if you have a tax system, they don’t have to pay the tax. What to do? There have been mumblings from Europe about a green tariff to offset these differences, which makes sense to me. This is a discussion we need to have no matter what system we put into place.

Mankiw doesn’t seem to have paid attention to the global debate about climate equity. In the long run, there is no defensible argument against allotting each of the planet’s residents the same carbon “space”. In the short run, the rich countries start out with more because they can’t cut back to the sustainable level immediately without causing themselves and everyone else grave harm. But they also have an obligation to take action first and more aggressively since it is the accumulation of carbon in the atmosphere that causes the problem, and us industrialized types have been adding to this accumulation for a hundred years or more. Kyoto was a bumbling attempt to implement this ethical framework; hopefully we will do it better in the future.

The reason we need global action is that it is a global problem. Countries that fail to act free ride off of those that do. This points to the need for a stronger climate treaty, but no such treaty would try to tell countries what methods they should use, only what results they should be held to. So Mankiw’s discussion of taxes vs permits in the global context is confused and, in the end, irrelevant.

Bottom lines: (1) Although we still have (soon to be extinct) dinosaurs blocking the path, there is now a general consensus behind aggressive action to forestall the most extreme climate change. If Mankiw had published this article five years ago I would have welcomed it. Today, however, the question is what to do about the problem, and I would strongly encourage those who put ecological responsibility and social justice first to stick to their guns. We should have permits because they put the planet first, and we should auction them and distribute the revenues on a per capita basis because it is fair and economically sound. (2) It is a mistake to get drawn into a debate over how high to set carbon taxes. No one wants to pay taxes. The result will be a half-hearted effort riddled with safety-valves and loopholes. Perhaps this is why the big money is behind a tax approach: they know they will be let off the hook. When we talk about how many permits to issue, on the other hand, the debate is over how much carbon accumulation, and therefore how large a risk of catastrophic climate change, we are willing to accept. That’s the conversation we need to have.

A French Lesson

Laissez-faire refers to pro-market policies (though in practice, they help big business and the rich). It is not the same as laisser faire, which means a feckless and unconsidered attitude in the application of any policy. Somehow the George W. Bush administration combined both laissez faire and laisser faire.
Jim

SURGIN' GENERAL

by the Sandwichman

Correct me if I'm wrong, but the main purpose of the Iraq "surge" was clearly to place extra U.S. troops in Iraq so when some of those extras were eventually withdrawn it could be hailed as a "troop reduction". This is like a merchant raising the price on an item and then putting it "on sale" for the regular price. Does Bush and his apparatus think the American people are that stupid? Are the American people that stupid?

A Tale of Two Unions

California has two very active unions -- the Nurses and the Prison Guards -- each uses a different form of politics and a different form of "caring." The nurses have done heroic work in forcing Governor Arnold to allow for sufficient staffing of hospitals. They have won significant political victories.

The prison guards have been very successful in calling for more staffing as well -- often by forcing the state to lock up more people. Those who resist passing such laws are charged as soft on crime. They have also been very successful in blackmailing the state into giving them more money. Here they go again.

http://www.sacbee.com/111/story/376533.html

PREGENITAL POLYMORPHOUS EROTICISM

by the Sandwichman

In Eros and Civilization, Herbert Marcuse quotes Barbara Lantos, "Play is an aim in itself, work is the agent of self-preservation." He concludes from this that, "it is the purpose and not the content which marks an activity as play or work.... For example, if work were accompanied by a reactivation of pregenital polymorphous eroticism, it would tend to become gratifying in itself without losing its work conent."

The key to such a libidinal work relation, according to Roheim (cited by Marcuse) is a "general maternal attitude as the dominant trend of a culture." "Consequently," Marcuse explains, "it is considered as a feature of primitive societies rather than as a possibility of mature civilization. Margaret Mead's interpretation of the Arapesh culture is enteirly focused on this attitude:

To the Arapesh, the world is a garden that must be tilled, not for one’s self, not in pride and boasting, not for hoarding and usury, but that the yams and the dogs and the pigs and most of all the children may grow. From this whole attitude flow many of the other Arapesh traits, the lack of conflict between the old and the young, the lack of any expectation of jealousy or envy, the emphasis upon co-operation.

