23 October 2006

Target outcomes, not alleged means of achieving them

We assume that if we raise pollution prices, pollution will come down. But not even the smartest economist can know how quickly it will come down, or by how much. We can only proceed by trial and error. Much of the tax-setters’ time will be spent debating how much of a price hike will produce how much of a reduction in pollution, when in fact what we should be debating is how quickly we want pollution to drop. Once that debate is settled, we should be able to set a value at the agreed-upon level. We can’t do that with pollution taxes. Pollution taxes, in short, though better than nothing, are far from an ideal way to protect nature.
An excerpt from the excellent Capitalism 3.0: a guide to reclaiming the commons, by Peter Barnes. Economists love pollution taxes, which are beguilingly elegant. Unfortunately, as Mr Barnes points out, their apparent sophistication has over-ridden their value: a common failing of policy that is driven by anything - except outcomes that are meaningful to natural persons. The elegance is often seen as an end in itself. No doubt I shall have more to say about this book when I have finished reading it. Meanwhile, another excerpt, quoting Kevin Phillips, a former (US) Republican party strategist:

“The timber industry spent $8 million in campaign contributions to preserve a logging road subsidyworth $458 million—the return on their investment was 5,725 percent. Glaxo Wellcome invested $1.2 million in campaign contributions to get a 19-month patent extension on Zantac worth $1 billion—their net return: 83,333 percent. The tobacco industry spent$30 million for a tax break worth $50 billion—the return on their investment: 167,000 percent. For a paltry $5 million in campaign contributions, the broadcasting industry was able to secure free digital TV licenses, a giveaway of public property worth $70 billion—that’s an incredible 1,400,000 percent return on their investment.” The reason our political system works this way isn’t that our politicians are particularly venal. Rather, the cause is structural.

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