A guest post from Harry Winters

David Roberts argues that carbon taxes are incapable of driving the industrial transformation necessary for a low carbon world. We are delighted to learn that no carbon tax can reduce consumption by a sufficient margin. Our only concern with the master plan to fund government with land and carbon pricing was that it might accidentally encourage efficient consumption and innovation [1]. Observing that the carbon tax may be immune to this bug, we should move forward with our proposal. The worst case scenario is a carbon free world at which point we may even have to consider taxing good things.

[1] See Laffer, Arthur. Annals of Applied Napkin Studies (1974).

Don’t miss Harry’s upcoming post on whether the California water crisis might be a source of infinite revenue for the state.

Edited to remove accusations that everyone might be a joker and emphasize the more substantive point that there are liberties more deserving of our undivided attention and relentless defense than the right not to live next to a guy with a rifle.

Not long ago, activists protested war and sat-in against racial oppression. Recently they protested consumption of foreign food and today they sat-in for the pyrrhic passage of useless policy. We should be more than a little embarrassed by politicians sitting in for gun control when they could be defending genuine Constitutional liberties. What if we fought for the 1st, 4th, 5th, 6th, or 8th amendments as vigorously as Republicans fight for the 2nd?

Here’s a quick summary of a few of the other original amendments.

  • The 4th amendment gives you the right to be secure in your house and against unreasonable searches and seizures and requires probable cause supported by oath or affirmation describing the place to be searched, and the persons or things to be seized. You’d think that’s a pretty important thing to defend when it was only yesterday that the Supreme Court decided to change “the right of the people” to “the right of the people who remembered to pay their parking ticket”.
  • The 5th amendment gives you the famous right to remain silent. More importantly it gives you the right not to be deprived of life, liberty, or property, without due process of law; [or  have your] private property be taken for public use, without just compensation. What if we wrote about the many people forced to sit in jail only because they can’t post bail as much as about gun control abroad? What if we spoke as much about the perpetual and tragic expropriation of private property under the auspices of civic forfeiture to fund margarita Fridays at the local precinct?
  • The 6th amendment gives everyone a right to a speedy and public trial. Wouldn’t it be a pretty honorable to defend this right to the very end when a 16 year old convicted of stealing a backpack commits suicide after waiting in Rikers Island for 3 years instead of writing again about the gun show loophole?
  • The pesky 8th amendment says that excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. Half a million Americans sit in pretrial detention. The idea that “pretrial detention” can even exist is appalling enough. Apparently protecting this right isn’t as fun as childish shouting matches, lie-downs, or sit-ins.

Joke we may about how founding fathers couldn’t possibly know about how powerful guns would one day become. But why not also acknowledge how immensely foresightful the they were about things that matter ten times more. That gun control might work is not a sufficient or even relevant metric. Getting rid of a right to fair trial might also save lives. What is fair and reasonable may not always be Constitutional, and what is Constitutional may not always be fair and reasonable. Unfortunately the right to life, liberty, and the pursuit of happiness that we ought to cherish is sacrificed on the altar of a political theater that caters more to the unfiltered emotion residual after tragedy than the extreme liberty and freedom that made his country great.

It isn’t enough that many writers acknowledge the ailing judicial defense of constitutional liberty. If an article was written about a “mass seizure of liberty” every time 3 guys get put in jail on bail they can’t afford, every time a guy gets two weeks of solitary for sneaking in a pillow, every time the police raids a random house either without a warrant or without a justified warrant, or every time the government kills and assassinates someone at home or abroad without declaring and waging war we would be a better country.

Today those on the political extremes defended our liberties with more life and animation than the too many others who applauded politicians sitting down and shouting mean things at Paul Ryan.

It’s frustrating to see that people who should know better are still saying this. That the government bought for 80 something it could have bought for 50 that went to 100 does not mean it earned a profit. In other words, the government could have made just as much cash for a lower upfront investment if it bought its equity stake in Citigroup on the market. You might say that the government overpaying to capitalize a systematically important yet insolvent institution was a good idea, and you would very plausibly be right. But in that case you would be happy about the outcome even if the government lost some of its TARP money. Citigroup did not accept public capital at a high price because it wanted to be charitable to the government. It accepted public capital at a low price because no one else would make an offer nearly as good. No economist, journalist, or politician would have been happy with the terms of TARP if they were lending their own money. The government didn’t proft from TARP any more than I did from the game of Russian roullette I survived that I was paid to play the other day. 

