UC Berkeley economist Laura D’Andrea Tyson penned an interesting op-ed for the WSJ today, arguing that President Obama’s stimulus plan and budget will have positive economic and social impacts. Some of her claims are wait-and-see economic projections, others offer some helpful detail and historic perspective, and a few are, in our opinion, open to vigorous debate. Key excerpts include the following:
The president’s budget is progressive and ambitious. It will not, however, explode the size of government as some critics warn. If the economy recovers as projected, over the next decade taxes as a share of GDP at around 19% will be lower than they were during the second half of the 1990s, government spending as a share of GDP at around 22.5% will be about where it was under Reagan, and nondefense discretionary spending at around 3.6% of GDP will fall to its lowest level since that data was first collected in 1962.
This is Tyson’s essential argument, and it’s important to read/hear. She notes that the projections are subject to some uncertainty: “The real risk lies in the possibility that the economy’s recovery starts later and is much weaker than the economic assumptions in the budget.” However, we think the underlying objectives are the ones to pay attention to. In our view, people on the political left and right tend to expect far too much good from their own policy preferences than warranted, and far too much harm from their opponents’. And right now, too many folks on the right are gnashing teeth, rending garments, and calling for the end of the world as we know it. We’ve been saying for some time that investors should brace themselves for public policy shifts that will lower most financial asset values at the margin, perhaps substantially. But it’s also important to keep in mind that (1) there’s nothing in Obama’s plans that spells doom or outright collapse (in fact they contain some worthy economic objectives) and (2) our political system tends to be very responsive to costly policy errors, at least compared to most current and historical alternatives.
President Obama’s budget will restore the top two marginal tax rates to their 1990s levels of 36% and 39.6% for individuals earning more than $200,000 and couples earning more than $250,000. These changes will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade. In addition, for these taxpayers the tax rate on capital gains will increase to 20%, the lowest rate in the 1990s and the rate President Bush proposed in 2001, and the tax rate on dividends will increase to 20%, a rate lower than the rate of the 1990s and nearly 40% lower than that proposed by President Bush in 2001.
Good policy context, and there have been some stubborn problems with the U.S. income distribution over the last few decades, which we believe is an important factor in the Democratic party’s return to power. In another passage, she also clarified the change in treatment of charitable deductions, which will be deducted at a maximum rate of 28%; that’s not as dire as some commentators have described. However, we have to keep a few counter points in mind. First, in the U.S., there is a relatively high rate of movement between tax brackets; the people being taxed more heavily in coming years may not be the people who benefited from rising incomes at the top over recent decades. Second, taxing the beneficiaries more heavily is not the only solution to improving the income distribution; for example, the inflation tax on savings, and most importantly, our relatively high marginal tax rates on corporate income (as demonstrated by David and Christina Romer, colleagues of Tyson’s at Berkeley) are compelling alternatives that might confer greater long term benefits to society as a whole. In fact, there was some thin but tantalizing data following the 2003 tax cuts that indicated income improvements among lower wage earners; unfortunately, the relevant measures expired before any firm conclusions could be drawn, but the 2003-2006 period might prove to be a fruitful area for research into taxes and income distribution. Tyson also waves away the impact on small businesses, arguing that only 3% of them would be subject to a higher rate; perhaps, but it still imposes a marginal cost during a time of deep economic recession and uncertainty, and it also worsens the relative distortions between personal and corporate income taxes. Third, the federal government must be very careful not to cross that unknown threshold where human capital begins to emigrate from the U.S., something that has happened in states like California and Illinois in recent years. As a country, we may be nowhere near that point yet, but we are closer than we were in 2008. And if we are reckless enough to cross it, the long term consequences would be depressing.
Reducing the nation’s dependence on foreign oil and cutting carbon emissions are also priorities, supported by overwhelming scientific evidence on the risks and costs of climate change.
This is the point we would take vigorous exception to; in fact, it’s almost reflexive any time we hear the phrase “overwhelming scientific evidence.” If we had a dollar for every time that phrase has been misapplied in the history of humankind, we could retire and write these missives for our own amusement. Good science acknowledges that uncertainty looms large in any model, however the evidence may look at any point in time. Human beings have been diligently modeling climate change and anthropogenic warming – an exceedingly complex and chaotic system of interactions – for less than thirty years. Our knowledge of many important contributing factors is just as young or younger, and for yet to be discovered factors, it’s nonexistent. As Benoit Mandelbrot wrote in Fractals and Scaling in Finance, “it is prudent to fear that ‘what we know’ is not necessarily the last word.”
Despite our heretical skepticism, we think that cleaner energy technologies are extremely desirable, and we fully acknowledge the risk that the current models prove to be accurate. Anthropogenic climate change and its consequences could be as serious as the critics say, or worse, and limiting CO2 emissions might indeed be an effective means of limiting the damage. Scientist James Hansen’s and others’ warnings of an irreversible ‘tipping point’ should not be dismissed out of hand either.
But the climate change movement reminds us very much of other movements once based on “overwhelming scientific evidence”. For example, it was believed for a time, by some otherwise intelligent people, that autism was primarily caused by cold and emotionally distant mothering! A more credible and persistent one is the connection between diet (saturated fat and/or cholesterol) and Coronary Heart Disease (CHD). The consensus built upon “overwhelming scientific evidence” has been subjected to an increasing number of attacks in recent decades, as evidence accumulates that limiting the ingestion of cholesterol and/or saturated fat to lower the risk of CHD in populations is highly questionable:
“[In the Framingham Massachusetts study,] the more saturated fat one ate, the more cholesterol one ate, the more calories one ate, the lower people’s serum cholesterol…we found that the people who ate the most cholesterol, ate the most saturated fat, ate the most calories weighed the least and were the most physically active.” Dr William Castelli 1992 (link).
