Court Rejects EPA's Latest Rule for SO2 Emissions Trading. Where to Next?

Last week, the United States Court of Appeals for the District of Columbia rejected an EPA rule known as the Cross-State Air Pollution Rule (CSAPR). The rule was supposed to have gone into effect at the beginning of 2012, but the same court had previously stayed its implementation on procedural grounds. Last week’s ruling is the first to address CSAPR on its merits.

CSAPR governed emissions of sulfur dioxide (SO2) from Midwestern coal-fired power plants and other sources. SO2, along with oxides of nitrogen (NOx) and others is a precursor of acid rain, which causes widespread environmental damage not only in the states where the sources are located, but also those downwind. >>>Read more

Latest CBO Projections Underline Need for a Goldilocks Budget Deal

The latest analysis from the Congressional Budget Office (CBO) shows a sharp divergence between  a baseline projection and an alternative fiscal scenario for the U.S. economy. To put it in language a child could understand, the baseline projection is too cold while the alternative scenario is too hot. It is clear from the report that we need a Goldilocks budget deal to get things just right.

The CBO’s baseline assumes no changes in current law. Paradoxically, no change in the law would mean big changes in policy. That is because we are facing the so-called fiscal cliff–a set of measures that include  allowing the Bush tax cuts to expire as scheduled, making sharp cuts in Medicare payments to doctors, ending extended unemployment benefits, and allowing mandatory cuts to defense and nondefense spending to come into force. The CBO projects that those changes would shrink the budget deficit to about 4.0 percent of GDP, compared with a projected 7.3 percent for 2012. The deficit would decline to 1 percent of GDP by 2016. >>>Read more

Economists Should Love Paul Ryan’s Support of Policy Rules—but are they the Right Rules?

Economists love the idea of rules for monetary and fiscal policy. Many politicians hate them, preferring the discretion to do whatever seems like a good idea at the time. For that reason, if no other, economists should love Paul Ryan, an atypical politician who supports policy rules. But there is a catch—are the rules that Ryan backs the right ones?

Why We Like Policy Rules

Economists prefer rules to unlimited political discretion because they improve the chance that policy will be appropriate and timely.
Some of the reasons are technical. Lags in data collection and decision making make it hard to take monetary or fiscal policy actions until well after a problem begins to develop.>>>Read more

It’s Unanimous: All Indicators Show Inflation is Slowing, Even the Index of Sticky Prices

To no one’s surprise, today’s inflation numbers from the BLS showed that U.S. inflation is slowing according to almost every indicator anyone has thought to report. Seasonally adjusted monthly data for the headline consumer price index, the core CPI and the Cleveland Fed’s trimmed-mean CPI are running well below the Fed’s 2 percent target. The year-on-year versions of the same indicators are also falling, and are all now running at or below the target. . . .

 Continue reading the full analysis here; follow this link to view or download the latest inflation charts and data in a convenient, classroom-ready slideshow format.

Why We Should Repeal the Ethanol Mandate and Replace it With a Carbon Tax

During the debate over the Obama administration’s health care policy, Republicans came up with the catchy phrase “repeal and replace.” I’ll get back to health care in another post, but for now, I’d like to filch the phrase for the increasingly lively debate over the federal ethanol mandate, or Renewable Fuels Standard (RFS), as it is formally known. “Repeal and replace” is the right approach when a problem is real and existing policy addresses it in so a clumsy a way as to make it worse.

With every passing day of drought in the American Midwest, the outcry against the RFS grows louder. The latest to weigh in is Jose Graziano da Silva, Director-General of the Food and Agricultural Organization of the United Nations. Writing in the Financial Times, he urges the U.S. government to suspend the ethanol mandate, which is expected to consume up to 40 percent of the reduced 2012 corn crop. Otherwise, he fears, the world will approach a tipping point where further supply shocks could cause a global food crisis.

Worries about corn state votes have so far kept both major party presidential candidates on the side of ethanol, but opponents of the RFS also have significant support in Washington. Backed by livestock interests, among others, more than 150 members of Congress have urged the EPA to suspend the ethanol mandate for the duration of the drought. Some livestock producers are hoping that emergency drought-relief legislation will include a clause forcing the EPA to act.

Suspending the RFS for the duration of the drought is not enough, however. The ethanol mandate is bad policy that should be scrapped permanently. It should be replaced with a policy that directly addresses the problem of overconsumption of carbon-based fuels. A carbon tax on transportation fuels—or better, on all forms of energy—would be an excellent choice. >>>Read more

Choice of Ryan as VP Puts Tax Reform Back on the Table. How Will They Handle It?

I am thrilled by Mitt Romney’s selection of Paul Ryan as his running mate. I say that not because of its effect on the outcome of the election, which has yet to play out, but because it puts tax reform squarely back on the table.

Fixing the tax code is a two-part process that simultaneously lowers tax rates and broadens the base by closing loopholes. Those elements of reform are essential whether they are implemented in a way that increases revenue or is revenue neutral. Ryan has been very clear about the first element. He advocates a two-bracket personal income tax with 10 and 25 percent rates. He is not so clear about the second. In principle, he also endorses broadening the base, but he has refused to specify just which deductions, exclusions and preferences will have to go.

