Tuesday, October 27, 2009

 

CBO Testimony Misleads on Cost of Cap-and-Trade

A team effort but I had a lot to do with this new IER blog post, regarding CBO Director Elmendorf's recent testimony on the economic impacts of carbon dioxide legislation.

Some of the points will be familiar to long-time readers, but one new thing I verified--after emailing with a CBO economist--is that the distinction between "household purchasing power" and "GDP" is very slippery:

After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:
In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.
This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.

Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”

Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.



Comments:
IER? Isn`t that the "free-market" blog that bans libertarians who are not on their pro-coal, pro-pollution wagon?

But while we`re on the subject, let`s not forget:

- Austrians` fundamental objections to cost-benefit analysis;

- that the combustion of coal, in addition to whatever climate "cost" it might have to various people whose preferences can`t be measured, has very real costs in terms of damage to persons and property;

- that federal law sanctions this, and grandfathers the very worst midwestern utilities, the oldest 10% of which (45 or so) are (according to the latest NAS report) estimated to be responsible for 43% of the damages;

- that our federal governments and states own most of the coal deposits and are otherwise addicted to the revenues;

- the "costs" that the IER analysis refers to are not discounted to present value;

- the costs of doing nothing are not considered;

- alternative policies - such as a rebated carbon tax, allowing immediate amortization of capital investment, eliminating antitrust immunity for public utility monopolies, ending Clean Air Act handouts to the worst utilities - are never advanced, much less their costs weighed;

- the risks of "do-nothing" policies are hardly considered, and when so are heavily discounted;

- the need for investment in infrastructure and change in laws to adapt (and foster adaptation) to very real ongoing climate changes are never discussed; and

- no one at IER ever seems to question the unstated presumption that utilities and our transportation industries have somehow homesteaded an ownership right over the global atmosphere, so that it`s perfectly okay to dismiss the preferences of those who have concerns at home and those abroad in the least developed countries that are most vulnerable to damages (much less to suggest how those injured should be aided).

In other words, those defending the status quo seem to have abandoned any Austrian training (or to have no familiarity with its concern for problem-solving and awareness that common law protection of private property rights was hijacked a century ago, with massive pollution and rent-seeking problems being the result).

Someone ought to post a few of these thoughts over at IER; Rob Bradley somehow finds comments of this type over fundamental principles to be "ad hominem" arguments.

Sure, we should fight over policy, but let`s not ignore principles or put our heads in the sand.ter
 
Supporters of cap and trade always turn to the argument that opponents are burying their heads in the sand. It's not true. This legislation won't do anything to help the environment. It is merely a front so that the administration and the Democrats can say they did "something." We don't need legislation that is going to cost every single American household and won't even be able to achieve its stated goals. Write your Congressmen at http://dontcapandtradeourjobs.net/?tr15.
 
Concerned, you`re missing my higher -level poinht, which is that IER is rather apparently UNINTERESTED in engaging productively or on a principled basis on this issue; rather, they are simply sniping (though they make excellent points) at the cap-and-traders).

Though, of course, from the view of those financing them, this form of engagement may very well be "productive", if it delays any action that will lower returns to coal, rail or utility investors.

What`s regrettable is that this obfuscation, which has been going on for decades, is what is likely to saddle us with extremely costly, porky and ineffective "climate change" policies.
 
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