Indicators that compare the outstanding balance of debt to a measure of repayment capacity are frequently used to estimate debt sustainability. There are many cases in which such ratios elevate the conversation, but it is helpful to highlight the pathological, indeed obvious, cases where they do not.

If the US suspended all tax collection for 3 years, the debt-GDP ratio may roughly double from 100% to 200%. Other things equal, I would guess rates would not move much. At least not without a presumption that individuals will use their rebate to dig holes. Even if we tried this over 30 years, instead of 3 years, future uncertainty in US earning potential might increase rate volatility and risk premia, but it isn’t obvious interest rates would increase much. This seems pretty clear at large magnitudes, but is equally valid for small changes in the ratio governing daily commentary on debt commentary and credit risk. Notably things about distribution over time is not necessarily important. A huge tax cut today means more cash provided in inheritance to future generations. (This doesn’t apply to spending because it doesn’t always in a form that can be sold and saved).

The level of debt-to-GDP is on the first order not much more than a choice about where we store future income, with some distributional effects thrown in at large magnitudes. And while countries are not perpetual entities, large debt-GDP ratios do not obviously change interest rates for credible institutions, even over large periods of time. Sometimes conversations such as these evolve into discussions on the properties of money, which I do not know much about. That said while it is true a large increase in US debt would be associated with certain “money-like” features, this observation is not necessarily limited to rich countries.

Obviously too much debt will increase interest rates and decrease expectation of repayment. Many times “too much debt” is associated with high debt-GDP ratios. But the underlying mechanism emerges from something else entirely. It may be that the increase in the ratio reflected large spending programs that were not expected to generate economic value. Or maybe it reflected the decline in expected future productive capacity of a country. (This isn’t a reflection of only stock and flow concerns as it would apply to flow/flow or stock/stock ratios as well.)

But without that information, understanding what debt ratios mean is hard. For example, it is sometimes claimed that we may not consider a large emerging market deficit to be problematic since we expect repayment from a growing economy. This is true in the same sense that we may not consider a deficit doubly big, other things equal, to be a problem outside of the way it modifies quality of projects funded. Since this ratio is a choice within reasonable bounds, understanding the motivation for this choice, the underlying economic truth it modifies, and the way it will affect and be affected by another country’s choice in the future are important to know.

Cases for the progressive carbon tax:

  1. Some people are concerned that carbon taxes might discourage innovation since it is a critical ingredient to the existing economy. However people emit carbon not because they care about the output, but because they like to emit carbon as an end in and of itself. More importantly, the most efficient emitters produce so much carbon that they wouldn’t even notice a large tax. It’s unlikely that a progressive carbon tax is going to force billionaires to stop flying in private jets, so the substitution effect is not large.
  2. Carbon offers a lot less utility to those who emit a lot of carbon, like a traveling doctor, than it does to those who do not, like a monk.
  3. Carbon inequality in the United States has reached levels not observed since the Carboniferous Age. The meat hipster renaissance means grass-fed beef connoisseurs can emit an unprecedented amount of carbon, but we’re concerned less fortunate Americans may be left out on the carbon binge.
  4. While we understand steeply progressive carbon taxes might reduce the incentive to emit at the highest levels, we can encourage emissions in other ways, including a middle school curriculum with slogans such as “If you keep your lights on frequently enough, even you can emit as much carbon as Richard Branson ” or “The American Dream: Emit a lot, save coal, and maybe your kids can drive a Hummer”.
  5. Still we should not get carried away. Equality of emission is less important than equality of the opportunity to emit. In this regard, we support targeted spending mechanisms such as business class upgrade subsidies and carefully crafted Pigouvian taxes such as a vegetarian penalty.
  6. We’re skeptical of our opponents who want to tax capital and labor. For one carbon is a necessary byproduct of employment and innovation, so an income or wealth tax would indirectly raise carbon prices as well. Additionally, a lot of people benefit from labor and capital favoring a carbon tax. We understand that not all labor is good, and can institute restrictive occupational licensing instead.

