Wednesday, December 2, 2009

Thoughts on Global Warming, Broken Windows, and Emissions Taxes

Yesterday, TC at MR had some interesting thoughts on "good versus evil thinking" about the Climategate issue. To summarize, he basically says that there is a chance that the people (who, in this case did something somewhat dishonorable) were acting with good intentions at heart. In other words:
One response is: 1. "These people behaved dishonorably.  I will lower my trust in their opinions." Another response, not entirely out of the ballpark, is: 2. "These people behaved dishonorably.  They must have thought this issue was really important, worth risking their scientific reputations for.  I will revise upward my estimate of the seriousness of the problem."
One other thought I have is, to look at the other side of the debate over climate. What if views and opinions are not only unfounded in rigorous scientific methodology, but are also inconsistent? What credibility do we owe them? For example, some opposers of "green job creation" liken the problem to the "Parable of the Broken Window" by Frederic Bastiat. It's a reasonable comparison in the sense that subsidizing the cleanup does marginally incentivize polluting behavior. This is precisely why most mainstream economists recommend a pollution tax over a cleanup subsidy. A cleanup subsidy (paying for the shopowner to fix the window) creates a moral hazard, or more simply, a modest incentive to produce in sectors that create the mess (break more windows). Two things: one, to accept the parable, you must admit that damage has been done (to the environment); and two, the next question is how to implement the proper incentive mechanism.
In the case of the broken window, the optimal mechanism is to tax (punish, fine, etc.) the breaker of the window above and beyond the simple replacement cost. In the case of the broken environment, it would be appropriate to "punish" firms (and consumers who buy those goods for that matter) that do most harm to the environment. The least discriminatory way to do this might be a carbon tax, but cap and trade has its advantages, too.
I've discussed these options before, and all else equal, the cap and trade auction is probably the most efficient. But there is another twist to things that I recently considered, which is, "How do we charge domestic carbon emitters without implicitly subsidizing foreign emitters?" Not only might it discriminate against domestic producers, but it might even result in more worldwide emissions - emissions intensive production may get offshored to an even greater extent to countries that allow even dirtier modes of production than previously occurred in the US. Thus, I am increasingly leaning towards a carbon tax, which could be levied against the carbon content of all goods sold (domestically produced or imported - cumulative of the carbon emitted in-transport). It lacks the elegance of an auction, but without an international trading block for emissions it is the next-best option.
But this sort of punishment (tax) on vandalizing the environment is not what the "broken window gang" argues for. In fact, they argue against both strategies. In other words, they argue against punishing window-breakers and against compensating shopowners (the future generations who are likely to be impacted by environmental degradation). In doing so I do not really see much benefit of the doubt that can be granted to the opposition. I can think of two scenarios. Either: one, they deny the science of climate change, and thus will construct any convenient argument to oppose it, without actually admitting their state of denial; or two, they do not think climate change is an important issue. I do not think that the first is the case because I think that most of the "broken-windowers" acknowledge climate change. Maybe there is a face-saving third alternative, but I'm skeptical.

Sunday, November 29, 2009

A bit on policy efficacy

Quoth Becker:
I fully endorse Posner's suggestions to cut the minimum wage, but I do not see that happening with the present Congress. My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital. Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.

I won't waste space addressing Posner's argument for these tax cuts - he's clearly a hack at this point. But, it is unfortunate that Professor Becker misses the most obvious and direct way to lower costs - cutting the payroll tax. Cutting the payroll tax would be a preferred and more direct intervention on labor costs than any fiddling with the overall rate of income taxes or capital taxes. Hiring workers directly into public works projects would also be a good short-run remedy.

It further surprises me that he does not recognize the obvious drawback to his own solution of cutting capital taxes - that it depends on the extent of complementarity (or substitutability) between capital and labor. (Then again, he may well recognize these things but is leaving them out of his story because it doesn't agree with his politics.) Reducing tax rates on capital might be desirable for other long-run objectives, but its effect on labor markets is theoretically ambiguous. It seems as if Dr. Becker has supported these sorts of tax cuts for some time for these other reasons, but arguing for them as a means for fixing the labor costs problem seems forced.