The “Fairly Impeccable” Case for (Revenue Neutral) Carbon Taxes

In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes at Cato Unbound:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.

Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic.  And you don’t need to be a Cato libertarian to come to this conclusion.  You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way).  This seminal piece from economists A. Lans Bovenberg and Ruud de Mooij is also good.  As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:

Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result.

Read that last sentence again.

So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same?  Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2.  Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.

Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper – and much more effective – than a policy of reducing greenhouse gas emissions.  Moreover, Goklany points out that this conclusion holds even if we accept the worse-case scenarios spun-out in the Stern Review on the economics of climate change.

Of course, Matthew Yglesias is free to disagree with the above.  But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway.  There are ample grounds for disagreement … and that’s true even if we ignore the debate about the underlying science.

Helicopter Paulson

Government equity investment or rescue of the broader (non-financial) economy is a mistake.  It will damage economic efficiency in the long-term by diluting the value of private shareholders and reduce incentives for cost cutting and product quality innovations.

Of course, the current focus is not on long-term incentives but on how to shorten and moderate the current economic recession.  The constantly changing mix of initiatives from the Treasury suggest:

1. A lack of knowledge/vision about what to do–so they’re throwing money at everything that moves in the hope that something will work.  These ex-Goldman Sachs personnel that make up the Paulson team are probably not economists–and certainly not good ones.  The majority are probably MBAs with little understanding of how things really work in the economy. They probably have a microeconomic firm-specific orientation and management skills that are unsuited for their current responsibilities. If I’m wrong, I’d be very surprised. If I’m right, it’s showing.

2. An attempt to assuage competing political constituencies and provide benefits to potential future supporters.

3. An attempt to distribute wealth to those people/firms that the next Congress and president won’t support–by tying their hands through government ownership of firms.

4. A deliberate and cynical attempt to damage the economy even more to make life difficult for the Obama administration.

I think # 4 is cynical on my part. But although unlikely, it is not impossible given how polarized the political atmosphere was during the GW Bush presidency.

Broad government involvement in private firms to solve the economic crisis is a dangerous turn.  The shareholders in these firms took risks and should bear the consequences of their decisions. If they sink, the economy may recover faster as other businesses are created over time in non-housing and less energy intensive sectors.  Supporting existing, inefficient firms run by poor decision makers is likely to prolong the recession because keeping those firms and their managers afloat won’t help to restore market confidence.  And, this policy will encourage future investors/managers to take even riskier decisions under expectations of yet another government bailout if they fail. Finally, government debt-financed wealth injections are worsening the nation’s finances–we’re already swimming in huge and unpayable entitlement obligations to a growing number of retirees, disabled, poor, and the sick.

The government purchase of securitized auto loans is probably intended to insure auto company creditors, who would otherwise become bankrupt and prolong the credit-flow freeze.  It’s another source of bad assets on bank and non-bank financial firm portfolios that’s contributing to the market failure in that sector.  I’m more sympathetic to the original TARP idea than government officials seem to be. That way the government’s involvement in the private sector will be limited and it will remove bad assets from their balance sheets–which are responsible for the pervasive uncertainty among financial market players and is causing the credit freeze.  But under TARP, government officials don’t get to choose whom to support–they must buy up assets from whoever is currently holding them–be it domestic or foreign firms, “friends and relatives” or “strangers and enemies.”

Bill vs. Reality

Fresh off his failure to defeat political reality with his Strong American Schools—which tried to push education high on the list of presidential election concerns—as well as disappointment with his small-schools efforts, Bill Gates is trying a new fix for American education: national standards.

How much money does this man have to lose before he gives up on the socialist, monopoly system we’ve got now and starts pushing truly game-changing reforms like school choice?

Don’t get me wrong: I’m not against Gates trying to formulate standards and tests and convince schools to use them. I don’t distrust Gates because he’s too influential, for instance, nor do I have any problem with national standards as long as parents are free to choose schools, and schools are free to adopt, oh, let’s call them Standards Vista. I just think Gates is delusional if he thinks the inevitably politicized, special-interest-dominated public schooling system that he’s never been able to change before is going to suddenly rush to adopt really challenging standards and tests.

As I’ve repeated until I’m blue in the face (or numb in my typing fingers) really high standards and rigorous tests will never be adopted and maintained by most public school systems because they would be hard to reach and, hence, a big pain for the people with all the power: teachers, administrators and politicians. Why challenge yourself when you can get the money for free?

