Why is taxing in one way superior to taxing in another?

[bedstuy]

Here's why the CRA argument is nonsense.

1.  The subprime market was dominated by non-depository loan originators like Countrywide.  Only banks (depository institutions) are covered by the CRA.

2.  The CRA only covered specific zip codes and low-income borrowers, but subprime mortgages and subsequent defaults were widespread in areas not covered by the CRA. 

3.  So, if you combine these two facts, that many subprime mortgages went to middle class and above people and were orginated by non-bank institutions, the result is a small, small number of subprime loans were covered by the CRA (6% according to the St. Louis Fed study).

Besides uninformed politically-motivated commentators, no one has claimed that the CRA loans themselves were responsible for the crisis. The allegation is that CRA created mandatory affordability guidelines for GSE's, which encouraged the loan pooling, bundling, and credit derivative phenomenon. If the government requires 57% percent affordability, but the market only yields 37%, the market will have to create more questionable loans by over-lending at below market rates. Sounds like Countrywide. To mitigate the risk of these unstable loans, Wall Street creates 101 new credit derivative instruments.

What the FCIC report said was that Fannie and Freddie met their affordability guidelines through the ordinary course of business until 2004 and only purchased 4% of their loans in 2005-2008 specifically to meet the affordability guidelines.  The data just isn't there to support that position.

If you think Fannie and Freddie were a problem, you're obviously right.  They have an inherent conflict of interest between being public and private.  But, their involvement in subprime was a result of their lost market share and desire to compete with the private label market.  Fannie and Freddie were chasing the private market, not the other way around. 

You also ignore how finance drives the market for loan origination.  The financial industry figured out a way to take a bad loan and create an asset that hid the risk.  AIG figured out a way to insure bad assets without being regulated as an insurer with it's massive pile of toxic CDOs.  Once that system was created, it was game-on. 

So, you have loan originators not worrying about the bad debt, because of the private-label market and to an extent the GSE secondary market.  You have the Wall Street banks not worrying about their toxic balance sheets because of CDOs.  And, you have AIG not worrying about their exposure because they were basically insane.  Plus, in that whole system, everyone takes a piece of the action in fees when they make the loans, sell the securities, sell the CDOs, etc. 

[AggregateDemand]

What the FCIC report said was that Fannie and Freddie met their affordability guidelines through the ordinary course of business until 2004 and only purchased 4% of their loans in 2005-2008 specifically to meet the affordability guidelines.  The data just isn't there to support that position.

If you think Fannie and Freddie were a problem, you're obviously right.  They have an inherent conflict of interest between being public and private.  But, their involvement in subprime was a result of their lost market share and desire to compete with the private label market.  Fannie and Freddie were chasing the private market, not the other way around. 

You also ignore how finance drives the market for loan origination.  The financial industry figured out a way to take a bad loan and create an asset that hid the risk.  AIG figured out a way to insure bad assets without being regulated as an insurer with it's massive pile of toxic CDOs.  Once that system was created, it was game-on. 

So, you have loan originators not worrying about the bad debt, because of the private-label market and to an extent the GSE secondary market.  You have the Wall Street banks not worrying about their toxic balance sheets because of CDOs.  And, you have AIG not worrying about their exposure because they were basically insane.  Plus, in that whole system, everyone takes a piece of the action in fees when they make the loans, sell the securities, sell the CDOs, etc. 

It is true that Fannie Mae and Freddie Mac were superior to the private sector regarding risk assessment for origination and securitization. Unfortunately, only 25% of GSE activity pertained to those activities. The other 75% was purchasing mortgage-backed securities from other institutions.

As lending sanity waned, we saw an unmarked intersection on the horizon. The Fed sounded the alarm and slammed on the brakes by raising rates. Congress held the accelerator to the floor. The private sector put their power behind Congressional regulation. The economy continued gathering steam. POW. We were blind-sided by a 200% increase in oil prices over an 18 month period.

Since liberals were not in power, and since GSE's did not actually originate the loans, liberals attempt to exculpate government. Why? Because they don't want to give up their social engineering project. Forget the obvious moral hazards of the GSE arrangement,  and forget the new perverse behaviors we just witnessed when the Fed raised rates. Democrats can control those things with responsible banking regulations.

Arrogant Republicans contributed to this crisis because they wanted the ownership society at any cost. Now, arrogant Democrats are doubling down on GSE's because they want wealth redistribution at any cost, and they are willing to shape the private sector to fit the GSE arrangement. Even if it works, why expose the US housing sector to such risk? I'm sure well-meaning liberals plan to dismantle the danger gradually as the economy improves, but they will be pummeled by the racial wing of the party. The liberal pragmatists have been defeated regarding welfare reform, social security reform, healthcare reform. Why would we suspect a different outcome for GSE lending?

[bedstuy]

What the FCIC report said was that Fannie and Freddie met their affordability guidelines through the ordinary course of business until 2004 and only purchased 4% of their loans in 2005-2008 specifically to meet the affordability guidelines.  The data just isn't there to support that position.

If you think Fannie and Freddie were a problem, you're obviously right.  They have an inherent conflict of interest between being public and private.  But, their involvement in subprime was a result of their lost market share and desire to compete with the private label market.  Fannie and Freddie were chasing the private market, not the other way around. 

You also ignore how finance drives the market for loan origination.  The financial industry figured out a way to take a bad loan and create an asset that hid the risk.  AIG figured out a way to insure bad assets without being regulated as an insurer with it's massive pile of toxic CDOs.  Once that system was created, it was game-on. 

