Global Warming vs. Medicare

I was noodling around yesterday with Excel in regards to government spending, Medicare and economic growth. I wanted to see how big government spending would get, as a percentage of GDP, over time as Medicare continued to grow at a rate of about 2.5% points higher than economic growth (source). First I checked 20 years, then thirty and eventually I got as far as 100 years. Sure, it is a bit silly to hold a projection that far based on a historical record that is about half the size of the forecast horizon, but what the heck…I was just noodling around.

But then when I was looking at the percentage of government spending (federal only mind you) for the 100 year scenario I had a thought…”Hey, I wonder why the global warming advocates aren’t all over this too?” After all, if just federal government expenditures account for almost 70% of GDP that is…well not a good thing in terms of our future. And the bulk of that will simply be just Medicare/Medicaid, forget about the increases in Social Security and other potential problems such as the higher tax rates necessary to sustain that kind of spending will likely slow economic growth. It seems to me that is one is going to wring their hands about temepratures 100 years hence, then shouldn’t such people wring their hands about immiserating taxation and spending 100 years hence?

And this brought to mind another thought I had about global warming and the people who think both the hypothesis is true and that it is a bad thing: they really don’t believe it. Deep down I doubt the veracity of their beliefs in the dangers of global warming, or either that they see the dangers sufficiently far off that they don’t feel that something serious should be done today. The reason I think this is simple. If you really truly believe that Anthropgenic Global Warming (AGW) is a serious threat to the world on a variety of fronts (catastrophic changes in weather patterns, rising ocean levels, rampant disease, etc.) then there is a really simple and obvious solution. In fact, somebody has already suggested the solution.

Yes that is right, higher taxes. This is basic public economics (and also basic environmental economics). This is so basic anybody who has taken either of these classes at the undergraduate level should be totally and fully aware of this solution. Yet, what do we hear about from most of the advocates of the AGW hypothesis? Kyoto this, Kyoto that. Bah, Kyoto wont work. But taxes? Taxes will work, and not only that they are simple to put in place. What isn’t simple is finding the right level for the pigouvian tax, but when there is a tax people will eventually reduce their consumption of the good that is causing a negative externality for society.

Al Gore has suggested something like this, but nobody seemed to think it was a good idea (at least that I know of). Of course, Gore isn’t the brightest bulb in the batch though, so maybe people figure that the policy was bad based on that point.1 But, in any event here is Gore’s solution,

For the last fourteen years, I have advocated the elimination of all payroll taxes – including those for social security and unemployment compensation – and the replacement of that revenue in the form of pollution taxes – principally on CO2. The overall level of taxation would remain exactly the same. It would be, in other words, a revenue neutral tax swap. But, instead of discouraging businesses from hiring more employees, it would discourage business from producing more pollution.

The only problem is that the level of taxation will be fixed so that the new pollution tax is revenue neutral with respect to the payroll tax that would be eliminated. The problem here is that to really deal with AGW the tax level might need to be higher than whatever tax rate Gore is proposing above. Still the above is pretty good. First we are getting rid of a highly regressive tax that does discourage both work and hiring of workers. Second, it would be paid by those who are doing some of the polluting–i.e. corporations. Of course, this doesn’t go far enough since it exempts everybody who drives a car. So another tax would have to be introduced to disuade people from driving so much.

Heck, this could be a way to help solve both problems, the Medicare short fall and AGW. But oddly enough I just don’t see much discussion of it, but maybe I’m just looking in the wrong places.

Update: Kevin Drum suggests that “virtually every serious analyst I’ve read agrees that a carbon tax is one of the primary building blocks for any effective global warming policy”. He points to this survey by the National Journal. However, in looking at the poll only about 50% of the respondents felt that a carbon tax was essential and the comment from one such policy analyst (member of Congress really) was to make the tax industry specific. Uhhh, sorry Charlie, that just isn’t good enough. We need to make it economy wide so that every source of CO2 is pretty much covered.
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1Gore also said,

Global warming pollution, indeed all pollution, is now described by economists as an “externality.” This absurd label means, in essence: we don’t to keep track of this stuff so let’s pretend it doesn’t exist.

Which is just stupid and an insult to just about every environmental economist out there. An externality is something that is fundamentally external to the market and hence is not factored into the relevant (marginal) cost and (marginal) benefit calculations by agents in the economy–that you would be you, me and everyone else because we lack the information to factor these things into the calculation, not out of some malevolent desire. That doesn’t mean that economists ignore it, but that it is hard to measure and thus correct.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Archives December 2006 August 2006 June 2006 May 2006 April 2006 March 2006 February 2006 [IMG Outside The Beltway | OTB] Global Warming vs. Medicare Voters Hate Newt Gingrich and Hillary Clinton the Most OTB Caption JamTM Obama Hires Facebook Founder Hughes Blogs Readers a Force Multiplier in the Army of Davids Captain Ed Goes Pro North Korea to Shut Down Nuke Facility?

