Tax cuts visualized

Much has been made of the fact that Trump’s revised tax plan cuts its implications for deficits in half (from ten to five trillion). Oddly, there’s less attention to the equity implications, which border on the obscene. Trump’s plan gives the top bracket a tax cut ten times bigger (as percentage of income) than that given to the bottom three fifths of the income distribution.

That makes the difference in absolute $ tax cuts between the richest and poorest pretty spectacular – a factor of 5000 to 10,000:


Trump tax cut distribution, by income quantile.

To see one pixel of the bottom quintile’s tax cut on this chart, it would have to be over 5000 pixels tall!

For comparison, here are the Trump & Clinton proposals. The Clinton plan proposes negligible increases on lower earners (e.g., $4 on the bottom fifth) and a moderate increase (5%) on top earners:


Trump & Clinton tax cut distributions, by income quantile.


Structure First!

One of the central tenets of system dynamics and systems thinking is that structure causes behavior. This is often described as an iceberg, with events at as the visible tip, and structure as greater submerged bulk. Patterns of behavior, in the middle, are sequences of events that may signal the existence of the underlying structure.

The header of the current Wikipedia article on the California electricity crisis is a nice illustration of the difference between event and structural descriptions of a problem.

The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a situation in which the United States state of California had a shortage of electricity supply caused by market manipulations, illegal[5] shutdowns of pipelines by the Texas energy consortium Enron, and capped retail electricity prices.[6] The state suffered from multiple large-scale blackouts, one of the state’s largest energy companies collapsed, and the economic fall-out greatly harmed GovernorGray Davis’ standing.

Drought, delays in approval of new power plants,[6]:109 and market manipulation decreased supply.[citation needed] This caused an 800% increase in wholesale prices from April 2000 to December 2000.[7]:1 In addition, rolling blackouts adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers.

California had an installed generating capacity of 45GW. At the time of the blackouts, demand was 28GW. A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price.[8][9] Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value. Because the state government had a cap on retail electricity charges, this market manipulation squeezed the industry’s revenue margins, causing the bankruptcy of Pacific Gas and Electric Company (PG&E) and near bankruptcy of Southern California Edison in early 2001.[7]:2-3

The financial crisis was possible because of partial deregulation legislation instituted in 1996 by the California Legislature (AB 1890) and Governor Pete Wilson. Enron took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California’s spot markets.[10]

The crisis cost between $40 to $45 billion.[7]:3-4

This is mostly a dead buffalo description of the event:


It offers only a few hints about the structure that enabled these events to unfold. It would be nice if the article provided a more operational description of the problem up front. (It does eventually get there.) Here’s a stab at it:


A normal market manages supply and demand through four balancing loops. On the demand side, in the short run utilization of electricity-consuming devices falls with increasing price (B1). In the long run, higher prices also suppress installation of new devices (B2). In parallel on the supply side, higher prices increase utilization in the short run (B4) and provide an incentive for capacity investment in the long run (B3).

The California crisis happened because these market-clearing mechanisms were not functioning. Retail pricing is subject to long regulatory approval lags, so there was effectively no demand price elasticity response in the short run, i.e. B1 and B2 were ineffective. The system might still function if it had surplus capacity, but evidently long approval delays prevented B3 from creating that. Even worse, the normal operation of B4 was inverted when Enron amassed sufficient market power. That inverted the normal competitive market incentive to increase capacity utilization when prices are high. Instead, Enron could deliberately lower utilization to extract monopoly prices. If any of B1-B3 had been functioning, Enron’s ability to exploit B4 would have been greatly diminished, and the crisis might not have occurred.

I find it astonishing that deregulation created such a dysfunctional market. The framework for electricity markets was laid out by Caramanis, Schweppe, Tabor & Bohn – they literally wrote the book on Spot Pricing of Electricity. Right in the introduction, page 5, it cautions:

Five ingredients for a successful marketplace are

  1. A supply side with varying supply costs that increase with demand
  2. A demand side with varying demands which can adapt to price changes
  3. A market mechanism for buying and selling
  4. No monopsonistic behavior on the demand side
  5. No monopolistic behavior on the supply side

I guess the market designers thought these were optional?