As long as he was just Congressman Ryan, head of the Budget Committee, he had a convenient alibi for his reluctance to be specific. As he told Fox News back in March, ““That’s what the Ways and Means Committee is supposed to do. That’s not the job of the Budget Committee.”

It was the old Wernher von Braun defense. In the words of Tom Lehrer’s song, “Once the rockets are up, who cares where they come down. That’s not my department, says Wernher von Braun.”

As vice-presidential candidate, Ryan will find it harder to use that dodge. The presidential team is supposed to lead, not sit back and wait for Congress to make back-room deals. If an interviewer or debate opponent asks just which tax breaks should go, there is no place for Ryan to hide, nor is there any place for Romney to hide, since he is the one who put tax reform back on the table by choosing the Wisconsin Congressman.

That brings us to Romney’s own tax situation. Things would be easier for the GOP team if his failure to release more returns indicated nothing more than a character defect, but that is not all that is at stake. As I argued back in January, Romney’s taxes highlight what is wrong with the whole system, especially the perverse way that high corporate tax rates interact with low personal rates on capital income.

Candidate Ryan is going to face frequent, pointed questions about his often-stated views on tax reform. How is he going to answer? I see three possibilities:

1.       “Don’t be frightened off by my rhetoric. We aren’t really serious about tax reform; we’ll be happy just to keep rates low for top earners and leave the rest of the system as it is.”

2.       “I was serious when I told The New York Tmes that ‘The tax code is patently unfair: many of the deductions and preferences in the system — which serve to narrow the tax base — were lobbied for and are mainly used by a relatively small group of mostly higher-income individuals.’ I stick by what I have said: the wealthiest Americans should pay an effective tax rate of around 25 percent, and that starts with my running mate.”

3.       “As a team, we’re serious about the concept of tax reform, but we’re going to let Congress fill in the details. If you’re among the 16 percent of Americans who think Congress has been doing a good job, vote Romney-Ryan!”

Somehow, all of these answers seem awkward, but Paul Ryan is a smart guy. Maybe he’ll think of something better.

Update: Since this was first published on Economonitor.com, the Romney campaign has issued a set of talking points that distances the campaign from details of the Ryan budget plan and includes extremely vague language on tax reform.

Will the Dutch Disease Kill Hopes Raised by Colombia's Free Trade Agreement?

After a torturous journey through Congress, the United States-Colombia Trade Promotion Agreement (CTPA), first signed in 2006, came into effect on May 15 of this year. The agreement has raised high hopes in Colombia, for which the United States is by far the largest trading partner. However, while the CTPA was fighting its way through a six-year obstacle course, a new threat to Colombia’s economy has emerged in the form of the dreaded Dutch Disease, which afflicts resource-rich countries in many parts of the world. >>>Read more

TEN BILLION: Return of the Population Bomb?

A generation ago—no, two generations ago, already—Paul Ehrlich scared us all out of our wits with his book, The Population Bomb. It turned out to be a bomb that we gradually learned to live with. Yes, it exploded—the world’s population did double between 1960 and 2000, the shortest doubling time in human history. No—it didn’t kill us.

As University of Michigan professor Donald Lam told us in a 2011 presidential address to the Population Association of America, the shift from large families making low investments in their children to small families making high investments in their children is a fundamental dimension of economic development that gives us reasons to be optimistic about the future.

Now the population bomb is back, this time in the unlikely form of a sold-out, one-man play, entitled TEN BILL10N, at London’s Royal Court theatre. I haven’t seen the play, but I would like to comment on the reviews, which, after all, are likely to be as influential as the play itself.

US Job Growth Improves in July but Unemployment Rate Rises a Bit

A recent on-line discussion of the Fed’s continued inaction in the face of worsening economic data included the following exchange of comments:

Commenter 1: When you got nothin’ but blanks left you just stand there with the gun and pretend you might pull the trigger
Commenter 2: Maybe Bernanke should just throw the gun

Now, two days after the Federal Open Market Committee’s midweek meeting, we get another weak jobs report. True, the BLS news release tries to put a good face on things, headlining a gain of 163,000 payroll jobs and reporting that the unemployment rate was “essentially unchanged.” A closer look at the numbers, though, shows that the report contains more bad news than good. >>> Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest employment data

Case Study in Supply and Demand: Will Fracking Enrich India's Guar Farmers?

The following post was originally published on Economonitor It is reproduced here for classroom use, along with a slideshow that demonstrate how the theory of supply and demand can be applied to events in the guar market. The slideshow is ready to cut-and-paste into your lecture. Follow this link for the classroom-ready slideshow.

A New York Times story last week featured a picture of a happy Indian farmer in his new house, a replacement for a miserable mud hut. His sister, a scarf modestly hiding her face from the photographer, extends her arm to show a new silver bracelet and ring. The house and the silver were bought with profits from guar, a crop for which India holds a global market share of 80 percent or more. The price of guar has soared recently, largely because it is a key ingredient in fracking fluid.

What is going on here? Will India’s near-monopoly of guar production be a lasting source of riches for India’s farmers? Will it be a lasting strategic headache for advanced economies, something like China’s monopoly of rare earth elements? A look at the factors behind the recent run-up in guar prices will show why the gains to India’s guar farmers are likely to be transient.