  2. spencer says:

    Do not forget that one of the major advocates of this tax is Greg Mankiw.

    Does this imply that you also think he is not one of the brightest bulb in the bunch?

  3. Edgardo says:

    Gore doesn’t know what an externality is. No surprise here. However, your definition differs greatly from the standard definition in micro textbooks: costs and benefits of an action that are not taken into account by the decision-maker (this is not a valuation problem, it’s an incentive problem because even if you can value the cost or the benefit, you don’t have the incentive to take it into account).
    Regarding your proposal, you should be aware that the large literature on tying taxes to particular expenditures centers on many reasons not to do it.

  4. […] Outside The Beltway ::: “Global Warming vs. Medicare“, a thoughtful (Ok, it’s long anyway < grin >) treatise describing “noodling with Excel” that shows everyone who wants something out of government should be concerned that Medicare will continue to take a larger chunk of the expenditure pie. […]

  5. Steve Verdon says:

    Spencer,

    Considering that the first link I have aside from the CBO link is to Greg Mankiw and that I’ve already signed on to Mankiw’s idea, what is your point?

    Oh, and I think that Gore isn’t very bright not because he supports a pigouvian tax, but because he doesn’t know what the heck an externality is.

    Edgardo,

    …costs and benefits of an action that are not taken into account by the decision-maker…

    That is not the definition. It isn’t that the costs/benefits are not taken into account it is that these things are external to the market an hence cannot be taken into account even if one wanted too.

    As for the problem of tying a specific pigouvian tax to a specific expenditure, yeah I realize that there is a problem. Rent seeking has been a topic I’ve discussed many times. Heck, I’ve even got James using the term. My preferred policy position is that the money raised from such a tax simply be destroyed…of course, I realize that even while this might be the best course of action, such a policy is likely to garner little support. The theory of the second best and all that you know.

  6. Edgardo says:

    Steve,
    Your definition in your post has two parts, the second one starting with “because we lack…”. Now you refer only to the first part of your previous definition, that is, benefits and costs that are fundamentally external to the market. They are “external” to the decision-makers because markets are interactions of decision-makers; the opposite of an externality is the internalization of benefits and costs by the decision-makers. As long as you ignore the second part of your definition we are close, but I still prefer the standard definition that refers to what benefits and costs are “internalized” by decision-makers and which ones are not. It is an incentive problem, not a valuation problem.
    If there is a good reason to establish a new excise tax, its revenue is better offset by a reduction in some other taxes but without tying the new revenue to a particular expenditure. I cannot think of any second best argument to do it. Maybe you’re referring to a political argument to justify the particular tax you want to reduce.

  7. Steve Verdon says:

    Sorry Edgardo, but my definition is the same one that guys like Jean-Jaques Laffont uses. It isn’t always a question of whether or not we choose to internalize the costs, but that some costs (or benefits) simply can’t be internalized. For example, please tell me how much I value clean air in Southern California? I don’t see how the decision makers in S. CA can choose to internalize this cost without some sort of government intervention (cap-and-trade programs, pigouvian taxes, etc.).

    As for the theory of the second best, my comment was about the politics of trying to get something like this implemented. If this is a good policy, and I think there are a variety of reasons to do it not just AGW, then if tying it too a specific expenses helps garner support then I’d be willing to take that risk/trade off.

  8. M1EK says:

    Gore’s ‘definition’ is a snark at the self-identified libertarians who insist on an accounting down-to-the-penny of all such external costs before they’ll agree to do anything about it. At least, that’s what I read into it.

  9. Steve Verdon says:

    M1EK,

    Oh yes, much better to rush in with a half-assed policy than to actually sit down think about the issue and come up with a decent solution.

  10. M1EK says:

    Steve,

    Of course it’s better to think it through – but the libertarians in question are using the requirement for an exact accounting as an excuse to avoid any action (because they simply don’t want that action – i.e. on ideological rather than practical grounds).

    You’ve as much as said that you think replacing the payroll tax with a carbon tax is pretty close to “thought through enough”, haven’t you? i.e. “pretty good”? That’s a position that the folks at Reason would tear apart because you haven’t accounted for each penny of cost and made sure that those who suffered the cost got exactly the same amount of benefit.

    Of course, it’s not coincidental that the standard they want to use makes it completely impossible to ever address any kind of externality. That’s what they want.