Chapter 3: In which Kat joins the Pigou Club
Posted: December 17, 2008 Filed under: Environmental Protection, president teleprompter jesus, U.S. Economy | Tags: energy policy, Oil Tax, Pigou Tax on Energy, steven Chu 5 Comments
This thread is going to speak to solving several major problems we have in our Economy in a way that is not going to be highly popular with folks outside the Pigou Club. If you slept during or avoided your microeconomics course, or blocked the bad memories the minute you finished the course, you undoubtedly are asking yourself wtf is the Pigou Club? If you do remember who Pigou is and what he suggested, you’re asking yourself, why would any economist suggest raising taxes on anything during a major recession? Well, get ready to discuss using a tax to shape social behavior because that’s what Pigou suggested and that’s what we now do on things like alcohol and cigarettes.
Arthur Cecil Pigou was a Brit economist who was part of the Cambridge school that also produced John Maynard Keynes. Pigou’s major work was in an area that we call welfare economics. You can read more about him if you’d like but this is from Wikipedia and gives you the major idea.
Pigou’s major work, Wealth and Welfare (1912, 1920), brought welfare economics into the scope of economic analysis. In particular, Pigou is responsible for the distinction between private and social marginal products and costs. He originated the idea that governments can, via a mixture of taxes and subsidies, correct such perceived market failures — or “internalize the externalities“. Pigovian taxes, taxes used to correct negative externalities, are named in his honor.
So what do the members of Greg Mankiw’s Pigou Club want to tax? Well, the answer is that now is the perfect time for a federal tax on gasoline and other petroleum products. It appears that the incoming energy secretary, Steven Chu, is also a member of the Pigou Club. Another Obama appointee, Lawrence Summers also supports the idea. Here is a description of Chu’s idea from the WSJ.
In a sign of one major internal difference, Mr. Chu has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work.
“Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,” Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.
But Mr. Obama has dismissed the idea of boosting the federal gasoline tax, a move energy experts say could be the single most effective step to promote alternative energies and temper demand.
That last sentence is the important argument is signficant. A Pigou tax on gasoline, heating oil, and other petroleum products would, in fact, be extremely effective in promoting alternative energies, decreasing dependence on foreign sources of the products, and giving us more leverage in the world with countries we have to endure just because they have oil. Check out today’s Market Watch and the new threat from OPEC. Threats from OPEC are nothing new, we’ve been dealing with them since the 1970s, but ineffectively, because they can negatively impact our economyand the way we deal with certain oil exporting countries with terrorist tendencies. We also know they loosen up the supply and let prices drop anytime we threaten energy independence which causes auto companies and stupid americans who love big vehicles to buy them.
NEW YORK (MarketWatch) — The Organization of Petroleum Exporting Countries has decided to cut its oil output by 2.2 million barrels a day from current output, or 4.2 million barrels a day from September levels, the Wall Street Journal reported on its Web site Wednesday.
…OPEC faces a world where oil prices are set by factors outside of the traditional supply and demand. Currency and interest rate moves, as well as jitters tied to the global economic crisis, have pushed oil prices down precipitously of late.Analysts at Pritchard Capital Partners noted that the lowered production target is expected to take effect on Jan. 1, with actual cuts coming mostly from Saudi Arabia, United Arab Emirates and Kuwait
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Sky Dancing 
What’s with people being enamored of petroleum autarky and treating other people like recalcitrant, dim-witted 12 year old children?
Other people’s lives are not your clay (or anyone else’s) to be used, molded, and manipulated into following one’s personal vision of what things ought to look like.
Other people have differing preferences, and there’s no reason why yours count more than theirs, aside, possibly, for the ability to use the power of the state to browbeat them into acting the way you want them to act.
And as for the “oil exporting nations with terrorist tendencies,” the US isn’t, and never was (to the best of my knowledge) a major oil exporter, but to a Guatemalan peasant circa 1954* (or anyone else in any other Latin American or Caribbean country at virtually any point during this century,) or a Vietnamese peasant in the 1960s, or a whole host of other people, the United States was the nation with terrorist tendencies, and not a few far-flung regimes that His Majesty must “endure” when they have the chutzpah not to be imperial house n——-s.
*Interestingly enough, Guzman was overthrown the year after Mussadeq in Iran, which coup set the stage for another nattering housefly of a nation buzzing about the ears of His Presidency.
