Workers in Countries with High Taxes Provide Less Labor

The Biden administration’s social spending plans are not fully articulated, but constitute a major addition to the $2.2 trillion Covid-19 pandemic relief package supported by the Trump administration a year ago.  The American Rescue Plan passed win March 2021 has already added $1.9 trillion to that total.  It provided relief funds for states, local governments, tribes and US territories.  It also provided helicopter cash to individual Americans, enlarged unemployment insurance benefits and enlarged federal housing subsidies. 

A second and third plan are in the wings waiting to be fully articulated.  The second is the American Jobs Plan, focused on a very generously-defined concept of infrastructure spending.  This plan has an estimated price tag of $2.3 trillion.  Biden has rejected the use of user charges to finance even the genuine, infrastructure projects. At the moment, his aim is to finance this catch-all program with through increased taxation of domestic and multi-national corporations.  

The third plan is the American Families Plan, with an estimated price tag of $1.8 trillion.  One trillion is direct spending and the rest likely will take the form of targeted tax credits and enlargement of the IRS.  The list of programs supported by this plan is huge, including subsidized child care, medical and family leave programs. health insurance assistance, free universal pre-school, free community college education to immigrants as well as citizens.  These would be paid for by redistributive tax levies on those with high incomes and capital gains.  

The Biden plans thus represent an increase in spending of $6 trillion   A long literature on taxes and labor supply suggests that there will be a reaction of workers to any tax levies needed to fund these plans.  However, these studies do not roll up the impact of higher taxes to the national level.  

The purpose of this post is to present an examination of the impact of higher taxes nationwide.  It uses a cross section of national data developed by the Organization for Economic Cooperation and Development (OECD).  The OECD membership is comprised of most of the major, western countries.  We use OECD data in this study to measure the national impact of increased taxation.  

Specifically, the OECD periodically measures the tax burden on the typical worker by constructing the so-called Tax Wedge—the percentage of the typical worker’s income that is usurped by government levies.  The OECD measure is based on the percentage tax exposure of a household comprised of a single individual, without children, at the income level of the average worker.  In 2011, the tax wedge ranged from 7 to 55 percent across the 33 countries for whom data is available.  

The microeconomic theory of policy impacts on individual workers postulates that the worker will withhold supplying labor services if taxed on these services. The graphic below plots, by the size of the tax wedge, the annual average number of hours that the workers will spend working.  The data used is the 2011 tax wedge and the 2018 labor hours supplied, by country. 

Figure 1.  Taxes Reduce Workers' Willingess to Supply Labor

The choice of 2018 for the work-hours data is not critical.  In general, tax policy evolves sufficiently slowly that all we need is data that is later than the year in which the tax wedge is measured.  Use of earlier years does not change the findings.  There is considerable variability in the data.  However, as the figure reveals, in general, the higher the tax wedge, the lower is the number of hours that workers offer the economy.  The experience of countries with large spending programs is that the ultimate incidence of the tax burden ends up being borne significantly by the average worker.  

The countries with the largest tax wedges tend to be European social-democratic countries.  Across all of the countries, the average annual hours worked varies dramatically.  The US worker, at 1800 hours per year, works  approximately 30 percent more that workers in the most highly taxed countries.  Statistically, for a given percentage increase in the tax wedge, hours worked decline by 20 percent of of that increase.   

Capital Gains Tax Increase: Another Bad Biden Idea, Part 2

It appears that the Biden administration has three goals in raising the US capital gains tax rate from 20 to 43 percent.  The first, of course is to punish successful people who are clever enough to acquire assets that appreciate.  As his old boss, Barack Obama once argued, it is better that everyone be poor than tolerate a policy that allows differences in standards of living, even if everyone is better off.  The goal is not to raise revenue, because his advisors, at least, know the facts that I set out in Part 1.  Raising capital gains tax rates does not generate more income.  It almost certainly generates less, especially in settings, iike the US, where individuals and firms are already paying taxes on other forms of income.  

