I leave the country and now they’re losing to Detroit? Seriously? Oy.

Meanwhile, last night I watched Hamburg defeat FC Bayern. The bar had a heavy pro-Hamburg tilt, though I couldn’t really say way. Anyways, I’m a Hamburg fan now, I suppose.

Angela Merkel wound up winning a strange kind of election victory, the kind where your party gets less support than it got before. Still, the CDU’s support only went down a little while the Social Democrats’ support collapsed and the liberal (in a European sense) Free Democrats gained a lot. The Greens and the Left Party also picked up support. The result is going to be some controversial free market reforms for Germany (I think the evidence suggests that most Germans actually don’t want the kind of reforms that this election result will lead to) and a real moment of crisis for the SPD that needs to really rethink some things:

I note that following on the European Parliament election results and some other national results, there seems to be a continent-wide crisis of social democracy. In a great many countries, social democrats are really getting squeezed by rising far-left parties and the fact that Europe’s center-right parties tend to be inconveniently non-crazy.

It’s also noteworthy that this will lead to FDP leader Guido Westerwelle taking over as Foreign Minister of Germany. He’s openly gay and a big believer in tax cuts. I don’t think the world has ever had an out gay man in such a senior role in a major country. He’s also really not a foreign policy guy at all. But German tradition dictates that the leader of the number two party in the coalition become Foreign Minister irrespective of his background and experience.

In an unfortunate coincidence, the libertarianish Free Democratic Party color scheme, when applied to an umbrella advertising a campaign literature booth, looks exactly like a New York City hot dog stand:

Relatedly, it turns out that when you amble around the Alexanderplatz area on a bicycle all the other tourists ambling around on foot think you actually live in Berlin and want to stop and ask you for directions.

Yesterday, Paul Krugman explained something that I bet could use a little more explaining for most people:

Now, a key point in all this is that the emissions tax or, equivalently, the rent on emissions permits, does not represent a net loss to society. It’s just a transfer from one set of people to another — from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated. The only net loss is the Harberger triangle created by the reduction in emissions — which has to be set against the benefits of reduced pollution.

What’s a Harberger Triangle? Well, here’s a good illustration:

What’s that showing us? Well, when a market is in equilibrium you have some supply of goods being sold at a certain price. The reason people are buying the stuff in question is that the stuff is worth more to them than the money it costs. That’s the “consumer surplus.” And the reason people are selling the stuff in question is that the stuff is worth less to them than the money they can earn from selling it. That’s the “producer surplus.” If the government puts a new tax on the stuff, then the price goes up and the quantity sold goes down.

That reduces the consumer surplus and the producer surplus. But that lost surplus doesn’t just vanish, it’s basically being taken by the government and turned into tax revenue and public expenditures. But it’s not all taken by the government; some fraction of it—the triangle represented by D and E in the chart—really does just vanish. That’s the “deadweight loss” the value, to producers and consumers alike, of transactions that would have happened at the un-taxed price but didn’t happen at the taxed price. This, rather than the “cost” in taxes paid, represents the real social cost of a new tax.

But of course how much deadweight loss there is depends on the actual shape of the supply and demand curves. That chart has nice-looking straight lines. But in the real world it just depends. Different taxes have different degrees of deadweight loss. What’s more, the loss can be apportioned differently between producers and consumers. And a certain kind of tax could have a small deadweight loss at one level and a huge one at another level depending, again, on the shape of the supply and demand curves.

When you talk about a cap-and-trade system rather than a tax, you get all these same issues with consumer and producer surplus and deadweight loss. But instead of automatic revenue, you get rents associated with acquisition of carbon permits. And a key issue in policy design becomes how allocate those rents. One popular with industry proposal is to give them to industry for free. This basically compensates industry for the lost producer surplus, and in principle could actually be better for producers than the status quo ante was.

Alternatively, you could sell the permits and rebate the money to citizens—compensating consumers for the lost consumer surplus. There’s pretty good reason to believe that this would actually leave most people with more money in their pockets than they have under the status quo.

