April 21, 2016

Who's not in the Pigou Club? Pigou!

I have railed often -- but not recently -- against N. Greg Mankiw's beloved "Pigou Club." Pigouvian taxes create an efficiency that attracts economists and a social agenda which attracts progressives.

I get a little, no a lot of, help against this unholy coalition in a great piece by Bruce Yandle in PERC.

And there we have the Pigouvian solution. To correct problems of systemic risk generated by large banks, overly nutritious drinks that lead to obesity, too much carbon emissions that may contribute to climate change, or too many grocery bags that ultimately foul the environment, a wise government can design just the right tax or subsidy and gently adjust the economic mechanism so that it runs more perfectly.

This proposal ultimately generated a massive academic debate. Chief among the debaters was Ronald H. Coase, who would later receive a Nobel prize in part for his contribution. Coase pointed out that markets failed to operate effectively only when property rights and rules of liability are not well defined, or when transaction costs restrict exchange.He noted that lighthouse operators long ago solved the problemof collecting fees from ships that benefited from their light. This response exemplified the institutional vacuum in which Pigou had conducted his analysis.Coase's classic 1960 article "The Problem of Social Cost," explaining all this, became the most cited academic paper in both lawand economics.However,while Coase easily won the academic debate, at least as measured by citations, conferences, and books built around his ideas, Pigou seems to have won the policy debate.

Yet it seems the great man himself was skeptical of public policy based on it.
PIGOU'S WARNING As strange as it may seem, Pigou did not believe that government could improve human well being by fine-tuning behavior with taxes, subsidies, and regulation. His concern was grounded in what we today call Public Choice. He did not accept the notion that politicians, given constitutional constraints, would be capable of implementing an efficient and effective set of taxes and subsidies. Put simply, he did not believe the politicians could get the calculations right. Instead of making things better, the chances were just as good that things would be made worse. Instead of keeping faith with implementing a well designed tax, the politicians' interest would be deflected to writing loopholes for favored interest groups and finding ways to generate evermore revenue

Leading Yandle to conclude that "It would seem that Pigou was not much of a Pigouvian."

Economics and Markets Posted by John Kranz at April 21, 2016 11:43 AM

I was just thinking about this "Pigou poo" business the other day. I was trying to formulate a strategy on the part of we who value free, individual trade in a public market - you know, capitalism - regarding the putative application of "market" approaches to government mandates.

The people who suggest that market forces, nudged by carefully crafted taxes and subsidies, are a fair, effective and efficient method of "making things better" are generally the same ones who insist that services like health care "must not be left to the vagaries of the market." I suggest that we make them choose - either support a healthy commerce market, always and in everything, or abandon it completely.

Posted by: johngalt at April 21, 2016 2:55 PM

We face so many threats to our liberty, but the Cass Sunstein / Malcolm Gladwell Nudge school frightens me very much. Start with soda taxes for the fat little children, carbon taxes to save the planet, $100 handgun licenses, and $117 Billion System Risk fees for banks.

Doesn't sound like a free people to me, and there is no way to stop its growth.

Posted by: jk at April 21, 2016 3:44 PM | What do you think? [2]