Second, Biden seems to have a desire to simply be remembered as an extremist along the lines of FDR.  This involves doing dumb things that make him appear a big, important man in policy, and hopefully, history.  I say this with some confidence because the country with the highest capital tax in modern times has been Denmark, at 42 percent.  Thus, Biden’s odd choice of 43 percent is simply an infantile effort to stand out.  What a man.  

Third, his administration has plans, as his Secretary of the Treasury has stated, to try to create a worldwide tax cartel among other countries.  The idea is to talk them into fixing a high, minimum rate so that there cannot be “a race to the bottom” through competition in the rate levied.  In economics terms, of course, trying to fix the capital gains tax worldwide at a higher rate is actually a race to the bottom of capital investment and growth.  

Sending Secretary Yellen around the world on such a goofy mission is unlikely to be successful.  The 28 large OECD economies has a wide range of rates.  The mean rate is around 14 percent, less even than our current 20 percent.  This is due in part to the fact that nine of the countries have a zero rate.  Belgium, the Czech Republic, Korea, Luxembourg, Netherlands, New Zealand, Slovenia, Switzerland and Turkey have had zero rates in modern times.  Another 60 percent of the countries have a rate of 28 percent or lower, and only 5 are in excess of that rate.  Denmark, France, Finland, Ireland and Sweden make up this group, but if one looks closer, some of them have lower tax rates on other sources of income.  France is one country that is in the midst of tax reform and unlikely to sign on to Biden and Yellen's tax cartel.  That kind of accommodation to avoid suppression of jobs and capital appears nowhere in Biden’s plans.  

Capital Gains Tax Increase: Another Bad Biden Idea, Part 1

It was announced today that the Biden administration wants to raise the capital gains tax to 40 percent from its current, 20 percent at the federal level.  As you can imagine, he is on a hunt for a way to pay for the Sanders/D.O.C. socialist promise bomb to which he has strapped himself.  He could just have Janet Yellen (US Treasurer) and Fed chief Powell get money in the new (unproven and dangerous) Modern Monetary Theory (MMT) way.  But that would not accomplish the goals of his keepers.  

He also has to find some way to hurt those darn successful folks by getting his hands on their income.  After, who do they think they are?  Just because they work hard running businesses and pay most of everyone else’s taxes, doesn’t mean that there isn’t another way to wave the equality flag.  So, he or some of his keepers resurrected the nearly decennial idea of raising the capital gains rate.  

As you know, the capital gains tax is applied to realized capital gains that may be lurking in your investment portfolio, or real estate, or other assets else that grows in value, free of exposure to the tax.  When you sell the assets, as many retired people are doing today with the accumulated conventional IRA balances, or when they die, the Tax Man wants his taste.  It annoys whose who think they deserve to spread your wealth around to their friends, that you get to choose when the gains are realized when sold.  No matter that much of the gains may be purely embedded inflation, or that you may also have financed and managed a business.  

No matter, also, that even 25 years ago, it was known that it is not just rich that invest.  Indeed, a NASDAQ exchange survey found just those that held stock were very driverse:  43 percent of the adult population did so; 47 percent of women did so;  55 percent of those younger that 50 did so; and 50 percent weren’t even college graduates.  You know the demographics today are even more diverse.  Old gray-beards don’t try putting the short-squeeze on trades in their a compupter game stock.  The important thing is that a capital gains transaction put folks money in play, and affords Joe the opportunity to snatch-and-grab some of that.  

So, the economists Sarin, Summers, Zidar, and Zwick in 2021, crafted a paper (unrefereed) that asserts that the scoring of the revenue potential of such a move could be more remunerative than others had found.  Scoring is the review by the OMB of such aspects of fiscal efforts.  They did not report that the OMB’s revenue scoring in the 1990s, in practice, was off by a factor of 2 every year.  In this case, they had scored the effect of cutting the capital gains tax.  However, the fact that cutting the capital gains tax underestimated revenues strongly suggests that an increase in the rate is likely to have the reverse experience, and underproduce revenue and throttle investment. 

