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The US Federal Reserve (Fed) Bank of Kansas City held its annual symposium in Jackson Hole last week [1]. Gathered there were central bankers and economist from around the world. This event has become a key date, on the global economic calendar, where central bankers discuss problems with the global economy. The discussion this year focused on the use of interest rates as a tool, by central bankers, to direct economies. 

In the past thirty years interest rates have been raised, when economies are growing too fast, and lowered when economies are growing too slow. This has proven to be a very effective tool in moving the economy in in a sustainable direction. However, more recently low interest rates are not providing the expected boost to the economy. This could be for a variety of reasons, including aging populations and high dept in developed countries, slow down in the Chines economy, increased concern about global events, grid locked politics, and overly cautious consumers who were severely burned in the last recession. The overwhelming consensus among American economist and bankers, at Jackson Hole [2,3,4,5,6], is that the Fed is reaching its limits in pushing the economy with interest rates, and that other methods such a government spending and structural changes need to be deployed.

One structural change that has been widely talked about is changing the tax rate for corporations in the US. The US currently has the highest corporate income tax rate among developed countries [7], at between 35 and 40 percent. However, this can be misleading because the US offers a lot of tax breaks. The effective tax rate, after the tax cuts, is more like 27 or 28 percent [8]. The United Kingdom has a cooperate tax rate of 20 percent, while Germany has one of 30 percent, so there is room for the US to lower its tax rate, but the positive benefits to the economy may not be as great as some suggest.

The US desperately needs investment in its infrastructure. The American Society of Civil Engineers (ASCE) gives the US eleven D's, four C's and just one B- in its infrastructure report card [9]. ASCE estimates that $3.6 trillion needs to be invested in our infrastructure by 2020! Even if we only made a modest investment of $18 billion a year, the first year would yield a $29 billion increase in GDP, and a net addition of 216,000 jobs [10]. This is because investment in infrastructure is a job generating machine, that distributes money through every sector of our economy, and leads to greater productivity. The benefits are so positive that you have to ask why we have not been doing this all along? Especially since interest rates have been so low, we could have funded much of this investment through borrowing. It would be dept that paid for it self, in the long run, because it is a good investment. 

Another possible method to invigorate our economy, that was not mentioned at Jackson Hole, is a carbon fee and dividend. This method is being promoted by Citizen Climate Lobby (CCL) [11], who is trying to get congress to pass a bill that would impose a $15 fee per ton of CO2, at its source (coal mine, refinery...) or at the boarder (for imports), and redistribute the revenue equally among all US citizens. The purpose of such a bill would be to start confronting Climate Change, but analysis of it shows that it would also have a positive impact on the economy. A report, by Regional Economic Modeling, Inc. (REMI) [12], shows that a carbon fee and dividend would add over $15 billion to the economy the first year, and over $70 billion a year by the fifth year. 

The cost on carbon would go up by $10 per ton of CO2 each year. The equivalent cost per gallon of gasoline, the first year, would be approximately 15 cents, for a fee of $15 per ton of CO2, and by the 5th year it would accumulate to 55 cents, for a fee of $55 per ton of CO2. This is well with in the range in price increases of gasoline we have experienced in the past. However, there is a very big difference, in that most people will receive more money back, through the dividend, than they pay due to increase prices. A household impact study [13] found that "overall, 72% of households experience either a net financial benefit or a minor loss of no more than 0.2% of income". This is because there is a strong correlation between income and CO2 emission, with the top 20%, income quintile, emitting three times the amount of CO2 per person, than the bottom 20%. By the fifth year, of dividends, the monthly dividend for a family of four would be over $200. This is money in the pocket, that families will spend pushing the economy forward, and creating jobs.

It is not only the economy that would benefit from implementing a fee and dividend on carbon. The most obvious benefit is that CO2 emissions would decline by 33% in the first ten years, and by 52% after 20 years. This would be a substantial step forward in confronting the causes of climate change. There would also be a health benefit, with potentially 230,000 lives saved in 20 years, due to reduced pollution. However, by far the greatest benefit would be the improved confidence of the American people. As CO2 emissions go down, people can take pride in knowing that the most difficult problems can be dealt with if we all work together. We can have confidence in our future, knowing that the greatest global problems can be confronted and solved. This would excite our imaginations and enable us to understand that our futures could be limitless.

References

  1.  https://www.kansascityfed.org/publications/research/escp
  2. http://www.nytimes.com/2016/08/29/business/economy/central-bankers-hear-plea-turn-focus-to-government-spending.html?ref=business
  3. http://www.bloomberg.com/news/videos/2016-08-26/nyu-s-henry-fiscal-policy-needs-to-step-up-to-drive-growth
  4. http://www.bloomberg.com/news/videos/2016-08-26/fed-s-powell-very-important-that-we-get-inflation-to-2-percent
  5. http://www.bloomberg.com/news/videos/2016-08-26/kaplan-fed-has-done-what-can-with-its-tools
  6. http://www.bloomberg.com/news/videos/2016-08-26/carmen-reinhart-on-post-financial-crisis-recovery
  7. http://stats.oecd.org//Index.aspx?QueryId=58204
  8. http://www.politifact.com/punditfact/statements/2014/sep/09/eric-bolling/does-us-have-highest-corporate-tax-rate-free-world/
  9. http://www.infrastructurereportcard.org/
  10. http://fortune.com/2015/10/08/americas-infrastructure-investment-taxpayers/
  11. http://citizensclimatelobby.org/ 
  12. http://citizensclimatelobby.org/remi-report/
  13. http://citizensclimatelobby.org/household-impact-study/

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