In few policy areas does good economics seem to conflict so dramatically with good politics as in the practice of subsidies to food and energy. Economics textbooks explain that these subsidies are lose-lose policies. In the political world that can sound like an ivory tower abstraction. But the issue of unaffordable subsidies happens to be front and center politically now, in a number of places around the world. Three major new leaders in particular are facing this challenge: Sisi in Egypt, Jokowi in Indonesia, and Modi in India.read more
In the wake of the April oil well blowout off the coast of Louisiana, policy-makers are rethinking the issue of off-shore drilling. Clearly the last decade’s neglect of safety rules by federal regulators needs to come to an end. But what larger implications should we draw for domestic oil drilling?
The tension has long been between those who give primacy to the environment, on the one hand, and those who give primacy to business on the other. Probably some of the first group oppose all oil drilling and some of the latter support all oil drilling (even when the government unconscionably offers oil leases on federal lands at below-market rates, as it often has historically). As so often, the right answer lies in between. Continue readingread more
I agree with Greg that the dominant empirical fact about investment is its procyclical volatility (the main reason investment has been depressed for the last two years is that the economy has been depressed), and also that the recent credit crunch made it worse. But I don’t agree with a third item on his list: “the policy environment seems adverse to business.” As in many areas, it is when we get to the politics that I disagree.read more
I was recently asked by the National Journal to comment on what I thought was a desirable path for tax reform, if one could wish away political constraints that normally handcuff politicians. My answer was, of course, to tax energy, particularly carbon emissions, and use the revenue to reduce other taxes. As I and many others have noted often in the past, taxes on oil or gasoline hit many birds with one stone.
Discussion of energy taxes has always been political suicide. But here are several twists that could potentially increase the ability of the electorate to swallow them politically:read more
Politicians are often tempted to think that a policy to help one goal, say air quality, must also help lots of other goals, say economic growth. Economists are more likely to presume tradeoffs, and to use the principle of targets and instruments. That principle says that you cannot expect to hit more than one bird with one stone, except by coincidence.
At the American Economic Association meetings in San Francisco, January 3, I was on a panel titled “Energy and the Environment: Policy Advice for the New Administration” (along with some real energy experts; I am a relative latecomer to the area). Within the framework of targets and instruments, I proposed a matrix such as the one that appears below. Continue readingread more
Three areas that President Obama will have to address during his term in office are the recession, energy and the environment, and the long-run fiscal outlook. The recession is the most urgent. But the long-run fiscal outlook will be the most difficult. Social Security and Medicare would have made addressing the long-run fiscal outlook difficult in any case. (Did you know that the first baby-boomers are starting to draw Social Security this year?) The Bush tax cuts of 2001 and 2003 made it worse. The rapid spending increases of the last eight years made it still worse. The financial crisis and recession are now making it still worse. To be clear, fiscal stimulus today is appropriate, given the weak economy. The trick is to combine it with the minimum damage to future budgets.
Ten years ago this summer, President Clinton’s Council of Economic Advisers, of which I was a Member, responded to requests from the Congress, which was then under Republican control, to explain in analytical terms what would be the economic effects of the Kyoto Protocol on climate change that had just been negotiated among the members of the UN Framework Convention on Climate Change. Our response was a document called the Administration Economic Analysis. It relied on some of the leading Integrated Assessment Models, and showed that the costs of Kyoto could be relatively low provided international trading of emission permits were freely allowed, and provided developing countries participated in the system. Not zero costs, as wishful thinking by some techno-optimists would have it. Not prohibitive costs, as some skeptics would have it. But moderate costs — relatively low if measures could be implemented sensibly.
President Bush yesterday eliminated a 27-year executive moratorium on off-shore oil drilling (NYT, 7/15/2008, p.A13), a move also supported by presidential candidate John McCain.
The Democrats responded:
(1) that this was an election-year stunt,
(2) that the move would be too small to make a difference
(3) that it would bring no downward pressure on oil prices at the crucial short-term horizon, and
(4) that it would not ultimately help move the country in the direction of energy security.
The Democrats have the right answer, but are perhaps giving the wrong reasons.
Everyone is looking for someone to blame for high prices of oil and other mineral and agricultural commodities. Speculators (among others) are high on the list, followed by the Federal Reserve. While I don’t think blame is necessarily the right concept here, I have been arguing that low real interest rates have worked to raise real commodity prices through a number of channels. Each of these channels could be called “speculation,” if speculation is defined as behavior based on expectations of future prices.read more
Economists frequently complain that even when 98% of the profession agrees on something (say a free-trade proposition), the media will go to lengths to dig up an economist from the 2% minority in order to balance one from the 98% majority, in their feverish and misguided attempt to appear unbiased and balanced on every issue, even issues that don’t really have two sides. The New York Times op-ed page has outdone itself today by publishing “The 18-cent Solution” by Bryan Caplan. The “callout” heading is “Found: an economist who backs the summer gas-tax holiday.” The impetus, of course, was the question posed to Hillary Clinton by a reporter: can you name a single economist who supports the idea of a summer suspension of the federal gasoline tax? Newshour gave up on trying to find one.read more