Toronto Sun columnist Lorrie Goldstein has something of a fixation on carbon pricing. He never misses an opportunity to condemn the idea. Even when there is nothing really going on with the climate change file, he will pump out a column complaining about the “hysteria” or the “myths” surrounding global warming. Number one myth is the idea that carbon pricing can be an effective policy response. His reasoning is fairly simple: carbon taxes don’t work, and since they don’t work, they must be nothing other than a cash-grab by the government.
Now if you read his stuff regularly, you get the sense that there is something wonky in his understanding of how the economy works. Indeed, it’s always fun listening to people on the right try to explain why carbon pricing can’t possibly work, because they usually wind up inadvertently ‘proving’ that capitalism as a whole can’t work. In other words, the arguments they make inevitably boil down to the claim that consumers are insensitive to price signals for ordinary market goods, such as gasoline. But of course, if people don’t respond to price signals, then what’s the point of having a market economy? (The more sophisticated try to argue that price elasticity of demand for fossil fuels is zero, or that maybe it’s a Giffen good. Those ones are not confused, they’re just mistaken. Most are just confused.)
In any case, reading Goldstein’s broad condemnations, you get a sense that he’s confused about how the economy works. This week, however, he tipped his hand, writing a jewel of a column – entitled “An Honest Carbon Tax” – that reveals the depth of his economic illiteracy. I counted three major economic fallacies in it, but if anyone can find more, go for it.
I should mention that the leader of the Progressive Conservative Party of Ontario has endorsed carbon pricing, Goldstein is starting to find himself without allies, and feeling a bit exposed on the very, very far right. This may account for the somewhat capitulatory tone at the end of the column. Let’s start with this, because the “positive” proposal that he makes is downright peculiar:
There’s a simple way to impose a national, revenue neutral carbon tax.
Raise the HST — in effect a carbon tax because it broadly taxes consumption — while returning 100% of the money raised to Canadians in the form of income tax cuts and grants to the poor who don’t pay income taxes.
That would encourage people to reduce consumption by making less carbon intensive choices in their purchases of goods and services — thus lowering emissions — while avoiding a recession by allowing people to keep more of the money they earn.
But our governments aren’t interested in lowering emissions. They’re interested in taking more of our money, even if it causes a recession.
So much going on here! He wants to raise the HST, and “return the money raised” to Canadians in the form of income tax cuts. This is an odd way to describe a shift in the tax base away from income taxes toward consumption taxes (what Paul Martin proposed, and Stephen Harper undid), but let’s pass that by. What I’m interested in is his idea that raising the HST is good, because it will lower consumption, and since consumption as a whole is what generates global warming, that will be good. All of this can be done, by the way, “without causing a recession.”
The big problem here is a conceptual one. He seems to be unaware of the following equivalence, which governs the economy as a whole (ignoring balance-of-trade):
total production = total consumption
This is because the economy is, fundamentally, a system of exchange. Goods are exchanged for other goods (also ignoring money – and we’re not in a recession, so we can ignore money). One person’s production is someone else’s consumption. So if increasing the HST were to reduce “consumption,” then it would also be reducing “production” – which is to say, the size of the economy would contract. This is what it means to have a recession.
So what he is recommending here is what environmentalists call a “degrowth” strategy (although I don’t think he intended to be positioning himself with the likes of Naomi Klein, but economic illiteracy makes for strange bedfellows). Of course, even then the way he has put it is dumb, since his proposal would not actually have the effect of reducing consumption. He wants to match the HST increase with corresponding income tax cuts & credits, so family budgets would be unaffected. How will that reduce consumption? What are people supposed to do with that money but spend it?
Ah but you say, perhaps they will save more. Here there is another relevant equivalence:
total income = total spending + total savings
Maybe he’s thinking that raising the HST will shift money out of consumer spending and into savings. Okay, well if the goal is to increase savings, then that could also be achieved by, say, increasing RRSP contribution limits. It might be difficult to sell that as a way to combat global warming! That’s because, of course, it wouldn’t. The money that is “saved” is just lent out again by banks, and someone else spends it. So the above equivalence is better described as follows:
total income = total amount you spend + total amount you lend to other people to spend
This is just a way of making the obvious point that increasing the savings rate does not reduce the size of the economy, or reduce aggregate demand (under ordinary circumstances, which we are in). On the contrary, it typically increases the rate of growth, and hence of total consumption in the long term.
But we’re just getting starting, digging down into the crazy. There are obviously some weird ideas in here about what causes recessions. Consider, for instance, what he says earlier in the piece:
The concern is that in order to impose carbon prices high enough to lower greenhouse gas emissions linked to climate change, they will have to take so much money from us, it will cause a recession…
Energy economist Mark Jaccard estimates to meet Trudeau’s 2030 target, (at least 241 Mt) Canada needs a national carbon price of $30-per-tonne in 2017, rising by $10 annually to $160 in 2030.
Even that sounds low, but the point is a carbon price of $160-per-tonne would have devastating consequences for our economy if it is not 100% revenue neutral.
That is, if the government doesn’t lower income taxes by the same amount it increases its revenues through carbon pricing.
This is an instance of what I elsewhere describe as the “government as consumer” fallacy. The idea – and it sounds crazy when you say it like this, but many people on the right really believe it – is that government is some sort of black hole, where once it taxes people, the money just disappears from the economy. This is then thought to cause the shortfall in demand that creates a recession. In other words, they think that somehow only consumer spending drives production, so the size of the economy is determined by the amount of consumer demand. This is why Goldstein thinks that, when the government imposes a carbon tax, it has to “give the money back” to consumers, otherwise there will be a recession – or in other terms, why he thinks that a revenue neutral carbon tax will have significantly different macroeconomic consequences than a revenue-generating one.
Needless to say, when the government raises money through taxation, the money does not disappear. It also gets spent. In fact, the government is just as good at turning money into demand as consumers are, and in many circumstances is somewhat better (observe the federal government deficit).
I should mention, perhaps in passing, that Goldstein’s misunderstanding of how the demand side of the economy works has been encouraged by generations of right-wing economists (who themselves know better), with their constant insistence that tax cuts will “stimulate” the economy. They almost never specify the (rather indirect) mechanism through which this stimulus is supposed to occur, and so many ordinary people jump to the conclusion that the government must be just sitting on the money, so that “releasing” it to consumers increases aggregate demand.
Final observation. The column misses the whole point, with respect to carbon pricing, in a very fundamental way. Consider the bizarre claim that increasing the HST “would encourage people to reduce consumption by making less carbon intensive choices in their purchases of goods and services.” Huh? Isn’t that what carbon taxes do? Reducing all consumption, as a way of reducing greenhouse gas emissions, is an incredibly blunt strategy – like pouring Roundup over your entire lawn just to get out a few weeds. The entire point of carbon pricing is that it increases the relative price of carbon-intensive goods, while lowering the relative price of non-carbon-intensive goods. It encourages people to paddle canoes, instead of riding jet-skis, etc. etc. It is the economic equivalent of a precision strike. The fact that Goldstein doesn’t get this is such a profound and fundamental misunderstanding of how markets work, that it really does disqualify him from being taken seriously on this, or any other, economic issue.
Can someone maybe send Bill Watson over to this guy’s house to straighten him out a bit? Or maybe we could do a Kickstarter to send him to this course? There must be something we can do.