An unwinnable arms race

It seems that we Americans are engaged in an arms race with our own government. Bozeman is the latest to join in, with its recent acquisition of an armored vehicle:

armoredArms races are an instance of the escalation archetype, where generally the only winning strategy is not to play, but it’s particularly foolish to run an arms race against ourselves.

Here’s how it works:
The police (left) and citizens (right) each have stocks of weapons and associated skills and attitudes. Each “side” adjusts those stocks toward a desired level, which is set by various signals.

Citizens, for example, see media coverage of school shootings and less spectacular events, and arm themselves against their fellow citizens and against the eventuality of totalitarian government. A side effect of this is that, as the general availability of weapons increases, the frequency and scale of violent conflict increases, all else equal. This in itself reinforces the citizen perception of the need to arm.

The government (i.e. the police) respond to the escalation of violent conflict in their own locally rational way as well. They acquire heavy weapons and train tactical teams. But this has a number of side effects that further escalate conflict. Spending and training on paramilitary approaches necessarily comes at the expense of non-violent policing methods.

Lester said he’s concerned about the potential overuse of such commanding vehicles among some police departments, a common criticism in the wake of the Ferguson protests.“When you bring that to the scene,” he said, “you bring an attitude that’s not necessarily needed.”

Accidents happen, and the mere availability of heavy armor encourages overkill, as we saw in Ferguson. And police departments are not immune to keeping up with the Joneses:

“For a community our size, we’re one of the last communities that does not have an armored rescue vehicle,” he said.

This structure is a nest of reinforcing feedback loops – I haven’t labeled them, because every loop above is positive, except the two inner loops in the acquisition/militarization stock control processes.

Strangely, this is happening at a time in which violent crime rates are trending down. This means that the driver of escalation must be more about perceptions and fear of potential harm than about actual shooting incidents.

Carrying the escalation to its conclusion, one of two things has to happen. The police win, and we have a totalitarian state. Or, the citizens win, and we have stateless anarchy. Neither outcome is really a “win.”

The alternative is to reverse the escalation, and make the reinforcing loops virtuous rather than vicious cycles. This is harder than it should be, because there’s a third party involved, that profits from escalation (red):
Arms makers generate revenue from weapon sales and service, and reinvest that in marketing, to increase both parties desired weapons, and in lobbying to preserve the legality of assault weapons and fund the grant programs that enable small towns to have free armor.
Fortunately, there is a remedy. Voters can (at least indirectly) fire the Bozeman officials who “forgot” to run the armored vehicle acquisition through any public process, and defund the Homeland (In)Security programs that bring heavy weapons to our doorsteps.

The difficult pill to swallow is that, for this to work, citizens have to de-escalate too. Reinstating the assault weapons ban is messy, and perhaps ineffective given the large stock of weapons now widely distributed. Maybe the first change should be cultural: recognizing that arming oneself to the teeth is a fear-driven antisocial response to our situation, and that ballots are a better solution than bullets.

GDP's … something?

While the government is shut down, it seems like a good time for a rousing round of Alan Atkisson‘s GDP Song:

The shutdown means GDP measurements are on ice, which is not all bad, though we can expect a 15 basis point drag on GDP per week to include some real harm.

Shutting down our measurement systems strikes me as alarmingly close to turning off the instruments on the flight deck of a plane, due to a route dispute between the pilot and copilot.

Tax time

It’s time* for environmentalists (and everyone else) to give up on a myriad of second-best regulatory policies and push for a simple emissions price (i.e. a carbon tax). The latest reason: green subsidies are unraveling under adverse energy market conditions. There are many others:

All of the above have some role to play, but without prices as a keystone economic signal, they’re fighting the tide. Moreover, together they have a large cost in administrative complexity, which gives opponents a legitimate reason to whine about bureaucracy and promotes regulatory capture.

