Wednesday, March 30, 2011

Gas Taxes and the Confidence Fairy

-- Posted by Neil H. Buchanan

On Monday, I posted some thoughts on a NYT opinion column by Greg Mankiw, an economist at Harvard who once served as George W. Bush's chief economic advisor. My central purpose in that post was to show that Mankiw's unsupported (and unsupportable) assertion that health care inflation is an incontrovertible technical fact of life allowed him to protect the powerful interests who benefit from our bloated system of health care finance: the health insurance companies who have pushed our medical system's costs to levels unseen in any country in the world.

Having sub silentio absolved the real culprits in our budget drama, Mankiw was then able to advance an agenda that would amount to nothing short of a direct transfer of wealth and power from the vast majority of Americans to those corporate interests: enacting deep cuts in Social Security, forcing people to pay more for health insurance policies that would provide minimal benefits, raising taxes on lower-middle- and middle-class Americans, and cutting "inessential spending." In every aspect, this is a radically regressive agenda. Although presented as a sad inevitability, it is really a simple and stark choice. We can allow the budget hawks to use the avoidable budgetary impacts of the current health insurance system to justify an assault on the non-wealthy, or we can go where the real money is.

Here, I will make two further points about the assumptions underlying Mankiw's arguments. First, as a reader pointed out to me privately, my description of Mankiw's list of necessary policy proposals as a "parade of horribles" inadvertently reinforced Mankiw's rhetorical decision to denigrate a very good policy option -- a gasoline tax -- by putting it on what was presented as a list of bad ones. Mankiw includes a gasoline tax as an item on his agenda, listed separately from the other proposed tax increases on "all but the poorest" (while ruling out further taxes on the wealthy). Although Mankiw notes the positive benefits of a gas tax -- its importance in "address[ing] various social ills, from global climate change to local traffic congestion" -- he nonetheless presents it as a grimly necessary choice, forced upon us by the supposed budget crisis.

While it is difficult to take his affirmative arguments in favor of a gas tax seriously, given his blithe willingness to cut energy conservation programs, it is still important to note that a gas tax should not be viewed as a necessary evil. Coupled with a progressive rebate structure -- which an anti-government ideologue like Mankiw would surely reject -- a gas tax is a positive part of any reasonable energy and environmental program going forward. Presenting it as an unfortunate necessity, Mankiw's backhanded endorsement of a gas tax rings quite hollow.

The second revealing assumption in Mankiw's op-ed is his choice to frame his arguments within an imaginary Presidential address to the nation in 2026. The President announces that he has been forced to accede to these terrible policies because of a budget crisis. The IMF (which he coyly describes as having relocated its headquarters to China) is treating the US as a basket case, because the global bond markets will no longer loan us money. If only we had acted a generation sooner, the President laments, we could have avoided this. But rue our forebears' poor choices as we may, the country is now at the mercy of external paymasters.

This is, of course, the familiar cry of the budget hawks: We must enact austerity now to avoid more painful austerity later. One must ask, however, why Mankiw chose 2026 as his drop-dead date. He salts all of his columns with assumptions and omissions that are anything but accidental, so it is difficult to imagine that this was just a matter of him saying casually, "Oh, let's say it'll happen in fifteen years or so." Even if he really was speaking loosely, however, it is quite revealing that he sets this up in fifteen years, rather than fifteen months, fifteen days, or fifteen minutes.

Both Joseph Stiglitz and Paul Krugman have referred to the "Confidence Fairy," the mythical sprite whose whims decide our fate. Once the Confidence Fairy loses confidence in us, the bond markets will savage our debt and our currency, leaving us looking like Greece. The Confidence Fairy, however, will not tell us when she will lose patience in us, so we have to assume that she is just about to unleash her fury. Stiglitz and Krugman point out that many right-wing commentators believed that the Confidence Fairy would strike after anti-recessionary measures (such as the 2009 stimulus bill) were passed, yet interest rates on government debt have fallen, rather than exploding.

Believers in the Confidence Fairy, however, are unmoved. She is now looking forward, seeing that we have still not put our fiscal house in order. Act now, or pay the consequences! Mankiw's choice to place the crisis 15 years from now is, therefore, more than a bit of a surprise. He believes that the CF will finally lose patience, but she is still quite willing to give us a significant amount of time.

One problem with believing in the Confidence Fairy, therefore, is in predicting when she might strike. That she has not yet struck is, of course, not proof that she never will. And it is certainly true that a country can go too far, ultimately creating a disaster that will inflict great pain.

The deeper problem, however, is in trying to predict what will make the CF happy. Imagine that the crisis hits in 2026, and the President is able to pass his austerity program. Will the CF be pacified? Why would she be?

The CF's problem, after all, is not with any given year's budget, but with the long-term path of a government's borrowing. If we adopted a series of austerity measures today, but sensibly set them to begin after the unemployment rate drops to about 5%, and then phased them in over a space of years, the Confidence Fairy could quite reasonably say that she finds such policies lacking in credibility. "You're not REALLY going to do that," she might admonish. "I won't believe you until you actually inflict pain on your middle class." Even then, why would she believe that the policies will be kept in place? They are painful, and people avoid pain.

Mankiw suggests that we have about a decade and a half to satisfy the Confidence Fairy. That is good news, especially compared to his brethren in the austerity camp. Even so, if we are really going to allow ourselves to be enslaved by the unknowable vicissitudes of the Confidence Fairy, we have no way of knowing what will work, when it will be necessary, or how to convince anyone that the policies will remain in place.

Yes, there could be a financial crisis, if the US fails to address long-term health care spending and to undo some of the Bush/Obama tax cuts. That, however, is a reason to address long-term health care spending and undo some of the Bush/Obama tax cuts. Gas taxes are a good idea because we need to address the overuse of gasoline. Acting rashly, however, undercutting the foundations of the middle class to avoid fundamental changes to the health care system, because we are scared of the Confidence Fairy, is both unnecessary and potentially not even sufficient to appease our enigmatic overlord.


Michael C. Dorf said...

The people promoting austerity also tend to believe in efficient markets, right? So how do they explain that interest rates remain very low? There is at least substantial uncertainty about whether the U.S. will reduce long-term deficits per their prescription, and given that uncertainty, the current markets ought to be predicting about a 50% likelihood of serious inflation, which in turn out to show up now as substantially higher interest rates. But it doesn't. So either they're wrong about the need for austerity or wrong about the efficiency of the markets or wrong about both. No?

Neil H. Buchanan said...

Correctly correct!