Wednesday, September 28, 2005

Econ 102

If Paul Krugman wasn't proof enough that most journalists don't know the first thing about economics, the Post's editorial this morning should lay any doubts to rest. After making the inevitable Jimmy Carter/cardigan sweater comparison to Bush's call to conserve energy, comes this:

If Mr. Bush really wants to promote more careful energy consumption, he ought to tax it.

Of course! Because taxes are the answer to everything!

Precisely because consumers are already outraged by fuel prices, a further, tax-induced price increase would force demand down more sharply than it would in normal market circumstances.

I am sure the airline and trucking industries will be delighted with this proposal. Does the Post further consider the degree to which an added surcharge on fuel would be inflationary? Put another way: Look around you. How much of what you see got to you through transportation? Who absorbs the cost of higher fuel taxes? Every American consumer not living in a fortified compound somewhere in Idaho. (Which is starting to sound like an attractive alternative.) Homeowners, many of whom are leveraged due to current high housing prices, must also be enamored with the idea of higher inflation and, as a result, higher interest rates.

But the sharp reduction in demand would cause the pretax fuel price to fall sharply, too, offsetting the after-tax increase.

So as I understand it, the Post is saying that their genius plan to reduce oil consumption, and therefore the price of oil, will successfully keep prices right where they are, but with more taxation. Brilliant!

What about more oil exploration? Tax incentives for companies (especially start-ups) to develop alternatives to the internal combustion engine? A national plan for more refineries? Clean-burning coal? Shale oil? Nuclear power? The WaPo is strangely silent.

Such jejune writing reminds me of what Reagan once said about those with a similar philosophy:

"If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it."

10 Comments:

Anonymous Amathai said...

Change your title to '...always germane and occasionally ignorant'!

Paul Krugman is a professional economist who happens to dabble as a journalist. As a measure of his credentials, apart from being a peer-reviewed academic in the top faculties, he won the JB Clark medal for the best economist under 40 in the US.

Tax incentives to conserve fuel can be made revenue-neutral in that they are refunded by equivalent income tax reductions. The net result is a change in behavior in consumption, by substituting away from the pattern of consumption that we're used to. (another economic concept to bend our minds around.) But perhaps thats what is most difficult to do.
Bio-ethanol anyone?

11:03 AM  
Blogger GT said...

Amathai:

Or as my liberal friends used to tease when I worked on the Hill; "often wrong, never in doubt."

"Peer-revieved academic in the top faculties" can be analogous to be called the healthiest leper, not much to recommend him there. Krugman is a hack and the most biased columnist on the Left. Go to lyinginponds.com for an objective analysis. You wouldn't argue Ann Coulter is unbiased, would you? (I don't think she is.) If by "dabble" you mean work in an arena entirely out of his depth, you may be on to something. Yes, I have opened the door to you accusing me of dabbling in blogging. I can live with that.

You raise some interesting points but wouldn't the free market achieve the same result as government intervention/taxation? Don't you think high gas prices have already changed consumer behavior? At the same time, higher oil prices affect the supply side as well, making it more economically feasible to begin processing shale oil, or enduring the legal fights to build more refineries, for example.

I'm all for lowering consumption and breaking the cycle of dependency on oil, I just have more faith in markets and less in government.

Thanks for the comment, especially for making valid points as opposed to calling me a Nazi, etc.

GT

12:58 PM  
Blogger c&d said...

Of course! Because taxes are the answer to everything!
Taxes are not the answer to everything, they are the market-based answer to decreasing consumption of a good or service. If you place a tax on an item, in the long run it will have a higher price and lower supply. Thus, people will consume less of the item in relation to other items -- encouraging "careful energy consumption." Taxes on particular items are economically efficient when the consumption produces negative externalities (where costs of producing the item are born by someone other than the producer or consumer). In the case of oil and gasoline, there are many very costly externalities. Using gasoline causes air pollution (both respiratory and other health problems and global warming), wear on public roadways, congestion, and increased dependence of the national economy on foreign sources of oil.

