Economics and Politics - Paul Krugman Blog - NYTimes.com

Economics and Politics - Paul Krugman Blog - NYTimes.com:

Think of the benefits to the private sector from pollution. Yes, benefits — in the sense that it’s cheaper to pollute than not to, or that it’s easier to produce goods if you don’t worry about whatever emissions result as a byproduct. So we can think of drawing a curve representing the private marginal benefit of emissions, as in this figure:

In the absence of government action, the private sector will increase emissions up to the point where there is no further marginal benefit. That is, emissions will rise to whatever level is implied by profit-maximization, paying no attention to the effects on the environment.

A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting. This price will, as shown in the figure above, equal the marginal benefit of the last unit of emissions allowed.

Now, the cost to the economy of this limit is the benefit the private sector would have gotten by emitting more than is allowed under the cap. It’s shown in the figure as the red triangle labeled “deadweight loss”. CBO puts these losses under Waxman-Markey at 0.2-0.7 percent of GDP in 2020, 1.1 to 3.4 percent in 2050. These costs have to be set against the environmental benefits.

In addition to this overall economic cost, there’s a distributional effect. The creation of cap and trade means that emission permits command a market price, and the value of these permits — the blue rectangle — goes to someone. Under Waxman-Markey, some of it (a growing fraction over time) would be captured by the government through auctions, and used to cut or avoid increases in other taxes — in effect, recycled to consumers. The rest would be passed on to industry — but because the biggest recipients would be regulated utilities, much of this would also be passed on to consumers.

OK, now let’s send in Beck and Feldstein.

Beck got his number from someone who learned about a guesstimate of what the auction value of permits might be (way higher than current estimates, by the way), divided by the number of households, and proclaimed this the cost of the bill. In effect, he looked at a guess about the size of the blue rectangle, which does not represent an economic cost, and called that the cost to the economy.

In a way, though, what Martin Feldstein did was worse. He took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.

Another way to say this is that under the Feldstein method, any time you try to correct an externality, which necessarily means changing relative prices, all of the negative effects of the price change will be counted as a cost — but none of the positive effects will be counted as a benefit.

Bad stuff. And what you should bear in mind is that all I’m doing here is conventional neoclassical economics, quite literally basic textbook material. What does it say when the people who claim to believe in this stuff throw it out the window as soon as it leads to policy conclusions they don’t like?

Special-Interest Secret - WSJ.com

Special-Interest Secret - WSJ.com:

Behind every policy that does more harm than good, there's a special interest that favors it anyway. The steel tariff was bad for consumers, steel-using industries and foreign steel producers, but the steel lobby still pushed for it. Farm subsidies are bad for both taxpayers and unsubsidized farmers, but in 2002 the American farm lobby got a 70% increase in government support.

...When special interests talk, politicians listen and the rest of us suffer. But why do politicians listen? Social scientists' favorite explanation is that special interests pay close attention to their pet issues and the rest of us do not. So when politicians decide where to stand, the safer path is to satisfy knowledgeable insiders at the expense of the oblivious public.

This explanation is appealing, but it neglects one glaring fact. "Special-interest" legislation is popular.

Keeping foreign products out is popular. Since 1976, the Worldviews survey has always found that Americans who "sympathize more with those who want to eliminate tariffs" are seriously outnumbered by "those who think such tariffs are necessary." Handouts for farmers are popular. A 2004 PIPA-Knowledge Networks Poll found that 58% agree that "government needs to subsidize farming to make sure there will always be a good supply of food." In 2006, the Pew Research Center found that over 80% of Americans want to raise the minimum wage. It is safe to assume, then, that few people want to abolish it. These results are not isolated. It is hard to find any "special interest" policies that most Americans oppose.

...Why would the majority favor policies that hurt the majority? There is a good reason. The majority favors these policies because the average person underestimates the social benefits of the free market, especially for international and labor markets. In a phrase, the public suffers from anti-market bias.

Economists have spent centuries explaining how markets channel greedy intentions into socially desirable results; how trade is mutually beneficial both within and between countries; how using price controls to redistribute income inflicts a lot of collateral damage. These are the lessons of every economics textbook. Contrary to the stereotype that they can't agree, economists across the political spectrum, from Paul Krugman to Greg Mankiw, see eye to eye on these basic lessons.

Unfortunately, most people resist even the most basic lessons of economics. As every introductory teacher of the subject knows, students are not blank slates. On the first day of class, they arrive with strong -- and usually misguided -- beliefs about economics. Convincing students to rethink their anti-market views is no easy task.

The principles of economics are intellectually compelling; but emotionally, they fall flat. It feels better to believe that greedy intentions imply bad consequences, that foreigners destroy our prosperity and that price controls are a harmless way to transfer income. Given these economic prejudices, we should expect policies like steel tariffs, farm subsidies and the minimum wage to be popular.

...In a monarchy, no one likes to blame the king for bad decisions. So instead of blaming the king himself, critics point their fingers at his wicked, incompetent and corrupt advisers. While this is a good way to keep your head, it is hard to take seriously. Kings often make bad decisions; and in any case, if his advisers are hurting the country, isn't it the king's fault for listening to them?

In a democracy, similarly, no one likes to blame the majority for bad decisions. So instead of blaming the majority, critics point their fingers at special interests. But this too is hard to take seriously. The majority often makes bad decisions; and in any case, if special interests are hurting the country, isn't it the majority's fault for listening to them?

We often ponder special-interest politics in order to solve a mystery: 'Why aren't policies better?' Realizing how many bad policies are here by popular demand turns this question upside down. The real mystery is not why policies aren't better. The real mystery of politics is why policies aren't a lot worse.