So, you have loan originators not worrying about the bad debt, because of the private-label market and to an extent the GSE secondary market.  You have the Wall Street banks not worrying about their toxic balance sheets because of CDOs.  And, you have AIG not worrying about their exposure because they were basically insane.  Plus, in that whole system, everyone takes a piece of the action in fees when they make the loans, sell the securities, sell the CDOs, etc. 

It is true that Fannie Mae and Freddie Mac were superior to the private sector regarding risk assessment for origination and securitization. Unfortunately, only 25% of GSE activity pertained to those activities. The other 75% was purchasing mortgage-backed securities from other institutions.

As lending sanity waned, we saw an unmarked intersection on the horizon. The Fed sounded the alarm and slammed on the brakes by raising rates. Congress held the accelerator to the floor. The private sector put their power behind Congressional regulation. The economy continued gathering steam. POW. We were blind-sided by a 200% increase in oil prices over an 18 month period.

Since liberals were not in power, and since GSE's did not actually originate the loans, liberals attempt to exculpate government. Why? Because they don't want to give up their social engineering project. Forget the obvious moral hazards of the GSE arrangement,  and forget the new perverse behaviors we just witnessed when the Fed raised rates. Democrats can control those things with responsible banking regulations.

Arrogant Republicans contributed to this crisis because they wanted the ownership society at any cost. Now, arrogant Democrats are doubling down on GSE's because they want wealth redistribution at any cost, and they are willing to shape the private sector to fit the GSE arrangement. Even if it works, why expose the US housing sector to such risk? I'm sure well-meaning liberals plan to dismantle the danger gradually as the economy improves, but they will be pummeled by the racial wing of the party. The liberal pragmatists have been defeated regarding welfare reform, social security reform, healthcare reform. Why would we suspect a different outcome for GSE lending?

Here's why that's wrong.  Fannie and Freddie bought 99%+ in AAA rated senior tranches, which had basically inelastic demand and issued GSE debt rated AAA to pay for it.  If you look at their real exposure in the subprime market through their assets, it wasn't at all decisive as a cause of the financial crisis.  We're not talking about hundreds of billions of dollars in subprime PLS losses here, it's ridiculous to say that was the cause of the financial crisis. 

[AggregateDemand]

Here's why that's wrong.  Fannie and Freddie bought 99%+ in AAA rated senior tranches, which had basically inelastic demand and issued GSE debt rated AAA to pay for it.  If you look at their real exposure in the subprime market through their assets, it wasn't at all decisive as a cause of the financial crisis.  We're not talking about hundreds of billions of dollars in subprime PLS losses here, it's ridiculous to say that was the cause of the financial crisis. 

I'm not sure why you steer the conversation back to a strict interpretation of subprime lending. Yes, it's true that only a small percentage of their loans were made to borrowers with sub-620 FICO scores; however, the subprime housing crisis refers to the overall degradation of lending standards. This includes interest-only mortgages, certain types of ARMs, PLS, etc.

Besides a few conservative pundits with an agenda against the lower-class lending, virtually no one is blaming the small fraction of loans made to borrowers with poor FICO scores. Everyone blames GSE entry into high-risk mortgages and PLS, and the incredible volume of high-risk assets they acquired to satisfy federal affordability guidelines.

The US Treasury department was forced to sink $120B into Fannie and Freddie just to bailout their PLS portfolios after 2-3 years of speculation. By 2007, the GSE's were buying 60% of all high-risk mortgage assets and mortgage-backed securities. Fannie and Freddie were the driving force.

[Bojack Horseman]

What Republicans call a "fair tax" isn't fair at all: it systematically shifts the tax burden downward, meaning the less you make the more you pay. Someone making $1,000,000 a year would get a six-figure tax cut, while someone making minimum wage would see their taxes go up by about 50%.

[bedstuy]

Here's why that's wrong.  Fannie and Freddie bought 99%+ in AAA rated senior tranches, which had basically inelastic demand and issued GSE debt rated AAA to pay for it.  If you look at their real exposure in the subprime market through their assets, it wasn't at all decisive as a cause of the financial crisis.  We're not talking about hundreds of billions of dollars in subprime PLS losses here, it's ridiculous to say that was the cause of the financial crisis. 

I'm not sure why you steer the conversation back to a strict interpretation of subprime lending. Yes, it's true that only a small percentage of their loans were made to borrowers with sub-620 FICO scores; however, the subprime housing crisis refers to the overall degradation of lending standards. This includes interest-only mortgages, certain types of ARMs, PLS, etc.

Besides a few conservative pundits with an agenda against the lower-class lending, virtually no one is blaming the small fraction of loans made to borrowers with poor FICO scores. Everyone blames GSE entry into high-risk mortgages and PLS, and the incredible volume of high-risk assets they acquired to satisfy federal affordability guidelines.

The US Treasury department was forced to sink $120B into Fannie and Freddie just to bailout their PLS portfolios after 2-3 years of speculation. By 2007, the GSE's were buying 60% of all high-risk mortgage assets and mortgage-backed securities. Fannie and Freddie were the driving force.

We keep going around in circles on this stuff.  But, if it's true that Fannie Mae and Freddie Mac caused the crisis, why did we need to bailout AIG and the big banks?

