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Preview: RealClearPolitics - Articles - Brian Wesbury

RealClearPolitics - Articles - Brian Wesbury

Last Build Date: Tue, 03 Jun 2008 13:48:28 -0600

Copyright: Copyright 2008

Cap and Trade Trap

Tue, 03 Jun 2008 13:48:28 -0600

Under these systems, the federal government would set a maximum limit on the emission of certain gasses. This is the "cap." Under this cap it would sell or give-away permits to companies, state/local governments, and other organizations. Permit owners would have the right to use the permits or "trade" them at market prices, like any other commodity.

The ability to trade the permits is why some see the bill as a "market-based" approach to reducing emissions.
Compared to direct regulation - where the government simply bans certain types of production methods in order to hit a maximum emissions target - a cap and trade system would certainly be less costly. Trading would allow the permits to gravitate toward firms that can generate the highest profits per unit of emissions.

Nonetheless, the legislation being debated by Congress right now would make a Soviet Central Planner feel right at home. The premise of the plan is that the government knows the right level of emissions. But this is absurd. No one person, or group of people, knows the "correct" level of CO2 emissions, any better than the old Soviet Union knew the "right" number of TVs or cars its subjects wanted.

One interesting twist is that the most prominent legislation being debated gives away allowances to existing companies for a portion (maybe 60%) of their current emissions. Companies must then purchase permits for emissions above and beyond the allowances. These allowances are worth trillions of dollars over the next 40 years, and the government seems to be using them to help curb dissent against cap and trade. In other words, there is a huge incentive for political corruption. Only existing companies will benefit from these allowances. New companies will be at a distinct disadvantage.

Over the next 40 years or so, the allowances for CO2 emissions will decline, and the restrictions will get tighter. Not only will the Federal government reap trillions in added revenue, but this cost will be shifted onto the consumer. While no one knows the future with any certainty, without a major breakthrough in energy technology, consumers will experience a massive increase in the cost of energy under "cap and trade."

As a result, any legislation will lead to "off-shoring" of emissions, a loss of US competitiveness, higher production costs, and much slower economic growth.

Inflation Denial

Mon, 25 Feb 2008 11:30:20 -0600

On Tuesday, January producer prices are expected by the consensus to rise 0.3% (we forecast 0.5%). Assuming the consensus is right, that would bring the total increase versus last January to 7.7%, the largest increase in any twelve months since 1981.

Import prices are up 13.7% versus last year, the largest increase on record going back to the 1980s. Most of the increase is due to oil prices but even excluding petroleum, import prices are up 3.6% versus last year. This may not seem like much, but back in the late 1990s and early 2000s, non-oil import prices were falling, leading many people to talk about the US importing deflation from foreigners.

These statistics are ignored by many because home prices are falling. But this decline reflects a lower (or negative) rate of return on residential land and structures, not the rental cost of putting a roof over one's head. Although home prices have fallen in the past year, rents have continued to put upward pressure on the cost of living.

Meanwhile, the Federal Reserve has joined the ranks of those unconcerned about inflation. Despite the data, and significant interest rate cuts, the last two statements issued by the Fed to accompany their interest rate decisions have completely omitted "price stability" as a policy goal.

This is a reversal of the 1990s, when the Fed consistently argued that maximizing economic growth over the long-run required price stability. The idea was that if the Fed focused on price stability, both low inflation and higher long-term economic growth would be the result.

This stance reflected the lessons of the 1980s when Paul Volcker used Fed policy to fight inflation and Ronald Reagan cut tax rates in an effort to free the economy. These policies reversed those that created stagflation.

Unfortunately, in the US today, the Fed is cutting interest rates in an attempt to boost economic activity at the same time politicians are discussing how much to raise tax rates. And denial that inflation is on the rise does not help.

This was one of the key ingredients of bad policy in the 1970s - denial that there was a problem. But it can't last forever. Eventually, inflation won't be ignored and that time seems to be getting closer and closer.