Sandwichman conjectures that -- contrary to the assumption of the psychoanaltic literature (according to Marcuse) -- Mead's account of the Arapesh is a feature of her mature civilization. Whether or not it actually depicts Arapesh culture is a matter of luck, personality (Mead's) and perception. In other words, not only is there a possibility, but the general maternal attitude toward the world-as-a-garden is a persistent utopian motif in modern civilization. The pregenital polymorphous eroticism is all around us already. We just have to tune in to it.

HAS THE IRAQ WAR BEEN ALL ABOUT OIL?

For many intelligent and well-informed people I know the answer to this question is an obvious "yes." However, I beg to differ. Certainly oil has been important. At a very high level the answer is "yes," to the extent the Iraq war has been the extension/sequel of the (first) Persian Gulf War. That was clearly all about oil, propaganda to the contrary. If Kuwait did not have the Burgan pool, then the world's second largest, with Saddam's conquest of Kuwait setting him up for an easy run to Saudi Arabia's al Ghawar, the world's largest pool of oil, George H.W. Bush would not have given a hoot about him invading Kuwait. So, if this war is finishing the business of that one, it's ultimate cause is all about oil and keeping it from falling under the control of perceived enemies, although of course after the first war, Saddam was in his box and not going to get those fields. I would also accept that Cheney seems to have long been heavily motivated by the oil factor, even if it is just as petty as feathering his own nest at Halliburton or for cronies like the Hunt brothers, with Bush having some of this from his own past as a Texas oil man, as well as his dad's old interests. And we know that Cheney was in on that report from the late 1990s going on about Iraq as the major possible source of new supply that could be tapped in the 21st century. So, Cheney clearly has been the major voice of the oil interest in all this, despite him also being a front for the broader military-industrial complex, and also having pet peeves about Saddam shooting at the US planes that flew over the no-fly zone, as reported in one of the Woodward books.

However, I see at least three other things going on in terms of actually initiating the war. One was the faction of Likud-oriented neocons, Wolfowitz, Feith, and Abrams being probably the most important in the making of the war. Their interest was securing Israel from Saddam making nukes or funding Palestinian parents of suicide bombers. Those who claim that the US backing Israel is somehow linked to the US wanting to control oil in the Persian Gulf are out of touch with history and the long struggle in the State Department between the pro-Israeli faction and the old oil-oriented "Arabists." Of course this group of neocons clearly made an alliance of convenience with the Cheney oil faction, but their interests were not fundamentally identical, except in both supporting war in Iraq. Then there is the faction that wanted a nice excuse for big funding for the military-industrial complex. Rumsfeld was a leader of this group. Then we get to arguments more tied to Bush himself, the crucial "Decider" here after all, despite all of Cheney's influence and machinations. One motive for him was political. Having a war in Iraq after the escape of bin Laden at Tora Bora allowed for distracting from disagreements over domestic policy and provided a way for demonizing the Dems, which worked in the 2002 elections and even again in 2004 (as long as a majority of the US population continued to believe the lie that Saddam was linked to 9/11), although this game finally fell apart in 2006. And finally there was all that psychological garbage with his dad, showing he was the real man who could "finish the job" and all that, and wanting to "get" Saddam after he tried to assassinate the old man, although clearly Cheney played to that particular aspect.

There is one other element of this that is rarely addressed by those who say "it is all about oil." That is, what were they going to do with the oil if they got it (which, of course, the war has failed to do so far anyway, even if the Oil Ministry building in Baghdad was secured right away)? Now if it was crude money in Cheney's pockets through Halliburtoon, that is one thing. But from Bush's perspective it is more difficult. His motive presumably was to get re-elected more than just making money from the oil industry. For that he needed presumably to increase oil production from the Gulf, thereby keeping oil prices down and pleasing the SUV-driving voters. However, the oil companies presumably preferred reduced prodcution, which increases their profits (and is what has happened, although I do not think that is what Bush either planned or hoped for). There was always this contradiction that is never resolved or explained in this explanation: would control lead to more or less production? So, bottom line: oil was important, but it was not everything in the war in Iraq.