The financial crisis was two things: a run on the bank and an asset bubble.  GSEs were instrumental in the housing market, but they didn't drive the worst practices or the downstream innovations that changed the game in the mid-2000s.  GSEs didn't cause the freezing the credit markets or the over-leveraging on wall street.  The real villain here, if you had to pick one, would be AIG and the counter-parties on their housing market transactions. 

[AggregateDemand]

We keep going around in circles on this stuff.  But, if it's true that Fannie Mae and Freddie Mac caused the crisis, why did we need to bailout AIG and the big banks?

The financial crisis was two things: a run on the bank and an asset bubble.  GSEs were instrumental in the housing market, but they didn't drive the worst practices or the downstream innovations that changed the game in the mid-2000s.  GSEs didn't cause the freezing the credit markets or the over-leveraging on wall street.  The real villain here, if you had to pick one, would be AIG and the counter-parties on their housing market transactions. 

The GSE's are to blame by virtue of the mandatory volume requirements. When they entered the PLS market, demand was so great that the market had to manufacture junk risk for them to buy. Each year between 2005 and 2007, Fannie and Freddie acquired more high-risk assets (volume and portfolio percentage). When private banks realized the products had become fraudulent, they eased their rate of PLS purchases in 2006, and then slowed PLS activity sharply in 2007, the GSE's kept buying at a steep increase to meet their volume quotas. A few dumb companies, AIG in particular, continued speculating in favor of PLS activity.

Prior to the 2008 collapse, many private companies had already done an about face on PLS lending. In 2006, non-GSE enterprises acquired roughly $1T in PLS. In 2007, they acquired just $400B. Fannie and Freddie, on the other hand, had increased their buying activity by about 40% to nearly $575B.

Private bank change in PLS activity 2007: -60%
GSE bank change in PLS activity 2007: +40%

That's what volume mandates do when they meet PLS markets. Only Congress can be so dumb.

[bedstuy]

We keep going around in circles on this stuff.  But, if it's true that Fannie Mae and Freddie Mac caused the crisis, why did we need to bailout AIG and the big banks?

The financial crisis was two things: a run on the bank and an asset bubble.  GSEs were instrumental in the housing market, but they didn't drive the worst practices or the downstream innovations that changed the game in the mid-2000s.  GSEs didn't cause the freezing the credit markets or the over-leveraging on wall street.  The real villain here, if you had to pick one, would be AIG and the counter-parties on their housing market transactions. 

The GSE's are to blame by virtue of the mandatory volume requirements. When they entered the PLS market, demand was so great that the market had to manufacture junk risk for them to buy. Each year between 2005 and 2007, Fannie and Freddie acquired more high-risk assets (volume and portfolio percentage). When private banks realized the products had become fraudulent, they eased their rate of PLS purchases in 2006, and then slowed PLS activity sharply in 2007, the GSE's kept buying at a steep increase to meet their volume quotas. A few dumb companies, AIG in particular, continued speculating in favor of PLS activity.

Prior to the 2008 collapse, many private companies had already done an about face on PLS lending. In 2006, non-GSE enterprises acquired roughly $1T in PLS. In 2007, they acquired just $400B. Fannie and Freddie, on the other hand, had increased their buying activity by about 40% to nearly $575B.

Private bank change in PLS activity 2007: -60%
GSE bank change in PLS activity 2007: +40%

That's what volume mandates do when they meet PLS markets. Only Congress can be so dumb.

I get what you're saying there, but it's questionable on two counts. 

One, how much of that activity was chasing affordability and how much was chasing profits?   

Two, Fannie and Freddie weren't buying investment grade tranches of the PLSs.  You put AAA on something, you can find someone to buy it.  There are so many institutional investors that need to hold a certain amount of AAA.  If it wasn't the dumb-dumbs at Fannie and Freddie holding the bag, it would be a dumb-dumb at a Scottish pension fund or something.

[AggregateDemand]

I get what you're saying there, but it's questionable on two counts. 

One, how much of that activity was chasing affordability and how much was chasing profits?   

Two, Fannie and Freddie weren't buying investment grade tranches of the PLSs.  You put AAA on something, you can find someone to buy it.  There are so many institutional investors that need to hold a certain amount of AAA.  If it wasn't the dumb-dumbs at Fannie and Freddie holding the bag, it would be a dumb-dumb at a Scottish pension fund or something.

Mortgage-backed securities are just an investment product. If they don't sell, they don't sell. Nobody gets stuck buying them. Liquidity in the housing market would dry up, and companies couldn't make toxic loans. It's not a good outcome, but it's better than systemic collapse.

I can't say to what degree greed was involved, but the final days were a telling narrative about the relative intelligence of various institutions. The Fed was the first to slam on the brakes in mid-2004. Wall St. was defiant, but, by the end of 2006, they were hard on the brakes, as well. Congress and the GSE's were still at wide ope throttle when we crashed. They are still running their programs at wide open throttle, now.

No one will ever be able to prove Congress/GSE-lending was responsible beyond a reasonable doubt, but the preponderance of the evidence is somewhat overwhelming.

[bedstuy]

I get what you're saying there, but it's questionable on two counts. 

One, how much of that activity was chasing affordability and how much was chasing profits?   

Two, Fannie and Freddie weren't buying investment grade tranches of the PLSs.  You put AAA on something, you can find someone to buy it.  There are so many institutional investors that need to hold a certain amount of AAA.  If it wasn't the dumb-dumbs at Fannie and Freddie holding the bag, it would be a dumb-dumb at a Scottish pension fund or something.

