Fun fact - the smoke stack featured in the thumbnail image is shutting down later this year, because it's no longer economical for them to pay the emissions fines.
The white stack was built about 15 years ago and replaced the orange one which was out of compliance with contemporary emissions standards. The fallout (pun intended) of this is still present in people's lives. Heavy metal poisoning is a common issue for children in the area.
Source - had a friend who grew up in Cheswick, PA.
The problem here that even big investment in clean energy will not be enough to bring about large enough net emissions.
And since I do not see how that can be a secret to environmentalists, why don't the talk up carbon taxation more as a medium term solution. So environmentalists can understand why Biden 2021 will not propose a carbon tax (like he will not propose Medicare for all), but the should still be beating the drum in the background.
A cap-and-trade system is categorically better than a per-ton carbon tax. We can rely on science to assess what the risks are if we raise or lower the _quantity_ of carbon. So set that quantity and then let the market sort out what price is needed to achieve it. If you just set a flat price, you're a step removed, and you'll always be a year or five behind on figuring out what the right price should be. It's much easier for a lobbyist to spin expectations about the effect of a price change, than it is to spin the actual climate science. (Not that this stops them from trying.)
Historically, where we've used a cap-and-trade style approach, once the right incentives were there, innovation brought down emissions faster than expected, at a lower cost than expected.
Note that I don't really care what you do with the revenue raised, or exactly how you structure the market. You could do an annual auction. You could to something like a Tobin tax on trading the permits, with one initial auction for permits that may represent a declining amount of right-to-emit, from year to year. And you can take the money and pour it into research and infrastructure, or dividend it back to citizens. The point is just that Q is the correct lever to pull, not P.
IIRC the original Clinton/Gore budget included an energy tax but it didn't get past the Senate. The problem then, which will be similar now, is distance. As far as I can see it likely will always be a big hurdle to such a tax. Agricultural states and big states have enough people who have to use lots of energy, either because they drive long distances to stores, etc. or run tractors for farming, and will raise bloody hell over the prospect of higher costs. (In the old days (circa 1950), on our farm we could get gasoline at a special lower rate delivered by the farm co-op because it wasn't taxed at the same rate as gas sold at service stations.)
The 1993 proposal didn't rebate the money, which is a new twist to proposals, but I doubt a proposal to rebate only to farmers would work.
People really like free stuff. So we’ll pay to have your car fitted for electric power and you get free/cheap electric charging is likely to be popular , as would paying to have cars retrofitted to run on 100% biodiesel. Especially since that means work for people who can do the retrofits.
A current example that illustrates some of Matt's points in the TCI-P, a cap and trade program for wholesale fuel emissions. It was seen by environmental activists as a great way to reduce emissions by raising gasoline prices, without the politics of raising gas taxes. There is substantial transportation and climate investment dividend, as well. Conservatives on the state level (CT, VT, RI, MA are the ones I am familiar with) have all used the unpopularity of gas prices/taxes as a cudgel to scuttle the entire program. Center/left legislators and governors are watching this moderate program fail as the original 13-state + DC compact collapses.
A carbon tax may seem like a great idea in the abstract, but in practice it is a regressive tax, as we should have learned from the Yellow Shirt Movement in France.
I'm trying, and failing, to think of a greater long-term Republican victory than the one over tax increases for the non-rich. They haven't yet succeeded in doing the same for the rich, but they should be quite satisfied that the idea of taxing anyone who is not super rich is now anathema. We know when they won that victory: in Mondale's nomination acceptance speech, when he told the American people bluntly that, unlike Reagan, he would raise their taxes (https://www.youtube.com/watch?v=FWUZVYg7Ubo). Brilliant strategy that paved the way to him winning both Minnesota AND the District of Columbia.
So instead we get the progressive dream platform based on the idea that a Nordic welfare state will be based purely on raising income taxes and creating wealth taxes on the super wealthy. I'll give them credit for realizing that proposing tax increases on the middle class is a death sentence. (Though I'll give Bernie some credit for being crazily honest.)