Mortality Risk of Men vs. Women: Implications for a Vaccination Plan

On January 15, 2021, the Oregon Governor announced a revised Covid-19 vaccination sequencing plan that includes vaccination of Oregon’s seniors.  Phase 1a of the State’s plan qualified health care workers to receive vaccines, as well as those in long-term care settings.  Individuals in this phase are currently being vaccinated.  

The first group to qualify under Phase 1b of the plan will be teachers and childcare providers, on January 25th.  Beginning Feb. 8, seniors are scheduled to be eligible for vaccination in four additional groups:  seniors 80 and older first; followed later by seniors who are 75 and older; then seniors who are 70 and older; and  lastly, Oregonians 65 and older.  

According to the latest information from the Oregon Health Administration, due to vaccine supply constraints, it will take 15 or more weeks (instead of the planned 5 weeks) to vaccinate the five Phase 1b groups—assuming supplies materialize.

Given the uncertainty of vaccine supplies, it is crucial that the focus of vaccination reflect accurately the Covid-19 mortality risk faced by seniors.  Unfortunately, the current plan implicitly assumes that the risk of death from Covid-19 for seniors increases only with age.  Thus, the vaccination sequencing focusses on the most elderly first.  This ignores completely the fact that gender is far more important, in terms of focusing on relative risk exposure, than simply age per se.  

Although men and women are at similar risks of infection by Covid-19, men are far more likely to be killed by it.  For example, a recent worldwide meta-analysis of over 3 million Covid-19 cases found that men are almost 3 times more likely than women to require admission to an intensive care unit (ICU).  The same study found men to be 1.4 times as likely to die from Covid-19, on average across all age groups. 

Age-Specific Relative Risks

But such average risk measures conceal the higher risks that gender adds at every age cohort.  There are approximately 600,000 Oregon men in the 4 senior cohorts tabulated below.  As the table indicates, male seniors face a mortality risk that is as much as 3.3 times that of their female counterparts. This pattern is true nationally, but is especially stark in the Oregon data.  

Using the US data, the male/female mortality ratios on an age-weighted basis is approximately 1.72 across the whole population.  It is interesting to compare this population-wide measure to similar measures by race and ethnicity groups.  Some are known to face greater risks than non-hispanic white persons. Indeed all but the Asian group have higher risks—by about 50%—than non-Hispanic white persons at a population level.  However, the risk ratios are not as stark as male/female ratios of seniors by age group.  

Benefits of Gender Adjustment of Mortality Rates

At present, there is implicitly higher priority given to lower-risk individuals because of the reliance on age-based prioritization alone. Correcting this gender-based disparity will improve the focus on some of the most at-risk Oregonians, which is the objective of the immunization plan. 

Doing so will benefit not, however, benefit just the vaccinated men.  For example, vaccinating senior men will benefit all users of hospital and ICU capacity.  Since men are almost 3 times more likely to require scarce and costly hospital ICU services, a vaccine that eliminates men’s risk of infection  and hospitalization will reduce these burdens.  

Everything else being equal, vaccination of a senior male will reduce ICU and hospital services demand by three times that of a vaccinated female of similar age.  This benefits all potential hospital patients—both Covid-19 and non-Covid-19 patients, and affected ethnic males who also may comprise the senior male group.    

Incorporating gender in the prioritization process will help to address another health disparity.  There are several biological reasons that Covid-19 is more dangerous to men.  These same factors appear to be associated with men’s relatively short life expectancy.   On average men have a 5-year disadvantage in life-span over women, independent of Covid-19.  Indeed, there are already about 90,000 fewer Oregon men than women in the senior cohorts identified in this study. Prioritizing men for Covid-19 helps to offset that health disparity to some degree.  

