Challenges to free market evangelism, pt 1: Externalities (Global Warming)

Great Debates
1

In the thread Who cares about what it means to be ‘conservative’? I had a couple of interesting exchanges with Sam Stone that inspired me to start what I hope will be a series of threads to debate some different current policy challenges, starting off with Anthropogenic Global Warming (AGW) in this thread.

Prerequisites

I realize that the subject has been pretty much been beaten to death in this forum (and this will also be true for many of the subjects of later threads), but I’d like for us to look at these issues from a certain perspective:

  1. My wish is to probe the political position that I will refer to as “free market evangelism” or “small government conservativism” or perhaps “libertarianism”. Obviously these terms are not necessarily synonymous, and they are open to interpretation and debate as to their proper meaning. But what I am getting at is the common ground between all people subscribing to two notions: firstly, that state government is generally inefficient and screws up, and secondly, that free, minimaly regulated market activity is generally efficient and preferable. In other words the general position of economic Laissez Faire, as popularized in recent history by Friedrich Hayek, Margaret Thatcher and Ronald Reagan. With some simplification we could say: small government, low taxes and minimal government meddling in economic activity.

  2. I have chosen each policy challenge for discussion on the criteria that I (as a progressive) fail to see how the general strategy of Laissez Faire or “no government meddling” can yield a successful solution to the policy challenge. They are all related to circumstances where progressives generally perceive market forces to be inadequate and government intervention warranted. So what I’m looking for here is credible policies or scenarios for the successful resolution of these challenges with preferably none, or, if not possible, minimal, or at least less government intervention than proposed “progressive” policy proposals.

My “hidden” (but henceforth outspoken) agenda is to prove my belief that a lot of current policy positions of “free market evangelists” are often contingent upon rejecting that any policy challenge exists because there is no way of meeting it within that ideological framework. So: your job is to prove me wrong in that regard!

Diclaimer: Since many of these issues depend heavily on different theories in the field of economics I will have to borrow a lot of terminology from that field. I am not an economist! If I use terms in disingeneous ways ways or misunderstand some concepts, please set me straight! I am considering this a learning experience :slight_smile:

Anthropogenic Global Warming (A Laissez Faire strategy for preventing or responding to external costs)

So starting off we have the issue of Antropogenic Global Warming.

That is, human activity resulting in increased concentrations of greenhouse gases in the earths atmosphere (supposedly) leading to an increase in the earths global mean surface temperature. In time, a continued increase in temperature is projected to result in huge negative impact on human conditions on earth.

This (projected) negative impact of AGW is an example of an external cost. That is, it is an unwanted sideeffect of all economic transactions that results in increased concentrations of greenhouse gases in the earths atmosphere, but not priced into the cost of the goods or service exchanged.

From the perspective of a progressive (in this case: me) it is therefore considered prudent that a representational government should have and use the power to impose a tax on such economic transactions so that the external cost is added to the price of the goods or service (i.e. a carbon tax or a market based cap & trade scheme).

Is such a government intervention warranted from the perspective of a “free market evangelist” (as defined above) to deal with AGW in particular, or some other external cost in general? If not, what would an acceptable and feasible strategy of minimal government intervention to deal with the problem of external cost look like?

2

Well, there are a lot of biases and assumptions in your OP. But for argument’s sake, assuming that all your positions are accurate (I take no position one way or the other), the only benefit to imposing carbon taxes on companies is if those taxes are then used to finance research and subsidize conversion to green alternatives. Otherwise, you would just be placing an economic hardship on industries that have limited green alternatives. The goal being to encourage companies to adopt non-carbon producing technolgies or incur costs for failing to do so.

I do question how efficiently this would work in practice though and whether it would provide the desired environmental benefit without producing undue economic hardship.

3

First off, why would you start this debate with a loaded term like ‘free market evangelism’? If I support markets, I’m an evangelist?

You do realize that economic orthodoxy still considers markets pre-eminent when it comes to allocating goods and services? Frankly, the position that markets are good is the default, and it’s YOU who are trying to evangelize for an alternative.

So how about we just drop the loaded terms in general, and discuss the specific issues?

Second, you’re painting with a pretty broad brush. Libertarians are not anarchists, and there’s a wide range between, say, social democracy and outright anarchy, and you can find people who generally believe that markets are good all along that line, each with a different amount of tolerance for state intervention.

The people you mentioned - Hayek, Reagan, and Thatcher, were not libertarians. Hayek is probably the closest, but even he felt there was a pretty big role for government. He believed in some labor regulations, he believed the government should control monetary policy, and he believed that the government could play a role in helping markets function efficiently when true market failures were identified. For example, Hayek believed that the government could act as an information clearing-house to correct market distortions due to information asymmetry. In The Road to Serfdom he explicitly stated that the price system does not work in the case of externalities and that another mechanism was needed in those cases.

