If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid. ~ John Maynard Keynes
Over the past several decades economists
have established a larger presence in the world of policy formulation. The sun
never sets on economic experts making pronouncements that are reported 24/7;
everything from inadequate GDP growth to the price of kale[1]
and quinoa. Despite this prominence, economists are far from cherished. We
lament, "Why aren't we loved?"
We're disliked because, mostly for the
best of reasons, we often espouse and support policies that raise the prices of
products that people actually purchase. Many economists argue that goods like petroleum
products, food, water and sugary drinks are priced too low and should be raised.
When offered a choice, most everyone wants lower,
not higher prices.[2] Hence
the negative feelings folks have with economists (and politicians) who endorse
higher prices.
The rationale for raising prices
sometimes focuses on how we can be saved from ourselves – or can save
"other people" from themselves (this is more popular than policies
that raise prices on goods or services we ourselves buy) – because our consumption
of some goods creates negative public externalities like air and water
pollution (perhaps remedied by a carbon tax that raises fuel prices). Consuming
other goods creates detrimental personal consequences like lung cancer or
obesity (resolved in part by implementing a cigarette tax or soda tax that
raises these goods' prices, so consumers buy less of them).
Speaking of soda taxes, a growing list
of localities have attempted, so far uniformly unsuccessful, to implement
various types of soda taxes. This list now includes San Francisco and Berkeley,
CA that have each placed differing tax propositions on sugared drinks on their
November ballots. The debate about the tax is already bubbling over in both
cities.
The advocates of Berkeley's intricate Prop
D state it's a 1-cent per fluid ounce tax on distributors of some sugared-drinks
(called "Big Soda" by proponents). the Berkeley city attorney states that
"The tax would be payable by the distributor, not the customer," which
seems to hope that voters will forget such taxes almost always get passed along
to final consumers in the form of higher prices. Pro-D'ers say the tax will
reduce the incidence of obesity and diabetes. That may be possible in the
longer term, but there are many other (known and unknown) factors that
contribute to obesity and diabetes. Unfortunately, available information about using soda taxes as a fiscal means of reducing America’s
growing obesity epidemic is fairly dispiriting. We'll see if a notably progressive
city's citizens will vote to raise the price of many of the sugared drinks they
consume in the name of public health.
Does anyone really want to pay higher
prices if they have a choice not to? Nope.[3]
Witness the popularity and permanence of a myriad of sizeable government
subsidies that artificially lower prices for consumers and/or producers. These subsidies
include those to industrial agriculture that ultimately reduce commodity food
prices (e.g., wheat, corn, milk, cotton) and tax subsidies provided to oil and
natural gas exploration and to home mortgage interest payments. Subsidies to
agriculture have been estimated to be from $10 billion to over $20B per year. The home mortgage interest
payment tax deduction (subsidy) was estimated to cost $80B in foregone revenues in 2010.
The Australian carbon tax "experiment"
offers an unusual case study in the fecklessness of politicians raising prices,
in this case energy prices. A carbon tax is a tax on the production and/or
consumption of fossil fuel based on the fuel's carbon content. Most economists
and virtually all environmentalists strongly support such a tax as a means of
improving air and water quality, even though many politicians remain extremely
wary of imposing one. Their well-founded fear is connected with creating an unpopular
policy that raises energy prices.
Australia initiated a national carbon
tax in July 2012 under Labor Party Prime Minister Julia Gillard, principally on
large industrial and electricity-generation firms' emissions. The tax on carbon
that companies paid was about A$25/metric ton in mid-2014. CO2 emissions went down. The price of
electricity and other goods increased. And Australians were not at all happy
about these price increases. So unhappy that voters threw out the Labor government
in the next election. The tax was then repealed in July 2014, under the new
leadership of Liberal Party (conservative) PM Tony Abbott, who said the tax was
a “9 percent impost on power prices, [and] a A$9 billion handbrake on our economy.” Mr. Abbott probably
doesn't spend much time chumming around with economists who advocated for the
ex-carbon tax. Australia is thus the only country that has both implemented and annulled a carbon tax.