Ideally, the rationing of vaccines and associated sequencing of vaccinations would be unnecessary.  However, there are long delays anticipated for receipt of vaccine supplies.  Elderly men will pay the price of the poor design of the vaccination plan.    

Use Masks, not Lock Downs, to Stop the Covid-19 Pandemic

When the Coronavirus arrived in the US, there was a rush by the public to acquire face masks. After all, the Coronavirus was a pathogen that caused disease by getting into the lungs by inhalation or by touching contaminated hands to the mouth, nose, or eyes. Face masks have the potential to filter particles and to deter touching one’s hands to the face. Wearing face masks thus seems a natural thing to do.  

However, health policy officials chastised them and told them to stop buying masks. For example, the US Surgeon General tweeted on February 29, 2020, saying: 

“Seriously people - STOP BUYING MASKS! They are NOT effective in preventing the general public from catching Corona virus, but if healthcare providers can’t get them to care for the sick patients, it puts them and our communities at risk!”~Dr. Jerome Adams, US Surgeon General. 

Apparently, health "experts" believed that transmission to others involved symptomatic individuals with viral particles in their sneezes and coughs. The resulting sharp bursts of droplets contaminate the hands and belongings of the affected individual and collect on doorknobs, furniture, clothing and other surfaces. Hence, initially the public was only advised to wash hands and disinfect contaminated surfaces.  

The snag in this logic is that virus transmissions from asymptomatic, but infected individuals, had been identified in the case of Coronavirus (Rothe et al. 2020), and found to be as much as 80 percent of all infections of others (Li et al. 2020). In March 2020, a summary of research on the mobility and characteristics of flu particles was published in the journal Aerosol Science and Technology. That literature made it clear that the Covid-19 particles of symptomatic and asymptomatic people were of the appropriate small size and persistence in the air to be inhaled deeply into the respiratory tract.

This is precisely the set of circumstances, of course, that wearing a mask to protect the wearer could have great benefit. The virus particles (or an important share of them) could be kept from entering the respiratory tract of the wearer. The importance of having the public wear masks is that the masks affect a pandemic at the virus’ first point of contact with people. Therefore, masks have the potential to immediately arrest the process that can cause the number of cases and deaths to grow out of control. 

Health officials chose, instead, to practice social distancing. Unfortunately, this has meant shutting down many business and social activities. Some activities can be replicated by internet conferencing, but in the US, social distancing resulted in the closure of schools and increased the nation's unemployment rate to over 14 percent.

Japan’s experience with Coronavirus was very differemt.  The Japanese public have a tradition of wearing masks every fall influenza season. Japan services this need by manufacturing 1.3 billion masks per year. At this writing, Japan has only one Coronavirus case for every 13,000 persons, versus the US with one per 500 persons. Japan also has a much lower death rate, at one death per 666,000 persons versus one death per 58,600 persons in the US). By these metrics, whatever the Japanese are doing is 26 to 77 times the US approach. 

In addition, of course, the Japanese are not bearing the economic disruption that the US, the UK and others are suffering from the comprehensive social distancing policies.  In contrast, at the theoretical extreme, effective masking could, by itself, not only control further spreading or rebound infections by Covid-19, but also control potential de novo or mutant airborne influenzas. Thus, a combination of comprehensive use of masks, frequent, periodic random testing to monitor the level and distribution of infection, and careful screening of US border crossings may be all that is needed going forward. It is also policy that can be activated and deactivated to quickly adjust to conditions.

