Cecilia Rouse on Biden Economic Policy, Part II
Yesterday I posted on the Zoom talk that Biden CEA chair Cecilia Rouse gave to a Stanford audience last Thursday. Here’s Part II. Part III will come tomorrow.
11:40: Rouse notes the dramatic drop in compensation in the labor market from February 2020 to April 2020, “when we asked everybody to go home.”
Not quite accurate. There wasn’t a lot of “asking” going on. It was mainly telling. While I found Rouse to be someone I would find very likeable if I met her, I see that she has already picked up, in just over 13 months on the job, this government-speak way of describing government coercion.
13:58: Rouse deals with the real GDP growth numbers that had just come in that morning at -1.4 percent on an annual basis. She states that imports subtract from GDP. I’m sure she knows that that’s not literally true; she’s simply explaining the arithmetic. She points that one of the factors was reduced investment in inventories and another was reduced government spending (yay!). She also notes that consumption and investment expenditures grew at a 3.7 percent annual rate and so the news isn’t that bad. I agree. Incidentally, I pointed this out to someone at pickleball who is almost spring loaded to criticize Biden but who also “gets” economics—and he got it.
15:50: The computer systems that are used to pay out unemployment insurance in many states are “quite antiquated.” “They run on software such as COBOL and FORTRAN.” Yes, really. FORTRAN was created in 1957, COBOL in 1959. That meant that it wasn’t easy to have a federal program giving federal unemployment benefits to people without giving way too much to many. She admits what a number of establishment economists admitted at the time, namely, that plussing up people’s state unemployment benefit with additional federal benefits of $600 per week gave millions of people more money in unemployment than they had earned while employed. Rouse concludes that “our unemployment system needs some investment.” True. And are many of the state governments doing that? She didn’t say.
18:00: Discussion of vaccines and positive externalities. Cost per life saved of $50K, assuming that the number of lives saved in the U.S. is one million. (I’m quite skeptical of her million lives saved number.) But the $50K is trivial relative to value of life. I haven’t checked her data.
21:00: Climate change.
22:00: Rouse implicitly attributes increase in wildfires to climate change.
23:20: Rouse says, using British data, that there’s not a big tradeoff between economic growth and using carbon taxes to reduce carbon usage.
24:00: Increased inequality.
27:20: Immigration can play an important role in expanding the labor force. Immigrants often are innovators. Also they are often complementary with U.S. labor, increasing productivity. The CEA estimates that due to Trump’s immigration policies and the pandemic, we have about one million fewer immigrants than we otherwise would have had.
28:30: Administration can make reforms without Congress by catching up on renewing green cards and ensuring an adequate number of H-2B visas and H1-B visas. To maintain our economic growth, we’re going to have to welcome immigrants. Good for her.
As I noted, Part III is tomorrow.
May 3 2022 at 4:55am
Regarding the carbon tax at 23:20, I am not surprised that a government official speaks of this instrument as her preferred option to reduce carbon emissions. What I find more surprising is the lack of reaction of economists, who could argue that cap-and-trade is preferable. There can be a reasonable debate about this claim, of course, but I believe cap-and-trade to be preferable because:
1) it doesn’t have the word “tax” in the title and generates no revenue for the governement (provided that the quotas are allocated for free),
2) as a consequence of 1), there is no need to redistribute the receipts from the carbon tax as is standard with a Pigouvian tax,
May 6 2022 at 5:36pm
A key difference between a carbon tax and a cap-and-trade system is how they handle errors in forecasting. That is, under a tax system it is easier for individual businesses to adjust if the overall target was chosen incorrectly. Under a cap-and-trade regime, the total amount of pollution is pre-determined; this either pollutes more than necessary if the cap is “too high”, or stifles the economy more than necessary if the cap is “too low”. As in many cases in economics, the central plan can be suboptimal.
May 3 2022 at 5:08am
3) as a consequence of 2), there are fewer opportunities of rent-seeking and buying constituencies with the said tax receipts.
I have seen no economist making those points. Nordhaus prefers the tax because, as he writes in an endnote, quotas are more susceptible to cause corruption in developing countries. Sumner considers “foolish” the idea of allocating the quotas for free in a cap-and-trade system (I don’t understand why, cf. opportunity cost). Harford considers that a tax or a cap-and-trade are almost equivalent and points to Weitzman’s 1974 “Prices vs quantities” article. Levitt fears that firms would be better at distorting politically the allocation procedure in a cap-and-trade system than with a tax.
Do you have an opinion on the subject, David?
May 3 2022 at 7:03pm
I have two opinions.
First, either the tax or the cap and trade opens things to rent seeking. Your point #3 applies, but you didn’t mention the extensive fight that would go on as various firms, individuals, and governments pushed for more than their pro-rata share of permits. It’s hard for me to judge which is worse.
Second, your point about not getting revenue for the government is a good one. They’re likely to waste a lot of it. In my ideal world, which I think is highly unlikely, given the political system, the revenue would go to reducing the federal debt or reducing the most distorting taxes, dollar for dollar. Those are likely to be taxes on capital. But the political pressure would be strongly against that and in favor of giving each person and household a check. So the chance to either pay down the debt or reduce distorting taxes would be wasted.
A bigger point, in my view, is that there’s not much justification at this point for either. Remember that the goal is to “solve” global warming, not to reduce carbon usage per se. Reducing carbon usage is one way to do so, but there’s virtually no evidence that it’s the least-cost way. I think that some form of geo-engineering is likely to be substantially less costly.
May 4 2022 at 1:07am
Thanks a lot for this long and thoughtful response.
A quick reaction:
Your third and bigger point is entirely right. No system solves for the optimal trade-off between reduction and adaptation. I will keep this in mind.
As for the first point, as long as there is some emission reduction, I believe cap-and-trade offers fewer opportunities for rent-seeking. Here’s why:
– it can be organized to be a one-time thing, so the rent-seeking contest occurs only once, initially, whereas the fight for the carbon tax receipts can go on forever;
– there is not much in it for bureaucrats, whose task would be to monitor emissions and not to regulate or collect a tax, so there’s a chance they will be more impartial.
Going back to your third point, I agree that cap-and-trade is far from “perfect” in any meaning of the word. Most economist I’ve heard criticizing it had a very different argument: “The price of tradable permits turns out to be too volatile to encourage firms to invest in carbon reduction technology”, they say (sic).
Your answer is implicitly that adaptation is better than reduction. This makes a lot more sense. It was also David Friedman’s answer.
May 5 2022 at 10:41pm
Good point about one-time.
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