Mortgage-backed securities are just an investment product. If they don't sell, they don't sell. Nobody gets stuck buying them. Liquidity in the housing market would dry up, and companies couldn't make toxic loans. It's not a good outcome, but it's better than systemic collapse.

I can't say to what degree greed was involved, but the final days were a telling narrative about the relative intelligence of various institutions. The Fed was the first to slam on the brakes in mid-2004. Wall St. was defiant, but, by the end of 2006, they were hard on the brakes, as well. Congress and the GSE's were still at wide ope throttle when we crashed. They are still running their programs at wide open throttle, now.

No one will ever be able to prove Congress/GSE-lending was responsible beyond a reasonable doubt, but the preponderance of the evidence is somewhat overwhelming.

That's not my point about MBS.  There was such high demand for AAA securities that even a large purchase of AAA securities will not necessarily change the contours of the market, especially when the purchase is combined with issuing more AAA debt to pay for it.

[traininthedistance]

Here's the response to that:

1.  You set up the market intelligently with the best trading technology and take into account the lessons learned from previous cap-and-trade systems. 

2.  You're right about non-point sources.  But, that's a sort of frivolous argument.  There isn't a choice of only one regulation, we're going to have a mix of regulations.  We have a gas tax, we have NSPS standards, we have two technological standards for cars in Title II of the CAA, we have SIPs.  For non-point sources, you do a few things, you increase the gas tax and you implement a higher technological performance standards for emissions and mileage.  There's no reason that can't go hand in hand with cap-and-trade.  Then, you've covered point sources and mobile sources.  The rest is less than 5% of emissions which is covered by SIPs which will include GHGs eventually.

Yeah, I guess we could do things piecemeal in such a way; that's a fair point.  But I still think you vastly underrate both the technical and political difficulties in setting up such a cap-and-trade market correctly, as well as the potential pitfalls if you do it wrong (such a blunder could potentially discredit the entire idea of carbon regulation, which is just about the worst thing that could happen). 

I also think there's some virtue in trying to keep the solution relatively simple; even if the theoretical peak efficiency of a broad-based carbon tax (which I am willing to agree is somewhat of a blunt instrument) is lower, the potential points of failure are also fewer.  My ideal solution is basically to slap a heavy, targeted VAP on drillers/miners, refiners, and importers, and split the revenue between a) funding transportation/infrastructure, b) research, development, and deployment of efficiency improvements, and c) a feebate to allay equity concerns and get buy-in from lower income people that might be affected by higher fuel costs.

I guess I'd also reiterate my more philosophical point that the Coase theorem is not really applicable to real-life situations except in weird circumstances.

[bedstuy]

Yeah, I guess we could do things piecemeal in such a way; that's a fair point.  But I still think you vastly underrate both the technical and political difficulties in setting up such a cap-and-trade market correctly, as well as the potential pitfalls if you do it wrong (such a blunder could potentially discredit the entire idea of carbon regulation, which is just about the worst thing that could happen). 

I also think there's some virtue in trying to keep the solution relatively simple; even if the theoretical peak efficiency of a broad-based carbon tax (which I am willing to agree is somewhat of a blunt instrument) is lower, the potential points of failure are also fewer.  My ideal solution is basically to slap a heavy, targeted VAP on drillers/miners, refiners, and importers, and split the revenue between a) funding transportation/infrastructure, b) research, development, and deployment of efficiency improvements, and c) a feebate to allay equity concerns and get buy-in from lower income people that might be affected by higher fuel costs.

I guess I'd also reiterate my more philosophical point that the Coase theorem is not really applicable to real-life situations except in weird circumstances.

1.  If cap and trade is so difficult, why was the EPA able to set up an effective cap-and-trade scheme over 20 years ago?  Furthermore, how complicated do you think compliance with EPA command and control regulation under NSPS and SIPs is?  I would argue that's far, far more complicated and intensive in terms of bureaucracy than cap-and-trade.  If we can tell a factory what kind of scrubber to build, we can set up a market.  I think you're just not that well-versed in how we regulate stationary sources.  This is a field of vast, technical regulation where permit markets are actually less complicated for the industrial sources.

2.  The idea of piecemeal regulation of pollution isn't one possible option, it's the only possible option.  We're treating GHG emissions as this discrete problem, but it's all part and parcel of the problem of pollution.  When it comes to stationary sources, you simply cannot regulate their pollution with a tax because you have to deal with things like mercury and lead.  So, it makes total sense to treat a coal burning power plant one way and a car's tail pipe a different way. 

3.  Here's my basic reason for supporting cap-and-trade:  Stationary source polluters have different marginal costs of reducing pollution.  These are complicated industrial processes.  We could be talking about using different fuel, installing million dollar pieces of emission control technology, etc.  We could also be talking about the difference between 1970s technology and 2010s technology.  If the brand-new factory can cut costs at 5 cents per X GHG units and the old factory can cut costs at $100 per X GHG units, it's sort of a no-brainer if we want emissions reductions.

4.  Taxes can never deliver sustainable or predictable emissions reductions.  They're also politically untenable.  Remember, George W. Bush and John McCain supported cap-and-trade. 

[traininthedistance]

1.  If cap and trade is so difficult, why was the EPA able to set up an effective cap-and-trade scheme over 20 years ago?  Furthermore, how complicated do you think compliance with EPA command and control regulation under NSPS and SIPs is?  I would argue that's far, far more complicated and intensive in terms of bureaucracy than cap-and-trade.  If we can tell a factory what kind of scrubber to build, we can set up a market.  I think you're just not that well-versed in how we regulate stationary sources.  This is a field of vast, technical regulation where permit markets are actually less complicated for the industrial sources.