Dr. Clare Hasler noted in a 2000 Journal of the American College of Nutrition article, “it is now known that there is little if any connection between dietary cholesterol and blood cholesterol levels.”
According to Dr. Uffe Ravnskov, “observations strongly suggest that high cholesterol is only a risk marker, a factor that is secondary to the real cause of coronary heart disease. It is just as logical to lower cholesterol to prevent a heart attack, as to lower an elevated body temperature to combat an underlying infection or cancer.” He has also aggregated substantial evidence that calls the association of saturated fat intake and CHD into question.
In recent years, regulatory bodies like the FDA have paid increasing attention to the role of trans fatty acids in the diet, and by many measures, they are at least as harmful, perhaps much moreso, than saturated fats were once believed to be. In short, the once “overwhelming scientific evidence” that saturated fat and/or cholesterol in the diet raise the risk of CHD in a population has turned out to be little more than the well-publicized-theorizing (or opinions) of some scientists (or activists) based on preliminary but incomplete findings, supported by economic beneficiaries, such as pharmaceutical companies. This is not to say that CHD management therapies, including dietary modification and drugs, are worthless; they are surely helpful for some individuals. But the diet-CHD hypothesis for entire populations, after decades of widespread acceptance, has been shown to be quite shaky.
There are countless other examples, from many fields of life, that “overwhelming scientific evidence” is often extremely plastic, and that “consensus” is often oversold (the SMON episode in Japan is a powerful example). Our sense is that the anthropogenic global warming movement has many of the features of such movements, and if true, the costs of pursuing this particular piece of change could far outweigh the realized benefits. And as long as we profess to care about future generations of citizens and taxpayers, not to mention understanding and solving the problem at hand, we should be explicitly mindful of this risk.
Another important concern relates to cap and trade as a means of limiting carbon emissions – the so-called “market based” approach. This sets up a public-private system that allows privileged entities to extract significant economic rents. According to Tyson, the Obama Administration claims that 80% of the initial auction revenues from a cap and trade system “will be used to finance a refundable tax credit of up to $400 for individuals and up to $800 for families.” There are severe agency risks in a cap and trade system, far more than a straight carbon tax, and its planned implementation strikingly contradicts, for example, the decision made by Treasury and Congress to end the use of private debt collectors by the IRS.
Epilogue: We have a serious beef with some of the global warming related thinking and marketing being peddled these days. One of the most irritating examples comes from our local cable company – it’s an ad with children ranging from perhaps three to twelve years old, warning their parents about impending ecological collapse – as if the planet itself needs us to save it! This idea is so inane that it borders on insane. The planet will be absolutely fine, with or without us, presumably until our solar system collapses. As Professor Valerius Geist noted in his book Whitetail Tracks:
The type of landscapes we take for granted as “natural” are actually an article of human intervention caused by human elimination of megaherbivores…
The huge, tree-crunching giants [are] gone, a profound departure from normal landscape ecology…Kill the big plant-eaters and continents sprout forests…That was the new setting, the new ecological stage, for a new beginning for life on Earth…Fires replaced giant herbivores as devourers of trees…Life adores opportunity. It simply will not rest!
In other words, life on planet earth is capable of adapting to many different climates. Thus, the whole global warming movement, for the most part, is not about the planet, but about us! It is propelled by our evolved capacity to think about the future, to worry about our place in it, and perhaps by cultural and institutional backgrounds that encourage us to embrace personal guilt and responsibility. This should not lessen the material concerns raised by the global warming hypothesis, of course. But it should at least start to demolish the old “Mother Earth needs our help” myth as the mindless bunch of nonsense that it is.
Geist’s observations also tie back into anthropogenic global warming, as the past existence of megafauna would argue that the earth’s climate has been much warmer in past epochs, perhaps warmer than the worst climate models currently predict. Imagine a world of giant herbivores toppling flora of any size, crunching, munching, and ingesting massive amounts of plant material, fermenting them in specialized digestive systems with multi chambered stomachs, and acting as giant fertilizing machines spreading seed-laden dung far and wide. The “greenhouse gas” emissions of such processes would have been massive, and a hot, tropical planet would have been the norm. Looked at in that light, it’s unreasonable to argue, for example, that large, stable polar ice caps represent some normal state of affairs in the natural history of the planet’s climate. Rather, their contraction represents a threat to our species’ and some other species’ status quos. But the planet will get along swimmingly with or without humans, polar bears, arctic seals, or the many other species at risk from a significantly warmer climate, many of whom exploited niches created by past shifts in climate. As Geist observes, life adores opportunity and will not rest – no new niche will go unfilled.
Again, to be clear, climate change is a possibility with potentially severe ecological consequences for human beings and other species. But it’s important to contemplate it in the broadest context possible, and with a clear understanding of our motivations for doing so. We will also point out that given the complexity and significance of the subject, the highest probability of optimal policy outcomes is likely to be conferred by referenda. However, there are few causes whose champions and true believers would agree to subject them to such a process, much less abide by an “undesirable” outcome (Bjorn Lomborg’s Copenhagen Consensus Center is a notable exception to these typical human behaviors). Hence the rush to implement programs – based, of course, on “overwhelming scientific evidence”.