If all the effort that’s now expended in fragmented venues to create these policies were focused on one measure, would it be enough to pass a significant emissions price with fair revenue recycling and a border adjustment? I don’t know for sure, but I’d like to see us try.

* Actually, I think it was time for a carbon tax at least 20 years ago.

EU ETS on the ropes

The EU declined backloading, a deferral of permit auctions that would have supported prices in the Emissions Trading System (ETS).

This is described imminent collapse to the system, threatening the achievement of emissions targets. Perhaps a political collapse is imminent – not my department – but the idea that low emissions prices threaten the system is a bit odd. The ETS price is a feedback mechanism. Low prices are a symptom, indicating that the marginal cost of meeting targets is extremely low. That should be a cause for celebration (except for traders).

For the umpteenth time, this shows the difficulty of running a system that invites wrangling over allocation and propagates noise from the economy into a market.

Meanwhile, carbon taxes grind away at their job.

Greek oil taxes – the real story

A guest post from Ventana colleague Marios Kagarlis, who writes about the NYT article on Greek heating oil taxes:

The problems in Greece are interdependent and all have their roots at the fact that the model of government that has been the status quo in Greece since WWII isn’t working and needs radical change, but the people who run the system know no other way, so the problems keep compounding with no solution in sight.There used to be two tiers of taxation for oil: one was for heating oil, which was relatively low, and the other was for oil used for all other purposes (e.g. for diesel cars etc) which was taxed at about 100% over the fuel cost.

Because of the inability of the government institutions to enforce the laws in Greece (which on paper are tough but in practice are not enforced because the system is incompetent), there has been widespread abuse of this: from refineries to gas stations, many oil merchants have been branding diesel as heating oil to evade the tax, and then selling at as non-heating oil, doubling their profit and ripping off both the consumers and the government.

The government has for years been attempting (supposedly) to crack down on this, with pitiable results. The international lenders have demanded from the Greek government, as a precondition for the continuation of the bailout installments paid every now and then (essentially going in their entirety toward servicing past debt, as opposed to relieving the economy), to crack down on tax evasion via illegal diesel sales of ‘heating oil’ as non-heating diesel. Because the tax collection system is broken and cannot control the diesel market or collect the taxes due, the Greek government had to do something quickly to meet the lenders’ demands. And this was the best they could come up with…

So they finally decided to do away with the two separate tiers of taxation and tax all oil as non-heating oil. To make up for the huge rise in cost to the end consumer they established obscure and bureaucratic criteria for lower income families to submit applications to the government for partial reimbursement of the extra tax, the idea being that this would deprive the sellers from a means to cheat and would still enable end consumers in need to get reasonably priced heating oil after reimbursements. However this didn’t work and instead people just massively stopped using oil for heating, which is by far prevalent in Greece (another government failure, for a country with no oil resources and lots of sun and wind). There are entire older building blocs in cities that were built without fireplaces (which up until recently in modern city apartments were more of a symbol of affluence than of any practical use – people essentially never using them) that have just turned off heating altogether, and fights amongst tenants are commonplace for disagreements over whether to turn on heating or not (which in older buildings is collective so it’s heating for all or for none). Those who cannot afford it just don’t pay so sooner or later most buildings in working class neighborhoods are forced to abandon central heating and sustain the cold or improvise.

Because the government again hadn’t foreseen any of this, and wood burning was never particularly widespread in Greece, there had not been standards for wood or pellet burning stoves. So the market is flooded with low quality wood-burning stoves which are totally inefficient and polluting. So suddenly from December the larger cities in Greece are filled with smog and particulates for the first time from inefficient wood-burning stoves, and from burning inappropriate wood (e.g. people burn disused lacquered furniture at their fireplaces, which is very polluting). Cases of asthma and respiratory illnesses in the larger cities since December have skyrocketed. In the meantime forests and even city parks are raided daily by desperate unemployed people who cannot afford heating (especially in northern Greece), who cut down any trees they can get their hands on.

