Friday, October 13, 2006

Join the Club

In reaction to this, I’m ready to join Greg Mankiw’s Pigou Club (people who support Pigovian taxes on carbon-based energy to deal with global warming – or other detrimental external effects of energy consumption – in an efficient way). There are a few reasons I might not be accepted, though:
  1. I’m not sure that anonymous bloggers are qualified for admission.

  2. I have to confess that my rationale is not 100% Pigovian. It seems clear to me that, even if Al Gore is only a little bit right about the causes and consequences of global warming, the optimal Pigovian tax is extremely high – much higher than what would be politically feasible (in the US) even in my wildest dreams. Energy demand is just not elastic enough, even in the long run, and the social costs of global warming are too high. So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax than as a Pigovian tax. There is a standard argument that taxes don’t do any harm if they don’t change behavior; in this case, changing behavior is gravy. (As for global warming, well, I’m just glad I’m going to die in another 40 years or so.)

  3. I’m not sure Greg Mankiw reads my blog regularly enough to catch this post.
The argument commonly advanced against Pigovian taxes is that we cannot measure the relevant quantities well enough to ascertain the optimal tax. For example, in the (Toronto) National Post article linked at the beginning of this post:
The problem with a Pigovian gasoline tax is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in gasoline consumption? And what's the price to be set at? How high will the tax have to go before it changes behaviour enough to reduce demand? Will the government just wing it and see what happens? Will the alternative behaviour be any better or create new externalities and unintended consequences? What does government do with the money collected -- except launch a program of subsidies and spending to run alternative economic initiatives?
Since I’m convinced that the optimal tax is much higher than what is politically feasible, the uncertainty about the exact number is not a problem for me: I just advocate the highest tax possible. More generally, though, one might always set some reasonable lower bound and argue that the tax should be at least that high. The Post’s argument, as I commented in Greg Mankiw’s blog post (linked at the top), is essentially saying that government is generally incompetent, so whenever there’s a problem that the private sector can’t fix, the only reasonable approach is to ignore the problem. And then I proceeded to apply the same logic elsewhere:
The problem with using government-supplied police officers to protect citizens from crime is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in crime? And what are the wages of police officers to be set at? How much of this so-called police protection will have to be supplied before crime is sufficiently reduced? Will the government just wing it and see what happens? Will the police forces be any better than criminals, or will they create new externalities and unintended consequences? Where will the government get the money to pay these police officers?
I realize that a few anarchists won’t regard this as a reductio ad absurdum, but I’m not an anarchist myself. The debate does continue, however, and you can read it in the subsequent comments to Greg Mankiw’s post.

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Blogger Gabriel M said...

If Al Gore is right... well, that's a big if.

Sometimes I joke that if the French continue on their socialist ways I'm willing to support them because I always wanted a Paris villa and in a few decades they will be very cheap ;-), if you know what I mean.

Unfortunately that's the kind of outcome "the highest tax possible" way of thinking fosters. So maybe I should save for a New York loft, as long as I'm willing to live in a New York in which everybody walks or rides horses.

The EU area grew differently, structurally, because of its gas taxes. So one of the reasons to worry would be the unavoidable transition to a different kind of economy.

P.S. I do think that there are political reasons for a shift in taxes, aways from some thing and towards things like gas, where the US looks like it's subsidising consumption. But then again I'm a methodological taliban, thus the fixating over names.

Fri Oct 13, 03:51:00 PM EDT  
Blogger Laurent GUERBY said...

What about the power of expectations?

That is, put a tax somewhat lower than what you think is appropriate. Then bump it up regularly (each year, each time the famous anonymous economist knzn publishes a post saying the tax is still too low, etc.. :), and appear to be tough on this.

Shareholders might pay attention as they are betting on future returns.

BTW, I read studies that said that only increase events in the tobacco tax in France led to less smokers, even high but constant didn't show much change.

Fri Oct 13, 04:38:00 PM EDT  
Anonymous Anonymous said...

It seems clear to me that, even if Al Gore is only a little bit right about ... global warming, the optimal Pigovian tax is extremely high ... So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax

Wrong. The atmosphere is a common pool resource. Lowering CO2 emissions in the US will only help the environment if China and India also mitigate their own pollution.

Fri Oct 13, 05:52:00 PM EDT  
Blogger knzn said...