So a carbon tax? With or without a dividend? Lear put it best: "Never, never, never, never, never."
Second, don't call it a carbon tax, call it a carbon dividend.
Third, a carbon tax is probably moderately regressive, but a carbon dividend can be as regressive or progressive as the distribution rules make it.
Fourth, popularism is a fine principle, but every principle can be misapplied. Whether a carbon dividend is "popular" depends on the under-explored details. Unlike gas taxes, where we have decades of legislative and political experience, I don't think we know with certainty whether a well-framed carbon dividend would be a political winner.
Perhaps oversimplifying but interest rates are low because we are printing money to compensate for massive government borrowing. “Follow the science” but economics is rightly called the “dismal science” so I don’t buy into the “nothing to see here, move along” view of the growing national debt.
Public, rather than incentivized private investment in alternative energy will inevitably suffer from the same cronyism and other political baggage that plagues infrastructure and defense projects.
Nobody really knows why interest rates are low. The most likely explanation is a combination of super high savings rates in China (because no welfare state), demographics skewing old in rich countries and more efficient capital allocation. The demographic driver is probably the most important one, at least judging from the Japanese experience.
One of the drums that MY has been beating on repeatedly is that "...moderate members who see the value of bipartisanship spent most of the Bush and Obama years paralyzed by a misguided fear of budget deficits." As best I can tell, he thinks this is because they were coming from a paradigm in the 90s where "the perception (and I think the reality too) was that objectively the government needed to raise taxes and cut spending."
Essentially - moderates believed that the economics of the 2000s and 2010s were the same as the 90s that required spending restraint when in reality they needed excess spending.
I'm concerned that this lingering lesson will go the other direction. That the economics will change and government spending restraint be needed, but most of congress will continue to believe that excess is acceptable and this will lead to economic problems.
This is even more concerning given I think future spending capacity will be needed to address climate change. There are likely to be major impacts that will need government intervention. Deficit spending for investments that will have a long term payoff return make sense. Outside of that though, the more debt we create now, the more we constrain our future capacity.
One nice thing about carbon taxes is that they keep your fingerprints off of the less popular aspects of climate policy. You can cut ads about how much you love fracking, and if it's suddenly rendered uneconomic for some reason, well that's just the free market for you.
So, ignoring the climate stuff, this is Matt's worst take and really demonstrates the limits of economic "popularism". The problem is that what is popular is always the same thing, giving people money. What's unpopular is paying for stuff. This whole dodge of, "Interest rates are low so we can just promise to print money at some undetermined point in the future instead of having to vote on a tax bill now." is a fucking disastrous way to do government. It's just a straight up political distortion. Just because people don't perceive it as a tax increase doesn't mean it's not exactly the same thing functionally. If you're doing what's "popular" it should be based on transparently debating the costs and benefits and not this bullshit monetary cup and ball game.
If you are “debating costs and benefits,” the fact that the cost is “borrowing money at roughly 0% real interest” is significant. The only reason the is possible is there is a lot of idle capital out there. If private investment were sucking up massive amounts of capital, interest rates would be higher. The fact that interest rates are zero is a signal that there is slack in the economy and that induced demand wkll increase total output rather than just create inflation.
All government spending is borrowed money. “borrowing money at roughly 0% real interest” is just saying "it's no more expensive than spending tax dollars". The only reason to deficit fund spending is to kick the spending down the road in a way that obfuscates the costs to taxpayers. It's about giving cover for politicians to tell their constituents, "Of course YOU won't have to pay for these things. I'd never ask YOU to pay." when the reality is they mostly have no fucking clue who it will end up costing and they don't care because the costs will be dispersed in some way that won't get traced back to them. (It's also a good way of disguising exactly who's throwing money at which cronies when the fed starts throwing a bunch of QE at the financial sector)
Now, none of this is to suggest that there aren't government investments that end up paying off for taxpayers, of course there are, but the ultimate value of a given piece of spending is no lesser or greater based on how it was financed. What changes is the political accountability of the people passing the legislation. I happen to think representatives should be as transparently accountable to their voters as possible.
