Mistakes economists make, climate/energy edition
Economist Tyler Cowen has a list of mistakes made by liberal and conservative economists. They are largely of the intellectual, “you’re doing economics wrong” sort. I’m more interested in Ezra Klein’s subsequent list of mistakes economists make in their interactions with journalists and the political class. These are the ones that really grind my gears and often motivate my endless Twitter disputes with economists. (More fun than it sounds!)
It’s worth reading them all, but a couple jumped out as particularly germane to the world of climate/energy policy.
If a policy makes sense only in the presence of a secondary compensatory policy — say, a regressive tax where low-income folks get some sort of refund — then you have to ask yourself whether the compensatory policy will pass. If the answer is no, then you need to come up with something that can pass or rethink your support for the policy. The fact that the losers of trade can theoretically be made whole doesn’t allow you to just assume they will be made whole.
This is a central — maybe the central — problem facing those who support putting a price on carbon.
Since energy is a larger percentage of low-income household budgets, energy taxes are regressive by nature. That regressivity can be offset in any number of ways. In fact, it could be offset with a relatively small portion of the revenue — the Center on Budget and Policy Priorities estimates it would take 14 percent to hold low-income consumers harmless. The feds could do it by reducing payroll taxes, funding efficiency programs, issuing per-capita rebates, or some mixture thereof.
The regressivity can be offset, but will it? A carbon tax of any size will raise a boatload of revenue. Lots of constituencies will want to get their hands on it. From a political economy standpoint, the policy is made weaker if most or all of that revenue is the subject of a tug-of-war every year. This lends weight to the arguments of those who would have the revenue recycled by some preset formula, either into a tax swap or a rebate program, à la cap-and-dividend. (Of course, Waxman-Markey actually returned quite a bit of revenue as rebates, but it never got any credit for it.)
The trick is, the very political economy considerations that make the policy preferable make it more difficult to pass. American politicians are not exactly inclined toward raising revenue at all, but if they do they sure as hell don’t want it put permanently out of their reach. This argues for satisficing — accepting a balance of political attractiveness, progressivity, economic efficiency, and ecological impact. No real-world policy will maximize any of those criteria.
Back to Ezra:
Political power matters. There are many outcomes that are economically efficient in the short term but lead to a dangerous imbalance of political power in the long term — which is, incidentally, not economically efficient at all. This has particular implications for how a lot of economists view unions.
Economists, at least mainstream economists out of the Chicago/neoliberal tradition, are averse to market intervention, generally speaking. Those interventions they do countenance have to do with taxing to account for externalities. They really, really don’t like “picking winners” or setting aside money or favors for particular industries.
Winning politically, however, requires political power, and political power requires organizing and mobilizing constituencies. Policies that strengthen those constituencies increase political power over time, even if their results are economically suboptimal. It’s for this reason (among others) that economists tend to undervalue more interventionist measures. They balk at policies designed specifically to strengthen clean energy industries. They turn their nose up at mandates and standards that force action (and the development of new habits and practices) in places where it might not be economically optimal but is politically important.
Most of Ezra’s list comes to the same thing: economists who want to intervene in the political world ought to learn about and take account of political economy. There’s no problem at all with arguing from pure principle in the academy. But in politics, the purest, cleverest route is almost never available. Arguing against policies that have good political rationale but suboptimal economic justification is the No. 1 way that economists contribute to sh*tty outcomes.