Lowering CO2 emissions in the US will only help the environment if China and India also mitigate their own pollution.

That statement is only be true if there are certain kinds of severe nonlinearities in the environment's response to CO2 emissions. Otherwise, if we take China and India's pollution as a given, it still helps for the US to reduce its own pollution.

But it occurs to me, a carbon tax should also include the indirect "carbon content" of imported goods. That might be a tough one in terms of international trade organizations, but if I were running things, I would threaten to leave the WTO over it.

Fri Oct 13, 06:26:00 PM EDT  
Anonymous Anonymous said...

The problem with "tak[ing] China and India's pollution as a given" is that it ignores crowding-out effects.

Fri Oct 13, 06:42:00 PM EDT  
Blogger Laurent GUERBY said...

knzn, evil protectionist!

Fri Oct 13, 07:02:00 PM EDT  
Blogger happyjuggler0 said...

I think gasoline taxes in the US is a moot point. Last year after Hurricane Katrina the US Congress held hearings about why gas prices were so high. Congress professed to be outraged, and that they were flooded with angry calls/mail from constituents wondering why prices were so high and that the government "should do something" about it.

The American people may claim to want to do something about *rising* "greenhouse gases", but they also are adamantly against higher gasoline, natural gas (or oil) heating, and electricity costs. If a Clinton administration with Gore as VP didn't have the guts/conviction to submit Kyoto to the Senate (if only to embarass those who vote against it), then don't think anyone else in the political sphere will try to make energy more expensive.

And if they do try, they will likely go down in flames anyway.

Fri Oct 13, 10:47:00 PM EDT  
Blogger happyjuggler0 said...

I read studies that said that only increase events in the tobacco tax in France led to less smokers, even high but constant didn't show much change.

I find this fascinating. I've always thought about taxes in terms of trying to minimize their harm. I am surprised, although I ought not to be I suppose, that gradualism in tax increases on tobacco lead to a greater reduction in use. It makes for a great advertisement, a reminder that your habit is going to cost more and more and quitting might be a good idea.

When I lived in Massachusetts they decided to use higher water prices to fund fixing the sewage problem (for many decades sewage was pumped into Boston Harbor) that was made famous in 1988 when "the other" George Bush visited Boston Harbor, which was his opponent's (Governor Michael Dukakis) "back yard".

"They" chose to gradually increase water prices, and to do so quietly, although the initial choice to fix the problem was definitely covered in the media. I'm sure "they" thought (correctly in my opinion) that a gradual approach in water price hikes would be easier to accomplish politically than a huge one time hike. Again, doing it quietly no doubt helped.

Fri Oct 13, 11:00:00 PM EDT  
Blogger happyjuggler0 said...

By the way, along those lines, just a few days ago I was pondering how to raise gasoline prices in an effort to curb its use without harming the economy, assuming it was politically possible. Even offsetting the tax hike witha tax cut somewhere else would have shock-type consequences. Therefore....

Let's say it was decided to riase its price by $2.00 per gallon. I'd let everyone know it was going to go to $2.00 more than it is now, but that it would happen 5 cents per month, taking 40 months, or 3 years and 4 months. Everyone would have time to adjust, and lots of people would buy higher mpg cars, while the economy would not be hit with a sudden shock.

The trick though is to make sure people know the tax will go up month after month after month....

Fri Oct 13, 11:17:00 PM EDT  
Blogger Laurent GUERBY said...

happyjuggler0, in the case of the tobacco tax in France, increases are not that small and hidden (everyone talks about them, it's in july of selected years), but the effect on future expectation should be quite the same as small "hidden" increases.

I'm surprised to find no study from Pigou club members on the impact of expectations. The main problem with a Pigou tax is how to find its level, right now analysis seem to be of a static form (tax must be X% period) which seem kind of limited to me.

Feel free to post URLs here if you find something.

Sat Oct 14, 06:12:00 AM EDT  
Anonymous Anonymous said...

If Al Gore is right...

If pigs could fly but, then I repeat myself.

Sat Oct 14, 09:22:00 PM EDT  
Blogger Gabriel M said...

You might want to comment on the "1$" target proposed by your club-leader, prof. Mankiw. It's time to come out of hibernation ;-)

Fri Oct 20, 05:23:00 AM EDT  
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