Monday, March 19, 2007

Greg Mankiw's Blog: David Friedman's Slippery Slope

Greg Mankiw posts on David Friedman's economics based objections to carbon taxes.

Mankiw, although a card carrying Republican, appears to be "environment friendly" in contrast to the majority of the Republican government. Here.

The reason I am a Republican is that, compared to Democrats, the Republicans tend to favor smaller government, lower taxes, and greater reliance on free markets. On many social issues, I find myself agreeing with the Democrats more than the Republicans, and I know that the Republicans are far from perfect on economic issues. (Don't get me started.) But as a classical liberal in the spirit of Milton Friedman, I find myself rooting for the Republican team more often. The recent debate over the minimum wage is a case in point.

His Pigou tax crusade is a good example. The Pigou Club Manifesto.

For a hatchet job on Mankiw's political position (and a fairly amusing one) see Can Mankiw survive politics). Written in 2004 when Mankiw was the chairman of the White House Council of Economic Advisers (CEA).

This is an interesting article on many levels but overall Greg Mankiw seems to come across as a "nice guy" and even a "good guy" (in a non political sense). The final sentence is:
Which is why, even if he had no bad intentions, Mankiw's story has to be viewed as a cautionary tale for academics considering serving an administration that puts such a low priority on intellectual integrity. If you take a job that makes you look like you're fudging the facts, at the very least, make sure you learn how to do it well.

I digress, back to Carbon Taxes and Friedman:

Global Warming, Carbon Taxes, and Public Choice

If I were dictator of the world, the answer would be fairly obvious. Impose a tax on activities that create greenhouse gases designed to reflect the marginal cost they create. That's the standard economic solution, due to Pigou, for problems of negative externalities. Since the tax brings in additional revenue, combine it with a corresponding reduction in whatever taxes currently have the largest adverse effects.

I do not, in fact, support such carbon taxes. The reason is that I do not believe that, if imposed, they would fit the pattern described above.

To begin with, they would not be based on a realistic estimate of the marginal costs; insofar as they would be based on anything, judging by the ongoing arguments over Kyoto and similar proposals, they would be based on some target level of emissions. If, as seems likely, the level of taxes needed to substantially slow global warming was much higher than the marginal damage done, the result would be to buy lower temperature at a price much higher than it was worth, making the net situation worse, not better.

Greg Mankiw's link:

Greg Mankiw's Blog: David Friedman's Slippery Slope

In his article Mankiw concludes:
Personally, I do not see how, in a world of climate-change extremists, advocating no policy is a more tenable solution politically than advocating a moderate policy of a modest carbon tax. Ultimately, policy is set by the median voter. When smart economists like David Friedman reject the first-best moderate policy to advocate the do-nothing position, he loses credibility among moderates, and that makes it easier for climate-change extremists to convince the median voter that we need to do something extreme.

Note that David's position seems very different from Milton's advice to put "politics aside" when giving economic advice. Maybe it's one of those father-son things.

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