Closer to home, let's consider the
price of water – perhaps the most precious resource that sustains our lives, next
to oxygen in the atmosphere. I believe that California's current, devastating
drought is caused in large part by the price of water being too low for way too
long – ever since the first dams were built in the early 20th century
principally to supply water to Central Valley agribusinesses and Southern
California consumers. It's true that residential, commercial and industrial
users also have benefited from paying low prices for their water. But the
biggest beneficiaries have long been agricultural (ag) irrigation users, who
all by themselves consume close to 80% of California's fresh water. And who
have paid downright benthic-level prices for decades.
For more than half a century, federal
and state water policy has been established in California and other Western
states to keep irrigators' water prices very, very low via significant government
subsidies. As Marc Reisner states in his classic book Cadillac Desert about water policies in the mostly arid West, ''What federal water development has
amounted to, in the end, is a uniquely productive, creative vandalism."
Here's a prime example of
preposterously low ag water prices, taken from Reisner's book. Through the
1980s the Westlands Water District, one of the largest in California and
therefore in the US[4], charged
its ag customers between $7.50 and $11.80 per acre-foot. Economists estimated the
actual cost of delivering this water was $97 per acre-foot. Thus, these
customers were paying only 8% to 12% of the cost of providing this resource.
This degree of public financial support is at the very deep end of the subsidy
pool. Who paid (and continues to pay) the remaining 90% of the cost? Us
taxpayers. Adding more water to this vandalism fire caused by low prices, the
dominant planted crop at the time in Westlands was cotton – a very water-thirsty,
"surplus crop" whose price is itself heavily subsidized by the
federal government. Talk about going from worse to terrible.
With its slight cost, California ag irrigators
have had no economic incentive to conserve or efficiently use water. They continued
to greedily guzzle until the rivers, reservoirs and wells have almost dried up during
this latest drought. This unsustainable water gluttony itself has also created
significant environmental damage in the Central Valley.
Water prices have finally started to increase
for ag irrigators; some of Westlands' customers are now paying over $1,000 per
acre-foot – nearly 10 times more for water than right before the drought. Irrigators'
allotments of water also have been cut– making the price of that water
infinite.
However, few if any residential
consumers are now paying more for their water. In fact, over 250,000 water users in California do not even
have meters to determine their actual water usage. These unmetered customers
are charged a flat fee, sometimes as low as $20/mo. Cities and areas where
unmetered water usage is significant include South Lake Tahoe (62% unmetered), Merced (52%) and
Sacramento (47%).
Thus, it's no surprise that we haven't
reduced our water consumption much, in spite of Gov. Jerry Brown's January declaration
to cut water use by 20%. In July 2014, statewide water usage was cut 7.5%, compared to a year ago. Southern
California consumers reduced their usage a trifling 1.7%. Is it time also to
raise non-irrigator water prices? Probably so, but it's also time to further
incentivize water conservation by giving credits to customers who have reduced
their usage more than 15% to 20% and/or installed water-saving methods.
Are water policy economists popular
when they support such needed price increases? Not at all; everyone is completely
comfortable with their long-time, subsidized, rock-bottom water prices. But
water pricing policy must change from a subsidy-based system, if existing water
resources can ever sustainably accommodate both the arid West's significant
population growth and increasing agriculture
needs. Appropriately set market-based prices can make every user recognize that
water is indeed a precious and limited
resource that must be used wisely.
But economists and other folks who
advocate for such higher prices aren't praised, they are usually disparaged. As
always, it's very hard to be loved when you're reducing people's disposable
income by increasing prices with higher taxes or reduced subsidies in the name
of efficient allocation of resources. Very few people care about efficiency once
there's less money in their wallets. So, maybe we'll never be thought of as
well as dentists. Still, it's strange that we struggle to be liked as much as
folks who grind down worn-out molars. So it goes for those of us affiliated
with the dismal science. L
[2] Recall from your Econ101 course the Law of
Demand, which states that ceteris paribus
as a product's price increases, the quantity demanded will fall. Rarely-seen
examples that dispel the Law of Demand include Giffen and Veblen goods –where as price increases the quantity
demanded of the good also increases.
[3] There is a thin sliver of conspicuous
consumers who might choose to buy certain goods because they're more expensive. We call such consumers the 1%. As
mentioned above, economists call such goods Veblen Goods – think of the Rolls
Royce Wraith.
[4] Reisner states that in the 1980s, just 1/4th
of Westlands Water District's annual available water would completely
accommodate New York City's total annual water needs.
