Monday, January 19, 2009

Killing Negative Externalities and Improving Bank Balance Sheets

1) ~20% of Americans smoke. Smoking is horrible for your health. This devastates Medicare (who we all pay for and who has to pay for smoking-related health issues), jobs where smokers work, smokers themselves and smokers' families. All around, a no-win.

2) Trans-fats cause heart disease and stroke, the number 1 and 3 (I believe) killers of Americans. See problem 1.

3) We are addicted to foreign fossil fuels, leaving us with no energy security and producing enough carbon to cause global warming whose effects we can't predict well but we can be pretty certain are negative.

4) We're in the middle of one of the worst economic crises since the Great Depression.

Levy taxes on:
CO2 emissions,
roads (tolls),
incandescent (non-CFL) lightbulbs,
water bottles,
single-pane windows,
cigarettes/smokeless tobacco

As an offset, we reduce income taxes across the board.

Additionally, subsidize:
water filters (to replace water bottles),
compact fluorescent lightbulbs,
double+ pane windows
electricity derived from wind, solar, tidal, geothermal or (arguably) natural gas sources.

We want people to smoke less, eat less trans fats and generate less carbon. We also want people to have more money in their pocket. Tax producers of cigarettes and packs of cigarettes, tax corporations for trans-fats in their foods, tax consumers for anything carbon-emission heavy, and then give money back in the form of income taxes and subsidies on alternatives. No overall economic income effect, large substitution effect away from products with big negative externalities.

Taxing these goods and giving people more of their income may increase savings rates. While traditionally, that's bad for recessions because savings don't stimulate an economy, in this particular case, banks are having balance sheet trouble, which seems to be prolonging the recession by creating credit trouble. Savings are therefore not a bad thing and could do a lot to stabilize the economy.

I'm sure people are wondering about the water bottles, windows and the light bulbs. Water bottles consume MUCH more energy than water filters on taps, non-CFLs consume much more energy than CFLs, and double-pane windows are much more energy efficient than single-pane windows. There's not much impact on most people by making these substitutions, so it makes them easy to implement.

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