Saturday, June 27, 2009

Efficient vs. inefficient regulation

As part of outsourcing economic criticism to save money during tough economic times, I’ve been quoting conservative and libertarian critics of the administration’s economic policies.

Today I’ll quote from three nominal supporters of the Waxman-Markey bill that passed the House Friday on a 219-212 party line vote (eight Democrats voted “no”.) All agree that “cap and trade” makes more political sense than it will ever make economic sense. Finally, I include a more skeptical analysis of the bill’s likely effects from one of the usual suspects.

The first two quotes are from the standard-bearer of American liberalism, the Gray Lady herself. From a May 17 NYT article by John Broder:

How did cap and trade, hatched as an academic theory in obscure economic journals half a century ago, become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?

The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.

Many members of Congress remember the painful political lesson of 1993, when President Bill Clinton proposed a tax on all forms of energy, a plan that went down to defeat and helped take the Democratic majority in Congress down with it a year later.

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.
From a column by Thomas “World is Flat” Friedman, April 8:
Last week, House Democrats, with administration support, introduced a 600-page draft bill on energy and climate. At the center of it is a plan to reduce greenhouse-gas emissions through a complicated cap-and-trade system. These people have the very best of intentions, but I wish they would step back and ask again: Can cap-and-trade pass? Will it really work? And is it the best strategy, with all the bureaucracy it will require to monitor, auction emissions permits and manage the trading?

Advocates of cap-and-trade argue that it is preferable to a simple carbon tax because it fixes a national cap on carbon emissions and it “hides the ball” — it doesn’t use the word “tax” — even though it amounts to one. So it can get through Congress. That was true as long as no one thought cap-and-trade could ever pass, but now that it might under Mr. Obama, opponents are not playing hide the ball anymore.

Since the opponents of cap-and-trade are going to pillory it as a tax anyway, why not go for the real thing — a simple, transparent, economy-wide carbon tax?
A word from the Washington Post editorialists on Friday:
Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) have toiled for months to produce legislation that would mark the first of many steps leading to a carbon-constrained economy -- and that would also get votes. The result is a 1,201-page measure filled with political compromises, directives, subsidies and selections of winners and losers that most members won't be able to analyze before the vote and that leaves us wondering how effective it will be.

The government would set a cap on the amount of carbon dioxide that could be emitted and would issue allowances to polluting sectors that could buy and sell those rights.

This complex system has some theoretical advantages over our preferred alternative -- a straightforward, easily understood carbon tax -- but it could be vulnerable to manipulation that would compromise its effect. Already pollution credits and their revenue are being divvied up to the advantage of polluters. During the campaign, President Obama supported the cleanest variation of this mechanism: selling all emission allowances at auction. This week he abandoned that sensible stance with a full-throated endorsement of Waxman-Markey, which gives away 85 percent of the pollution credits in the first years of the program and provides many avenues potentially to evade compliance. While in theory the bill relies on the market to find the most efficient alternatives to greenhouse-gas emitting energy sources, in practice its subsidies, regulations and exemptions could skew the outcome in costly ways.
Finally, from the Wall Street Journal editorialists, also on Friday
The Cap and Tax Fiction

[T]he Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. … A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.

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