Sovereign debt , as a potentially crippling fiscal problem world wide, has risen to the forefront over the past few months. Whether it is the US, Europe, Japan or many other developed and developing countries the sovereign debt watch is on.
The major metrics of a pending sovereign debt crisis that have been in vogue for decades used to be applied only to developing countries. Unfortunately this is no longer the case. The Herculian efforts by governments all over the world; the developed in particular; to avoid a repeat of the debilitating depression of the 1930's has forced these countries to increase substantially their fiscal stimulus programs. In a sense the monetary and fiscal policies adopted by the officials of all of these countries have been very successful. A worst case scenario has been avoided.
But as economics has always taught us, There Ain't No Such Thing AS A Free Lunch; TANSTAAFL. Yes we avoided a deep recession and the top officials can pat themselves on the back for this. But maybe not. Is the cure at least as expensive or maybe even more so than the ailment that it saved us from? That is , currently, the $64,000 question or maybe I should say the $64 billion question?:-)
Often, our efforts at prescribing remedies are counter productive because of what is inherent in problem solving. We always seem to target the symptom rather than the disease. As a result we inevitably move from one crisis to the next as a result of the law of unintended consequences.
In our efforts to save the system and to prevent a major economic depression we proceeded to throw money at the problem in order to generate more final demand and thus put more people to work. What we did not stop to consider is the major question of how are we going to pay back all of these funds that we have borrowed? It seems that we did what we always do, shift the burden onto the future generations. The debt will not come due for some decades ,right? Wrong.Well informed individuals know that more debt implies more taxes in the future and so they take corrective by refusing to own the highly risky debt. Once we find out that the debt service is too large and that we cannot keep on rolling the debt unto the future then we will have no choice but to become deadbeats. That is where we are at the moment. The question is which country is going to go under first? Would it be Greece or would it be one of the other PIIGS? How about the UK, or evn Japan or the US? If any of these countries default would they set up a contagion that will devastate all the current international financial sytem as we know it?
Believe it or not there is a potential mechanism that if adopted could go a long way towards addressing the real cause of this issue and not only the surface phenomenon. The solution that I am about to propose is not new, actually,N.G Mankiw wrote about it in 2007.
"The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. ...
The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”...some taxes align private incentives with social costs and move us toward better outcomes."
I would love to see a carbon tax levied not only in the major industrial countries but all over the globe with all the proceeds dedicated to lowering the sovereign debt. Such a tax could be a first step towards internalizing the negative externalities of all the production inthe world economy. If that leads to less and more efficient production then all of us will be winners.
3 comments:
I agree by taxing carbon emissions we would also decrease them. That is a plus as far as the environment is concerned. At the same time, carbon is emitted due to; driving to work, factory production, energy use in general. As a constantly growing economy, do we actually have the ability to decrease carbon emissions or must we increase the amount of pollution just to keep up with the times. Populations are growing as well. Although the tax on carbon may decrease each persons carbon footprint we have to take into account how many people will be leaving one tomorrow compared to today. It's almost as though we are decreasing the individuals carbon output while increasing the overall total output.
In a world of many governments and many thoughts on the way a civilization should run, it seems to me that a global tax could only be accompanied by a global governemtn. The reason being, Americans cannot begin to cut their carbon emission if China will not do the same as the playing field is no longer level. Then we look at who is being taxed, well the people driving to work or the trucks for a business or even a factory. All these cost then are internalized locally and recovered again in the form of a price increase to the consumer. We already have a tough enough time keeping up with China and Japan in production due to our labor rate, why now a tax to put us even farther "behind" the 8-ball? It seems the ones who need to take the initative are the ones lacking the ambition, yet are affecting our air in this world. I agree the polluter should be taxed and Pigou had a good idea, but my main concern is getting the world to join in/buy into the idea as a whole. It's not to say that the US should remain the most powerful nation, but with the US lending help to every country (based off the assumption it has the ability too) along with taxing now the factories keeping it alive and the citizens as well to preserve our environment? Too me it seems we need either with need that paradigm shift, or we should begin to focus within our borders. That raises the question, If we have the largest debt that is held by another country, why then do other countries believe we have the ability to lend aid? All the money that politicans devoted to relief efforts,yes it help other countries, but should it have be given to the citizens of the US who are struggling with almost a 20% unemployement and help boost our economy. In summary, we have a system that is based off of doing what will get you reelected, what puts you in the spot light, and not one of self preservation.
I absolutely agree that a carbon tax or cap and trade must be a standard globally to address pollution and environmental costs. It amazes me when politicians refer to these methods as "job killers", in order to protect the profit margins of their campaign contributors. There a lot countries around the world, mostly in Scandinavia, that combine environmental progress and high quality of life and employment. I'm sure that the US and the rest of the world can join that party.
Post a Comment