You could also auction the permits, have the government keep the money, and use the funds to reduce some other tax. If that tax has a higher deadweight loss associated with it than does the carbon cap, the overall economic cost of the carbon cap will be negative. And there’s actually pretty good reason to believe that permit auctions would be more economically efficient than many of the taxes we currently rely on, so as an abstract matter of policy design it would be relatively easy to design a pro-growth carbon cap regime. The dual problems are that the distributive consequences of going this route might be bad, and politically a tax swap is hard to pull off.

That said, as I was saying yesterday this idea is really laying out there in the street waiting for a political movement that (a) doesn’t mind redistributing wealth upwards, (b) likes to complain about the adverse economic consequences of taxes, and (c) would like to do something about climate change. We have a movement in the USA that fits (a) and (b) quite nicely, but their opposition to (c) is unfortunately so robust that they’ve somehow managed to forget everything they normally say about tax policy issues in order to concoct a theory to support the conclusion that a carbon cap would necessarily be economically ruinous.

Went to the Pergamon Museum yesterday and as I stood before the very impressive Ishtar Gate I couldn’t help but think to myself “If Iraq ever does emerge as a stable democracy whose government is a well-respected member of the community of nations, they’re probably going to want their awesome antiquities back.”

Later poking around elsewhere in the museum I found a sign that was sort of whining about how the Soviets stole a bunch of artifacts after WWII and then made a big show of returning them to the East German government in the early fifties but actually kept some stuff. Well, you can see why the Germans might not be thrilled with that outcome, but considering that they themselves carted all these artifacts off from foreign lands in the first place I’m not sure how much standing they really have to complain. Not that Germans were the only ones doing that (certainly some ill-gotten gains in Paris and London museums) but no honor among thieves, etc.

That said, the ups-and-downs of European conquest over the years have probably made museum-going an all-around better experience. Spain used to rule the Low Countries and parts of Italy so the big art museum in Madrid has paintings by Dutch and Italian masters along with the Spanish ones. That makes it a more interesting place than it otherwise would be, and Italy and it’s not like anyone stands around in the Rijksmuseum saying to themselves “I wish there were some more Dutch paintings here.” Similarly, had Jacques-Louis David not been hounded out of France by the Terror, The Death of Marat wouldn’t be in Brussels where it came as a much more unexpected surprise than it would have been in a French museum.

(cc photo by Robert Stinett)

A suggestion from a friend of James Fallows:

As an aside: I’ve long thought it would be an interesting commentary on the stratification in this society to have political candidates asked during a debate if they’d ever shopped at a Wal-Mart. I have to think that very few could honestly answer yes–and the higher the office the fewer the yeses. To think that a democracy’s leadership class should have no connection (other than owning stock–or, in Hillary Clinton’s case, being once on its board) to the biggest corporation in the country, how strange!Bback when the biggest corporation was GM or Exxon, even the wealthiest people likely had *some* dealings with it, even only being chauffered in a cadillac.

I think this is a much less clever suggestion than the suggester thinks. I’m about as much of an out-of-touch northeastern elitist as you’re going to find and I’ve been to Wal-Mart several times. In good out-of-touch northeastern elite fashion, it’s always been when I’m on vacation the Outer Banks or in Maine, but still I’ve been. These stores constitute a huge proportion of the retail available in the large non-dense portions of the country and anyone who travels around at all is bound to wind up in one. I’d bet that the biggest “never been to a Wal-Mart” demographic in the country would consist of very poor inner city dwellers who lack the means to drive to one but would benefit from the low prices.

Probably a better Wal-Mart related social stratification question would be to ask people if any of their friends and family work at Wal-Mart or did so recently and in what capacity. Over a million people work at Wal-Mart, most of them in low-level positions, and since the firm has a high turnover rate former Wal-Mart employees are a large fraction of the population. But they’re not randomly distributed.