So in theory, none of the people you mentioned would be averse to some government intervention to correct the externalities of carbon release. And neither am I. So I’m not going to defend total Laissez-faire, because that’s not what I support. Maybe someone else is willing to step up to the plate on that.

Let’s move on specifically to global warming. Frankly, the quality of debate on both sides is terrible. I keep trying to engage in serious debates about it with people on both sides of the issue, and continue to get nowhere. On the one side, there are the deniers who simply refuse to believe it’s even plausible, let alone certain. On the other, there are those who make the leap from, “Global warming exists” to supporting any hare-brained scheme to stop it, without consideration of whether it could possibly work or whether it would cost more than the damage from warming, or whether we can afford it at all.

In theory, I would not be opposed to a carbon tax to correct for the externality cost of global warming. But here are the problems:

  1. No one knows what the cost is.

  2. No one knows how to get the entire world to go along, and if you can’t get everyone to go along, then taxing carbon in one country isn’t correcting a market failure - it’s actually increasing the externality cost to the taxpayer, and increasing the value of the subsidy inherent in the externality to everyone else. Economically speaking, it makes the problem worse.

  3. It’s not clear at all what the net present value of carbon externalities are, when the damage from them will not happen for decades. If you apply normal discount rates, the net present value drops to almost zero for any but the most extreme estimates of damage.

  4. Given that cutting CO2 on the demand side through taxes does not look feasible at the global level, it’s not clear that we wouldn’t be better off with another strategy, such as investing the money in carbon sequestration or scrubbing carbon out of the air, or simply saving the money and using it to pay for the damages of global warming when they arrive.

That’s where the debate is today. I have yet to hear reasonable answers to any of the above questions, from either side. So one side insists we do nothing at all, whereas the other side’s position is that we must do anything at all. And then of course, there are those who use global warming to increase the scope and power of government, and don’t really care about much else other than having an excuse to tax the evil businessman and give the government more control over our lives.

Perhaps you can fill me in on the answers to some of these questions?

4

I disagree with that. Even if you aren’t spending the tax on research and subsidies, it still serves the purpose of internalising a cost that was once an externality. It forces the industry to make all their decisions based on the real cost of doing business, rather than having the option to ignore the cost suffered by third parties as a result of their actions.

5

Unless of course those businesses pay the tax and the price of their goods goes up, and demand shifts to China, which has no cap. So China’s sales actually increase because they aren’t paying for their carbon. And since the goods get made anyway, the carbon still goes into the atmosphere.

That’s the first, and biggest problem with cap and trade and with locally-applied carbon taxes. They make you feel good, but they don’t actually do anything unless you can get everyone else to play along. They don’t necessarily even reduce demand for carbon-intensive products - they just shift the demand out of the taxed region. And they may even make the problem worse - the U.S. is much, much more efficient than China in terms of carbon emitted per dollar of GDP. Your tax may simply have the effect of moving the production of goods to an area where it costs far more in carbon to make those goods.

If China’s GDP were the same as the U.S’s it would emit something like five times as much carbon. Policies which damage American businesses and help Chinese businesses, thereby shifting the ratios of GDP towards China, could be a bad deal for everyone.

When I present this argument, I often get back that a unilaterial cut is a good ‘first step’ and gives the U.S. moral authority to convince the others. Two problems with that:

  1. It’s not a good first step. In fact, a unilateral cut increases the value of the other country’s carbon emissions, making it harder for them to economically justify the cost. To the extent that it mitigates any warming, it also reduces the urgency for China to get involved.

  2. Anyone who thinks that negotiations among nations is based on ‘moral authority’ knows nothing about diplomacy. Countries act in their own interest, all the time. To get a country to engage in something economically destructive in the short term, you need to somehow convince them that it’s in their interest to do so - doubly hard when you’re doing the hard lifting yourself already, thereby giving them ‘free rider’ privileges.

The U.S. would have a better chance of convincing China to reform by threatening to heavily subsidize coal and work to double the U.S.'s use of cheap coal energy unless China agreed to a mutual CO2 reduction strategy.

6

Hold up, energy generation is by far the biggest source of CO2. Sam Stone, how do the Chinese plan to run power lines across the sea?

7

Huh? I never said anything of the sort. Products move to China. This reduces energy requirements (and GDP) in the U.S., and increases them in China. China has to build even more coal plants to meet demand.