Public Employees for Privatization

The Sacramento Bee reports the giant California Public Employees' Retirement System is planning to use some of its money to invest in infrastructure, which is, of course, privatized infrastructure.

http://www.sacbee.com/103/v-print/story/371759.html

I wish that I could savor the irony of public employees financing privatization, but I guess I should learn to expect that sort of thing.

Martin Feldstein

Martin Feldstein just resigned as head of the National Bureau of Economic Research a couple of weeks before the release of my new book, The Confiscation of American Prosperity.

http://www.amazon.com/Confiscation-American-Prosperity-Right-Wing-Depression/dp/0230600468/ref=sr_1_5/103-0846498-1105414?ie=UTF8&s=books&qid=1175802382&sr=1-5

I devote a large part of one of my later chapters to exploring the history of the Bureau and the career of Martin Feldstein.

THE NEW KURDISH OIL LAW

Another item covered in Ben Lando's http://www.iraqoilreport.com that has been almost completely unnoticed in the MSM is that on August 6, the Kurdistan Regional Government (KRG) passed an oil law, in sharp contrast with the central Iraqi government, which has so far failed to do so. In the wake of its passage, the KRG is apparently making a deal with Hunt Oil Company of Dallas, which the Oil Minister of Iraq, Ali Shahristani, is threatening to declare illegal because it does not apparently contain a provision for sharing revenues with the central government, although the KRG has issued a statement saying that it is in principle willing to do so, especially if no oil deals are allowed in the Kirkuk region, containing the second biggest pool of oil in Iraq, and which the KRG is hoping a referendum will hand over to the KRG.

Actually, the KRG has since May 2006 cut deals with five oil companies, most of them wildcatter operations not from the US, with the first (and the first to start production) being DNO from Norway, with the others from Canada and Turkey. The early prospects have been favorable, with "gushers" reported coming in from parts of Iraqi Kurdistan in the fields operated by DNO, and the KRG apparently hoping to have 200,000 barrels per day (bpd) going by the end of this year and 2 million bpd in five years, out their own pipeline through Turkey (assuming that taking Kirkuk does not anger the Turks too much, who are worried about the Turkmen population there). Reportedly the DNO contract gives the company 10-30% of the revenues as profits, with the rest going to the KRG, and none to the central Iraqi government.

So, this may be the economic beginning of the "ground-up" partition of Iraq that seems to be going on more widely. The SIIC in the south is pushing for a separate entity there, which region has the largest oil pool. And the tribal Sunni sheiks in al-Anbar are getting armed by the US (which arming could have been done without the surge). Today they fight al-Qaeda in Iraq (which Juan Cole has long claimed would have happened sooner if US troops had completely withdrawn sometime ago, and their move to do so predated the surge), but tomorrow they will be able to fight an increasingly Shi'i-dominated central government, especially if the other regions take all the oil revenues for themselves. leaving nothing for the Sunni Arabs in the center, who remain alienated by the ongoing de-Baathification Commission, led by Chalabi.

Left vs. Right Brains: a new twist

[from Jim]

[Does this study say that the reason why some people become more conservative with age is brain rot? that hardly explains quick changes, such as that of David Horowitz.

[what do such studies say about Marxist brains?]

From the Los Angeles Times

Study finds left-wing brain, right-wing brain

Even in humdrum nonpolitical decisions, liberals and conservatives
literally think differently, researchers show.

By Denise Gellene
Los Angeles Times Staff Writer

September 10, 2007

Exploring the neurobiology of politics, scientists have found that
liberals tolerate ambiguity and conflict better than conservatives
because of how their brains work.

In a simple experiment reported today in the journal Nature
Neuroscience, scientists at New York University and UCLA show that
political orientation is related to differences in how the brain
processes information.

Previous psychological studies have found that conservatives tend to
be more structured and persistent in their judgments whereas liberals
are more open to new experiences. The latest study found those traits
are not confined to political situations but also influence everyday
decisions.