I just love how often you go back to the well of "interest rates are incredibly low" as if that were a completely neutral fact independent of historical government policy. Like, yes r* is negative in the US right now. The channels contributing to that are not all instantaneous and include policy choices going back decades.
Even if inflation does arrive, everybody knows the Fed won't be able to raise rates more than 100-150 basis points over a few years, because if they did it would push the US into a sovereign debt crisis, cause waves of corporate bankruptcies, and basically collapse US politics as we know it. And that jeopardizes the Federal Reserve itself, so they just won't do it.
So just be careful with how much money you think we can dump into the economy, because if inflation does come, it will be low-growth stagflation, and consumers will be forced to eat that inflation for at least a few miserable years. And if that stagflation happens, we all know the Democratic Party will be stuck owning it.
I've wondered about this too. Low interest rates mean that interest payments are low. It says nothing about principle payments. I may be able to afford a $300,000 mortgage at low rates, but that doesn't mean I can afford a $10 million mortgage, even with zero percent rates.
It's very enlightening for me to hear "this is why the Fed won't ever raise rates too quickly" because I never get exposed to the other side of the argument. The only people I ever read arguing for being concerned about this kind of problem are in the denialist camp regarding r* being negative right now (and for the past x years). The idea that there are finance-specific problems that aren't obvious on the surface is much more compelling. So thank you for commenting! Now I have something to dig deeper on.
I mean if you land where I do, you get a set of opinions that are incompatible with either political party. Denialists do so because they want to stay consistent with a party, and they should pay attention to none other than Donald Trump who spent the middle years of his presidency insisting the Fed was raising rates too quickly.
My position is simple: we're a massively leveraged securitization-driven economy, mired in unproductive debt (both public and private), and it's been plain since GFC that we can't let too much of that debt go bad without a deflationary event that would disempower everybody who has let us get this far. Look at Japan for inspiration into our future - the Bank of Japan literally buys ETFs every time the stock market dips a few %.
Yeah I've always wondered about this. Matt and other "there's no downside to spending" types always cite low interest rates like we have simply found ourselves in a period of sunny weather, when it seems to me we *chose* those interest rates.
So if, as a matter of policy, we can choose low interest rates and then as a consequence choose to spend whatever we want without downsides, well, I don't understand economics well enough to know how long this can last but at a gut level it starts to feel pretty Ponzi scheme/perpetual motion.
At the very least we've shown we're vary capable of building really stupid shit with our free, unlimited money - for example, the very urban freeways that we apparently can't afford to fix but always have money to build, and which are huge contributors to climate change.
We did not choose low (real) interest rates. They are natural and part of a long-term trend. I would also expect the Fed to meet its average inflation target even if that required raising interest rates by more than 150 basis points. The political system might then be facing true austerity budgeting for the first time in a long time but I would expect the Fed to prevail.
It is unserious to suggest you can tease out "natural" "long-term" trends from a financial system which has been routinely bailed out by monetary authorities since 1987 to keep institutions from eating bad investments. You don't get to have activist monetary policy/a "Greenspan Put" and also claim to be following "natural" "long-term" trends.
I think you do. Even if you were right the direction of the trend would be salient if not the level. But in any case, the Fed funds rate cannot deviate by much or for long from the "natural" rate without causing hyperinflation or hyperdeflation, so that fact should give a ballpark estimate of where the natural rate is.
Fun fact - the smoke stack featured in the thumbnail image is shutting down later this year, because it's no longer economical for them to pay the emissions fines.
The white stack was built about 15 years ago and replaced the orange one which was out of compliance with contemporary emissions standards. The fallout (pun intended) of this is still present in people's lives. Heavy metal poisoning is a common issue for children in the area.
Source - had a friend who grew up in Cheswick, PA.
The problem here that even big investment in clean energy will not be enough to bring about large enough net emissions.