If we truly wish to become less dependent on foreign oil, a oil tax increase is an economically efficient way to accomplish this goal. Tax increases are the market-based solution, rather than government regulation of car gas mileage or other limits on consumption.

Put another way, we are caught in a prisoner's dilemma: it would be better for all of us if we used less gasoline, but individually we don't have incentives to drive less. A gas tax could create the optimal outcome.

Does the Post further consider the degree to which an added surcharge on fuel would be inflationary?
A tax on gasoline would not be inflationary. This argument is facially ridiculous and demonstrates a complete lack of understanding of macroeconomics. Its a wonder we don't have run-away inflation from those huge taxes of wages!

Who absorbs the cost of higher fuel taxes?
Those who consume more fuel. With a tax increase, the government has three options: pass an equal tax cut on income (in which case many Americans would receive a net tax cut), increase spending (in which case Americans would receive some added service, such as rebuilding bridges destroyed by a hurricane), or decreasing the debt (in which case the level of future taxation is reduced).

One problem with a gas tax is that, like most consumption taxes, they fall more heavily on low-income Americans. A tax cut in the form of an increased earned income credit could offset this.

Homeowners . . . higher inflation and, as a result, higher interest rates.
As noted above, a tax increase would not create more inflation, making your argument baseless. Second, increasing a tax that lowers the deficit would encourage lower interest rates. Right now the government borrows a great deal of money. If taxes were increase, it would borrow less money. That money could then be lent to others, such as a small business or homeowner. The greater amount of money available to lend, the lower the interest rate (the greater the supply of money, the lower the price of money). However, this analysis gets more complicated because of the geopolitical motives of China (and other international government lenders) purchasing Dollars.


So as I understand it, the Post is saying that their genius plan to reduce oil consumption, and therefore the price of oil, will successfully keep prices right where they are, but with more taxation.
As I understand it, the Post is not saying that prices will remain where they are, but with more taxation, just that prices would nice rise the full amount of the tax (they write "offset," not "fully offset."). I think they are being a little over-optimistic if they think the long-term offset will be very high because gasoline is a fairly inelastic good.

The Short Term
In our current situation, where gasoline prices have risen dramatically due to short term disruptions in supply, a gas tax would not decrease production much or increase prices. This is because refineries are already running full capacity, profitably: A tax would reduce profits but not supply. Companies will continue to produce the nearly the same amout of gasoline because that is the most profitable option available. Consumers will not see higher prices, because price is determined by supply and demand, not the costs of selling the gasoline. For example, if the cost of producing and selling a gallon is $2.30 (including cost of oil), and the market price is $3.00, a tax of $.50 would not chance the price or the supply of gasoline.

The Long Run
In the long run, higher expected profits will encourage more production. A tax increase will reduce the profit incentive to bring more supply to the market and lower prices. Thus, a tax increase will raise prices (some amount close to the tax, but not the full amount of the tax) and reduce supply.

A tax on oil (or carbon) would also encourage private companies to "develop alternatives to the internal combustion engine" and invest in "Clean-burning coal," "Nuclear power," and renewable energy as they become cheaper alternatives.

I would argue that this is a good outcome. See the discussion of externalities above. An efficient market sometimes requires regulation where externalities and other market failures are involved.


lyinginponds.com
Lying in Ponds measure how often a columnist says something "good" or "bad" about a person with a partisan affiliation. It does not measure whether criticisms are valid, whether evidence is used dishonestly, or whether arguments are logical. It does not distinguish between backhanded compliments and genuine compliments.

Krugman does ignore problems with Democratic policies and commentary. But, given that government is currently controlled by Republicans, that seems reasonable. For example, John Kerry's budget plan did not add up and Krugman only wrote about how GW Bush's plan did not add up. I think he felt the important message to communicate to readers was that Bush's plan did not add up by a few trillion dollars more than Kerry's. Other columnists might try to paint a false equivalence between the two budget plans, saying that both are being deceptive (thus getting a better lyinginponds.com rating, but misinforming their readers). It might also be noted that in the late-90's Krugman was a critic of Democrats who made arguments against free-trade using bad economics.

