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.

I would love to get Arnold Kling's take on the following data on the Canadian economy:

So the manufacturing sector is where most of the damage occurred. Even though it employed fewer than one worker in eight when the recession hit, it accounts for almost two-thirds of the jobs that have been lost. And if we restrict attention to manufacturing jobs in Ontario, the story is even more startling: a sector that employed 5.3% of Canadian workers has absorbed more than 36% of the total losses.

Of course, not all of those losses can be directly attributed to the recession; manufacturing employment was already falling:

Before the recession, the manufacturing sector was losing something over 6,000 jobs a month. If this trend had held up after October 2008, some 80,000 manufacturing jobs would have been lost - about 40% of the total losses that actually occurred.

In Canada, at least, it would appear that the major effect of the recession was to accelerate a number of processes that were already underway. How generalizable is this? And if it is, does this support the recalculation hypothesis?

From The Cleveland Fed:

Some observers blame monetary policy for lowering interest rates over 2002-2005, pushing up housing demand, increasing residential investment, and raising housing prices. In this view, the monetary-policy-induced housing boom thus set the stage for an inevitable housing bust.

Others contend that relaxed lending standards, highlighted by the rise in subprime lending, played a critical role. This loosening of standards led to an increase in housing demand, as mortgages were issued to households that were likely to have trouble making the mortgage payments. This extension of credit to risky borrowers helped fuel a housing boom and set the stage for the resulting surge in defaults, which were a big factor in the housing "bust."

I would add mortgage interest deductability and nonrecourse mortgages to the factors contributing to the housing bust (or making the housing bust worse than it would otherwise be).

That being said, I am not sure you can let monetary policy completely off the hook. A question that needs to be asked is as follows, "Had the United States had Canada's housing and lending policies and avoided a housing bubble, would we simply have seen the bubble occur somewhere else, such as in equities or gold?" Time to see if anyone has studied that question!

But lower overall. From the Wall Street Journal:

Is the current economic slump worse than the recession of the early 1980s?

Measured by unemployment, the answer appears to be no, or at least not yet. The jobless rate was 10.2% in October, compared with a peak of 10.8% in November and December of 1982.

But viewed another way, the current recession looks worse, not better. The unemployment rate among college graduates is higher than during the 1980s recession. Ditto for workers with some college, high-school graduates and high-school dropouts.

So how can the overall unemployment rate be lower today but higher among each group?

Click on the above link to get the answer.

To me, the bigger question is Why do we use the unemployment rate as our primary indicator on the labor market?

Over the past two weeks, our Economics - The Basics section has expanded greatly to include more Econ 101-level information. Is there anything you would like to see added?

Former Canadian politician Ed Broadbent:

Why is it that Finland, Sweden and Denmark have almost wiped out child poverty, and we have not? Why do more than 600,000 Canadian kids wake up hungry and go to school trying to read, write and think on an empty stomach?

He goes on to present a solution:

In the next budget, let's impose a six-point increase in income tax on those earning more than $250,000 a year (whose average taxable income is $600,000). While leaving them with very high incomes, this would provide $3.7-billion in additional revenue.

Stephen Gordon responds in a much more generous way than I would.

If you are going to ask how Finland, Denmark and Sweden are solving the problem, shouldn't you, say, actually look at how they're doing it? The problem is, if you do, you do not come up with the policy response that Mr. Broadbent has been pushing for 3 decades. Here is how they are financing it:

Sales Tax Rates
Finland - 22%
Sweden - 25%
Denmark - 25%
Canada - 5-15% (depending on the province)
EU Source (PDF)

You would think that Mr. Broadbent's party would support higher sales taxes. Think again.

We should be concerned about high levels of poverty. We should also be concerned with: How Good Intentions Lead to Crushing Marginal Tax Rates on the Working Poor.

This line from Arnold Kling on the climate research e-mail scandal:

In my days as a macroeconometric model jockey, I often used "add factors" to make the equations fit the data better. But I never used them to distort the data. I disagree with those who think that "climategate" is a typical scientific brouhaha. This is at least one standard deviation away from normal academic behavior.

If this is one standard deviation away (and I do recognize that Prof. Kling used the modifier 'at least') from 'normal' academic behavior, then 16% of academic behavior, or one academic action in 6 is worse than this. And I thought I had a negative opinion of academic culture!