Cases against the progressive carbon tax:

  1. A carbon tax, if it exists at all, should be very regressive because you didn’t emit that. Even though it may appear as though your private jet produced a lot of carbon, you wouldn’t have been able to fly that jet without the workers who built it. It is only fair that they share some of your burden.
  2. A carbon tax cut could actually increase revenues. If the carbon tax is high, people might inadvertently emit less or develop non-carbon alternatives, reducing our tax base.
  3. It might appear that carbon inequality has increased a lot over the past 30 years, but this doesn’t properly adjust for carbon surplus. Mass consumer items, like cars and heating, have become a lot more carbon efficient. The apparent inequality only reflects the fact that the largest carbon emitters haven’t seen a substantial drop in their carbon needs. In fact the trend may have even reversed, as grass-fed beef requires more water and energy than its factory-farmed counterpart. While electric bikes exist today, private jets will remain gasoline-fueled for some time to come.
  4. We understand that carbon inequality still exists, however that is a private issue. You can always donate gasoline and coal to your frugal neighbor or the Treasury.
  5. A little envy is always good. Watching your friend eat a burger while you eat lettuce will encourage you to find the desire to emit more carbon, creating a virtuous cycle of carbon creation.

Cases for the income tax:

  1. Income taxes are a market-oriented mechanism to reduce productivity.
  2. Minimum wages, maximum work weeks, and occupational licensing are “command and control” alternatives that might get the job done, but have no respect for price.
  3. While it’s important to curtail the employment epidemic, some people like work more than others and income taxes are a good way to let the market reduce employment in the most natural manner.
  4. If reducing employment really has to involve moving on many fronts, anything that looks like an administrative solution — say, forcing companies to fire people or increasing occupational licensure requirements— is going to be much more costly than an income taxes that exploits all possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as disemploying all poor people with minimum wages about the median wage — broad based labor taxes are much less central.
  5. The efficiency case for income taxes is about making the best use of existing technology to encourage leisure, not providing incentives for development of new technologies that further this goal, like sleeping pills or cocaine.
  6. A sound market alternative is a “cap-and-trade productivity” model. Every individual would be granted the right to work a fixed number of hours a year, but is free to trade these contracts on an open market.
  7. Critics, however, are concerned about the administrative burden of such a system, and the potential for large corporations to buy a disproportionate allocation of issued hours, preventing small and medium businesses from participating in the labor market. Income taxes, on the other hand, have the potential of being too low, resulting in too much employment at any given time. Others allege that hours worked cap might be set aggressively low, effectively banning employment for the poor.

Cases against the income tax:

  1. There is some evidence that workers, like welfare recipients with high implicit marginal tax rates, aren’t hyper rational when it comes to employment, that they may try to get a job even if it may cost them some money — and in that case minimum wages high enough to prevent them from even trying, rather than income taxes may be the right way to keep them at home.
  2. Talking about income taxes is a first world problem. While kids of billionaires and Hollywood liberals can talk about saving the world from too much employment, most people can’t afford the low-employment alternative to the daily job. Income taxes may end up being deeply regressive by forcing the payment on people who can afford them least.
  3. Discouraging labor and productivity is an international goal. While it is certainly a good idea to reduce employment other things equal, India and China have rapidly growing labor forces and we shouldn’t act until Asian countries commit to our program of de-employment.
  4. Individuals with an inclination to work really hard may move abroad to avoid the income tax, where their productivity is even less regulated and where they may be more overworked due to lax income tax rules.
  5. Products and technologies encouraging disemployment are increasingly inexpensive with the advent of cheap recreational opioids, Netflix, and disintegration of the family. We should wait for the market to make unemployment cheap enough before interfering unnecessarily.
  6. As a recent paper suggests, “a gradual expansion of employment-reducing public policies – such as increasing ad-valorem taxes on labor or paying employers not to hire hard workers – may exacerbate the problem as it gives workers the incentive to avoid future employment levies in anticipation by working more today”. A better alternative might be mass incarceration of able bodied men.
  7. Finally the new left fixation on an income tax is at least facially peculiar, since, it seems to me, the policy issues from classically neoliberal instincts. It is a way of achieving a social goal (less innovation) while minimizing interference in markets. The impetus for minimizing interference is a deep-seated belief that attempts to meddle in labor markets via mandated maximum hours, overbearing occupational licensing, and forced retirement tend to backfire, distorting the economy and slowing growth. Reinforcing that skepticism is not a wise long-term strategy for labor hawks, because I can guarantee that disemployment is eventually going to require activist government. No market-based policy is going to equitably force mothers to stay at home.

