Mankiw on Fairy Godmotherism
As a former energy secretary during the Clinton administration, Richardson has presumably studied these issues. But here he demonstrates extraordinary ignorance (or perhaps extraordinary disingenuousness) about the economic impact of cap-and-trade systems. By contrast, Obama shows extraordinary clarity and honesty about the effects of the policy he is proposing.
The economics is straightforward and uncontroversial. Both carbon taxes and cap-and-trade systems put a price on carbon, raising the cost of producing carbon-intensive products such as gasoline. In both cases, this cost will be passed on to consumers. The government can, however, raise revenue through a carbon tax or auction and use that revenue to reduce other taxes and help offset the adverse income effect.
In case you are curious, Hillary Clinton is the next speaker on this question, but she does not weigh in on the particular issue of carbon taxes vs cap-and-trade. Instead, she offers the typical vacuous blather about requiring utility companies to help us all become more energy efficient. I think of this as “magic-wand economics.” Like your fairy god mother, the President can wave a magic wand and make your problems go away.
Fairy godmothers are way cool. When you want something, all you have to do is wish real hard. For example, you could just say, “I wish that we could have affordable health care for everyone” and … bibitty-bobitty-boo … it’s done!
Economists of the Mankiw ilk often deny that fairy godmothers exist. It makes them unpopular–the economists, that is. The fairy godmothers are extremely popular.
By the way, Alex Tabarrok seems to have seen the same debate that Mankiw watched.