2.  The idea of piecemeal regulation of pollution isn't one possible option, it's the only possible option.  We're treating GHG emissions as this discrete problem, but it's all part and parcel of the problem of pollution.  When it comes to stationary sources, you simply cannot regulate their pollution with a tax because you have to deal with things like mercury and lead.  So, it makes total sense to treat a coal burning power plant one way and a car's tail pipe a different way. 

3.  Here's my basic reason for supporting cap-and-trade:  Stationary source polluters have different marginal costs of reducing pollution.  These are complicated industrial processes.  We could be talking about using different fuel, installing million dollar pieces of emission control technology, etc.  We could also be talking about the difference between 1970s technology and 2010s technology.  If the brand-new factory can cut costs at 5 cents per X GHG units and the old factory can cut costs at $100 per X GHG units, it's sort of a no-brainer if we want emissions reductions.

4.  Taxes can never deliver sustainable or predictable emissions reductions.  They're also politically untenable.  Remember, George W. Bush and John McCain supported cap-and-trade. 

I'm not opposed to command-and-control when it's appropriate; and of course I recognize that it's bureaucratically intensive, and that's necessary.  Not everything can be one hundred percent commanded out of existence; I think both of us recognize that fossil fuel usage is one of those things that has to be slowly tapered down over time, because it is so much more central to the economic functioning of our entire society than any particular other pollutant; and also because I suppose CO2 is not acutely toxic in the way mercury or lead is, it's more of a chronic condition.

The idea that cap-and-trade is more politically tenable than a carbon tax may have been true in the past... but have you paid attention at all the past five years?  Are you familiar with the Luntzism "cap and tax"?  Any sort of regulation will be fought tooth and nail, will be smeared as a "war on coal" or somesuch; the fact that Newt Gingrich once sat on a sofa with Nancy Pelosi and admitted we need to do something about global warming has less bearing on today's political realities than one would hope.  Any political benefit cap-and-trade once had is very obviously dead and gone, and the fact that it has become such a political football does in fact factor into my calculus when I say it will be tough sledding to make it right, way tougher than it was 20 years ago.  If GHG reductions were indeed this consensus goal that we could set up without the klieg lights of partisanship, then maybe it would be possible to set an exchange up well.  I am deeply pessimistic.

As for your point 3, I would have to think about it some more but I'm not entirely convinced that a simpler carbon tax idea would do that much worse in terms of correctly aligning incentives for stationary polluters. 

[bedstuy]

I'm not opposed to command-and-control when it's appropriate; and of course I recognize that it's bureaucratically intensive, and that's necessary.  Not everything can be one hundred percent commanded out of existence; I think both of us recognize that fossil fuel usage is one of those things that has to be slowly tapered down over time, because it is so much more central to the economic functioning of our entire society than any particular other pollutant; and also because I suppose CO2 is not acutely toxic in the way mercury or lead is, it's more of a chronic condition.

I think you might be missing my point on this.  I basically think you're applying the economics of regulating the consumer market to the economics of regulating power plants.  Power plants are  vastly different in ways that you may not appreciate without an understanding of the regulatory scheme for air pollution under the EPA and the industrial processes involved.  For one thing, we already have a massively intrusive and complicated set of rules comprising a technological standard.  If we put 1/5th the effort into create permit markets for industrial pollution, it wouldn't be that difficult.

The idea that cap-and-trade is more politically tenable than a carbon tax may have been true in the past... but have you paid attention at all the past five years?  Are you familiar with the Luntzism "cap and tax"?  Any sort of regulation will be fought tooth and nail, will be smeared as a "war on coal" or somesuch; the fact that Newt Gingrich once sat on a sofa with Nancy Pelosi and admitted we need to do something about global warming has less bearing on today's political realities than one would hope.  Any political benefit cap-and-trade once had is very obviously dead and gone, and the fact that it has become such a political football does in fact factor into my calculus when I say it will be tough sledding to make it right, way tougher than it was 20 years ago.  If GHG reductions were indeed this consensus goal that we could set up without the klieg lights of partisanship, then maybe it would be possible to set an exchange up well.  I am deeply pessimistic.

If we're talking about the politics of this, maybe that's true to an extent.  But, to the extent that cap-and-trade is unpopular, a carbon tax is more unpopular. 

But, at the level of actually passing legislation, obviously no good legislation is leaving this garbage congress we have now.  We have to bide our time and bury our nuts for a brighter day.  In the meantime, dumb Republicans are going to yell slogans.  That's what they do and it has no substance.  I say that it's something that ought to be ignored.  Nobody is going to remember the party line on this issue in 5 years or whenever we get a chance.

I also wonder whether we could do cap-and-trade under the current CAA.  It would require some chutzpah and favorable D.C. circuit judges, but it's possible.

As for your point 3, I would have to think about it some more but I'm not entirely convinced that a simpler carbon tax idea would do that much worse in terms of correctly aligning incentives for stationary polluters. 

That's a valid and extremely complicated question.  But, my understanding is that marginal costs can vary greatly and a properly set up market would take great advantage of that fact.