Peking Over Our Shoulder | The New Republic

Peking Over Our Shoulder | The New Republic: "And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. 'They were intrigued by the most recent legislative developments,' Orszag says. 'It was like, 'You're fresh from the field, what can you tell us?' '

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. 'At some point, if you refuse to contain health care costs, you'll go bankrupt,' says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. 'It's widely known among [Chinese] policymakers.' Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine--kind of the Chinese version of Fortune.

And so, whereas previous U.S.-China dialogues, which former Bush Treasury secretary Hank Paulson officially launched in 2006, consisted largely of discussions of international issues like trade, currency, and cross-border investment, this year's included conversations about domestic topics like health care and budget discipline. Indeed, the joint announcement that capped two days of talks in Washington actually included a U.S. commitment to 'reform its health care system with the aim of controlling rising health care costs for businesses and government . . . [and] reducing the federal budget deficit relative to GDP to a sustainable level by 2013.'

The language marks a shift in Sino-American relations that extends far beyond these formal meetings. For decades, while the United States has prodded China on any number of internal issues, the reverse has rarely been true, except for the vaguest exhortations. The notion that we might take advice from a developing country--even one as large and rapidly industrializing as China--would have been a blow to our self-image, at least if it weren't so laughable. Within a few short years, though, Washington has come face to face with a daunting new reality: Not only are the Chinese raising questions about our domestic policies, but we suddenly have to listen. 'The U.S. had all the answers once upon a time,' says a senior administration official. 'But China's not the apprentice anymore.'
...the Chinese had their own experience with large deficits in the 1980s--driven, in part, by health care costs and other generous benefits under the country's "iron rice bowl" system. The country financed the deficits by printing money, which created inflation and debased its currency. Against this backdrop, the ever-pragmatic Chinese have a hard time believing that Americans, faced with over $9 trillion in deficits this coming decade, might not avail themselves of the same option, devastating China's dollar stockpile in the process. The Chinese leadership shares these concerns--perhaps understandably so. Not only is the United States minting truckloads of debt each day, but, in recent months, the Fed has essentially printed money to buy up substantial chunks of it. "In the meetings I've had, they tend to ask me about . . . the Fed's ability to buy Treasuries," says Steve Orlins, a former State Department official and investment banker who now heads the National Committee on U.S.-China Relations. "The Chinese looked at that [and said], ‘There are two buyers: us and the Fed. That's a little scary.' " Chinese officials can be forgiven for worrying, in weaker moments, that the U.S. government is simply playing them for fools--hawking Treasuries whose value we intend to erode by spurring inflation."

Ezra Klein - Kent Conrad and the 'Annie Hall' Theory of Health-Care Reform

Ezra Klein - Kent Conrad and the 'Annie Hall' Theory of Health-Care Reform: "Kent Conrad is chairman of the Senate Budget Committee and one of the chamber's loudest, and most powerful, deficit hawks. On Tuesday, for instance, he directed the Congressional Budget Office to score the impact of health-care reform over a 20-year time frame, rather than the traditional 10 years. This is a tougher fiscal test than any bill has had to pass in memory.

You could see this as a good thing. Reformers sometimes argue that health-care reform's true impact on the cost curve will be seen over the long term. If CBO's scores reflected that, Conrad's demand could be a boon to reform. But Conrad doesn't appear to believe the scores will reflect that. He called the CBO's scoring of the bill's cost controls 'stingy,' and predicted that 'the savings will be greater than CBO is showing.'
...

One explanation is that Conrad is a stickler for deficit reduction, even at the cost of health-care reform. After all, the CBO's acid test might be overly difficult, but perhaps a high bar is warranted for a reform of this magnitude. 'We've got to have somebody that we give this responsibility to and that we follow,' Conrad explained. That would be more credible if not for two data points.

The first came earlier this year when Conrad modified Obama's first budget. Obama had eliminated a couple of Bush-era gimmicks that made the deficit appear smaller than it really was. Bush, for instance, shortened the budget window from 10 years to five, so the total deficit sounded smaller. Obama's budget returned it to the traditional 10. And then Conrad changed it back. The Politico reported that Conrad made this decision 'because of the uncertainty of long-range forecasts.' Others thought he did it to hide the size of the deficit. In any case, 10 years, as the alert reader will notice, is less than 20 years. If 10 years was too long a time period for certainty, then it is difficult to see how 20 years could possibly be acceptable.

The second came in 2003, when Conrad voted for the Medicare Modernization Act, better known as
Medicare Part D. The Congressional Budget Office estimated that the bill would increase the federal deficit by $421 billion and reduce federal revenue by another $174 billion. The total cost to the deficit, then, neared $600 billion. Conrad not only accepted the CBO's 10-year time frame, but he voted for the bill."

Health costs hurt incomes in Bush years | Marketplace From American Public Media

Health costs hurt incomes in Bush years | Marketplace From American Public Media: "The more plausible culprit is the surge in health care costs. Over the years from 2000 to 2007, the price employers paid for labor rose handsomely: on average, 25 percent. Yet for the typical worker, none of that extra cost translated into higher wages.

Between 2000 and 2007, the cost of the average health insurance policy for a family of four doubled, from about $6,000 to over $12,000. That took a big bite out of the gains available for wage increases. More than a bite: the health-care system gulped down every morsel, and forced employers to raise co-pays and deductibles for good measure."

Barack Obama Does Something Really Stupid: Tire Tariffs

Barack Obama Does Something Really Stupid: Tire Tariffs: "Barack Obama does something stupid. So does Harold Meyerson, who writes an op-ed on the tire tariff that clouds the issues."