The housing market started teetering sometime in 2006. The investment banking crisis climaxed in September 2008 after Merrill Lynch was acquired, Lehman Brothers failed, and Goldman Sachs became a bank. Over this week both the incumbent and future presidents would talk about the upcoming financial crisis. The commercial banking crisis became acute toward the end of 2008 through Citigroup’s second bailout in 2009. The unemployment rate starts ticking up in 2007, hits 6.5% in October 2008, and races through a 10% peak in October 2009. It’s not until 2013 that it falls back to where it was a month after Lehman. This was the opposite of overnight.

Yet you might miss that in consumer search activity.

 

Screenshot 2016-04-22 23.34.47Screenshot 2016-04-22 23.35.29Screenshot 2016-04-22 23.37.16Screenshot 2016-04-22 23.38.03Screenshot 2016-04-22 23.40.48Screenshot 2016-04-22 23.44.49Screenshot 2016-04-22 23.51.01Screenshot 2016-04-22 23.53.32Screenshot 2016-04-23 00.07.34

Screenshot 2016-04-22 23.51.44

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Sometime after September 15 Americans thought the world might burn. And sometime by October 10th they decided everything was fine. Notably most of the peaks in the charts above, typically between September 28 and October 11, were post Lehman. This isn’t a feature of lagged searching, searches about the Lehman bankruptcy peaked in on September 14. This is no coincidence. A little over a week after Lehman failed, Americans watched their Treasury Secretary warn of economic calamity if TARP wasn’t passed. By the end of September a chorus of other luminaries were threatening economic doom. TARP was finally signed into law on October 3.

What’s fascinating is the compression of fear over two weeks that wouldn’t turn out to be very relevant for the American consumer. The stock market was flat or up for at least two weeks after Lehman failed, and Americans were calm and would remain calm after the market decline started in earnest. Nor did concerns about financial stability really return in 2009, even though unemployment soared and the commercial banking system remained weak.

While September 2008 was an important moment for the investment banking crisis, it wasn’t particularly relevant to most Americans. Families didn’t have deposits at Lehman, and didn’t borrow from Goldman to fund their home. Even interest in the housing crisis, which was brewing for at least a year if not longer, surged as the investment banks failed. Nor did search interest in crisis return prominently towards the end of the year when the banking system was in shambles.

Even the moderate increase in interest for “bank bailout” and “banking crisis” in the first quarter of 2009 doesn’t nearly match the same for late September 2008, before the banking crisis really even started. Of course this might be a distinction most searchers ignore, but the spike in “banking crisis” we observe in January-March 2009 that we do not observe in “financial crisis” suggests there is some discrimination. Of course the big difference was that by 2009, America’s wise men stopped warning of economic doom.

I’m not going to pretend I understand this data, what this data means for consumer sentiment, or what consumer sentiment means for the economy. But it strikes me as quite plausible that the incredible fear American political leadership provoked at the end of September 2008 may have had repercussions magnifying the the economic downturn. The official chronicle of the crisis plays so much lip service to “stigma” and “confidence”. It’s peculiar that there were some people who probably tried to force Bill Gates to accept TARP funds to conceal the obvious fact that Citigroup was desperate – but not concerned that this parade increased search interest in terms like “is my money safe”, “is my 401k safe”, or “next depression” by 100-fold.

For some searches we don’t see an immediate return to normal.

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Within two weeks we observe a regime change in concern about a “great recession”. It’s hard to explain such a sharp change from September 15 to October 10 without considering the political theater that was considered necessary to pass TARP. It doesn’t strike me as unreasonable that the anxiety that follows from watching your Treasury Secretary talk about the next depression could have an acute impact on durable good and other luxury purchases, at a time when the economy was already underperforming.

I’m not suggesting that stress in the broker-dealer system was irrelevant to overall financial stability. But they weren’t directly relevant to most Americans. To the extent they were economically relevant, it would be indirectly felt through the commercial banking system. There are many times between 2007 and 2010 when Americans could have been reasonably scared – when house prices started falling, when subprime lenders started failing, when bank failures picked up, or when unemployment exceeded 10%, among others.  That this fear only appeared during September 2008 appears to be the outcome of a deliberate decision to scare people into legislating bailout.

This isn’t a criticism of the fairness or efficacy of TARP. Just the observation that a six sigma spike in “is my money safe” probably doesn’t lend much to credibility and confidence in the banking system.

 

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