Author Danny Vinik

Fiscal Cliff v2.0

Danny Vinik 1 Comment

Just a quick post with my thoughts on Treasury Secretary Jack Lew’s announcement today that by mid-October the U.S. will only be able to make payments with the cash it as each day. In other words, we’re hitting the debt ceiling a couple of months early. Kevin Drum posits that this means negotiations over the budget are going to be lumped in with the debt ceiling:

If mid-October really is the drop-dead date, it means that budget negotiations in late September and debt ceiling negotiations in early October pretty much run right into each other. It’s Fiscal Cliff v2.0.

I don’t quite know what this does to John Boehner’s fragile attempts to keep the lunatic wing of his party under control. Nothing good, probably. I’m also not sure what it does to President Obama’s promise not to negotiate over the debt ceiling. If all of this stuff get munged together, then everyone’s going to get mighty hazy mighty fast about what exactly is being negotiated.

The budget negotiations and debt ceiling running into each other will hurt President Obama and Democrats on both those issues. Raising the debt ceiling should be a technicality that no American would consider holding hostage. We know that House Republicans don’t believe that though. We also know that most Americans don’t follow politics closely and asking them to differentiate between Obama’s willingness to negotiate over the budget, but refusal to do so over the debt ceiling is difficult. Most aren’t going to understand the difference. and will expect Democrats and Republicans to compromise since there are two issues.

If the two were separate, Democrats could bargain with Republicans over the budget and come to a deal (or a continuing resolution). Then, a few months later, they could refuse to negotiate over the debt ceiling and explain to the public that this isn’t debatable. We don’t debate paying our bills. The two issues running into each other just muddies the water. That will allow Republicans to escape some blame on both topics and give the GOP more leverage in negotiations. It may even force the President to bargain over the debt ceiling (or do so subtly). Either way, Republican elites should be pleased with this outcome. It may make their party a bit harder to control during the process, as Drum points out, but the increased leverage they have over the President is a worthwhile tradeoff. As for Democrats, there’s nothing good about this at all. Get excited for Fiscal Cliff v2.0.

Conservative Hatred for the Social Cost of Carbon is Infuriating

Danny Vinik 6 Comments

Conservative reporter Matt Lewis of the Daily Caller was on Fox News this weekend denouncing the Obama Administration’s decision to increase the social cost of carbon (SCC) and also wrote a short post this morning titled, “4 reasons you should be outraged by Obama’s new microwave regs.” Lewis is a thoughtful conservative voice, but he’s overreacting here.

Let’s start with his first reason: this was a unilateral decision by the Obama administration. Well, yes it was. But this isn’t a new law. It’s a measure used in the cost-benefit analysis of regulations. In the microwave rule that Lewis is so furious with, the Energy Department (DOE) also made assumptions about annual energy use, the product cost, product lifetime and forecasted efficiencies. When it’s making rules that estimate costs and benefits for decades, the DOE has to make assumptions. There’s no way around it. Congress is not going to pass a bill for every assumption in every regulation. That would be the end of regulation. Lewis doesn’t like this assumption so he complains that the action was unilateral, but that’s how the DOE (and all federal regulators) operates.

That gets us to reasons number two and three: “it was hidden” and “the price is arbitrary.” Lewis calls the social price of carbon a “guesstimate” and that regulators have lots of autonomy in their decision-making, but this is unfair too. Calling the price a “guesstimate” makes it seem like it came out of thin air. But that’s not true whatsoever. The Department released a 21-page document explaining its reasoning for the change in the social cost of carbon. The first page of it lists 11 different agencies that were involved in the process and the report goes on to cite a number of academic studies. Lewis is right that the social cost of carbon is tough to calculate, but what should we do instead? Just ignore the costs and pretend they don’t exist? That’s a terrible idea. Instead, we should try to calculate them as best we can, using both public and private resources. That’s what the Office of Management and Budget (OMB) did and that’s the number that the DOE used for its microwave regulation.

In addition, if you dig into the final rule, there is a part devoted entirely to explaining the old social cost of carbon and the new one. There is also a paragraph that warns about the uncertainty of the estimate:

It is important to recognize that a number of key uncertainties remain, and that current SCC estimates should be treated as provisional and revisable since they will evolve with improved scientific and economic understanding. The interagency group also recognizes that the existing models are imperfect and incomplete. The National Research Council report mentioned above points out that there is tension between the goal of producing quantified estimates of the economic damages from an incremental ton of carbon and the limits of existing efforts to model these effects. There are a number of concerns and problems that should be addressed by the research community, including research programs housed in many of the Federal agencies participating in the interagency process to estimate the SCC.

Does that sound like an agency trying to cover up a guesstimate? The Obama Administration didn’t announce the change in the SCC with a big press conference or a media blitz, because It’s a change in an assumption used in the cost-benefit analysis of complicated regulations. That’s not to say that Administration didn’t try to downplay it. It is a big (justified) change and the Administration announced it on a Friday afternoon in late May. It was a classic news dump. But they also didn’t try to hide it. In the very brief (five paragraph) press release on it, a full paragraph is devoted to the new estimate. That’s not an attempt to hide a massive regulatory change from the American people.

I actually agree with Lewis’s final reason: “it’s a big deal.” I’m going to quote him at full here:

This could impact the cost of almost everything you consume (including, yes, the cost of microwaves). What is more, the new regulations will impact the projected cost of building and maintaining power plants — and the Keystone XL Pipeline project. (When calculating a cost-benefit analysis, these new regulations will increase the (supposed) cost, making it less likely that new energy projects will be green lit.)

Lewis is exactly right. The SCC has big implications for a number of other projects. Lewis is complaining that this update has far-reaching effects, but that’s exactly why it’s so valuable that we revise it. This isn’t a reason to oppose the regulation. On the contrary, it’s a reason to praise the DOE and other agencies for updating their assumptions. Lewis and other conservatives may dislike the idea of the SCC and oppose any update to it that raises it’s price, but it’s a vital consideration in regulatory policy and should be a pillar of conservative policy. After all, taking into account the SCC is internalizing a negative externality that the market doesn’t take into account. It’s a step closer to a free-market system. Shouldn’t conservative embrace that?