the true purpose of a carbon tax

[mike777]

Too be clear I personally support a carbon tax and not for the financial reasons. I am also quite left in my leanings.

 

However, the term revenue neutral strikes me as misleading language. All tax money is spent somewhere, revenue neutral just means the benefactor of this revenue is predetermined.

 

 

ok but why support it...I mean your only goal is to reduce gas emissions because why?

Again you say your main goal is not to stop temp. from rising in the first place or stop disasters

 

 

"I thought the purpose of a carbon tax was to prevent temperature from rising in the first place.

 

A resource-management proposal to prevent future disasters"

--

 

btw I think one can be quite left and be against a carbon tax and for liberal gun laws. ONe can be quite far right and be for a tax and against liberal gun laws :)

[dwar0123]

ok but why support it...I mean your only goal is to reduce gas emissions because why?

Again you say your main goal is not to stop temp. from rising in the first place or stop disasters

 

 

"I thought the purpose of a carbon tax was to prevent temperature from rising in the first place.

 

A resource-management proposal to prevent future disasters"

Because reducing carbon gas emissions will lessen the amount of warming from carbon. I guess I'm not comfortable skipping as many steps between cause and effect as you, it leads to misunderstandings and people talking past each other.

[hrothgar]

ok but why support it...I mean your only goal is to reduce gas emissions because why?

 

 

Mike, you've been reading these forums for a decade.

If you don't under this issue by now just give up...

[Cthulhu D]

I don't pretend to be an expert, but I have long been under the impression that the government should deficit spend when the economy is bad/slow (to stimulate the economy), and run surplusses when the economy is doing well (to pay off the deficits you ran when the economy was slow). It seems the problem is that the second part rarely happens.

 

I have one other major issue with your proposal. Wouldn't that give the president/congress/political parties/etc. incentive to either start a war or keep an existing war going in order to fund their desired spending levels? That seems like the last thing we need.

 

There are a bunch of right wing lunatic economists that believe government intervention, particularly deficit spending, is the only cause of recessions. They also reject the use of models, statistics and maths when testing economic theories, so I leave it up to you what to make of that.

 

However this represents a significant body of economic thought used by the republican party, leading to these NO DEFICITS EVER positions.

[y66]

Or maybe you confused debt and deficit?

 

I mean, wow, this thread is bad even by watercooler standards.

 

The Reuter's article confused debt and deficit when it stated

 

Such a tax would generate approximately $88 billion in 2012, rising to $144 billion by 2020, the report said, slashing U.S. debt by between 12 and 50 percent within a decade, depending on how high the deficit climbs

 

According to the CRS authors

 

Enacting the carbon tax options discussed in the previous section could reduce future budget deficits. As illustrated in Figure 4, a $20/mtCO2 price on carbon (increasing by 5.6% annually) would have a considerable impact on budget deficits using CBO’s August 2012 baseline projection.

 

• The 10-year budget deficit could be reduced from $2.3 trillion to $1.1 trillion, or from 1.1% to 0.5% of GDP.

• Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by more than 50%.

 

Under CBO’s alternative fiscal scenario, the same carbon tax would have a smaller impact on budget deficits.

 

• The deficit would be reduced from $10.0 trillion to $8.8 trillion, or from 4.9% to 4.4% of GDP.

• Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by about 12%.

 

Perhaps our arachnid colleague's estimates were calculated from the single year projections for 2020 which is pretty understandable given the way the Reuter's article was written. Or perhaps not. I get between 1.4% and 6.3% when I compare those projections.

[mike777]

I thought the purpose of a carbon tax was:

 

 

 

"I thought the purpose of a carbon tax was to prevent temperature from rising in the first place.

 

A resource-management proposal to prevent future disasters."

 

I am for it. My concern is:

 

"But there are ideas that reliably cause disasters and one of them is, notoriously, the idea that the future can be scientifically planned"

 

 

But if we dont know it will do this and only be a massive redistribution of wealth i would be against it.

 

 

If, I mean if, this is just another arrogant example of putting massive economic power into the same political hand, I would be against it.

[VMars]

I have one other major issue with your proposal. Wouldn't that give the president/congress/political parties/etc. incentive to either start a war or keep an existing war going in order to fund their desired spending levels? That seems like the last thing we need.

 

That was my first reaction, too.

[billw55]

If, I mean if, this is just another arrogant example of putting massive economic power into the same political hand, I would be against it.

Agree. And conversely, if (and only if) this would be a genuine program to reliably improve our environment, I could be for it.

 

But I have seen our government in action. I have a very high level of confidence that the former is much more true than the latter.

[phil_20686]

Agreed. Federal budgets should be balanced in the long term with some years running deficits and some years running surpluses.

