This summer, my favorite podcast Planet Money is doing its most recent version of an “economics 101” series they have done the past couple of years called Planet Money Summer School.
First, if you don’t listen to Planet Money, start. It is the best public policy podcast out there, and it isn’t even a public policy podcast. The podcast started as a National Public Radio show in the wake of the Great Recession. The idea: talk about economics…in a way that isn’t completely boring. In this way, Planet Money is trying to do the same thing Scioto Analysis is–though they are admittedly a little better at it than we are.
Why I call Planet Money the best public policy podcast out there is that they are constantly talking about the public policy implications of topics they cover. I don’t think this is necessarily something the reporters on the show set out to do initially, but I think it’s a natural outgrowth of reporting on the economy. It is impossible to cover the economy without covering how the public sector interacts with it. As much as people want to paint the U.S. economy as a privatized economy, the economy is decidedly mixed, with the public sector intervening in private markets through regulations, subsidies, taxes, enforcing property rights, certification, and a number of other avenues.
This summer’s Planet Money Summer School is focused specifically on this topic: how government interacts with the economy. This has made it a bit of a crash course in public policy analysis, especially given that economics is our main framework for conducting public policy analysis.
I was surprised about this when I first enrolled in graduate school. I do not know exactly what I was expecting when I first enrolled in the University of California, Berkeley’s Graduate School of Public Policy, but two courses of microeconomics was not exactly what I thought I would encounter. I found myself confused by why we spent so much time on economics and not much time on philosophy and political economy.
Ultimately, I came around to it. Aaron Wildavsky, the original founder of Berkeley’s public policy school, settled on a curriculum of microeconomics and statistics when starting the school, figuring an education in accounting and management would be too redundant with education students would learn on the job and that an education in political economy and philosophy would be too abstract to be useful to aspiring analysts. Microeconomics and statistics allowed analysts to construct models that could be used to understand how public policies work and what they do to the economy and, by proxy, people’s lives.
This Planet Money Summer School has been a great reminder of this to me. The episode I listened to the other day was on taxes. The episode was over 37 minutes long–quite long for a Planet Money episode. But this topic is so important. In the United States, one in every four dollars in the economy is collected in taxes, filtering through the public sector. The way these taxes are designed has a significant impact on the economy as a whole.
One segment of the story made my ears perk in particular: the segment covering Pigouvian taxes. Pigouvian taxes are taxes named after Early 20th-Century Economist Arthur Pigou, a father of welfare economics. He developed a theory of market failure that undergirds many public policy and public sector economics, the theory of externalities.
The main thrust of the theory of externalities is that there are certain economic transactions that happen where the consumer and the producer are not the only parties affected by the transaction. If someone purchases electricity from a coal-fired power plant, the consumer pays the producer for energy. This means the consumer gets energy and the producer gets money. Children who play in the park downwind from the power plant get the nitrous oxide and particulate matter emissions from the plant in their lungs.
From an economic standpoint, this means that the social costs of the transaction exceed the private costs. So while markets are efficient systems for allocating resources when goods are purely private, when trade in goods generate these external costs (“externalities”), social costs exceed private costs, incentivizing producers to overproduce and consumers to overconsume the good due to costs being unloaded on third parties.
Pigou had a theory for how to fix this problem: tax goods that have negative externalities. This tax then brings the private cost in line with the public cost, making the market efficient, and generating revenue for the public sector as a bonus.
This theory has gone on to be incredibly influential in public policy over the past century, being the major theory undergirding carbon taxes, providing a framework for taxing secondhand smoke and the external costs of alcohol, and inspiring contemporary policies like Manhattan’s new congestion fee. These are all forms of Pigouvian taxation.
What I found most compelling about this Planet Money episode, though, was the suggestion for a Pigouvian tax put forth by guest Derrick Hamilton.
I first came across Derrick Hamilton when he came to my home of Columbus, Ohio to serve as the director of the Kirwan Institute, a data and racial equity institute at Ohio State University. At the time, he was talking about baby bonds, the idea that the public sector should put a certain number of dollars toward every new child that then grows in value until they are awarded it at age 18.
During the Planet Money episode, he was asked what Pigouvian tax he would want to put in place. His answer? Junk mail. You get mail sent straight to your home that (1) is not good for the environment, and (2) requires you to go through the work of sorting and throwing away. Both of these are external costs incurred by society not currently captured by junk mail.
I hate junk mail. I hate that we have advanced to the point where we can do most of our mail communication electronically and yet I still have a chore I have to do daily of throwing away unwanted solicitations in my mail. This seems like a fair use of our tax system, and a smart one, too. Why not give us our time back, save the environment, and raise more public funds to boot?
Pigouvian taxation is an incredible tool. I would love to see it unleashed on one of my worst enemies: unwanted paper in my mailbox. Can you think of a new Pigouvian tax we could put in place?