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The Government's Rearview Driver

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Brad Plumer has a very nice post on why the Congressional Budget Office has, historically, predicted that pollution regulations would cost much more than they actually did. When Congress went to create a cap-and-trade plan for sulfur dioxide in the early '90s, the CBO figured that permits would sell for $750 a ton. By 1997, they were $100. And that's not an isolated example.

The basic story, as Plumer explains, is that "markets almost always tend to be smarter than forecasters, and adjust in ways that no one expected (and, as such, are hard to build into the models)." Technological innovation tends to emerge much more rapidly than CBO's predictions admit. And there's a reason for this. The CBO plays by "all-else-being-equal" rules. Asked to evaluate cap-and-trade, they essentially ask, all else being equal, what will this do to the economy?

But the point of a policy like cap-and-trade is that it all else won't be equal. The idea is that making carbon more expensive will spur the market to develop carbon alternatives. People will thus use less carbon, demand for the permits will drop, and the policy will be less onerous than it initially was. CBO can't build that into their model because, well, it hasn't happened yet, and CBO can't score something we hope will happen. But the fact that they can't score it doesn't mean it won't happen. Predicting the outcome of a new idea based on evidence gathered from old ideas is a tricky business.

As a senator once said to me, CBO is like a navigator who tells you where you're going by staring into the rear-view mirror. There's a role for that. If you're asking, for instance, how much it will cost to expand Medicaid eligibility to 150 percent of poverty, then data from what happened when we've expanded Medicaid eligibility in the past will probably be pretty helpful. But if you're asking how much it will cost to do something we haven't done before, then looking in the rearview mirror is less useful. The CBO estimate, in that scenario, plays an important role as it's still the number we use for budgeting purposes. But as an analytical contribution, it's highly uncertain.


Photo credit: AP Photo/Pat Roque.

By Ezra Klein  |  June 23, 2009; 4:01 PM ET
Categories:  Budget , Climate Change  
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Comments

I'm confused. If the point of cap & trade is to make carbon more expensive, why does Mr. Klein favor an extraordinarily complex bill that may not actually accomplish this stated purpose, given that the licenses to emit carbon will be handed out to the utilities for the next 10 years (and likely perpetually)? Why doesn't Mr. Klein favor Representative Bob Inglis's (R-SC) bill that would simply tax carbon-based emissions, and correspondingly lower the payroll tax?

Posted by: Dellis2 | June 23, 2009 4:28 PM | Report abuse

This may all be moot.

http://www.youtube.com/watch?v=FfHW7KR33IQ

Posted by: ElViajero1 | June 23, 2009 4:51 PM | Report abuse

In any proposal for a new program (public or private), there is, and should be, a set of alternate program features for analysis, and each of these features has some reasonable set of second and third order effects. Probabilities can be assigned to these based on the past, our current understandings, and expected and unexpected actions of other facets of the arena - the marketplace in this case. And there is also the "who could have known" outlier of a totally unforeseen outcome, which can be assigned a probability of occurance as well.

We don't need or benefit from any analysis that considers just a single set of factors that doesn't consider the 2nd and 3rd order factors, and the other potential effects and outcomes. Indeed, we need a much more thorough analysis for the decision makers to consider and evaluate.

For the existing programs, the current CBO approach works fine. For this more sophisticated, but still non-partisan, analysis we need a separate division of CBO (call it the Congressional Analysis Office, or whatever). Its work should be iterative in nature, based on feedback from outside observers, congressional committee staffs, and congresspersons themselves. The alternatives and probabilities can be adjusted, new factors considered, and undesirable paths eliminated.

No business executive in a well run organization would be, or should be, satisfied with a single-scenario analysis. A single model with only fixed inputs and outputs is not analysis, as Wall Street should now be well aware of.

So, we need a far more sophisticated, but still respected as unbiased, mechanism for dealing with a major change proposal. It should be capable of looking ahead as well as keeping an eye on the rear view mirror. More of the former and less of the later is probably a good model, since that is what a (still living) good driver would do.

Posted by: JimPortlandOR | June 23, 2009 4:59 PM | Report abuse

What kind of aliens are those supposed to be? ... Although I'm glad to see that Alien Mr. Rodgers supports Congressional action against climate change.

Posted by: tomveiltomveil | June 23, 2009 5:00 PM | Report abuse

I don't know what their baseline is. Is their assumption that the physical environment will remain unchanged? Did they figure in the cost of drought and rising ocean shore lines while there is simultaneously a drop in fresh water levels in the great lakes?
In other words, did they figure the probable costs of doing nothing?

Posted by: patrick27 | June 23, 2009 5:54 PM | Report abuse

These thigs always go in cycles. Back when the Republicans were in power, they made similar claims about how expensive policies X and Y would actually save money if only the CBO would use dynamic scoring, and the Democrats defended the CBO's pessimism by reference to its historic integrity. Now the roles are reversed.

Posted by: tomtildrum | June 24, 2009 3:14 PM | Report abuse

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