 

This isn't even true. You should run, on average, a deficit roughly in line with your natural population growth. It makes sense to spend more than you have now in order to build the capital that your future citizens will need. This is especially true for human capital.

 

Actually that is not even true. You should also want to have a stock of Government treasuries that is large enough (say 30-60% of gdp for the total stock) for the Fed to engage in effective monetary policy. This isn't strictly necessary, but if you want to fund asset purchases to control inflation/interest rates, then you need to have something that the Fed can buy, without massively distorting spending patterns. If you buy bonds from the government you are basically just spreading the money out among all government spending programs, in the same way as deficit spending. This avoids the Keynesian problem of inefficient spending. In practice its hard to quickly come up with plans to spend enough money to get out of a depression, without just wasting a lot of it. Of course, wasting it can be better than not spending it, but you would rather spend it and build useful things. :)

 

Large temporary deficits are not a problem, and neither are small persistent deficits in a growing population. Persistent large deficits normally end up with inflation. Political systems that are dysfunctional seldom get their act together, and eventually the central bank ends up having to bail them out or face the total meltdown of the system.

[phil_20686]

Agreed. Federal budgets should be balanced in the long term with some years running deficits and some years running surpluses.

 

This isn't even true. You should run, on average, a deficit roughly in line with your natural population growth. It makes sense to spend more than you have now in order to build the capital that your future citizens will need. This is especially true for human capital.

 

Actually that is not even true. You should also want to have a stock of Government treasuries that is large enough (say 30-60% of gdp for the total stock) for the Fed to engage in effective monetary policy. This isn't strictly necessary, but if you want to fund asset purchases to control inflation/interest rates, then you need to have something that the Fed can buy, without massively distorting spending patterns. If you buy bonds from the government you are basically just spreading the money out among all government spending programs, in the same way as deficit spending. This avoids the Keynesian problem of inefficient spending. In practice its hard to quickly come up with plans to spend enough money to get out of a depression, without just wasting a lot of it. Of course, wasting it can be better than not spending it, but you would rather spend it and build useful things. :)

 

Large temporary deficits are not a problem, and neither are small persistent deficits in a growing population. Persistent large deficits normally end up with inflation. Political systems that are dysfunctional seldom get their act together, and eventually the central bank ends up having to bail them out or face the total meltdown of the system.

[phil_20686]

Agreed. Federal budgets should be balanced in the long term with some years running deficits and some years running surpluses.

 

This isn't even true. You should run, on average, a deficit roughly in line with your natural population growth. It makes sense to spend more than you have now in order to build the capital that your future citizens will need. This is especially true for human capital.

 

Actually that is not even true. You should also want to have a stock of Government treasuries that is large enough (say 30-60% of gdp for the total stock) for the Fed to engage in effective monetary policy. This isn't strictly necessary, but if you want to fund asset purchases to control inflation/interest rates, then you need to have something that the Fed can buy, without massively distorting spending patterns. If you buy bonds from the government you are basically just spreading the money out among all government spending programs, in the same way as deficit spending. This avoids the Keynesian problem of inefficient spending. In practice its hard to quickly come up with plans to spend enough money to get out of a depression, without just wasting a lot of it. Of course, wasting it can be better than not spending it, but you would rather spend it and build useful things. :)

 

Large temporary deficits are not a problem, and neither are small persistent deficits in a growing population. Persistent large deficits normally end up with inflation. Political systems that are dysfunctional seldom get their act together, and eventually the central bank ends up having to bail them out or face the total meltdown of the system.

[luke warm]

This isn't even true. ...

you must have been amazingly proud of this post :)

[blackshoe]

I don't pretend to be an expert, but I have long been under the impression that the government should deficit spend when the economy is bad/slow (to stimulate the economy), and run surplusses when the economy is doing well (to pay off the deficits you ran when the economy was slow). It seems the problem is that the second part rarely happens.

 

I have one other major issue with your proposal. Wouldn't that give the president/congress/political parties/etc. incentive to either start a war or keep an existing war going in order to fund their desired spending levels? That seems like the last thing we need.

Personally, I'd rather figure out what's causing the economy to be "slow". Perhaps there's some way to fix that without the government spending more than it takes in. Also, I suspect that leaving money in the hands of private investors is a better long term strategy than this business with the government trying to control the economy through deficit spending.

[awm]

Personally, I'd rather figure out what's causing the economy to be "slow".

 

At this point it seems like the main problem is that people who would spend money don't have money to spend. This perpetuates a lack of demand, which keep unemployment high. Because of the low demand, businesses look to make money by cutting costs rather than expanding; they are able to reduce employee salaries and benefits (even if the company is highly profitable -- see verizon and caterpillar for examples) because the high unemployment rate makes it unappealing for workers to quit (as they may not find another job, and the company can always hire an unemployed person at the minimum wage). State governments are also cutting lots of jobs, basically because they can't run a deficit (many states have the balanced budget amendment) and because the combination of unemployment, reducing salaries, and lack of economic activity reduces tax revenue. This makes the unemployment situation worse, and perpetuates the lack of money in the hands of people who would spend it.