It’s hard to see that there can be any short term solution to this, in the middle of the worst economic crisis Greece has faced since WWII.

Marios lives in Athens.

Oil tax forces single cause attribution folly

A silly NYT headline claims that Rise in Oil Tax Forces Greeks to Face Cold as Ancients Did.

The tax raised the cost of heating oil 46%, which hardly sends Greece back to the Bronze Age. Surely the runup in crude prices by a factor of 5 and a depression with 26% unemployment have a bit to do with the affordability of heat as well?  And doesn’t the unavailability of capital now make it difficult for people to respond sensibly with conservation, whereas a proactive historic energy policy would have left them much less vulnerable?

The kernel of wisdom here is that abrupt implementation of policies, or intrusion of realities, can be disruptive. The conclusion one ought to draw is that policies need to anticipate economic, thermodynamic, or environmental constraints that one must eventually face. But the headline instead plays into the hands of those who claim that energy taxes will doom the economy. In the long run, taxes are part of the solution, not the problem, and it’s the inability to organize ourselves to price externalities that will really hurt us.

Update: the real story.

Et tu, EJ?

I’m not a cap & trade fan, but I find it rather bizarre that the most successful opposition to California’s AB32 legislation comes from the environmental justice (EJ) movement, on the grounds that cap & trade might make emissions go up in areas that are already disadvantaged, and that Air Resources failed to adequately consider alternatives like a carbon tax.

I think carbon taxes did get short shrift in the AB32 design. Taxes were a second-place favorite among economists in the early days, but ultimately the MAC analysis focused on cap & trade, because it provided environmental certainty needed to meet legal targets (oops), but also because it was political suicide to say “tax” out loud at the time.

While cap & trade has issues with dynamic stability, allocation wrangling and complexity, it’s hard to imagine any way that those drawbacks would change the fundamental relationship between the price signal’s effect on GHGs vs. criteria air pollutants. In fact, GHGs and other pollutant emissions are highly correlated, so it’s quite likely that cap & trade will have ancillary benefits from other pollutant reductions.

To get specific, think of large point sources like refineries and power plants. For the EJ argument to make sense, you’d have to think that emitters would somehow meet their greenhouse compliance obligations by increasing their emissions of nastier things, or at least concentrating them all at a few facilities in disadvantaged areas. (An analogy might be removing catalytic converters from cars to increase efficiency.) But this can’t really happen, because the air quality permitting process is not superseded by the cap & trade system. In the long run, it’s also inconceivable that it could occur, because there’s no way you could meet compliance obligations for deep cuts by increasing emissions. A California with 80% cuts by 2050 isn’t going to have 18 refineries, and therefore it’s not going to emit as much.

The ARB concludes as much in a supplement to the AB32 scoping plan, released yesterday. It considers alternatives to cap & trade. There’s some nifty stuff in the analysis, including a table of existing emissions taxes (page 89).

It seems that to some extent ARB has tilted the playing field a bit by evaluating a dumb tax, i.e. one that doesn’t adapt its price level to meet environmental objectives without legislative intervention, and heightening leakage concerns that strike me as equally applicable to cap & trade. But they do raise legitimate legal concerns – a tax is not a legal option for ARB without a vote of the legislature, which would likely fail because it requires a supermajority, and tax-equivalent fees are a dubious proposition.

If there’s no Plan B alternative to cap and trade, I wonder what the EJ opposition was after? Surely failure to address emissions is not compatible with a broad notion of justice.

Wedge furor

Socolow is quoted in Nat Geo as claiming the stabilization wedges were a mistake,

“With some help from wedges, the world decided that dealing with global warming wasn’t impossible, so it must be easy,” Socolow says.  “There was a whole lot of simplification, that this is no big deal.”

Pielke quotes & gloats:

Socolow’s strong rebuke of the misuse of his work is a welcome contribution and, perhaps optimistically, marks a positive step forward in the climate debate.

