January 26, 2007

Whither Pigou

I part with the beliefs of Greg Mankiw reluctantly. I respect the good doctor. But his recent pushing of Pigouvian taxes and creation of the Pigou club have left me cold.

Today, Charles Krauthammer joins the Pigou Club and is applauded by ThreeSources's own LatteSipper. I sense an unholy alliance building between LS, Mankiw, and Krauthammer -- a triumvirate I'm not prepared to consider.

Josh at Everyday Economist has a thoughtful post on the topic today. Like me, he's a Mankiw fan but like me he is unconvinced.

Individuals respond to incentives. So, if a tax is placed on a good, individuals will be inclined to change their behavior. Pigouvian taxes work especially well on things like cigarettes and alcohol. The increased taxes cause many to cut down on their unhealthly habits; or even quit. However, there is something quite different between tobacco use and automobile use.

Most people use their cars to drive to work, the store, and to see friends and family. If the tax on gasoline was raised, Mankiw argues, individuals would consume less. However, individuals would still have to go to work, pick up the groceries, and presumably visit with family. Thus there would be little wiggle room for reducing consumption.

With regard to Charles Krauthammer's piece, I hate to interrupt the comity implied by LS's improbable link, but I can't agree with that plank of his piece either. Krauthammer has a three-part path to energy independence: "Tax gas. Drill in the Arctic. Go nuclear."

If my friend LatteSipper will sign on for all three of those, I'll compromise on the gas tax. Building nuclear power plants and increasing domestic drilling would be good moves. As far as Krauthammer's Pigouvian leanings, I think he makes a big mistake confusing economics with capitalism:

No regulator, no fuel-efficiency standards, no presidential exhortations, no grand experiments with switch grass. Raise the price, and people change their habits. It's the essence of capitalism.

I would suggest that capitalism would be allowing the market to decide the balance of energy sources and trusting the pricing model to spur innovation.

Sorry, LS, the big group hug is put off 'till another day.

Oil and Energy Posted by John Kranz at January 26, 2007 7:13 PM

Well, I'm certainly glad that ONE of us read Latte's link. That Latte is a sneaky guy!

I'm also thrilled to learn the academic source of Washington's belief that it can alter reality by raising taxes: English economist Arthur Cecil Pigou and his "Pigovian tax."

I daresay that thinking like his is what brought us the very idea of DAWG. Like class-action lawyers beating the bushes for plaintiffs, proponents of Pigou's "Economics of Welfare" needed a club with which to malleate a mostly free world market into something more to their liking. DAWG is, without a doubt, the closest they've come to date.

Posted by: johngalt at January 27, 2007 2:59 PM | What do you think? [1]