Kat — As you undoubtedly know, the libs in Canada just lost yet another bid to regain power because they tried to introduce a so-called ‘revenue neutral’ carbon tax during this past fall’s election — during which the Bushwannabe conservatives easily painted the libs as hardhearted meanies who want poor and old people to freeze to death, etc.
Unfortunately, there are a number of distributional and efficiency issues that have to be addressed before jumping onto the pigovian bandwagon re energy costs:
First, the research showing the actual impact of European carbon taxes has been unclear, with no unequivocal results showing whether carbon taxes actually have the impact that pigovian theory posits.
Second, as flat-rated consumption taxes, carbon taxes will be regressive re income, and therefore will burden those groups that tend to have lower incomes — women, the disabled, the poor, single parents, and racialized people — more than they will burden those with standard employment or reasonable incomes.
Third, even tax rebates designed to address point #2 tend to be universal (i.e., not income-based), and thus very expensive.
Fourth, once the poverty, gender, ability, race, etc., impacts of these new regressive taxes is offset with rebates, everyone for whom it is offset will lose their own particular incentive to look at alternative sources of energy.
Fifth, high-income people and organizations will be able to either spend their way or deduct their way past the disincentive effects of carbon taxes. This means that two big chunks of the population — low income and high income individuals and business sector — will be impervious to the pigovian effects posited, and will only incentivize the middle classes.
Sixth, using rebates (especially the universal types) to make carbon taxes ‘revenue neutral’ undercuts the stability of the income-based tax system, which is very important in times of major economic shifts (like now), because giving rebates out of carbon taxes is said, by some, to justify reducing income tax rates (for corporations and for individuals), and thus shifting a chunk of revenue-raising over to a tax base government policy is trying to destroy — the carbon-based fuel tax base.
All these problems can be worked out by a government that is committed to true equality. However, the BO gvt is undoubtedly going for the path of least resistance on every possible issue, and so, for sure, is not going to address differential gender, race, ability, poverty, etc. issues in designing this tax. Nor would the BO gvt pass up the chance to trumpet those magic words — ‘tax cuts’ — re income tax rates while shifting to a flat-rated carbon tax. And finally, I don’t predict that the BO gvt would be willing to use this as a chance to really do something about the systemic use of joint tax/benefit instruments to suppress women’s incomes — which is what ‘household level’ carbon tax rebates would be.
So up close, in the hands of pro-male privilege pro-corporatist and manipulative politicians, this particular good idea is likely to do more harm than good. Which is not the way things should be.
Kal
Kal:
I think it’s possible to deal with the redistribution/regressive tax problems with the income tax system but I’d not rebate every one, just adjust the lower level tax rates to provide more take home income … although I do believe at some point, we have to recognize that all income levels need quit using carbon based fuels. If it’s graduated, it would provide for some transitioning and also, the rich are the ones with multiple huge houses and multiple huge cars.
You can see how higher prices this year did dampen the quantity demanded for fossil fuels. This is one of the things that is translating to less cash to Russia which has been acting imperialistic with its oil proceeds. There’s been some change of behavior over the last three years in driving habits and such. Even though every one is not going to be able to buy a hybrid, hopefully, this will eventually stop them buying those huge trucks and SUVS. Perhaps just placing a huge tax on the sales of these vehicles would do it but then it would kill the big three who’ve been feeding these bad decisions with their own. The biggest problem is that these bad decisions do have external costs placed on society. Even if it does come from lower and poorer incomes (and believe me, I see poor folks in my neighborhood by huge gas guzzling cars while living in section 8 housing), there has to be a way of transferring the social costs back on to the offender.
I guess I see all your points, but think that after watching us go through all of this in the 70s and not solve the problems, and to think lower gas prices might lead us once again to dependency on foreign oil and also highly polluting, energy guzzling decisions, I’ll take the big brother decision for awhile anyway. Until they come up with some alternative thing … and not the stupid biofuels thing. Using food for energy is crazy too.
Kat — Good points. I’m glad to see that you would not object to low-income-only rebates at the initial stage. It’s interesting to me that Canada provides enough of a VAT rebate to cover approximately the first US$4000 in VATable consumption for those with incomes below the low-income cutoffs. So the policy model certainly exists, although I would be surprised if a BO government went that way.
The other point I’m curious about is how much the cuts in fuel consumption in various markets can be reasonably traced back to rising fuel costs. There are some elasticities operating here that are very income-level specific, and that is what gives me pause about full-force application to low-income people. But not to low-income businesses, which can still get some tax benefit from deducting carbon taxes.
Any links you might have would be greatly appreciated!