8

If by free market we mean a fair market, an uncorrupted market then the minimally regulated market is none of these. Minimally regulated markets are heavily manipulated by the rich insiders and are in no sense free. The market cannot be free without serious regulation.

9

So why hasn’t, say England, lost all it’s business to China?
Also you’re ignoring the fact we’re China’s biggest customer. We can just tax their merchandise, and therefor tax the carbon used for it’s production by proxy.

10

What makes you think it hasn’t? Do you see a lot of goods stamped “Made in England” these days?

Right. So now our consumers got hit with a carbon tax, then they got hit with an import tariff. In the meantime, China retaliates by slapping its own tariffs on American cars and other goods, and the economy craters. Or maybe they decide to play real hardball and crash the American dollar.

This is the direction cap and trade will head in. It will soon become evident that American manufacturers are subsidizing the carbon output of the rest of the world, and they will cry foul and demand tariffs on foreign goods.

So now we’ve got higher taxes and Smoot-Hawley #2, ready to wreak havoc on the recession just liike the Snoot-Hawley helped bring about a deep depression.

Or maybe the disaster that is this bill will cause so much damage the voters will rebel and it will be repealed, and the political will to do something about climate change will vanish for a generation.

11

I’m pretty sure that carbon tariffs were already part of the latest plan.

Yes, they were:
[

](China Again Objects to Tariffs on Nations Not Capping Emissions - WSJ)

12

Yes, I know. And even Obama is against them. Hopefully, he’ll refuse to sign unless they are taken out of the bill. Actually, I don’t think the tariffs will survive the Senate.

If you took all the members of Congress and tried to get them to brainstorm good ideas, the best you could hope for is a light drizzle.

13

Regarding domestic industry being hurt by foreign competition, the WTO gave their approval for using taxes on imported goods to account for the Chinas of the world who decide to drag their heels on reducing emissions.

The key will be cooperation between the U.S. and Europe. If we can all agree to tax those imports, China will eventually have to play ball. What kind of meaningful retaliation could they possibly engage in against their most lucrative export markets?

14

Ok, I’ll start out with a clarification of my OP, since it was bungled in parts.

It was certainly not my intention to be neither particularly biased (apart from obviously having a point of view, clearly stated) nor inflamatory! I am all about logos, with only trace amounts of ethos and pathos :wink:

I can see however, how my OP was flawed in the way it conflated “free market evangelism”, “small government conservativism”, “libertarianism” and Hayek, Thatcher and Reagan. I was quite aware of that part being not perfectly stringent (and tried to acknowledge as much). Honestly, I was kind of at a lack of the proper terminology to use for what I wanted to denote and so the argument in that passage was not properly hammered out. So I took a shortcut, expecting you guys to straighten me out eventually.

So to be clear: the topics for discussion as imagined by me is certainly not whether libertarians and small government conservatives in general is aptly labeled “evangelists” of free markets.

Your responses got me thinking though, so I think I can now be a bit more clear on what I was getting at and avoid misunderstandings.

There is a certain position (sometimes rethorical, sometimes political) that is quite often taken that I think may be aptly described as “free market evangelism” or maybe “free market utopism”. I would define it as such:

*A de facto “free market evangelist / utopist” is someone:

  1. with a Modus Operandi of habitually rejecting any need for government intervention in market activity coupled with a rejection of causes of market failures or external costs, etc as being anything else but previous government intervention in market activity.

  2. and, for a given policy challenge, no analysis of why this should be so in that particular case is usually made, or the analysis is tailored to fit the conclusion. That government intervention is bad has in reality become an axiom.

This entails, IMHO an a priori assertion that untampered free market activity can not fail to be efficient or have external costs, only external benefits. Therefore economical Laissez Faire is always warranted a priori. *

This position I think, can be fairly summarized by a very frequently quoted part of Ronald Reagans first inaugural address:

But we find that the quote is actually taken out of context:

Given the society and policy challenges of 1980 I personally would give the full, unabriefed Reagan, at least half a point. Sam, i believe you would give him the full point.

Either way, the shorter version of the quote is arguably the more popular one - being prominently quoted in the republican primary debates last year if i don’t misrecall - and today there is no shortage of people around that fit this (redefined) definition of a “free market evangelist / utopist” (for clarity: no equivalence being drawn with the republican presidential candidates of last year). I.e. people who have bought into a popularized, simplified - and unworkable - bastardization of a reasonable political position (with which reasonable people can agree or disagree).