Sources: 

Asadi, Sima, N. Bouvier, A. S. Wexler, W. D. Ristenpart. 2020. “The Corona Virus Pandemic and Aerosols: Does COVID-19 Transmit via Expiratory Particles?” The Journal of Aerosol Science and Technology; Li, R., S. Pei, B. Chen, Y. Song, T. Zhang, W. Yang, and J.Shaman. 2020. “Substantial Undocumented Infection Facilitates the Rapid Dissemination of Novel Coronavirus (COVID-19).” Science. Rothe, C., M. Schunk, P. Sothmann, G. Bretzel, G. Froeschl, C. Wallrauch, T. Zimmer, V. Thiel, C. Janke, W. Guggemos, et al. 2020. “Transmission of 2019-nCoV Infection from an Asymptomatic Contact in Germany.” The New England Journal of Medicine. 382 (10):970–1.   

Looking Back at the Mortgage Mess and Great Depression: Who was to Blame?

The subprime mortgage crisis and the deep recession that followed was in the new night and day at the time.  Almost universally, the press traces the problems to the greed of mortgage lenders and Wall Street investment bankers. A Sixty Minutes episode on CBS, for example, at the time intimated that lax rapacious bankers had drawn unwitting wannabe homeowners into purchases and mortgage structures they could not afford. Worse yet, the default rates were highest among precisely among minority and central city borrowers. 

Charges of predatory lending--intentionally targeting those who could ill-afford financial adversity--still fly fast and furiously. Cities with concentrations of low-income and protected class borrowers (such as Cleveland and Baltimore), still speak about sleezy lenders and others. Fingers point at bankers, appraisers, the Wall Street investment bankers and rating agencies. But is this really the whole, or even the most important part, of the story? Are we mesmerized by the fire and forgetting to look for the matches? 

The irony in the predatory lending story is that, not much more than a decade ago, the popular, political view of mortgage lenders was very different. In the 1980s and 1990s, the widely-held view was that mortgage lenders discriminated against the poor and stifled urban redevelopment by refusing to lend in run-down neighborhoods. It was widely alleged that mortgage lenders discriminated against women and minorities, and against central city neighborhoods. (The latter form of alleged discrimination was called "redlining".) Indeed, the Community Reinvestment Act,  passed in 1977 at President Carter's urging, memorialized these suspicions in law.  

Was the CRA the First Match that Lit the Great Recession?

Later in the 1990s, in pursuing alleged violators of the CRA, President Clinton was so convinced of lender bias that he even dispatched "testers" to pose as vulnerable home buyers to catch the bankers in the act of discrimination. His Comptroller of the Currency, Eugene Ludwig, sent fleets of inspectors into banks, looking for disproportionate patterns of lending.  I, personally, defended a prominent west coast against these allegations.  Not only was their no evidence off discrimination against protected classes, I found evidence the white buyers were statistically underrepresented once we could the full details in individual claims.  Ludwig ultimately, as I understand it, apologized in front of the Bank's board.  

Note that it is exactly the borrowers whose gains are ascribed to CRA who, subsequently, suffered the greatest financial distress. The Office of the Comptroller of the Currency itself summarized the effect of the CRA as follows: Under its impetus, banks and thrifts have opened new branches, provided expanded services, adopted more flexible credit underwriting standards, and made substantial commitments to state and local governments or community development organizations to increase lending to underserved segments of local economies and populations. (Emphasis added.) 

A later retrospective study of CRA's effect, done by Federal Reserve System economists, confirms that CRA regulation had an effect: "...a majority of surveyed institutions engaged in some lending activities that they would not have in the absence of the CRA.." However, the same study found that a "significant minority of institutions incurred losses conducting some of their marginal CRA-related lending activities." In other words, lending to marginal borrowers under pressure of CRA was not financially viable. 

Today, most economists believe that the mortgage discrimination assumed by the CRA was never a demonstrated reality.  If one accepts this view, the CRA and its implementing regulations thus constituted a selective tax on the profits of regulated mortgage lenders. The special sanctions and additional costs imposed on regulated mortgage lenders undoubtedly provided some impetus for lending to move into unregulated capital markets.  It also provided impetus for their efforts to package the mortgages for the market in a way that might dilute the risk of the poor quality mortgages being generated by the industry. 

 

Did the Fed Light the Second Match? 