So let’s get first things first, Mr. Gates: Get education money to parents, and autonomy to schools, so we can have real choice and competition. Then I’ll gladly cheer on Microsoft as it battles Apple, the Educational Testing Service, Billy Mays, or anyone else who wants a piece of the suddenly competitive, innovative, and dynamic national-standards action.

Change We Need, Except When, Umm, the Unions Don’t Like It!

Kudos to Clarence Page for hitting President-elect Barack Obama on school choice.

Obama’s daughters are currently enrolled in a private school. The Obamas are likely to send them to one of the more expensive and exclusive private schools in DC. But Obama opposes private school choice programs that would allow parents with smaller incomes and less power to find good schools for their own children.

Page asks Obama, “what about the kids left behind in failing schools?”

Unfortunately, Obama has followed the lead of most other black politicians and decided that the poor black (not to mention white, Hispanic, Asian, etc.) kids left behind can wait for another 5, 10, or 15-year plan to improve the public schools.

It’s a sad political fact that black leaders are as strongly opposed to school choice as black parents are strongly supportive of it.

A 2001 study from the Joint Center Political and Economic Studies found 70 percent of black elected officials oppose vouchers while “in the black population, there was what can accurately be described as overwhelming support for vouchers (approximately 70 percent) in the three youngest age cohorts” under age 51. Support for vouchers in the inner-city can hit 77 percent according to research conducted by Terry Moe.

There is a massive and problematic disconnect on education policy between the average black voter on one side and the Democratic Party and black leaders on the other. It’s nice to see a liberal pundit point this out.

Tim Lee on “the Durable Internet”

Tim Lee released an excellent new Policy Analysis today. The Durable Internet: Preserving Network Neutrality without Regulation is a must-read for people on both sides of the debate over network neutrality regulation.

What I like best about this paper is how Tim avoids joining one “team” or another. He evenly gives each side its due - each side is right about some things, after all - and calls out the specific instances where he thinks each is wrong.

Lay readers may be challenged by some of the concepts in the paper, but there’s no time like the present to familiarize oneself with the basic infrastructure of our future economy and society.

Tim makes the case for treating the “end-to-end principle” as an important part of the Internet’s fundamental design. Tim disagrees with the people who argue for a network with “smarter” innards and believes that neutrality advocates seek the best engineering for the network. But they are wrong to believe that the network is fragile or susceptible to control. The Internet’s end-to-end architecture is durable, despite examples where it is not an absolute.

Tim has history lessons for those who believe that regulatory control of network management will have salutary effects. Time and time again, regulatory agencies have fallen into service of the industries they regulate.

“In 1970,” Tim tells us, “a report released by a Ralph Nader group described the [Interstate Commerce Commission] as ‘primarily a forum at which transportation interests divide up the national transportation market.’” Such is the likely fate of the Internet if its management were given to regulators at the FCC and their lobbyist friends at Verizon, AT&T, Comcast, and so on.

This paper has something for everyone, and will be a reference work as the network neutrality discussion continues. Highly recommended: The Durable Internet: Preserving Network Neutrality without Regulation.

Border Biometrics: “Zero Benefit?”

ZDnet ran a story last week citing how security guru Bruce Schneier slams the US-VISIT program, which collects biometrics from people entering the country, saying that it has “zero benefit.”

I respect and like Bruce — he will be a participant in a major counterterrorism strategy conference we are having at Cato in January — but I have to voice my disagreement with him on this score. My belief is that border biometrics have an extremely small benefit — a benefit that rounds to zero, and one that is more than canceled out by the costs. But not zero.

As of 2006, US-VISIT had cost about $15 billion and was responsible for the apprehension of about 1,000 criminals.

“Take that $15 billion number,” wrote Schneier in a 2006 blog post. “One thousand bad guys, most of them not very bad, caught through US-Visit. That’s $15 million per bad guy caught. Surely there’s a more cost-effective way to catch bad guys?”

He’s right, but that’s an illustration of the costs overshadowing the benefits, not zero benefit. (Net benefits are actually negative. We’d be better off letting those 1,000 criminals remain free to do their hundreds of thousands  of dollars in damage, or using conventional law enforcement methods against them, than spending $15 million each to catch them.)