And since I do not see how that can be a secret to environmentalists, why don't the talk up carbon taxation more as a medium term solution. So environmentalists can understand why Biden 2021 will not propose a carbon tax (like he will not propose Medicare for all), but the should still be beating the drum in the background.
What polling are you relying on? I'd never seen polling but a carbon tax strikes me as (1) common sense and (2) the sort of thing that is too wonky for most voters to care about. I googled around and I didn't see the "less popular than defund the police" polls. I did find this, though: https://www.carbontax.org/blog/2021/01/19/still-they-persist-2-3-of-voters-in-poll-want-carbon-tax/
Question the first premise.
A cap-and-trade system is categorically better than a per-ton carbon tax. We can rely on science to assess what the risks are if we raise or lower the _quantity_ of carbon. So set that quantity and then let the market sort out what price is needed to achieve it. If you just set a flat price, you're a step removed, and you'll always be a year or five behind on figuring out what the right price should be. It's much easier for a lobbyist to spin expectations about the effect of a price change, than it is to spin the actual climate science. (Not that this stops them from trying.)
Historically, where we've used a cap-and-trade style approach, once the right incentives were there, innovation brought down emissions faster than expected, at a lower cost than expected.
https://www.edf.org/approach/markets/acid-rain
Note that I don't really care what you do with the revenue raised, or exactly how you structure the market. You could do an annual auction. You could to something like a Tobin tax on trading the permits, with one initial auction for permits that may represent a declining amount of right-to-emit, from year to year. And you can take the money and pour it into research and infrastructure, or dividend it back to citizens. The point is just that Q is the correct lever to pull, not P.
IIRC the original Clinton/Gore budget included an energy tax but it didn't get past the Senate. The problem then, which will be similar now, is distance. As far as I can see it likely will always be a big hurdle to such a tax. Agricultural states and big states have enough people who have to use lots of energy, either because they drive long distances to stores, etc. or run tractors for farming, and will raise bloody hell over the prospect of higher costs. (In the old days (circa 1950), on our farm we could get gasoline at a special lower rate delivered by the farm co-op because it wasn't taxed at the same rate as gas sold at service stations.)
The 1993 proposal didn't rebate the money, which is a new twist to proposals, but I doubt a proposal to rebate only to farmers would work.
People really like free stuff. So we’ll pay to have your car fitted for electric power and you get free/cheap electric charging is likely to be popular , as would paying to have cars retrofitted to run on 100% biodiesel. Especially since that means work for people who can do the retrofits.
A current example that illustrates some of Matt's points in the TCI-P, a cap and trade program for wholesale fuel emissions. It was seen by environmental activists as a great way to reduce emissions by raising gasoline prices, without the politics of raising gas taxes. There is substantial transportation and climate investment dividend, as well. Conservatives on the state level (CT, VT, RI, MA are the ones I am familiar with) have all used the unpopularity of gas prices/taxes as a cudgel to scuttle the entire program. Center/left legislators and governors are watching this moderate program fail as the original 13-state + DC compact collapses.
A carbon tax may seem like a great idea in the abstract, but in practice it is a regressive tax, as we should have learned from the Yellow Shirt Movement in France.
I'm trying, and failing, to think of a greater long-term Republican victory than the one over tax increases for the non-rich. They haven't yet succeeded in doing the same for the rich, but they should be quite satisfied that the idea of taxing anyone who is not super rich is now anathema. We know when they won that victory: in Mondale's nomination acceptance speech, when he told the American people bluntly that, unlike Reagan, he would raise their taxes (https://www.youtube.com/watch?v=FWUZVYg7Ubo). Brilliant strategy that paved the way to him winning both Minnesota AND the District of Columbia.
So instead we get the progressive dream platform based on the idea that a Nordic welfare state will be based purely on raising income taxes and creating wealth taxes on the super wealthy. I'll give them credit for realizing that proposing tax increases on the middle class is a death sentence. (Though I'll give Bernie some credit for being crazily honest.)
So a carbon tax? With or without a dividend? Lear put it best: "Never, never, never, never, never."