The Fed lit the second match via the steep yield curve that lasted nearly four years (a policy period referred to as the "Greenspan Put"). Low cost credit, and rising home prices, made buyers, lenders, investment bankers, rating agencies, and investors alike, complacent. The securitization of a pool of mortgages provides investors in those securities with credit risk diversification, but not protection from systematic risk. That is, if the odd borrower defaulted, or a housing market got weak her or there, mortgage-backed securities would buffer the bad loans with the good, the weak markets with the strong. It was clear that there was a systematic bias of toward lending money to households with poor credit; the home-ownership rate ballooned.  If something affected all markets in the same direction, the values of the underlying mortgages, their housing asset security and securities backed by the mortgages would move synchronously--down. 

The shock that did it was the abrupt end of the Greenspan Put. The Fed Funds rate was raise as quickly and as far as it had been depressed after 2000. By 2005-2006, the yield curve was flat or negatively sloped, and the short-long borrowing and investing opportunity was gone. In addition, the advantage of a security backed by a diversified pool of weak credits became a liability. Diversity become synchrony, and the pooling and stripping of the mortgage credits became a source of opaqueness. 

The Third Match

Thus, there were policies that, in my view, constitute the two "matches" in this scenario. One is the intervention of the CRA regulations, These regulations were tantamount to a mandate to make low-quality loans and were amplified by the Clinton and others' do-gooding belief that the market was discriminatory.  The third match was the see-saw monetary policies of the Federal Reserve. The tendency of the Fed, under Greenspan, to manage soft landings, and to engineer real-sector recoveries, is a mistaken policy. 

Greenspan understood that the "democratization" of mortgage credit carried risks.  He expressed his concern  a speech in San Francisco as early as 1997, he expressed concern about subprime mortgage trends. Unfortunately, like so many in the regulatory environment, the political correctness of CRA and lending to weak credits, coupled with the Fed's focus on micro-managing the economy, apparently made him turn a blind eye.

Useful Sources: 

 http://www.federalreserve.gov/BoardDocs/Speeches/1997/19971011.htm

 http://www.usc.edu/schools/sppd/lusk/research/pdf/wp_2003_1016.pdf

The Hazards of the Rush to be Green

The public and policy makers are responding to the daily drumbeat of events reported as consequences of global warming. Every especially-warm day, picture of a melting glacier, drought report, etc. adds to the enthusiasm to contain greenhouse gas (GHG) emissions, especially carbon dioxide emissions. The loudest call is for regulation of offending activities and subsidy of non-offending activity.

From an economist's perspective, this thrust is a virtual recipe for failure. It is highly likely that, not only will we not meet goals of reduced GHG emission, but we will in the process of trying, actually make GHG emissions worse than they otherwise would have been.

How can this be? Read on.

The Political Economy of Regulations

Regulation is based on the notion of "market failures", i.e., that the private market mishandles certain resource allocation activity, requiring government to intervene manually and properly redirect resource allocation. In reality, of course, the failure is not of private markets, but rather the failure of government to support even the existence of certain markets.

The economy needs government to provide the supporting legal framework in order for private markets to function. Government has neglected to support markets in air, water, noise and most other resources that constitute the natural environment. Indeed, the Environmental Protection Act actually forbids consideration of benefits versus cost in environmental analyses such as environmental impact studies (EIS). In so doing, the Environmental Protection Act effectively denies the relevance of markets. Again, not a market failure but a governmental failure.

Viewed from this perspective, calling in government to act in lieu of private markets is a bit like asking the guy who was supposed to build the safety nets to run the circus high-wire act. Without any market values or benefits and costs to balance, regulation in the environmental arena can only be arbitrary and capricious. Obviously, this is the perfect setup for a regulation to, in the end, do more harm than good.

