27 June, 2008

Climate change and distributional impact

In one of our earlier threads on climate change policy, Guadalupe brought up the distributional costs of putting a price on carbon. How do we deal with the fact that the poor spend a much higher percentage of their incomes on energy, in addition to the near certainty that higher fuel costs will, in the short term at least, raise the price of almost all basic necessities? This is an important question for those of us committed to progressive economic policies. However, it is too often put to the side by liberals as a bad-faith argument by conservatives who don't care about either progressivism or climate-change (which it often is) rather than a real problem whose nuts and bolts we have to dig into.

So, via Matt Yglesias, some discussion of the nuts and bolts on the redistributional impact of climate change policies. (For the details, click the link and download the pdf).


spencer said...

It's a real problem but it has a pretty easy solution: give poorer people more money. The CBO's solution is to give everyone a lump-sum grant, which works just fine.

So any political problems with the increasing the progressivity of the gas tax are the same problems that occur when you try to increase progressivity in general. The problem with a carbon tax is that the tax + the redistribution is TWO concessions from conservatives, while, for example, free trade + redistribution is one concession from liberals and one concession from conservatives. So I expect it will be harder in this case.

Cassady said...

Ok, I agree with your astute definition of comprimise, but I hope you were kidding about simply giving poor people more money.

Maybe I'm confused about how you mean to give that money, or in what manner and mode, but I think that's just misguided.

People trapped in the cycles of poverty, I feel, would not respond to the same incentives as your average American, and would quickly find themselves back in the same old straits. The end result would be a short-term change in quality of life for those people, and a longer-term hit in the government pocketbooks.

What I'm saying is that there are larger socio-economic issues in play that can be solved by the government Stepford wives by throwing money at it.

Eremita said...

I agree with Cassady, at least to the extent that I balk at calling this solution "easy." Where does this money come from in the budget? Will it be in the form of a lump sum gift, lump sum tax-refund, gas stamps, or tax-cuts? Will people literally spend the money on transportation, splurge, or (in this scared economy) save it?

I hope there are answers to these questions - offhand to me it seems like a lump-sum of some kind in the first year and then tax-cuts for the poor would help keep people on board in the short term and long term... Plus spending money on improving and expanding public transportation - but you'll probably need to have some progressivity in a gas tax to fund that.

Anyway, I am wondering, Spence, are there are examples of similar situations in which the methods we are discussing have been tried with success?

spencer said...

Okay, okay, let me explain. This is not such a radical policy.

What CBO is suggesting in the post to which Elliot links is taking the revenue from the gas tax (or cap'n'trade) and rebating it in equal amounts to each household (or person). For example, if the gas tax brings in $300 billion and there are 300 million people in the U.S., at the end of the year everyone would get a check for $1,000. This would not be a one-time transfer; it would happen every year, probably through tax returns.

The result of this gas-tax/rebate scheme is that the (after-tax) income of the average poor person would rise and the income of the average rich person would fall, reducing inequality. This is because, while the poor spend a larger proportion of their income on energy, the rich still spend a larger absolute amount on energy (they take more flights, drive more cars, etc.) Thus, the poor would lose the least from the higher price of energy (in dollar terms), but everyone would get the same amount of rebate (in dollar terms), so the poor would get the best net deal.

To answer Eremita's questions: The money for the rebate comes from the gas tax itself. It is revenue-neutral, so it doesn't affect the budget at all. It would be in the form of a "lump-sum gift", although it would be just as accurate to call it a "lump-sum tax refund" or a "tax cut". I'm not sure what the difference between "lump-sum gift" and "lump-sum tax refund" is and "tax cut" can mean a lot of different things. Refunding in the form of gas stamps would pretty much defeat the purpose of the gas tax.

As to what the people will spend the money on, they can spend it on anything they want. Since the lowest quintile spends about 22% of their income on energy, my rough guess would be that they would spend about 22% of their rebate on energy, but probably less since the cost of energy will be higher. But it doesn't really matter. The idea is to increase their incomes.

There are lots of other ways to get the money back to people. Besides lump-sum transfers, you could reduce income taxes, improve transit (which is progressivity-increasing, since the poor use transit more), etc. This is just one way to do it and it has the benefit of being really easy. So, knowing that there is a really easy solution, we can explore harder solutions to see if they would be better or worse (and CBO does this in the "letter" linked off Orszag's blog post.)

This is just a way to combine a transfer with a gas tax that makes the whole package progressive instead of regressive. This is not a plan intended to get people out of "cycles of poverty", as Cassady puts it. There are certainly many people who are stuck in poverty traps, and they may require other solutions. But a lot of people just need some more income, and a lump-sum grant gives that to them. One of the most successful poverty-fighting programs that we have is the Earned-Income Tax Credit, which is sort of like a negative income tax for people making under a certain level of income. And this is basically just a "give poor people money" kind of scheme.

However, the larger point I was trying to make was that when thinking about policy, you should separate the two issues. First, what can we do to make the level of general welfare as high as possible (gas tax, free trade, etc.)? Second, once we've decided on those policies, what can we do to compensate the losers (people who spend a lot of money on energy or lost their jobs to free trade)? There's no reason why, in a policy debate, these can't be separated. Of course, when politics comes in, everything gets messed up.

Eremita said...

