Let’s set aside for a moment the question of whether government
is inherently biased toward property and focus instead on a purely mechanical
question: is taxation a good tool for preserving gifts of nature? I pose
this question because economists have advocated “green taxes” for
over eighty years, and it’s time to move beyond this hoary panacea.
The idea of using taxes to protect nature dates back to 1920, when Cambridge
University’s top economist, Arthur Pigou, proposed
it. At first blush the idea makes sense. If pollution is free, there’ll
be lots of it. If it’s taxed, there’ll be less. Taxation
forces polluters to internalize some of the costs they’d otherwise
So far, so good. The devil, however, is in the details. For example,
who sets the taxes? What algorithm do they use? How quickly can they
act? To whom are they accountable? And where does the money go?
When the federal government sets taxes, the key players are the House
Ways and Means Committee and the Senate Finance Committee. As any observer
of Congress will tell you, the process of writing tax laws is ugly, contentious,
and time-consuming. Bills are introduced, hearings held, politics unleashed.
More than anything else, this is what keeps Washington’s lobbyists
on their cell phones.
What algorithm drives committee members when they write tax laws? Most
often, it’s what’s best for their reelection. They’re
not economists, they’re politicians. They want to please donors
and voters. Protecting nature, or future generations, isn’t foremost
in their minds. Hence, pollution taxes will never be as high as they
need to be.
Consider a real example here — carbon taxes. A tax on carbon emissions
could, in theory, reduce global warming. But in order to make a difference,
the tax would have to get extremely high. This means Congress would have
to raise the prices of gasoline, natural gas, and electricity year after
year, hitting every business and consumer in the pocketbook. That’s
an improbable scenario.
In most situations, mainstream economists would shout, “Politicians
shouldn’t set prices, markets should!” Prices should announce
to the world, on any given day, what buyers are willing to pay and sellers
are willing to accept. To the extent that government distorts or delays
this process, it leads to inefficient allocation of scarce resources,
not the least of which is Congress’s own time.
So why did Pigou and his followers give the price-setting job to politicians?
Because, in their minds, there was no alternative. Someone had
to set prices for pollution, and they thought no one else could do it.
But there are other options.
Consider, for example, the Federal Reserve Board, created in 1913 to
manage the nation’s money supply. The Fed is a hybrid entity. Technically,
it’s a corporation whose stock is owned by member banks. However,
the seven members of its board of governors are appointed by the president
and confirmed by the Senate to staggered fourteen-year terms. The genius
of the Fed is that its governors can make tough economic decisions without
risking defeat at the polls. In particular, they can raise interest rates,
which means higher borrowing costs for businesses and higher mortgage
and credit card payments for millions of voters. No politician wants
to do this, and thanks to the Fed, none have to. When constituents complain
about high interest rates, Congress members point to the Fed and say, “Talk
to them.” This model is so sensible that, nowadays, almost all
countries use it.
One can imagine similar entities for managing carbon and other pollutants.
Their governors would serve long terms and have a fiduciary responsibility
to future generations. They could make tough economic decisions — such
as raising energy prices — without committing political suicide.
Such entities might appeal to elected politicians precisely because they
permit a shifting of responsibility and blame.
And that’s not the only alternative to political price-setting.
We know from “cap-and-trade” programs that markets can set
prices for pollution. In such systems, politicians have an important
task — they set up the system and assign the initial property rights — but
once they do that, they can be off the hook on prices. ... read
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