[Foucaulf]

What the hell went on in this thread re that AggregateDemand exchange? Obviously he is not arguing economics, since he refused to consider the magnitude of Freddie/Fannie purchases on the MBS market relative to other institutions. The end is political: it is evidence to back this theory of regulation as "social engineering." To that end, I respond by questioning his capability for empathy.

(I may edit in later my thoughts on cap and trade versus the carbon tax. I lean to the latter, though I am more agnostic these days.)

[AggregateDemand]

What the hell went on in this thread re that AggregateDemand exchange? Obviously he is not arguing economics, since he refused to consider the magnitude of Freddie/Fannie purchases on the MBS market relative to other institutions. The end is political: it is evidence to back this theory of regulation as "social engineering." To that end, I respond by questioning his capability for empathy.

(I may edit in later my thoughts on cap and trade versus the carbon tax. I lean to the latter, though I am more agnostic these days.)

GSE volume was 60% of the entire MBS market in 2007. In 2006, it was roughly 30% and 2005 was 25%. The GSE's had a major impact on market pricing and volume.

Housing prices increased 200% against median income over 2 decades, which eliminated the prospect of home ownership for young people, especially in this era of student loans. Systemic collapse has jeopardized the entire middle class.

I'm empathetic. You're clueless.

[traininthedistance]

I'm not opposed to command-and-control when it's appropriate; and of course I recognize that it's bureaucratically intensive, and that's necessary.  Not everything can be one hundred percent commanded out of existence; I think both of us recognize that fossil fuel usage is one of those things that has to be slowly tapered down over time, because it is so much more central to the economic functioning of our entire society than any particular other pollutant; and also because I suppose CO2 is not acutely toxic in the way mercury or lead is, it's more of a chronic condition.

I think you might be missing my point on this.  I basically think you're applying the economics of regulating the consumer market to the economics of regulating power plants.  Power plants are  vastly different in ways that you may not appreciate without an understanding of the regulatory scheme for air pollution under the EPA and the industrial processes involved.  For one thing, we already have a massively intrusive and complicated set of rules comprising a technological standard.  If we put 1/5th the effort into create permit markets for industrial pollution, it wouldn't be that difficult.

I know a little bit about power plant regulation but my knowledge is somewhat rusty and incomplete, so that is something I should probably be refreshing myself on.  I'm well aware that it's vastly more intrusive, though.

The idea that cap-and-trade is more politically tenable than a carbon tax may have been true in the past... but have you paid attention at all the past five years?  Are you familiar with the Luntzism "cap and tax"?  Any sort of regulation will be fought tooth and nail, will be smeared as a "war on coal" or somesuch; the fact that Newt Gingrich once sat on a sofa with Nancy Pelosi and admitted we need to do something about global warming has less bearing on today's political realities than one would hope.  Any political benefit cap-and-trade once had is very obviously dead and gone, and the fact that it has become such a political football does in fact factor into my calculus when I say it will be tough sledding to make it right, way tougher than it was 20 years ago.  If GHG reductions were indeed this consensus goal that we could set up without the klieg lights of partisanship, then maybe it would be possible to set an exchange up well.  I am deeply pessimistic.

If we're talking about the politics of this, maybe that's true to an extent.  But, to the extent that cap-and-trade is unpopular, a carbon tax is more unpopular. 

But, at the level of actually passing legislation, obviously no good legislation is leaving this garbage congress we have now.  We have to bide our time and bury our nuts for a brighter day.  In the meantime, dumb Republicans are going to yell slogans.  That's what they do and it has no substance.  I say that it's something that ought to be ignored.  Nobody is going to remember the party line on this issue in 5 years or whenever we get a chance.

I also wonder whether we could do cap-and-trade under the current CAA.  It would require some chutzpah and favorable D.C. circuit judges, but it's possible.

Well, ten or even five years ago cap-and-trade seemed more feasible because you did have some Republicans who were willing to say that emissions reductions were a worthy goal to pursue, and it didn't have the talismanic taint of being a "tax".  However, my whole point with bringing up the phrase "cap and tax" is that it's lost that edge; it'll be considered a tax anyway. Obviously the road to hoe for a carbon tax is still quite insanely steep, but it seems to me that there is actually a potential path by which you build a coalition for it that I don't see is available to the permits market approach- namely, by stressing the benefits that the revenue can be dedicated to.  People don't really seem to care about global warming much these days, but if you frame it in terms of financing infrastructure investment you might almost be able to get somewhere.  Whereas if you have a permits market people are going to assume that it's just going to enrich some speculators or something.

I know it seems topsy-turvy to say that a carbon tax is more politically feasible than cap-and-trade... but I honestly do think that's true right now.

[bedstuy]

The idea that cap-and-trade is more politically tenable than a carbon tax may have been true in the past... but have you paid attention at all the past five years?  Are you familiar with the Luntzism "cap and tax"?  Any sort of regulation will be fought tooth and nail, will be smeared as a "war on coal" or somesuch; the fact that Newt Gingrich once sat on a sofa with Nancy Pelosi and admitted we need to do something about global warming has less bearing on today's political realities than one would hope.  Any political benefit cap-and-trade once had is very obviously dead and gone, and the fact that it has become such a political football does in fact factor into my calculus when I say it will be tough sledding to make it right, way tougher than it was 20 years ago.  If GHG reductions were indeed this consensus goal that we could set up without the klieg lights of partisanship, then maybe it would be possible to set an exchange up well.  I am deeply pessimistic.

If we're talking about the politics of this, maybe that's true to an extent.  But, to the extent that cap-and-trade is unpopular, a carbon tax is more unpopular. 