In defense of border biometrics, the article cites Robert Jamison, undersecretary at the Department of Homeland Security’s National Protection and Programs Directorate, which oversees US-VISIT:

“There have been several instances of someone applying for entry under one name, being denied, applying under another name, and again being denied [due to biometrics records],” said Jamison. “In a few cases, criminal activity and, in some cases, terrorist activity have been prevented.” Jamison declined to say exactly how many terrorists had been caught as a direct result of the program, saying the information was classified.

Rather than granting Jamison’s assertions and accepting the existence of benefits, Schneier has probably done in shorthand what any good judge in a court would do: find unproven a fact that a party won’t present reliable evidence for. Though the average American (and reporter) probably does, Schneier doesn’t grant as proven whatever a self-interested national security bureaucrat claims to be true but secret.

But for the sake of argument, let’s grant that a few people with some level of terrorist intent were turned back by border biometrics. This is prevention of “terrorist activity” in the sense that a person with terrorist intent was prevented from doing something he wanted to do. But entering the country is only a small part of doing any damage once inside the country.

There’s a terrific example written up here of a man turned away at the U.S. border (not by US-VISIT but by a program called ATS-P) who later became a suicide bomber in Iraq. The implication DHS officials would like you to take from this is that preventing his entry into the country prevented a suicide bombing in the United States. In fact, it’s just as likely, if not more, that this individual became suicidal because of being turned away — he had already lived in California for two years without incident. And one can’t exclude the possibility that he was coerced to commit a bombing through threats, a hostage-taking of a family member, or some other way.

Anyway, turning someone away from the border is a trivial security against terrorism because terrorists are fungible. Turning away a known terrorist merely inconveniences a terrorist group, which just has to recruit someone different. The 9/11 attacks were conducted for the most part by people who had no known record of terrorism and who arrived on visas granted to them by the State Department. Biometric border security would have prevented none of them entering.

(Another option is physical avoidance of the border — crossing into the United States from Canada or Mexico at an uncontrolled part of the border. I know of no instance of this occurring (successfully), but it could. And, most importantly, there’s no cost-effective way to prevent it.)

In summary, border biometrics have some benefit! They are at best a mild inconvenience to terrorists — an inconvenience that the 9/11 attacks mostly anticipated. But that’s not zero benefit! It’s just negligible benefit.

In May 2007, I testified in the Senate Judiciary Committee about the costs and benefits of the REAL ID Act, a similar identity-based security system — and similarly expensive at about $17 billion. Because avoidance of identity-based security is so easy, its benefits are quite small, though I allowed it generous assumptions at every turn:

Assuming … that a future attack would be on the scale of a 9/11 — an exaggerated assumption unless all the rest of our security efforts have done nothing — REAL ID might be assumed (generously) to delay such an attack by six months. The value of delaying such an attack, and thus the security value of REAL ID, ranges from $2.24 billion to $13.1 billion. REAL ID offers less in benefits than it does costs — even using very generous assumptions.

But, again, that’s not zero benefit. It’s a very small benefit, a benefit that is far outstripped by costs. We’re doing ourselves more harm than we’re preventing with border biometrics — and that’s just on a static dollar-for-dollar basis, not accounting for lost tourism, trade, and goodwill.

More Debunking of DHS E-Verify Claims - and the Bureaucrats that Make Them

In past months, I spent a good deal of time debunking advocacy for E-Verify from the Department of Homeland Security.

The National Immigration Law Center has been in the fray for quite a while, too - they have a wealth of materials online - and recently added to it with a short, sweet primer on what it takes to comply with E-Verify: more than DHS wants to believe, that’s for sure.

That’s typical of bureaucrats, by the way. They study their programs all day every day - unaware of the challenges and priorities of real businesspeople - and come away finding it impossible to believe that someone could find their product complex.

Well, guess what? When your job is running a plumbing business, a grocery store, a restaurant, or a manufacturing plant, you don’t have all day every day to figure out your compliance issues. They’re burdens that destroy productivity.

E-Verify has been offered up as a panacea for immigration problems, but the cure is worse than the disease. I wrote at length about the regulatory burdens, complexities, and principled reasons to oppose electronic employment verification on principle in a paper called “Franz Kafka’s Solution to Illegal Immigration.”

I had a friendly chat with Stewart Baker, the foil in many of my “debunking” posts linked above, the other night. Affable as ever, he reported unawareness of my writings on this blog. If true, this illustrates another problem with bureaucracy: Decision-makers are insulated to the point of ignorance. Privacy advocates “can’t and won’t tell you precisely how [things like] REAL ID [and E-Verify] threaten[] privacy” if you’re not paying attention.