 

We basically need to figure a way to get money into the hands of poor/middle class people who will spend it. Note that big corporations have lots of money (record profits, trillions sitting on the sideline) as do wealthy individuals (CEO salaries keep increasing by large amounts every year, for example); getting more money to these people isn't the answer.

 

At this point there are several possible solutions. The direct ones involve the government either using deficit spending to employ people, or redistributing wealth by raising taxes on those who won't spend the wealth and using it to subsidize (either through jobs or welfare) people who will spend it. This evidently goes against your political leanings. An alternative approach would involve passing measures like raising the minimum wage or mandating paid time off (which would basically force wealth redistribution from businesses to employees without the government as a direct intermediary) or strengthening unions (which might allow employees to negotiate better deals for themselves despite the downward wage pressure from the high unemployment rate) but again these measures are opposed by those with "fiscal conservative" leanings. The economy will probably become "unstuck" in the long run anyway, but basically all the measures that will speed up the process do require government intervention of one form or another.

 

Anyway, as far as a carbon tax goes, the main purpose of this type of tax is to encourage good behavior. It's compatible with a free market system -- one legitimate role of government in a free market is to make sure people pay for externalities. If I can just pollute your air and water without paying for it, the free market system breaks down into anarchy and militarism -- it's easier for me to just take your stuff than follow contracts. Of course the revenue raised in this way can be used for something, but I think most proponents of a carbon tax would say the ideal situation is that no one pays it (i.e. everyone is carbon-neutral)!

[cherdano]

Personally, I'd rather figure out what's causing the economy to be "slow". Perhaps there's some way to fix that without the government spending more than it takes in. Also, I suspect that leaving money in the hands of private investors is a better long term strategy than this business with the government trying to control the economy through deficit spending.

But this is a false choice. You think that if the government doesn't run a deficit, than instead investors will take loans to make investments. But investors don't currently have the luxury of taking out 10-year loans at negative real interest rates.

 

Usually, it's a lot more expensive to defer paying your bills for 10 years. For the US government, it's cheaper to do that.

[phil_20686]

At this point it seems like the main problem is that people who would spend money don't have money to spend. This perpetuates a lack of demand,

 

Everything you wrote after this was unnecessary This is the whole problem. If only there was an institution that was capable of printing money and injecting it into the economy to prop up aggregate demand. That would be free.

 

Oh wait, there is, they just aren't doing a very good job.

 

Fiscal policy works, but governments aren't very good at actually doing it. Monetary policy works better because it spreads the extra money out around the economy and avoids the distortions that are typical when governments try to increase their spending rapidly. Sensible infrastructure investment takes years of planning, for example. If you want to hire more teachers you first have to train more teachers. Possibly build more teacher training colleges etc.

 

The only real insight needed to understand nominal shocks, is that "prices clear markets". In the real world, everyone one is prepared to buy things at some price, and we are never so far out of whack in production that there is not a price that clears inventories. If people arent buying something, it means that the price is wrong. If you make it cheaper, more people will buy it. If this happens to the whole economy at once, we call it a nominal shock, and the response should be to change the price of money until people are buying stuff again. The purpose of money is to facilitate economic activity, you should print the amount that maximises economic activity. Since the value of a dollar is basically (All output)/(All dollars spent = NGDP), we see that nominal shocks (changes in NGDP) are really changes in the price of money. So change it back. :)

 

If you want to know why NGDP fell, well that is a more difficult question, but the why is not too important in determining the correct policy response. I think the best explanation of why it fell is provided by the collapse of the market in CDO's. There was a market with a daily volume in the trillions of dollars, and then there wasnt. Since items that can be exchanged for cash at face value are money, this represented a collapse in the money supply, and this fed through into a collapse in NGDP. If you prefer to think in terms of inflation, this represented a severe deflationary shock. Deflation makes debt harder to handle, and this is basically what drove the banks under. Then the banks started raising liquidity by sucking cash out of what you would call the `real' economy. Thus the deflationary shock in finance was translated into the real economy. The ideal early response is a cash injection into the banks, in return for a share of the profits later, before the deflationary pressure pushed out into the real economy. Now, the ideal response is to inject cash into the real economy, via QE, which will eventually feed into the banking sector and fill up the gaping hole in their liquidity.

