Category Archives: Gregory Mankiw

Why We Badly Need a Revenue Neutral Carbon Tax

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A large and steadily growing majority of Americans believe that global warming, caused by the burning of fossil fuels, is a serious problem which must be addressed. What remains is to figure out how to do this with the least possible amount of economic damage to ourselves and others.
Capture1Consider that:

  • Energy consumption will increase 56% worldwide by 2040, overwhelmingly with the use of fossil fuels. Biofuels are a very inefficient source of energy and wind energy isn’t much better. Solar energy is dropping in price but is still much more expensive than natural gas.
  • The Environmental Protection Agency has just issued its Final Rule for a Clean Power Plan to reduce carbon emission levels in 2030 by 32% below 2005 levels.
  • California is now considering drastic legislation requiring a 50% reduction in petroleum use by 2030 which is likely to do much damage to the California economy.
  • In 2008 the Canadian province British Columbia introduced a revenue neutral carbon tax which has succeeded in reducing carbon emissions without damaging the BC economy.
  • The advocacy group, Washington Carbon, is trying to put a carbon tax on the Washington State 2016 ballot. Initiative Measure 732 would institute a tax on fossil fuels of $25 per ton of carbon dioxide. According to the Seattle Times many environmentalists are opposed to this initiative because it would be revenue neutral!

Conclusion: humanity is faced with the very serious problem of global warming and the response so far is chaotic and totally inadequate. The developing world is rapidly increasing its use of fossil fuels while the EPA is trying to put the brakes on our own use. Meanwhile states (and Canadian provinces) are establishing their own individual energy policies.
Isn’t it clear that what is needed is a conceptually simple unified approach to create incentives for all of us to cut back on carbon dioxide emissions? Isn’t it also clear that the best way to do this is with a national carbon tax?
It is up to the U.S. and other developed countries to take the lead in doing this. Once we are clearly doing what is needed, then and only then can we begin to lean on less developed countries to follow our example.

 

 

How to Increase Growth and Decrease Inequality at the Same Time!

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The Department of Commerce has just reported basic economic data for the second quarter of 2014.  As the chart below shows, the economy gradually lost steam from 2004 – 2008, sunk badly in 2008 and 2009, and has now grown at a slow but steady rate of about 2% during the period 2010 – 2014.
CaptureOne of my favorite journalists, the New York Times’ economics reporter Eduardo Porter, has just written again on the topic of inequality, “Income Inequality and the Ills behind It.”  He quotes the economist Tyler Cowen as saying “The right moral question is ‘are poor people rising to a higher standard of living?’  Inequality itself is the wrong thing to look at.  The real problem is slow growth.”  The economist Gregory Mankiw is quoted as saying that “Policies which address the symptom (of inequality) rather than the cause include higher taxes and a more generous safety net.  The magnitude of what we can plausibly do with these policy tools is small compared to the size of the growing income gap.”
What Mr. Cowen and Mr. Mankiw are both suggesting is that we can’t effectively attack income inequality without also increasing economic growth.  I believe that it is possible to address both problems at the same time by implementing broad-based tax reform as follows:

  • Individual income tax rates should be lowered across the board, paid for by closing loopholes and shrinking deductions, in a revenue neutral way.
  • The 64% of all taxpayers who do not itemize deductions will get a significant tax cut. Since they are largely the middle and lower-income wage earners with stagnant incomes, they will tend to spend their tax savings, thereby giving the economy a big boost.
  • At the same time the 36% of taxpayers who do itemize their deductions will, on average, see their income taxes go up. But these are, on the whole, the wealthier wage earners who can afford to pay higher taxes.
  • A plan such as this represents a shift of net after-tax income from more wealthy people to the less wealthy. It therefore reduces income inequality.

If we can cut tax rates, increase economic growth and reduce income inequality all at once, why can’t our national leaders come together and act along these lines?

Should Government Address Inequality Directly?

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Wall Street Journal columnist William Galston suggests in “Where Right and Left Agree on Inequality”, that both sides of the political spectrum agree that economic inequality is increasing in America and that government needs to address this problem.  “Poverty is part of the explanation, as liberals insist.  But so are parenting and family structure, as conservatives believe.”
CaptureIt so happens that we have a broadly supported federal program which simultaneously addresses both poverty and family structure.  It is the Earned Income Tax Credit program.  It provides $3,305 a year to low-income working families with one child and up to $6,143 for families with three or more children.  The U.S. spends $61 billion a year on this program and it has proven to be very successful in encouraging low-income people to find and keep jobs.  In fact, the economist, Gregory Mankiw, recommends the EITC over a higher minimum wage as a better way to increase the earnings of the working poor.
The New York Times’ Eduardo Porter reports in “Seeking Ways to Help the Poor and Childless”, that New York City is conducting an experiment to see if a locally run program similar to the EITC  will have the same positive effect in increasing employment of childless adults.  It is understood that many of the jobs being created in today’s economy are low paying service jobs.  As Mr. Porter says, “for the American market economy to remain viable, being employed must, one way or another, provide for workers’ needs.”
Conclusion:  as important as it is for Congress and the President to adopt measures to increase economic growth (e.g. tax reform, fiscal stability, expanded foreign trade, immigration reform), in order to create more and better paying jobs, government also has a responsibility to provide direct help to the needy who are trying to help themselves.  The EITC program is an excellent way to do this!