Romm refutes,

I spoke to Socolow today at length, and he stands behind every word of that — including the carefully-worded title.  Indeed, if Socolow were king, he told me, he’d start deploying some 8 wedges immediately. A wedge is a strategy and/or technology that over a period of a few decades ultimately reduces projected global carbon emissions by one billion metric tons per year (see Princeton website here). Socolow told me we “need a rising CO2 price” that gets to a serious level in 10 years.  What is serious?   “$50 to $100 a ton of CO2.”

Revkin weighs in with a broader view, but the tone is a bit Pielkeish,

From the get-go, I worried about the gushy nature of the word “solving,” particularly given that there was then, and remains, no way to solve the climate problem by 2050.

David Roberts wonders what the heck Socolow is thinking.

Who’s right? I think it’s best in Socolow’s own words (posted by Revkin):

1. Look closely at what is in quotes, which generally comes from my slides, and what is not in quotes. What is not in quotes is just enough “off” in several places to result in my messages being misconstrued. I have given a similar talk about ten times, starting in December 2010, and this is the first time that I am aware of that anyone in the audience so misunderstood me. I see three places where what is being attributed to me is “off.”

a. “It was a mistake, he now says.” Steve Pacala’s and my wedges paper was not a mistake. It made a useful contribution to the conversation of the day. Recall that we wrote it at a time when the dominant message from the Bush Administration was that there were no available tools to deal adequately with climate change. I have repeated maybe a thousand times what I heard Spencer Abraham, Secretary of Energy, say to a large audience in Alexandria. Virginia, early in 2004. Paraphrasing, “it will take a discovery akin to the discovery of electricity” to deal with climate change. Our paper said we had the tools to get started, indeed the tools to “solve the climate problem for the next 50 years,” which our paper defined as achieving emissions 50 years from now no greater than today. I felt then and feel now that this is the right target for a world effort. I don’t disown any aspect of the wedges paper.

b. “The wedges paper made people relax.” I do not recognize this thought. My point is that the wedges people made some people conclude, not surprisingly, that if we could achieve X, we could surely achieve more than X. Specifically, in language developed after our paper, the path we laid out (constant emissions for 50 years, emissions at stabilization levels after a second 50 years) was associated with “3 degrees,” and there was broad commitment to “2 degrees,” which was identified with an emissions rate of only half the current one in 50 years. In language that may be excessively colorful, I called this being “outflanked.” But no one that I know of became relaxed when they absorbed the wedges message.

c. “Well-­?intentioned groups misused the wedges theory.” I don’t recognize this thought. I myself contributed the Figure that accompanied Bill McKibben’s article in National Geographic that showed 12 wedges (seven wedges had grown to eight to keep emissions level, because of emissions growth post-­?2006 and the final four wedges drove emissions to half their current levels), to enlist the wedges image on behalf of a discussion of a two-­?degree future. I am not aware of anyone misusing the theory.

2. I did say “The job went from impossible to easy.” I said (on the same slide) that “psychologists are not surprised,” invoking cognitive dissonance. All of us are more comfortable with believing that any given job is impossible or easy than hard. I then go on to say that the job is hard. I think almost everyone knows that. Every wedge was and is a monumental undertaking. The political discourse tends not to go there.

3. I did say that there was and still is a widely held belief that the entire job of dealing with climate change over the next 50 years can be accomplished with energy efficiency and renewables. I don’t share this belief. The fossil fuel industries are formidable competitors. One of the points of Steve’s and my wedges paper was that we would need contributions from many of the available option. Our paper was a call for dialog among antagonists. We specifically identified CO2 capture and storage as a central element in climate strategy, in large part because it represents a way of aligning the interests of the fossil fuel industries with the objective of climate change.

It is distressing to see so much animus among people who have common goals. The message of Steve’s and my wedges paper was, above all, ecumenical.

My take? It’s rather pointless to argue the merits of 7 or 14 or 25 wedges. We don’t really know the answer in any detail. Do a little, learn, do some more. Socolow’s $50 to $100 a ton would be a good start.


a. “It


b. “The