One source of frustration for me when discussing economic policy is outright dismissals of proposals as being 'political infeasible'. Suppose you are arguing for a carbon tax on business offset by reductions in the corporate income tax. You will often hear things such as:

That might work economically, but politically it will never fly. A politician can't enact a carbon tax if he wants to get re-elected. It'll never work. Why not promote a policy that has a chance of passing?

This is a bad argument, for a couple reasons:

1. The person putting forward the position almost never states why it is politically infeasible. It just is, and we're all supposed to accept that. But why? Where's the data? Where's the theory? At least appeal to The Logic of Collective Action or the Median Voter Theorem or the Myth of the Rational Voter. Otherwise you might as well say "I can't counter the economics on that, so I don't want to talk about it."
2. There seems to be an implicit assumption that no politician would raise taxes... ever. But how did we get carbon taxes in the 1920s and in B.C. just this year?. If taxes are never introduced or raised, then how is it that we currently pay so many different taxes?

If I can get one thing for Christmas - just one thing, it is that anyone who makes an appeal to political feasibility back it up with something.

Another Krugman post where I agree with the basic premise:

OK, that's way too strong. But Alistair Darling's new super-tax on bank bonuses sounds like a good idea, on first read. Or as Justin Fox puts it, why the heck not?

Are we afraid that the best and the brightest will leave high finance and pursue other occupations? That strikes me as a good thing: everything we know suggests that the rapid growth in finance since 1980 has largely been a matter of rent-seeking, rather than true productivity. (As Paul Volcker says, it's hard to come up with any clearly productive financial innovations of recent decades other than the ATM).

I agree with the Paul Volcker position on financial innovation. I agree with Paul Krugman that the "rapid growth in finance since 1980 has largely been a matter of rent-seeking". In that case, shouldn't the policy be:

Find out what policies and laws are causing the rents, and get rid of them? Why are economists so allergic to dealing with the root cause of problems? Why must economists always be trying to fight the symptoms, rather than fighting the disease? We see that all the time in the health care debate, where economists fail to recognize that often what is needed is not health care, but avoiding preventable diseases caused by distortionary agricultural policy and an unwillingness to deal with environmental externalities.

There is often a discussion about the great divides in economics - Neoclassical vs. Keynesian, Freshwater vs. Saltwater, Left-Wing vs. Right Wing, Top-Down vs. Bottom-Up, Elites vs. Populists, etc. Another one should be between economists who feel the way to counter the distortions caused by 34 different government policies is to created a 35th policy and those who believe in countering root causes and would like to avoid Rube Goldberg-type policy structures. I said 'should be', because there are so few of the latter kind of economists out there. We could hold our meetings in a phone booth.

A continuation of The Difference Between a Carbon Tax and Cap-and-Trade.

There is a terrific piece at EconoSpeak on the Econ 101 differences between a carbon tax and cap-and-trade under the situation where we lack perfect knowledge about the demand curve. Unfortunately the analysis leaves out what the government does with the money under a carbon tax (which to me, is vital). Of course, if you assume that governments auction off 100% of the permits, then there is not much of a difference. However, in the case of uncertainty the revenue collected from a tax will be different than the amount of revenue collected from a permit auction.

A great piece by Krugman today (no, seriously) - Unhelpful Hansen. One thing I do not understand is this:

For here's the way it is: we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future.

Why is there no chance of getting a carbon tax enacted? I hear this asserted all the time without explanation. British Columbia recently enacted a carbon tax. If B.C. can do it, why not America? It is not as if carbon taxes are new things - Canadian provinces have had carbon taxes since the 1920s. When Alberta enacted their first gas tax, the Yankees had yet to win a World Series! It is not as if this is a radical new proposal.

Krugman does a terrific job in describing the ways a carbon tax is similar to cap-and-trade - but there are two important differences if the cap-and-trade permits are not auctioned off:

1. The revenue generated from a carbon tax can be used to reduce other taxes. If the carbon tax is less damaging to the economy than the tax it replaces (say, the corporate income tax for small and medium size enterprises), there is a net benefit to the economy. There is no such benefit under cap-and-trade.





2. Under cap-and-trade without auctions, permits are given away to companies that already pollute - if companies reduce their emissions, they can sell the permits to other companies. Under this system, billions of dollars in assets are given away to polluting companies by the government. Some of you may be okay with rewarding past bad behavior. Some of you may be okay will billions of dollars of corporate welfare. For me, it leaves a bad taste in my mouth.

Serious question time - Are there any 'progressive' economists (by any definition you want to give to the term progressive) left who believe that giving billions (trillions?) to Wall Street and billions in corporate welfare to big business is bad economics? Other than me, that is.