Author: Richard Tol

A Green New Deal for Ireland

Comhar SDC has released its blueprint for a Green New Deal. An Bord Snip Nua has proposed the abolition of Comhar and they have now strengthened that case.

The Green New Deal is a stimulus plan for the economy: 3.7 billion euro a year for the next two to three years. We all wish Ireland had that sort of money for a stimulus.

Comhar proposes to finance the Green New Deal from the revenue of a carbon tax (400 million Euro a year), from the auctioning of carbon permits (which will not start before 2013), and with new borrowing (but with “green” bonds, so that’s alright).

The aim of the stimulus is not just to revive the economy but make it environmentally sustainable too. Most experts reckon that the transition to a low-carbon economy will take 50 years (give or take a few decades) but Comhar seems to think that 2.5 years is enough to make a dent.

The stimulus comes mostly in the form of subsidies for “green” investments. A carbon tax has the wonderful property of equalising marginal costs across all emitters, and being robust against special pleading. Subsidies break the principle of uniform pricing, and politicians have been tempted to pick winners. This is double regulation, and half of it is bad regulation.

The Green New Deal is meant to create jobs, just like the original New Deal. It would. The Green New Deal would create jobs a plenty in certain sectors, but these jobs would be at the mercy of state intervention. There would be more subsidy junkies. The Green New Deal would destroy market-based jobs in other sectors. Because the Green New Deal would raise the price of energy and keep labour taxes higher than needed, the economic recovery is slowed down and jobs are destroyed. Similar policies have been tried elsewhere, and there are natural experiments too. The empirical evidence is clear. A plan like the Green New Deal would destroy more jobs than it creates. Net unemployment would go up.

If there were money for a stimulus, then we should reduce VAT rates and labour taxes.

The Green New Deal does not stop there. The carbon tax revenue would be put into a National Decarbonisation Fund to be managed by the National Treasury Management Agency — as if absorbing NAMA isn’t enough. Anglo-Irish would be turned into a “green” bank. Anglo-Irish should maximise its return to the shareholders (aka the taxpayers), and placing constraints on the type of loans it can give and the type of investments it can make would reduce its profitability — higher taxes in the future, therefore. Comhar also argues that the pension funds should be forced to invest greenly. I would argue that pension funds should provide pensions, and to that end they need to invest in whatever gives the highest risk-adjusted return, regardless of whether it is green or blue or yellow.

In short, Comhar’s Green New Deal for Ireland is full of bad economics. It also has all the right buzzwords, so expect glowing endorsements from our dear leaders.

Fine arts and economic growth

Gerry Godley does not have the answer to the question “How much does James Joyce contribute to the growth rate of the Irish economy”, but he does raise some interesting points. (There is some self-serving pleading, but not too much.) See here.

Distributional implications of a carbon tax

In a paper just published in the ESR, Verde and Tol study the implications of a carbon tax across the income distribution. The paper by and large confims previous work (Callan and others being the most recent). A carbon tax is markedly regressive. It disproportionally hits poorer households. That said, the scale of the carbon tax is modest (euros per week) and small relative to income taxes and benefits. That means that the distributional damage can easily be repaired (should our dear leaders be so inclined).

The paper adds to previous research by also quantifying the indirect effects of a carbon tax. (This was last done by Cathal O’Donoghue for 1987.) A carbon tax increases the price of energy (direct effect) and thus of everything else (indirect effects). The paper shows that the indirect effects are small relative to the direct effects, and thus hardly affect the regressivity of the tax. The paper also shows that a carbon tax abroad would have a similar impact on Irish households again.

Benoit and Marsh on excellence (or not)

In a paper just published in the ESR, Benoit and Marsh confirm that research excellence is measurable — even for political scientists, some of whom argue that reality is constructed. They show that research quality varies considerably. Should research budgets be cut, there is now a basis for cuts that minimise damage to quality.

Some of you will want to bitch that Benoit and Marsh feature as the numbers 1 and 3 on their own ranking. This is nonsense. The correlation between the various indices is high. The same people are top regardless of the quality measure used, and people-in-the-know already roughly knew who would do well. This exercise primarily serves the community — and the authors invested time that they could have used to publish in a more prestigious journal.

Commission on Taxation: Property taxes

When I studied public finance in the late 1980s, stamp duties were presented as historical oddities: Simple to collect but so distortionary that they had long been abolished in the civilised world.

The Commission on Taxation recommends that stamp duties be abolished and replaced by a property tax. Impeccable.

In fact, the CoT recommends that the stamp duty on non-owner-occupied residential property be maintained. This creates unnecessary friction between the rental market and own homes.

The CoT also recommends that rezoned land be subject to capital gains tax. This is smart, treating land like any other capital, thus improving capital allocation. It would further depress the land market, though.

Returning to the property tax, the CoT recommends that house values be self-assessed. This creates a problem with asymmetry of information. In fact, the CoT immediately adds that the Revenue Commissioners would not have a clue about the value of houses. This part of the proposal would create the new national sport of property tax dodging.

It seems, though, that the political leadership is not too keen on the property tax. I would suggest that it’d be introduced in 2011 and that 2010 is used to build up a database for “objective” valuation of residential property. In other countries, the “taxable” value of a house is typically far below the market value (so that no one can challenge the tax person) while the tax rate is fairly high (so that revenue is not affected). Building up the data can be done in a year, and would actually employ a few recent graduates.