Discussion on how to screw up a terms of trade increase II
Posted June 20, 2008on:
First we should accept that there is a liability we have to pay. If anyone wants to comment saying we should just not pay our Kyoto Liability, do it somewhere else (If it makes you feel better, we will assume that the world will punish us by more than the cost of the scheme if we drop out). So given that we are looking at the situation where New Zealand has to pay for it, why is there concern around the ETS.
One concern that Queen Bee has, which is of course correct, is that rushing into an emissions trading scheme without thinking about the issues surrounding it is a mistake, but is that what we are doing. Compared to other polices the ETS has had a ton of work done around it, general equilibrium models, real options analysis of forestry stocks, all sorts of stuff. Some of the technical issues surrounding the measurement of liabilities need to be cleaned up, but in the economic sense I’m pretty happy with where we are sitting.
The feeling that we haven’t properly costed the ETS stems from the NZIER GE model on an ETS (something we discuss here). Now I didn’t completely agree with the conclusions that were glenned from the NZIER review, and if you read the review of the review you can see that others feel the same way (*).
However, even if we believed that the NZIER model gave the best representation of what is going to happen, policy is not solely a question of “growth”, it is a question of welfare. This question is important as we cannot just have “high growth” and compensate the losers in this case – as these firms are stating they can’t afford to stay in business if they have too pay the full cost of their carbon emissions.
It is fundamentally fair to make people pay the full social cost of their actions. By increasing income taxes to pay for the liability instead of using an ETS or a carbon tax we are making the result of society pay for a mess that these industries are creating.
I do agree with Queen Bee insofar as uncertainty surrounding the ETS is creating unnecessary problems for our economy, mainly by reducing investment. However, given that we have to take on the liability in the first place, I am not certain that getting the funds through an ETS is much of an additional risk – ultimately, it is the liability that is a cost to society, not the scheme.
What do you think is the major risk?
In terms of policy failure, I’m most worried about the government losing focus of when spending is appropriate and inappropriate. A terms of trade increase increases the whole countries set of resources – completely independently of any government action.
However, if the government views the growth this brings as an illustration of how good their own policies are we could end up with a loss of fiscal discipline. Such action would increase fundamental inflationary pressures and fritter away some of our wealth gains.
Now don’t get me wrong, I agree with parties shifting taxes and spending based on their belief in an equity-efficiency trade-off. However, a loss in fiscal discipline isn’t about a measured trade-off, it is about the potential for waste.
My fear is that our terms of trade boost will lead to the government taking their eye off the ball (no matter what party is in power), as although the government can do very little to influence the rate of economic growth, it still has the ability to throw resources down the toilet (a risk that is highlighted by The Standard’s view of public sector productivity – although I agree that public sector productivity measures are different, such attitudes could be used justification for throwing more an more money at a problem without even thinking about what comes out).