senate-finance

With official U. S. unemployment at 10.2% and with Congressional debate on a climate bill sputtering, last week the Senate Finance Committee held a hearing on how climate legislation might help fix the economy and create jobs. At the same time, President Obama announced he would hold a White House forum next month to gather new ideas for achieving the robust job creation that has so far eluded stimulus efforts, and opponents and supporters of cap-and-trade legislation both echoed the jobs theme, saying that in the end, any US climate bill must be a jobs bill. These are promising developments that may point the way to an effective climate policy. Because with them, the crucial enabling connection between creating jobs and fighting climate change has finally entered explicitly into our politics. I say “finally” because throughout most of 2009, even as the economy hemorrhaged some 3.8 million jobs, while they were framing proposals for climate change legislation, most members of Congress and their staffs were curiously reluctant to broach the obvious jobs connection. They expressed lots of concern over the impact of regulating carbon on energy producers, coal states and carbon emitters, but very little about its impact on jobs and workers in general. (President Obama’s 2010 budget proposal was a notable exception; it plowed carbon permit revenues back into a payroll tax credit to help working families, but unfortunately that provision didn’t pass Congress) . But it’s not that surprising the jobs dimension of the climate debate has been relatively muted until recently, considering the federal government doesn’t like to be explicit about the true extent of unemployment, either. Unemployment is much worse than official statistics suggest. That official 10.2% rate represents only a fraction of the adult population that is not working; the total figure is closer to 40%. BLS statistics show that of the total non-institutionalized adult population of 235 million, only about 140 million, or about 60%, are working. Officially, there are 15 million unemployed; unofficially, the true number of unemployed is roughly five times higher. But double-digit unemployment crosses an undeniable perceptual threshold in the public’s mind. When we hit it, the political rhetoric around the climate bill shifted, and the jobs connection was finally made explicit. Acknowledged or not, it’s been clear for a long time that in order for climate legislation to pass, it must not exacerbate job loss, and that for it to make sense, it should take advantage of this once-a-century opportunity for retooling the economy to optimize job gain. In October the CBO released a study projecting a net job loss from the climate legislation bill that passed the House. It contradicted the findings of a report released by the Center for American Progress which projected a net job gain. The projections are contentious politically, hence the Senate Finance Committee hearing last week. Part of the debate is about whether a US cap and trade system could in effect create more “green” jobs than “non-green” it destroys, whether it will ultimately grow the economy or shrink it. But there is a more fundamental principle involved than whether the particular cap-and-trade mechanism in the House bill or in Senate proposals can create a certain number of jobs. At the heart of the matter is one of the most basic decisions societies make: how to manage the fundamental tradeoff between the two primary factors of production — labor utilization vs. resource consumption. The two aren’t quite a zero sum, but in general, they are substitutes for one another. The more natural resources such as energy and materials a business uses, the more labor it “saves,” and vice versa. Ideally, in a market economy the two should find an optimal balance. But for decades, through taxation and other interventions, we have pushed our thumb down hard on the scale, and tilted it steeply in favor of employing things over people. Even when U. S. joblessness is obviously deeply damaging our economy, not to mention our communities and families, we continue to define “productivity” in terms of how little labor we can use, and Wall Street can still rally on bad jobs reports. As a result our economy consumes natural resources very aggressively. At the same time, US policy actively discourages labor demand. More or less by accident, we have sent a giant “use things, not people” price signal as payroll taxes have increased from 1% to almost 40% of federal revenues over the last several generations. This raises hiring costs, lowers employment, and hands an effective subsidy to resource consumption, skewing the relative prices of labor vs. resources over 30%. The human impact of this is enormous. The potential contributions of tens of millions of people are wasted (hundreds of millions worldwide), studies show the health of sidelined workers and unemployed retirees suffers, and a whole host of social ills arises, from crime to students who see no future, with debilitating costs to individuals, business, and government. The climate impact is equally enormous. The effective subsidies favoring resource consumption and discouraging hiring mean we are burning a lot more fuel, tearing up more land and emitting a lot more carbon, than if the relative prices of labor and resources were corrected, and we produced utilizing far more people and far fewer natural resources. That’s the bad news, and it’s also the good news. It suggests that if we reverse the current price signals, we can also reverse the perverse incentives that drive joblessness and over consumption of energy and resources. We can do this by taking the tax burden off payrolls and therefore employment, and putting it instead on energy waste and resource consumption. OECD countries that have cut their payroll taxes substantially boosted employment and lost fewer jobs in the downturn than countries which didn’t, like ours. This week The Economist magazine recommended the U.S. adopt a similar policy. If we cut payroll taxes and replaced the lost revenue with levies on non-labor inputs to business, such as a non-labor Value Added Tax (VAT), carbon permit fees and/or energy taxes, we could create tens of millions of jobs and stimulate economic growth while deeply cutting natural resource use and emissions. Such tax switching is a revenue-neutral approach that involves no net increase in taxes. It also creates no bureaucracies, choosing of winners or losers, implementation delays, or risk of corruption. It is, not surprisingly, attractive to smart conservatives and liberals alike. Recent advocates range from Charles Krauthammer to Thomas Friedman, Al Gore to Richard Lugar and T. Boone Pickens. This year Rep. Bob Inglis (R-SC) and Rep. John Larson (D-CT) both introduced climate change bills that recycle over 90% of carbon pricing revenues into payroll tax cuts. That’s a hint of this approach’s broad appeal. It would align the relatively small contingent of committed environmentalists who want strong action on climate with the huge constituency of the tens of millions of Americans of all backgrounds who need a job and the hundreds of millions who want a stronger economy. Whereas now, climate negotiations are fractious and expectations from Copenhagen and Washington are depressingly low, such a coalition for real economic and environmental change would be unstoppable and allow us to aim higher. To fight climate change, we need concrete goals — return to 350 ppm atmospheric carbon, achieve 80% GHG reduction by 2050, hold global warming to an average of 2 degrees Celsius, etc. If we are serious about reaching them, we must add another fundamental one — create tens of millions of jobs by reorienting our economy and our tax structure towards engaging more people and using fewer things.