The Catholic University of America
Oct 25 2010

Please Forgive Me, But I Need To Vent

Posted by Ernest Zampelli at 9:46 AM
- Categories: Economy | Government & Civil Society

During the last several weeks, I have read about the Tea Party, cutting “runaway” government spending, the ineffectiveness of the stimulus, disgust with the individual mandate for health insurance, and the suspicions about global warming and climate change.  These are all topics that I’ve blogged on before so I will not go into the details on each as I did previously.  But on each of these issues, I need to do some venting and repeating.

We are not, repeat not, going to solve our current or future deficit problem by cutting discretionary spending and lowering taxes.  There is not any amount of waste, fraud, pork, that we could cut that would get us anywhere close to solving the deficit problem.  And the supply side effects of tax cuts are simply not large enough for tax cuts by themselves to increase receipts.  Following Britain’s lead in implementing bold fiscal austerity measures in the current very fragile economy would be pure folly anyhow.  The original stimulus was too small with a big chunk going to ineffectual tax cuts aimed (unsuccessfully) at getting some members of the GOP to go along.  If it were politically feasible, another round of up to $500 billion would be in order with much going to shore up the budgetary crises of our state and local governments. 

The source of the increasing future deficits is first and foremost Medicare and health expenditures.   (In a distant second place is Social Security.)  If we do nothing about Medicare and health care expenditures, spending cuts made anywhere else will do us no good.  And that is precisely why the health care reform package, even with all its warts, was a big step in the right direction.  The health care bill puts into place elements that begin to address seriously the rising cost of health care and Medicare.  But what about that sinister individual mandate?  Well, do you want to be insured at affordable rates even if you or a family member has a pre-existing condition?  Do you want to be assured that if you contract some sort of debilitating or chronic disease that your insurance premium won’t go sky high or worse, that your insurance company won’t drop your coverage altogether?  Well, you can’t get those without the mandate!  If you were to implement such regulations on insurance companies without an accompanying individual mandate, we would witness an incredible death spiral in the health insurance market.  A situation such as that is simply not sustainable.   

And finally, we come to climate change.  Though there is a fair bit of skepticism among the general populace of humankind’s role in climate change, there is really no skepticism in the scientific community, save for a small contingent of outliers who deny outright the phenomenon itself and/or the role we humans play in it.  So, abstracting from the fringe elements, how should we go about addressing the issue?  The fundamental problem is the lack of a carbon market.  Carbon emissions are detrimental to the atmosphere, imposing a cost on society at large.  In a perfect world, those who emitted carbon would be held accountable for those costs and would have to pay a price per unit of carbon they spewed into the ambient.  The world isn’t perfect and no such market exists.  That’s the point of cap-and-trade.  The government sets an upper limit on carbon emissions, significantly less than the current level of emissions, and issue carbon permits that aggregate to that regulated amount.  Carbon emitters are then free to buy and sell these permits as their individual circumstances require.  This exchange of permits is the market through which the carbon price is established.  This is the first best solution.  Of course, in the current climate (pardon the pun) putting a price on carbon is labeled as an energy tax.  With the dreaded “t” word attached to cap-and-trade along with the skepticism surrounding climate change, many believe that the potential for passing and implementing an effective cap-an-trade policy is dead.  And so we now go the easier route—let’s subsidize the production and/or consumption of green technologies so that they can “compete” with dirty technologies.  Unfortunately, this will be more costly, it will not be as effective in reducing emissions, and it will cause too many resources to be allocated to overall energy production.  Putting a price on carbon, globally, is something that has to be done if we are going to make headway in the climate change challenge.         



Matt wrote on 10/25/10 10:03 AM

You tell 'em Ernie! If you're right, Republicans have arguably put themselves into a bind in terms of proactive policy -- they cannot solve the deficit problems they rightly point to without doing something other than what they've campaigned on. Only a few lawmakers (Paul Ryan is one) at least seem serious about addressing these and other problems.

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