Coal Mining Moratorium

There are stupid policies. Then there are really stupid policies. Then there are ignorant policies. I doubt there is any policy in our nation that is as collosally ignorant than selling publically owned coal resources.

For example, the Bureau of Land Managment recently leased 400 acres of land in Colorado to Peabody Energy for a price of $800,000. The land is expected to produce 3.2 million tons of coal, so we are selling it for a whopping $0.25 a ton. The market price for coal from that area is around $35/ton, so right off the bad, it looks like we are getting a bad deal, only capturing a fraction of a percent of the final sales price.

However, the real issue is that both coal mining and coal burning wreak havoc on public health and the environment. Each of those tons of coal will result in about 2460 kilowatt hours of electricity, and the most comprehensive estimates of the fully externalized costs of coal (including mining, power plant emissions, etc) are nearly $0.18 per kwh! That implies that each ton of coal causes almost $440 of damage to the public for each ton burned, in terms of destroyed land, fouled water, toxic chemicals and fine particles released into the air, and climate change. We are literally selling something for pennies that will have hundreds of dollars of costs blow back into our faces. The $800,000 we received for leasing those 400 acres is trivial relative to the over $1.4 billion in damages that mining and burning that coal will cause.

I have seen governments implement a lot of bad policies over the years, but I doubt I have seen any that fails cost-benefit by three orders of magnitude. Not only should we place an immediately place a moratorium on coal-related leases on public lands, we should take back any we have already issued and compensate the lease-holders justly. It would be much better for us to hand Peabody $5 million and renege on the lease than let them mine the coal, which would cost us hundreds of times more.

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Post-analysis: What about jobs?

First, the coal industry does not employ many people, 134,000 at all levels across the US. With over a billion tons produced per year, that's about 8000 tons per worker per year, implying about 400 man/years to mine the 3.2 million tons noted above. That would imply a cost of well over $3 million per man/year even assuming this 400 figure was true. However, it is not, at least if you believe in free market economics, which would not leave the capital and workers idle but rather shift them to the next best resources, which would likely employ about the same number of people. "Counting jobs" has always been an exercise which I find to be totally pointless and no more accurate than counting pinhead-dancing angels. If anything, it is pretty clear that coal employs fewer people per kwh than other forms of energy, which is one of the main reasons it is "cheap".

Social Security vs Art Laffer

Do higher taxes slow down economic growth? The answer to this question is far from clear, with data to support just about any opinion on the matter readily found in both the academic literature and the political sphere. However, most of the data I have seen on this matter suffers from at least one of the two major flaws

1: The data fails to separate changes in tax policy with changes in deficit spending. In most cases, tax cuts are not paired with similarly-sized spending cuts, nor tax increases coupled with similar-sized spending increases. What happens in practice is that tax cuts are often paired with spending increases, thus causing a big increase in deficit spending. However, this makes it impossible to determine whether it was the change in tax policy that caused changes to economic growth, or the deficit spending itself, which seems like an obvious candidate for the causal factor. Of course you can goose your short term economy with borrowed money.

2: The data fails to account for reverse-causality. As often as not, we change tax policy in response to economic changes, not vice versa. So even if you find a weak correlation between lower tax rates in growth, it might be because we tend to cut taxes vigorously in response to economic slowdowns, allowing them to correlate to the rebound without causing it. Likewise, we seem to pass the most tax increases at the height of bubbles, when the populace is more flush with cash than usual and more tolerant of paying additional taxes.

However, there is one tax that suffers neither of these problems - Social Security (OASDI).  First, Social Security spending and revenues have been pretty close together as the program was phased in over over 50 years starting in 1937, thus giving us a rare example of more or less simultaneous tax increases and corresponding spending increase.

 

 

The exceptions to this can be found in the 50's, 80's, and 90's, where there were slightly faster increases in revenues than spending. However, these changes were slight, and given the fact that these were all economic boom years, are hardly evidence that an increase in tax rates harm the economy.

 

 The other great thing about Social Security is that the tax increases were planned years ahead of time and phased in slowly. Hence, we can be certain that these tax increases were not a response to economic conditions. If there is a correlation, the causality must run the other way. Additionally, there has been little political fiddling (until recently) with the OASDI system. Other than the gradually phased-in tax increases, its structure is the same now as in 1937.

 

So what does the data look like? Well, we can first look at a simple chart of OASDI revenue vs the statuatory tax rate. If the famous "Laffer Curve" is correct, revenues should not keep up with the tax rate - a 10% tax should not bring in twice the revenue of a 5% tax.

 

 

 

Is that what we see? Nope. Not at all. In fact, revenues correlate perfectly with the tax rate. No evidence of a "Laffer Curve" appear at all. It appears people aren't trying very hard to dodge the OASDI tax, despite it amounting to nearly 6% of the economy and constituting our single largest tax.

 

 

 

But wait! What if Social Security is harming the economy? We wouldn't see that in the above chart, so we have to look elsewhere. So I have prepared the two charts below. Both consist of one data point for each year, with the horizontal axis being the change in OASDI tax rate relative to the prior year. The vertical axis are the change in GDP growth, with the upper chart being the difference in growth in the subsequent year less the growth in the prior year, and the bottom chart being the growth in the three subsequent years minus the growth in the three prior years. Positive values on the vertical axis indicate accelerating growth. Most values fall at zero on the horizontal axis because most years saw no change in tax rate.

 

 

 

 

 

So there you have it. Our experience with Social Security shows no evidence at all of even a hint of a "Laffer Curve", or having an effect on economic growth, despite it being our largest individual tax. This is all the more compelling because the Social Security system is a rare example of a tax increase coupled with a corresponding spending increase AND not being a response to the current state of the economy. In appears unlikely that at anything approximating our current tax rates, further tax increase or tax cuts would have a substantial effect on the economy if those tax changes were coupled with a corresponding change in spending.

 





 



 

 

What 94% of Americans don't know...

Obama has reduced the deficit.

There. You are now officially more informed than 94% of Americans.  Just to make it really clear, here is a simple chart of deficit by calender-year quarter, which resolves any questions as to who was President when the deficit exploded into the stratosphere during the economic collapse.