The results show "there are two cognitive styles -- a liberal style
and a conservative style," said UCLA neurologist Dr. Marco Iacoboni,
who was not connected to the latest research.

Participants were college students whose politics ranged from "very
liberal" to "very conservative." They were instructed to tap a
keyboard when an M appeared on a computer monitor and to refrain from
tapping when they saw a W.

M appeared four times more frequently than W, conditioning
participants to press a key in knee-jerk fashion whenever they saw a
letter.

Each participant was wired to an electroencephalograph that recorded
activity in the anterior cingulate cortex, the part of the brain that
detects conflicts between a habitual tendency (pressing a key) and a
more appropriate response (not pressing the key). Liberals had more
brain activity and made fewer mistakes than conservatives when they
saw a W, researchers said. Liberals and conservatives were equally
accurate in recognizing M.

Researchers got the same results when they repeated the experiment in
reverse, asking another set of participants to tap when a W appeared.



Copyright 2007 Los Angeles Times

Latest Trade Data

Much has been made of the continuing strength of US exports and the decline in the so-called "non-oil" trade deficit, but Brad Setser, as usual, hits the nail squarely:

"The same forces propelling Chinese export growth – the weak dollar and still-strong global economy – are also propelling US export growth. Those same forces are also a key reason why oil is high. Take away strong global growth and both US export growth and the price of oil would be lower."

Incidentally, OPEC is puzzling over the effect that financial turmoil will have on the demand for oil, but the oil funds themselves play an important role in propping up the markets. Not that anyone knows the real numbers, of course.

conspiracy theorists cross the line

[This kind of stuff is banned on pen-l, the progressive economists' discussion list, but I think it's important.]

Sept. 11, 2007 / New York Times.

A Sept. 11 Photo Brings Out the Conspiracy Theorists

By SEAN D. HAMILL

SHANKSVILLE, Pa., Sept. 7 — Valencia M. McClatchey thought she was doing the right thing when she gave the F.B.I. a copy of her photo of the mushroom-shaped cloud that rose over the hill outside her home after United Flight 93 crashed in a field here on Sept. 11, 2001.

And, after it became apparent that hers was the only known picture of that ominous gray cloud — and the first taken after Flight 93 crashed — Mrs. McClatchey thought she was still doing the right thing when she gave copies to people who asked for them, and let newspapers and television stations use it.

But fame for the photo has had an unexpected cost for the photographer.

“Every time I’ve done any stories it goes online and all these conspiracy theorists start up and they call me and harass me,” said Mrs. McClatchey, 51, who runs her own real estate company.

In online postings, critics have ripped apart every element of the photo and Mrs. McClatchey’s life. They accuse her of faking the photo, of profiteering from it and of being part of a conspiracy to cover up that the government shot down Flight 93.

They claim the mushroom cloud is from an ordnance blast, not a jet crashing; the cloud is the wrong color for burning jet fuel; the cloud is too small and in the wrong position.

They have posted her personal e-mail address, phone numbers and street address online. One Canadian “9/11 debunker” surreptitiously taped a phone conversation with her, questioning her about the photo, and then uploaded it to his Web site.

“It’s just gotten so bad, I’m just fed up with it,” Mrs. McClatchey said. “This thing has become too much of a distraction in my life. I have a husband and a new business to deal with, too.”

The photo is considered legitimate by the Federal Bureau of Investigation; the Smithsonian Institution, which used the photo in an exhibition on Sept. 11; and the Flight 93 National Memorial, which has used the photo in pamphlets.

“We have no reason to doubt it,” said Special Agent Bill Crowley, a spokesman for the Pittsburgh F.B.I. office, which oversaw evidence collection in Shanksville.

Along with the rest of the nation, Mrs. McClatchey was watching the coverage of the Sept. 11 attacks in New York and Washington when she was shaken from her couch by a blast just over a mile away. She grabbed her new digital camera and took just one picture from her front porch.

The photo shows a sloping green farm field with a brilliant red barn in the foreground. Hovering above the barn in a brilliant blue sky is an ominous dark gray mushroom cloud. Mrs. McClatchey titled the photo “The End of Serenity.”