Whoa, Spence, just because I don't think that these policies are "easy" doesn't mean I don't get it. I understand what is being suggested here, but I don't think after navigating the channels of our government, the implementation would look anything like the system you or the CBO are describing. And that means it's NOT easy.

It's NOT easy to convince enough policy-makers that your suggestions will get them re-elected, or that the solutions you find so easy to believe in are actually going to work. It's NOT easy to convince high-income voters that redistribution taxes are a good idea, after 8 years of the opposite. It's NOT easy to convince the poor that what the government gives them will be enough.

Just because you find these economic policies so obvious doesn't mean they'll turn out to be "easy" to do.

spencer said...

Hold on a minute, I didn't AT ALL mean to suggest that anyone doesn't understand the policy. By "easy" I don't mean "easy to understand", I mean that the policy problem doesn't have massive trade-offs that cause you to weigh competing ends. I would say, pretty unequivocally, that this policy, if implemented, would make the world better.

I completely agree that the politics of it is very difficult, but getting the policy passed is a very different thing from coming up with a good policy. And we are in a much better situation if we start out with an "easy" policy than if we start out with a policy that is not "easy", like in health care where no one really knows for sure what the best system would be, there's lots of disagreement among experts, and there are many many legitimate competing interests.

Eremita said...

Agreed, agreed. It is mostly the politics that makes this difficult. And perhaps some disagreement about which economic policies are best, but I am willing to say that might be mostly due to a lack of understanding of economics in general. You're right, a policy that makes sense and that is budget-neutral will help. Unfortunately, the competing interests in this case are really rich and, as we've seen in the climate crisis, that alone can create some "disagreement." Ah, our f'ed up system...

Guadalupe said...

I'm extremely busy and mildly sick right now, but I love the discussion on this. It is evident that this is a crucial conversation for us as well as our world considering that even the word "easy" has become a source of emotion. I'll find some time to read through the CBO article and try to prompt some more thoughts.

Cassady said...

I'm going to try to write this in a way that doesn't openly display my relative ignorance or sound like I'm bashing anyone (Spencer).

That said, I still have misgivings about Spence's whole idea, or rather CBO's idea, but I think I can get over them, and I'll try to say why. This is me thinking out loud, so bear with me.

I am completely agreed that coming up with good policy is a good and necessary start. The fact that it's budget-neutral is also great. The issue that I have is still with the effect for poor people. You all probably know in what little esteem I tend to hold any number or stat with a "net" in front of it, and the same holds here.

Net gains are all well and good if you can sit and watch the effects from the relative security of your middle-class home. For people standing in lines to get into shelters and scrounging for each and every meal, they fall short.

Giving a lump-sum of $1000 ONCE a year does increase their income, but the timing and disbursement are not good enough to help these people deal with there problems. The one factor of these cycles of poverty that really hold sway here are that these people generally have no savings, have defaulted or overdrawn on accounts, and are generally fiscally irresponsible.

Regardless, they need money every day. Giving them an extra $1000 a the beginning of the tax year will, in my estimation, give them a large amount of money to abuse, and eventually lose, through their destructive habits, without the support they need to help get their feet under them.

Unless the CBO or anyone else can come up with a program to provide immediate, continuous, AND budget-neutral aid, I just don't see this having the effect that they want.

Now, that said, I can apologize for the policy because I think it is a step in the right direction, and the system I just described may well be impossible. In short, what Spence is talking about is probably our best bet for this situation.

spencer said...

I think you make a lot of good points, but perhaps misinterpret my intent.

I agree that if you were designing a poverty-reduction program targeted at the very poorest and worst-off among us, then your concerns would be completely valid. But this is not intended to be a solution for homelessness or chronic poverty. It's just a way to create an energy tax that doesn't hurt people on the lower end of the income distribution more than people on the higher end. More than 50% of the population would come out ahead in this arrangement--that's vastly more people than the very very poor that you're talking about. And I completely agree that we should have policies directed at the very very poor, but that's not what I or CBO was proposing.

Incidentally, I don't really understand why "net gains" is such an objectionable term. All it means in this context is that you are rebated more at the end of the year than you spent on taxes, which seems totally harmless. (And it doesn't have to be at the end of the year, there's no reason checks can't be sent out proactively. In fact, one of Obama's plans to deal with the high price of gas is to send everyone a $300 check, just like the stimulus checks we all recently received.)

Otherwise, I think your concerns are absolutely well-founded and there are a lot of good ideas out there to solve some of these problems.

Cassady said...

Ok, very well explained, thank you.

I do very much like the idea of proactively sending the checks out, especially now that I have a clearer picture of the nuts and bolts of the whole scheme. I think I can safely come on board with this, with the understanding that it's not meant to be the problem-solver of all time for very poor people, but a step in the right direction.

I don't like nets because they ignore realistic factors, most of the time. Don't get me wrong, I'm all for net gains in this, that, and the other. Nets tell us that we're doing something right. However, just like with the cap'n'trade system, I think that to make true progress, we need policies that will encourage (force?) responsible change across the board, without loopholes. Loopholes is maybe a harsh term, but that's how I view anything that lets someone get around doing what's right.

I also understand that there are certain industries and where more time will be necessary to clean themselves up, and so the Captain and Trade-neil plan affords them that time. Forgive me yet again for being a hardliner, but I'm willing to take the pocketbook hit to effect more immediate change.