http://www.canada.com/ottawacitizen/views/story.html?id=244d2749-4441-4150-aeb2-8a1d8208b037
Dan Gardner . Harper economics
Dan Gardner
The Ottawa Citizen
Wednesday, September 17, 2008
Stephen Harper has a masters degree in economics. He is conservative. He says he understands how markets function and he prefers market solutions to public policy problems.
Gregory Mankiw is a professor at Harvard University and a world-renowned economist. He was chairman of U.S. President George W. Bush's Council of Economic Advisers and adviser to Mitt Romney's campaign for the Republican presidential nomination. Mankiw definitely understands how markets function and he, too, prefers market solutions to public policy problems.
One might think Stephen Harper and Gregory Mankiw would agree on energy taxes. But one would be wrong.
Stephen Harper says the Liberal "green shift" proposal -- a carbon tax on most forms of energy with matching cuts to income, corporate and other taxes -- could do "catastrophic" damage to the economy. He is proposing instead to cut the federal tax on diesel, which will, he says, reduce shipping costs and the costs of goods in stores.
That sort of sounds like the kind of advice an economist would offer. Don't add taxes. Reduce them. Get government out of the way. Let the market provide.
But Gregory Mankiw suggested something considerably different when I called him at his Harvard office. Gas should be taxed much more, he said. So should lots of other energy-related products. But be sure to off-set those taxes with cuts to income and other taxes.
Sounds familiar, doesn't it? But let's not wander back into politics just yet because Mr. Mankiw knows little about Canadian politics and, quite sensibly, cares less.
His reasoning is straight out of Economics 101. It starts with "externalities."
Take a Sunday drive and your car emits various gases, including carbon dioxide. This adds to the rising atmospheric concentrations of carbon dioxide that are the principal cause of climate change. But do you pay for having contributed to the flooding of Bangladesh? No, you don't. That is an externality: A cost suffered by someone other than the responsible party.
Taxing people to ensure they pay for the external costs they impose on others is fair, but fairness is more the bailiwick of philosophers than economists. What economists care about is the efficient allocation of resources, which markets do wonderfully -- except when there are externalities involved. So making people pay for externalities improves market efficiency.
Of course, energy taxes mean higher energy costs. That hurts people and damages economies. The solution? For every dollar of increased energy tax, there must be a dollar cut from the burden of income or other taxes.
OK, some may say. I get the theory but I think climate change is bunk. So the whole thing falls down.
But it doesn't. Aside from climate change, energy use inflicts all sorts of external costs. "One might debate the science behind climate change," Mankiw notes, "but I don't think you can doubt that having more cars on the road, congestion get worse and accidents get worse." (It's worth noting the Liberal plan would not increase the existing tax on gasoline. Only other energy sources would be hit. Why is that? Politics. Only gasoline prices are advertised on large signs at the side of the road.)
Now, the Conservatives will protest that they've already introduced a plan for American-style fuel efficiency standards, which will ultimately reduce carbon dioxide emissions. But what they don't mention is that this will increase the cost of producing cars, which will be reflected in the price tag. So consumers will pay just as they would with a carbon tax -- except the government will raise no revenue and there will be no off-setting tax cuts.
The same problem vexes cap-and-trade, which is an alternative to carbon taxes supported in principle by everyone from the NDP to the Conservatives and Ontario Premier Dalton McGuinty. If emission credits were auctioned off by the government, a cap-and-trade system would be almost identical to a carbon tax. But for various political and practical reasons, cap-and-trade systems seldom auction credits. Instead, credits are given out to existing polluters based on current emissions and so, in the end, the costs of a cap-and-trade system are passed along to consumers but the government raises no revenue and there are no off-setting cuts to income and other taxes.
So why is the cap-and-trade option preferred by almost all politicians? As usual, it's politics. Under cap-and-trade, politicians can claim they are hitting "big polluters" while leaving the ordinary person unscathed. That's nonsense, of course. Costs borne by big polluters will be passed on, so the ordinary person pays either way. But with cap-and-trade, unlike a carbon tax, the cost to the ordinary person is hidden.
This is all orthodox economics, Mankiw insists -- a 2006 survey of American Economic Association members found two-thirds agreed that "the U.S. should increase energy taxes" -- and so the issue shouldn't be cast as left versus right. It's more like "experts versus laypeople. There is a big gap between what economists view as very sensible and non-controversial policy and what the public is willing to swallow." Closing that gap is "fundamentally an issue of education."
I wouldn't be so sure about that last point. After all, a masters degree in economics hasn't done much for Stephen Harper.