So. What I hope to accomplish with this (and future) threads, is that - through looking at some real and hypothetical policy issues, with the help of current mainstream economic theory, and examining policy solutions that with minimal amount of government intervention can feasibly solve the issue - we will:

  • Find complexity.
  • Find a certain amount of common ground between reasonable “progressives”, “small government conservatives” and some types of “libertarians”. I expect one area of common ground to be agreement that the proper question to ask for each instance (or family) of policy challenge(s) should be: “what amount of government intervention is warranted in this particular case”?
    and
  • Illustrate that the “free market evangelist / utopist” position (as redefined) is untenable, and may be dismissed as such, when encountered.

If anyone reads this new definition and feels “Hell yeah!” - please participate, and please argue the position why Laissez Faire (no government intervention) leads to a successful resolution of the issue under scrutiny! Off course, for any particular issue we discuss someone could find that they believe a policy of Laissez Faire is warranted and still not fit my description of a “free market evangelist / utopist”. The point of this excersize is that I expect we will find that sometimes Laissez Faire is not warranted and sometimes it is, and that we need a sliding scale.

15

Yes! Unless you are asserting that unregulated markets with no intervention are always maximally efficient (Pareto optimal? wiki) in every single case, then no.

“Markets are good [period]” seems like a stretch, and not warranted as a conclusion from the preceding statement? But i’m guessing that you’re volleying off of my unfortunate introduction of religious terminology with the term “free market evangelism”. I suggest we reboot using my clarification of the OP as starting point!

16

But doesn’t kicking solutions down the road just make them more expensive?

At some point we need to decide on a limit to how much CO[sub]2[/sub] equivalent we want in the atmosphere.

Right now, a relatively safe level, 450 ppmv, will be hard to reach. How do you propose we reach 450 ppmv if we don’t start now, but wait a generation? (Is 25 years what you mean?)
Seems to me a better solution than tariffs is to convince China to get on board with carbon restrictions, taxes, or its own cap-and-trade.

17

In an earlier thread, I tried to ask you what cost from Global Warming damage would justify the supposed remedies being proposed by Congress, and you didn’t respond.

It’s helpful to realize that other debaters can be frustrated just as you are frustrated.

18

I think I did, although it may have been in another thread.

I don’t know the exact numbers, but I can give you the process I’d want followed:

First, you show me the range of estimates of the damage warming will do without the bill, and when it will do it. Then, show me the range of estimates of the damage warming will do if the bill is signed, and when. I don’t care how accurate it is, but I do need to know the size of your error bars.

Once we have that data, we can work out the potential savings from the low, median, and high estimates for the difference in damage. That will give us a range of cost savings for the current bill.

From there, we can look at when this damage will happen, and figure out a reasonable discount rate to determine the net present cost of the damage prevented. That gives you a good number to use for the tolerable cost of the bill. We can use the error bars and the high end estimate to figure out the price of the risk, and add that in as well.

If you can’t come up with numbers like that, I’d argue that your understanding isn’t well enough established to justify taking drastic action today.

The problem for your side and for the current bill is that it seems clear to me on its face that cap and trade will fail the test. Badly. Because it won’t reduce CO2. At all.

If you don’t believe me, you might want to listen to what Obama’s own head of the Environmental Protection Agency has to say about it.

No impact on world CO2 levels. None. The cost? According to Brookings, about 5.7 trillion dollars between 2012-2035. That’s 5.7 trillion dollars that won’t be available to spend on mitigation, climate research, investment in green technology, or to subsidize low-carbon programs in other countries. Pissed away because we have to ‘do something!’

This is one of the worst bills I’ve ever seen.

Anyway, the problem we have in general is that if you apply straight mathematics and science and economics and accounting principles to the problem, the answers that come out generally indicate that we shouldn’t do much at all today to reduce damages 100 years from now. So then advocates veer away from scientific and mathematical analysis and start talking about biodiversity, ‘social cost’, discount rates of zero or less, and other intangibles which they assign extremely high costs to. And then we reach another impasse.

19

Just like the beggar’s biggest problem with riding is that he has no horse.

Let’s suppose for the moment that AGW is real. Let us further suppose that no libertarian-oriented solution exists. Is there a ‘progressive’ solution to this, apart from US tariffs on Chinese goods?

Because the challenge posed in the OP’s title doesn’t seem to be peculiar to a government who regards the free market as the solution of first resort. It’s the Prisoner’s Dilemma, more or less.

I for one can see how government might be justified in dealing with these kinds of problems, and I am about as free-market oriented as they go 'round here.

Regards,
Shodan

20

I just as seldom see “Made in Canada” as well. You do know the UK has a lower unemployment rate then the United States, right?

If taxes drive business away how do you account for that?

Riiight, China’s just gonna throw away trillions in American bonds so it can save a few billion destroying the environment. On what planet does this make sense?