First, vegetables are good.
Second, don't call it a carbon tax, call it a carbon dividend.
Third, a carbon tax is probably moderately regressive, but a carbon dividend can be as regressive or progressive as the distribution rules make it.
Fourth, popularism is a fine principle, but every principle can be misapplied. Whether a carbon dividend is "popular" depends on the under-explored details. Unlike gas taxes, where we have decades of legislative and political experience, I don't think we know with certainty whether a well-framed carbon dividend would be a political winner.
Perhaps oversimplifying but interest rates are low because we are printing money to compensate for massive government borrowing. “Follow the science” but economics is rightly called the “dismal science” so I don’t buy into the “nothing to see here, move along” view of the growing national debt.
Public, rather than incentivized private investment in alternative energy will inevitably suffer from the same cronyism and other political baggage that plagues infrastructure and defense projects.
Nobody really knows why interest rates are low. The most likely explanation is a combination of super high savings rates in China (because no welfare state), demographics skewing old in rich countries and more efficient capital allocation. The demographic driver is probably the most important one, at least judging from the Japanese experience.
If that's true, shouldn't we expect a spike in interest rates as the boomers finish retiring?
One of the drums that MY has been beating on repeatedly is that "...moderate members who see the value of bipartisanship spent most of the Bush and Obama years paralyzed by a misguided fear of budget deficits." As best I can tell, he thinks this is because they were coming from a paradigm in the 90s where "the perception (and I think the reality too) was that objectively the government needed to raise taxes and cut spending."
Essentially - moderates believed that the economics of the 2000s and 2010s were the same as the 90s that required spending restraint when in reality they needed excess spending.
I'm concerned that this lingering lesson will go the other direction. That the economics will change and government spending restraint be needed, but most of congress will continue to believe that excess is acceptable and this will lead to economic problems.
This is even more concerning given I think future spending capacity will be needed to address climate change. There are likely to be major impacts that will need government intervention. Deficit spending for investments that will have a long term payoff return make sense. Outside of that though, the more debt we create now, the more we constrain our future capacity.
One nice thing about carbon taxes is that they keep your fingerprints off of the less popular aspects of climate policy. You can cut ads about how much you love fracking, and if it's suddenly rendered uneconomic for some reason, well that's just the free market for you.
Passing a tax is pretty damn big fingerprint.
So, ignoring the climate stuff, this is Matt's worst take and really demonstrates the limits of economic "popularism". The problem is that what is popular is always the same thing, giving people money. What's unpopular is paying for stuff. This whole dodge of, "Interest rates are low so we can just promise to print money at some undetermined point in the future instead of having to vote on a tax bill now." is a fucking disastrous way to do government. It's just a straight up political distortion. Just because people don't perceive it as a tax increase doesn't mean it's not exactly the same thing functionally. If you're doing what's "popular" it should be based on transparently debating the costs and benefits and not this bullshit monetary cup and ball game.
If you are “debating costs and benefits,” the fact that the cost is “borrowing money at roughly 0% real interest” is significant. The only reason the is possible is there is a lot of idle capital out there. If private investment were sucking up massive amounts of capital, interest rates would be higher. The fact that interest rates are zero is a signal that there is slack in the economy and that induced demand wkll increase total output rather than just create inflation.
All government spending is borrowed money. “borrowing money at roughly 0% real interest” is just saying "it's no more expensive than spending tax dollars". The only reason to deficit fund spending is to kick the spending down the road in a way that obfuscates the costs to taxpayers. It's about giving cover for politicians to tell their constituents, "Of course YOU won't have to pay for these things. I'd never ask YOU to pay." when the reality is they mostly have no fucking clue who it will end up costing and they don't care because the costs will be dispersed in some way that won't get traced back to them. (It's also a good way of disguising exactly who's throwing money at which cronies when the fed starts throwing a bunch of QE at the financial sector)
Now, none of this is to suggest that there aren't government investments that end up paying off for taxpayers, of course there are, but the ultimate value of a given piece of spending is no lesser or greater based on how it was financed. What changes is the political accountability of the people passing the legislation. I happen to think representatives should be as transparently accountable to their voters as possible.