But, at the level of actually passing legislation, obviously no good legislation is leaving this garbage congress we have now.  We have to bide our time and bury our nuts for a brighter day.  In the meantime, dumb Republicans are going to yell slogans.  That's what they do and it has no substance.  I say that it's something that ought to be ignored.  Nobody is going to remember the party line on this issue in 5 years or whenever we get a chance.

I also wonder whether we could do cap-and-trade under the current CAA.  It would require some chutzpah and favorable D.C. circuit judges, but it's possible.

Well, ten or even five years ago cap-and-trade seemed more feasible because you did have some Republicans who were willing to say that emissions reductions were a worthy goal to pursue, and it didn't have the talismanic taint of being a "tax".  However, my whole point with bringing up the phrase "cap and tax" is that it's lost that edge; it'll be considered a tax anyway. Obviously the road to hoe for a carbon tax is still quite insanely steep, but it seems to me that there is actually a potential path by which you build a coalition for it that I don't see is available to the permits market approach- namely, by stressing the benefits that the revenue can be dedicated to.  People don't really seem to care about global warming much these days, but if you frame it in terms of financing infrastructure investment you might almost be able to get somewhere.  Whereas if you have a permits market people are going to assume that it's just going to enrich some speculators or something.

I know it seems topsy-turvy to say that a carbon tax is more politically feasible than cap-and-trade... but I honestly do think that's true right now.

What if the EPA created a cap-and-trade program only for coal plants, just using existing authority (I'm thinking of CAA Section 111)?  No bill has to be passed at all.  Coal plants are one of the major environmental offenders and it could serve as a demonstration project for a large-scale cap-and-trade scheme. 

We could similarly create cap-and-trade schemes for vehicle fuel under CAA 211 without passing a bill.

That's sort of a trump card when it comes to political feasibility, no?

[TertiumQuid]

-Stuff-

Well, ten or even five years ago cap-and-trade seemed more feasible because you did have some Republicans who were willing to say that emissions reductions were a worthy goal to pursue, and it didn't have the talismanic taint of being a "tax".  However, my whole point with bringing up the phrase "cap and tax" is that it's lost that edge; it'll be considered a tax anyway. Obviously the road to hoe for a carbon tax is still quite insanely steep, but it seems to me that there is actually a potential path by which you build a coalition for it that I don't see is available to the permits market approach- namely, by stressing the benefits that the revenue can be dedicated to.  People don't really seem to care about global warming much these days, but if you frame it in terms of financing infrastructure investment you might almost be able to get somewhere.  Whereas if you have a permits market people are going to assume that it's just going to enrich some speculators or something.

I know it seems topsy-turvy to say that a carbon tax is more politically feasible than cap-and-trade... but I honestly do think that's true right now.

Wouldn't it be more palatable to make a carbon tax revenue-neutral? By, say, cutting income taxes to correspond? I'm not aware of the vertical equity impact of that, but I'm sure you can tweak the schedules so net progressivity isn't affected. I think British Columbia, in particular, has done some pretty pioneering work on actually implementing the green tax shift.

I'd argue that your frame conflates the green tax shift (which would affect climate change) with infrastructure and the absolute level of taxation (neither of which affect climate change, and which would probably be dealbreakers for Republican support). Honestly, if we're going to make a decent attempt as a society to actually fight climate change, we probably need to achieve some level of bipartisan consensus. It's important that we don't give the coal lobby the chance to spin it as "muh socialism."

Besides, it's probably a lot harder to educate the public about three issues at once than something as simple and crisp as "we should tax bad things first." Even a Tea Partier couldn't disagree with that logic.

[Badger]

I'm sure well-meaning liberals plan to dismantle the danger gradually as the economy improves, but they will be pummeled by the racial wing of the party.

I sincerely hope this was a typo of "radical".

Otherwise, your psychology is ugly.

[traininthedistance]

-Stuff-

Well, ten or even five years ago cap-and-trade seemed more feasible because you did have some Republicans who were willing to say that emissions reductions were a worthy goal to pursue, and it didn't have the talismanic taint of being a "tax".  However, my whole point with bringing up the phrase "cap and tax" is that it's lost that edge; it'll be considered a tax anyway. Obviously the road to hoe for a carbon tax is still quite insanely steep, but it seems to me that there is actually a potential path by which you build a coalition for it that I don't see is available to the permits market approach- namely, by stressing the benefits that the revenue can be dedicated to.  People don't really seem to care about global warming much these days, but if you frame it in terms of financing infrastructure investment you might almost be able to get somewhere.  Whereas if you have a permits market people are going to assume that it's just going to enrich some speculators or something.

I know it seems topsy-turvy to say that a carbon tax is more politically feasible than cap-and-trade... but I honestly do think that's true right now.

Wouldn't it be more palatable to make a carbon tax revenue-neutral? By, say, cutting income taxes to correspond? I'm not aware of the vertical equity impact of that, but I'm sure you can tweak the schedules so net progressivity isn't affected. I think British Columbia, in particular, has done some pretty pioneering work on actually implementing the green tax shift.

I'd argue that your frame conflates the green tax shift (which would affect climate change) with infrastructure and the absolute level of taxation (neither of which affect climate change, and which would probably be dealbreakers for Republican support). Honestly, if we're going to make a decent attempt as a society to actually fight climate change, we probably need to achieve some level of bipartisan consensus. It's important that we don't give the coal lobby the chance to spin it as "muh socialism."