Subsidies: The Three-Card Monty of Environmental Policy

The other, general approach to steering the economy to a green future is the subsidy. Hybrid vehicle purchases enjoy tax subsidies, as do solar panel installations, biofuel manufacturing, wind power farms, compact fluorescent light bulbs, etc. Like the sidewalk con of Three-Card Monty, these policies create the illusion that some costs disappear when, in fact, they do not.

Subsidizing a product that would otherwise not be deemed cost-effective by the marketplace risks making the economy less efficient--not only in productivity terms, but also in GHG accounting terms. A solar panel based on solid crystalline silicon cells, for example, likely uses more energy to manufacture, transport, install and operate than it will ever save over its lifetime. Subsidizing such a product and, thereby increasing its use, therefore actually increases, rather than decreases, the amount of conventional energy used in the economy. If conventional energy sources emit GHGs (which they do), then GHG emissions go up, rather than down, through the effect of such subsidies.

Proponents will argue that public subsidies are needed temporarily in order to transform the market and increase penetration of the product. In other words, market participants are too stupid to recognize a good thing without prescient government lighting the way. In fact, of course, private markets make huge investments and take huge risks on unproven technologies every day. The cell phone, Apple computers, Microsoft software,iPods, medicines, the video recorder, jet skis, the automobile, the skyscraper, and a million other products arose primarily from risk-taking capital sources. The notion that there is a silver-bullet energy technology out there that is languishing because of lack of risk-taking capitalists is simply foolish.

Subsidies, by their very nature, bias the economy toward the production of goods that waste resources at the expense of the production of goods that use them more sparingly.

Cap and Trade, Carbon Offsets and other Quasi-Market Schemes

The green frenzy is not without its attempts to mimic real markets through trading schemes. So-called cap-and-trade schemes cap the carbon emissions of a group of producers. As long as some producers caps are not binding, they can sell their excess rights to emit CO2 to another producer whose cap is binding its behavior.

There is, indeed, a market created in cap-and-trade schemes. However, the caps are arbitrary regulatory constructs, the stringency of which is determined in a political economic context. Most cap-and-trade schemes have loose caps that reflect the relative political influence of the capped entities.

Carbon offsets are another method intended to stimulate carbon-sparing activities, such as planting carbon-sequestering trees. Al Gore and Land Rover users can then obtain absolution for their carbon emitting activities by buying carbon offsets. Unfortunately, it is virtually impossible to determine the validity of the carbon-offset arithmetic, or even whether the firm selling the carbon offsets is doing anything different than it would have done in absence of the offset program. Would the tree farmer have planted the trees anyway? Would the landfill have controlled its GHG emissions anyway?

The Market is Working Where it is Allowed to Do So

As long as an input to a production process costs money, businesses have an incentive to be sparing in its use. Indeed, the energy-intensity of the US economy (BTU per dollar of GDP) has been declining steadily for as long as we have data available. Higher energy prices may accelerate this trend, but only if the energy-sparing technologies available to the firm are, themselves, not energy intensive. If they are, then there may be no cost advantage to adopting the new technology.

Ironically, the best way to move quickly toward energy-saving technologies is for a firm, individual or country to be wealthy enough that they can afford to abandon still-useful old technologies in favor of the new. If GHG policies have the effect of impairing personal or corporate wealth, therefore, the turnover of technology wil slow. Those who say that we are just going to have to live more simply, etc., forget this important fact.

Recent trends in energy consumption confirm this notion. Those who embraced the Kyoto Protocols in 1997 such as European Union members, have energy use that is growing more rapidly than US energy use on a per capita basis. While Europe was imposing regulatory constraints on its industry and subsidizing massive solar panel farms (especially in Germany), the US was turning over its capital stock.

Maybe that is why a recent article in Nature declared Kyoto a failure:

The Kyoto Protocol is a symbolically important expression of governments' concern about climate change. But as an instrument for achieving emissions reductions, it has failed1. It has produced no demonstrable reductions in emissions or even in anticipated emissions growth.

In a future post, I will discuss some things that actually might be worth doing.