TLDR: If government spending isn't popular when it has to be paid for, it isn't popular.
I don't know. It seems pretty popular when it has yet to be paid for.
Obfuscating diffuse costs through monetary gimmicks isn't the same as not being paid for.
Which is fine, I just think you lose the high ground of "it's popular". And I think more broadly it's a bad way to do government.
I just love how often you go back to the well of "interest rates are incredibly low" as if that were a completely neutral fact independent of historical government policy. Like, yes r* is negative in the US right now. The channels contributing to that are not all instantaneous and include policy choices going back decades.
Even if inflation does arrive, everybody knows the Fed won't be able to raise rates more than 100-150 basis points over a few years, because if they did it would push the US into a sovereign debt crisis, cause waves of corporate bankruptcies, and basically collapse US politics as we know it. And that jeopardizes the Federal Reserve itself, so they just won't do it.
So just be careful with how much money you think we can dump into the economy, because if inflation does come, it will be low-growth stagflation, and consumers will be forced to eat that inflation for at least a few miserable years. And if that stagflation happens, we all know the Democratic Party will be stuck owning it.
I've wondered about this too. Low interest rates mean that interest payments are low. It says nothing about principle payments. I may be able to afford a $300,000 mortgage at low rates, but that doesn't mean I can afford a $10 million mortgage, even with zero percent rates.
Now, if we offered you a mortgage at -5%, maybe you could swing a $1M home. You'd only have to pay ~$250K by my rough (probably wrong) calculations.
It's very enlightening for me to hear "this is why the Fed won't ever raise rates too quickly" because I never get exposed to the other side of the argument. The only people I ever read arguing for being concerned about this kind of problem are in the denialist camp regarding r* being negative right now (and for the past x years). The idea that there are finance-specific problems that aren't obvious on the surface is much more compelling. So thank you for commenting! Now I have something to dig deeper on.
I mean if you land where I do, you get a set of opinions that are incompatible with either political party. Denialists do so because they want to stay consistent with a party, and they should pay attention to none other than Donald Trump who spent the middle years of his presidency insisting the Fed was raising rates too quickly.
My position is simple: we're a massively leveraged securitization-driven economy, mired in unproductive debt (both public and private), and it's been plain since GFC that we can't let too much of that debt go bad without a deflationary event that would disempower everybody who has let us get this far. Look at Japan for inspiration into our future - the Bank of Japan literally buys ETFs every time the stock market dips a few %.
Yeah I've always wondered about this. Matt and other "there's no downside to spending" types always cite low interest rates like we have simply found ourselves in a period of sunny weather, when it seems to me we *chose* those interest rates.
So if, as a matter of policy, we can choose low interest rates and then as a consequence choose to spend whatever we want without downsides, well, I don't understand economics well enough to know how long this can last but at a gut level it starts to feel pretty Ponzi scheme/perpetual motion.
At the very least we've shown we're vary capable of building really stupid shit with our free, unlimited money - for example, the very urban freeways that we apparently can't afford to fix but always have money to build, and which are huge contributors to climate change.
We did not choose low (real) interest rates. They are natural and part of a long-term trend. I would also expect the Fed to meet its average inflation target even if that required raising interest rates by more than 150 basis points. The political system might then be facing true austerity budgeting for the first time in a long time but I would expect the Fed to prevail.
It is unserious to suggest you can tease out "natural" "long-term" trends from a financial system which has been routinely bailed out by monetary authorities since 1987 to keep institutions from eating bad investments. You don't get to have activist monetary policy/a "Greenspan Put" and also claim to be following "natural" "long-term" trends.
I think you do. Even if you were right the direction of the trend would be salient if not the level. But in any case, the Fed funds rate cannot deviate by much or for long from the "natural" rate without causing hyperinflation or hyperdeflation, so that fact should give a ballpark estimate of where the natural rate is.