Besides, it's probably a lot harder to educate the public about three issues at once than something as simple and crisp as "we should tax bad things first." Even a Tea Partier couldn't disagree with that logic.

I tend to think of the sorry state of our infrastructure and the climate issue as pretty intimately connected (as well as high on my priority list), so the idea of a revenue-positive carbon tax that can kill two birds of the same genus with one stone is a pretty big thing in my book.  I do recognize that you'll have a hard time getting Republican votes for anything that increases total revenue... but eh, that's a large part of why I'm not a Republican.   I'd definitely be willing to go with a revenue-neutral green tax shift (i.e. cut taxes elsewhere as a sweetener) if that's what it takes though.

[bedstuy]

What about coal plant and/or vehicle fuel trading without passing a bill?

[traininthedistance]

What about coal plant and/or vehicle fuel trading without passing a bill?

At what level, exactly, would vehicle fuel trading happen?  The refiners?  Can't really do it much further downstream than that.  (Note that it's not just vehicle fuel- heating fuel for buildings and physical plants is a huge part of the equation as well.)

Yeah, I think it's still really suboptimal for several reasons.  The optics of "government bureaucrats GONE WILD" would be pretty dangerous; and my point still stands about how, if you're serious about tackling this issue, you do need to do it in concert with a widespread infrastructure investment push that is a lot more (as well as a lot more diffuse) than just tacking scrubbers on power plants.  Fund it with that dedicated Pigouvian income stream, get buy-in by framing it in terms of jobs rather than just emissions, those are things you can't get when it's just large institutions trading credits between themselves.

I'd say that I'm thinking of the ancillary benefits here- except they're not really all that ancillary, to be honest.

I guess if there is politically literally no other way to tackle this issue than the EPA using their rulemaking power to set up a cap-and-trade system for power plants by fiat, then oh well.  We will clean up a few power plants temporarily (until some Republican President decides to unilaterally shut down or otherwise gut the program), and we will decline to make the necessary and job-creating efficiency investments in our residences, our commercial buildings, our transportation system, because the incentives and the funding won't be properly lined up on that end.  It'll be a shame.

[traininthedistance]

Or, to put it in (probably too-)pithy economicese terms... a cap-and-trade system can certainly reduce the supply of pollution, and allocate the supply reductions well.

But we need to be reducing the demand for pollution as well, and that's where a more broad-based Pigouvian approach, with the funding largely earmarked for technological improvements, really has the upper hand.

[bedstuy]

What about coal plant and/or vehicle fuel trading without passing a bill?

At what level, exactly, would vehicle fuel trading happen?  The refiners?  Can't really do it much further downstream than that.  (Note that it's not just vehicle fuel- heating fuel for buildings and physical plants is a huge part of the equation as well.)

There's no way to regulate "fuel" in general under the Clean Air Act.  Under the act, there's a separation between mobile and stationary sources.  The stationary source sections are harder to fit under cap-and-trade for a number of complicated reasons.  But, fuel used for a boiler would be regulated under the stationary source sections. 

This would be under Section 211 of the Clean Air Act, which is super broad authority to regulate.  For example, we used modified trading under this section to phase out lead from gasoline in the 1980s.  Obviously, it would apply to refiners, but also fuel importers and anyone else who is producing fuel products for the market.  This would be easy to set up because there aren't many refineries in the US.

Yeah, I think it's still really suboptimal for several reasons.  The optics of "government bureaucrats GONE WILD" would be pretty dangerous; and my point still stands about how, if you're serious about tackling this issue, you do need to do it in concert with a widespread infrastructure investment push that is a lot more (as well as a lot more diffuse) than just tacking scrubbers on power plants.  Fund it with that dedicated Pigouvian income stream, get buy-in by framing it in terms of jobs rather than just emissions, those are things you can't get when it's just large institutions trading credits between themselves.

That's sort of letting the perfect be the enemy of the good.  It's also not an either-or, a radical new taxing and spending set-up OR cap-and-trade.  There's no silver bullet for fixing the environment, you want to try everything that makes sense.

I'd say that I'm thinking of the ancillary benefits here- except they're not really all that ancillary, to be honest.

I guess if there is politically literally no other way to tackle this issue than the EPA using their rulemaking power to set up a cap-and-trade system for power plants by fiat, then oh well.  We will clean up a few power plants temporarily (until some Republican President decides to unilaterally shut down or otherwise gut the program), and we will decline to make the necessary and job-creating efficiency investments in our residences, our commercial buildings, our transportation system, because the incentives and the funding won't be properly lined up on that end.  It'll be a shame.

It's not fiat, it's enforcing the law which has been on the books since the 1970s.  It only seems radical because the EPA has been asleep at the switch for its entire history.   

Or, to put it in (probably too-)pithy economicese terms... a cap-and-trade system can certainly reduce the supply of pollution, and allocate the supply reductions well.

But we need to be reducing the demand for pollution as well, and that's where a more broad-based Pigouvian approach, with the funding largely earmarked for technological improvements, really has the upper hand.

That's true to some extent.  But, it's really two different projects.  One is optimizing the pollution for the economy we have.  Cap-and-trade works because it optimizes the allocation of pollution economically, getting the best bang for our buck.

The other is project is not regulatory, it's more dynamic and visionary.  It's embedded in almost every decision from education, to transit, to land use, to taxation, to spending, etc.  For that, a single taxation source is not that important.  We could fund those things with general revenue.