 

Finally, the reason it is still going on, is that wages are downards sticky. For example, the chicago teachers did not say that `look, mr Rahm, we realise inflation has undershot, and that our pay now buys 8% more consumption than it was supposed to when we agreed our last pay deal five years ago, and so we should start our negotations with a 8% pay cut.'. Of course, consumption is what matters. Low inflation is crippling chicago's budget, as all its public employees are getting paid more than their negotiations were meant to pay them. If you look at the chicago balance sheet, it will look like revenues are down, but of course this is just the money illusion. Real GDP has not changed nearly as much as revenue projections would suggest, as money is just worth more now.

 

Here is a nice graph of sticky wages:

http://www.themoneyillusion.com/wp-content/uploads/2012/09/wageNGDP-e1348604165929.jpg

 

 

The blue line is average hourly wages, the red line is RGDP, both in 2003$. That tiny down turn in the blue line's gradient is the effect of "wage renormalisation".

 

At least now that the Fed is taking steps to do suitable policy, there is a pretty good chance that the red line will start to catch up to the red line over the coming months.

[luke warm]

At this point it seems like the main problem is that people who would spend money don't have money to spend. This perpetuates a lack of demand, which keep unemployment high.

 

Everything you wrote after this was unnecessary This is the whole problem.

then why doesn't the fed, during the next "quantive easing" just print money and give it to the folks who are dying to spend it? since, i guess, you're against just paying off china with it

[dwar0123]

then why doesn't the fed, during the next "quantive easing" just print money and give it to the folks who are dying to spend it? since, i guess, you're against just paying off china with it

QE is effectively the same thing as printing money and who says the bankers are not dying to spend it. They need some way to keep their multi million dollar a year compensation packages afloat, they have proved incapable of keeping those compensation packages afloat through constructive contribution to society.

[blackshoe]

All I know is, the more deficit, the bigger the debt gets. Fourteen trillion dollars is a very scary number. Ivory tower economists tell me it doesn't matter, but I don't believe 'em.

[dwar0123]

All I know is, the more deficit, the bigger the debt gets. Fourteen trillion dollars is a very scary number. Ivory tower economists tell me it doesn't matter, but I don't believe 'em.

Numbers like these are arbitrary, it is only meaningful in comparison to something, like percentage of gnp.

 

http://en.wikipedia.org/wiki/File:PublicDebtTriade.PNG

[Winstonm]

robert shiller explains fundamental problem of using debt to gdp ratio as a guideline: shiller's text

[phil_20686]

1348886424[/url]' post='670379']

All I know is, the more deficit, the bigger the debt gets. Fourteen trillion dollars is a very scary number. Ivory tower economists tell me it doesn't matter, but I don't believe 'em.

 

It's not that they don't matter, it's that they are unrelated to the short term problems facing the economy. I am in favour of governments cutting their structural deficits. I fully believe that the Fed has the power to fully offset cuts in spending with appropriate policy, provided they are not done with undue haste. I also believe that fiscal policy would work to drag one out of a depression, it is just not as efficient as monetary policy, and that it could be scuppers if they fed did ot support such measures with appropriate policy.

Regarding QE, that does not 'give money to the banks'. You print money and buy Treasuries from whoever holds them and is prepared to sell them. The primary benefactor is the tax payer, since the benefit both from lower interest rates on its stock of debt, and any profit made by the fed on its holdings are returned to the treasury. There is a Small. Secondary benefit from those who hold treasuries, since a large buyer will increase the price, but this is marginal. Prices have not changed much due to QE, and if it's successful bond prices will fall.

Thus the primary beneficiaries of QE are the public, even excluding the fact that it will lead to faster economic recovery, they Fed is making buckets of money which is returned to the taxpayer. :)

[mike777]

fully believe that the Fed has the power to fully offset cuts in spending with appropriate policy, provided they are not done with undue haste

 

 

would you care to elaborate?

 

I thought you are running out of room at the short end of interest rates?

 

I suppose you could go to neg rates at the short end.

[phil_20686]

1348962842[/url]' post='670508']

fully believe that the Fed has the power to fully offset cuts in spending with appropriate policy, provided they are not done with undue haste

 

 

would you care to elaborate?

 

I thought you are running out of room at the short end of interest rates?

 

I suppose you could go to neg rates at the short end.

 

So interest rates are just one reasonably convenient way to do monetary policy. At its most basic, the fed could print money, go to the shops, and buy stuff. Even if they subsequently burnt everything they bought and had Ben bernanke dance naked in its glowing embers, they would still have increased demand for stuff.

This argument basically applies to anything that the fed could buy, but obviously it has a secondary aim of doing stimulus in a productive way that benefits the tax payer, so it buys treasuries, and mortgage backed securities.

Ps note that QE three caused the interest rate on treasuries to go up not down, as interest rates are partly liked to expectations of future growth.