In sum, I agree with you on some points to some degree (taxes will increase prices and supply in the long run), but overall your comments are ill informed and demonstrate more ignorance than they educate.

2:38 PM  
Blogger GT said...

c&d:

Although I disagree with your conclusion, way to go on attacking the argument and not the person. Your response is reasoned and eloquent.

Your conclusion that higher fuel prices aren't inflationary is wrong, and although I have a degree in economics, I defer to Alan Greenspan, in his remarks in the "Humphrey-Hawkins" report from July, 2005

"Although both overall and core consumer price inflation have eased of late, the prices of oil and natural gas have moved up again on balance since May and are likely to place some upward pressure on consumer prices, at least over the near term."

"A flattening out of the prices of crude oil and natural gas, were it to materialize, would also lessen upward pressures on inflation. Overall inflation would probably drop back noticeably from the rates experienced in 2004 and early 2005, and core inflation could hold steady or edge lower."

Regards,

GT

2:55 PM  
Blogger Jayanta Sen said...

A failure of economic thinking is that the price of gas is determined by demand and supply and hence the government cannot do anything about the rising prices. I show that a tax can be so structured to reduce the price of gas received by foreign producers from $65 to $30, while providing the US economy a stimulus of over $100 billion a year. Additionally this would reduce gas consumption and global warming. Please read the complete article at: http://econstimulusgastax.blogspot.com/ and share with your friends.

7:30 PM  
Blogger c&d said...

Alan Greenspan is talking about rising gas prices due to decreased supply or increased demand, he is not talking about a gas tax. The distinction is very important. Of course, Greenspan would probably not support a gas tax, but that has more to do with his political preferences than economic analysis.

I am unimpressed by a degree in economics (I have one myself). You don't seem very impressed by a doctoral degree in economics and being awarded the Clark medal.

8:52 AM  
Blogger GT said...

c&d:

Hell, I am not impressed with my degree in econ, so get in line.

And the Clark Medal is prestigious, I am fan of Steve Levitt and Larry Summers, for that matter. I am not a fan of the hackery that Krugman practices, and therein lies the rub.

Here's the thing though: A new gas tax would still raise the price of gas, no? It would force businesses and consumers to spend more money for fuel. While Greenspan's comments reflect the inflationary impact of gas prices due to supply and demand, if gas prices were to increase in another way, say... taxes, how does that not have the same effect? Talk to someone in the trucking industry and explain to them the difference, noting the reaction your receive.

BTW: I was quite impressed by Professor Sen's blog article and he has a Ph. D in finance.

9:06 AM  
Blogger Jason said...

Having a degree and being a "professional economist" doesn't make one immune to having stupid ideas. All one has to do is be a liberal and the stupid ideas come naturally.

11:26 AM  
Anonymous Anonymous said...

"Having a degree and being a "professional economist" doesn't make one immune to having stupid ideas. All one has to do is be a liberal and the stupid ideas come naturally."


It is nice to know that there are teenagers reading these posts. At least Jinx is spending some time away from the the Xbox.

10:11 PM  
Anonymous Some Fella said...

"Having a degree and being a "professional economist" doesn't make one immune to having stupid ideas."

Quite right. However, that's not the flavor of the initial claim. Here it is:

"If Paul Krugman wasn't proof enough that most journalists don't know the first thing about economics..."

I think that having a degree, being a professor and receiving prestigious awards in the field of economics usually indicate that one does know the first thing about economics. It's a tempting rhetorical device; make an excessive comment to make a statement sound stronger, then when confronted with contradictory evidence, defend a much weaker version of your original statement. I'm not trying to stomp on Amathai here, but I do call em as I see em. Like I said, it's tempting.

3:50 AM  

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