Barbara Black, acting site manager for the Flight 93 memorial, said, “What makes the image so powerful is that it’s this serene scene in Pennsylvania, this typical red barn, green trees, and then this terrible cloud above it that changed our life here forever.”

At the temporary memorial site, Flight 93 “ambassadors,” local residents who volunteer to tell visitors what happened here, always start the story by showing people Mrs. McClatchey’s photo.

From the beginning, Mrs. McClatchey said, she tried to use the photograph to help remember the 40 passengers on Flight 93. She sells copies to people and lets them choose whether $18 of the $20 fee goes to the Flight 93 National Memorial or the Heroic Choices organization (formerly the Todd Beamer Foundation).

To ensure that she controlled distribution of the photograph, in January 2002 she copyrighted it. To “protect the integrity of the photo,” Mrs. McClatchey said, she filed suit in 2005 against The Associated Press, saying that it violated her copyright by distributing the photo to its clients as part of an article. The lawsuit is pending.

Mrs. McClatchey’s neighbors here defended her against the accusations of the people they called the “Internet crazies.”

The McClatcheys “are as good neighbors as you could possibly have,” said Robert Musser, who owns the red barn that is so prominent in Mrs. McClatchey’s photo.

To accommodate visitors who will show up on Sept. 11 to recreate the picture, and who eventually find their way to the Mussers’ 94-year-old barn, they have tried to spruce it up this past week, adding a touch of paint. They plan to spend thousands in the near future to shore up the foundation on one side so the barn will endure for years to come.

“Here this barn could fall down, and it’s in the picture that’s so famous,” said Mr. Musser’s wife, Phyllis. “We have to do something.”

M. de Tocqueville,

I recently re-read *Democracy in America* with some political theorists, criminologists, and philosophers. I was struck by the following passage, which I haven't seen anybody make much of in the years since. It is a fascinating turning-of-the tables on the public-choice crowd (anachronistically, I mean):


I have no doubt that the democratic institutions of the United States, joined to the physical constitution of the country, are the cause (not the direct, as is so often asserted, but the indirect cause) of the prodigious commercial activity of the inhabitants. It is not engendered by the laws, but it proceeds from habits acquired through participation in making the laws.

D-I-Y POP-UP GUIDE TO JOY IN WORK IIB

by the Sandwichman

The "problem of leisure"

Eric Gill defined the problem of leisure in the following terms: "In former times, such culture as men attained as the product of their working life. Now culture, if it is to be attained at all, is a product of leisure."

Gill also defined the relationship between work and leisure as a political problem. "It is the problem of freedom and slavery. For the freeman does what he wishes when he is at work -- but the slave, when he is working, does what he is compelled to do. And the slave is only happy when he is not working -- but the freeman, as it says in the Book of Ecclesiastes, 'has joy in his work and this is his portion.'"

A coup in the US future

From today's New York TIMES:

>>September 10, 2007

Americans Feel Military Is Best at Ending the War

By STEVEN LEE MYERS and MEGAN THEE

Americans trust military commanders far more than the Bush administration or Congress to bring the war in Iraq to a successful end, and while most favor a withdrawal of American troops beginning next year, they suggested they were open to doing so at a measured pace, according to the latest New York Times/CBS News Poll. ...

The poll found that both Congress, whose approval rating now stands at its lowest level since Democrats took control from the Republicans last year, and Mr. Bush enter the debate with little public confidence in their ability to deal with Iraq. Only 5 percent of Americans — a strikingly low number for a sitting president’s handling of such a dominant issue — said they most trusted the Bush administration to resolve the war, the poll found. Asked to choose among the administration, Congress and military commanders, 21 percent said they would most trust Congress and 68 percent expressed most trust in military commanders.<<

COMMENT: if these numbers continue and start to apply to more and more issues in US politics, we should expect a military coup d'etat in the future (in a decade or two?) After all, neoliberalism and especially the Bush 2 version of that disease have messed up the economy and made it almost impossible for the "loyal opposition" (the Dems) to do better. The country's becoming more and more like Latin America, so it may come a time when a golpe del estado is a normal event.
Jim