Tuesday, January 30, 2007

What's in a price? The great Pigovian flaw

The plan to nationalize the price of oil
One of the great flaws of Pigovianism is the role reversal imposed on prices. An example of how that flaw plays out appeared in Charles Krauthammer's recent piece for The Washington Post Group on energy policy. Along with other Pigovians on the Right, Krauthammer takes the gas tax plan right to its Pigovian root: Tax gas till it hits US$4 a gallon and then watch the market react. "Raise the price and people change their habits. It's the essence of capitalism." As I note in a column today (The new OPEC) posted at the No Pigou Club site, that's not at all the essence of capitalism. It's the essence of planning and statism.
Pigovian taxes turn the role of prices upside down. The proper view of prices in a market economy is that the price contains thousands of pieces of information about a product: the unmeasurable individual wants of millions of people, the costs of hundreds of inputs, the supply and demand circumstances at a point in time, assessments of future conditions, the relationship of all the prices for similar and competing products, etc. Price is part of a process, jam packed with unmeasurable information, not a fixture in time that just needs to be tweaked to get a desired result. Taxes are not prices.
The Pigovians throw all the real price information out, declare that it's all wrong and claim we need a new price that will incorporate the information we think should be in the price or would be in the price if people only knew what we know. The Pigovians plan to tear down the market price and all the information it contains and impose their own government-regulated price. They plan to nationalize the price gasoline and set prices to get the results they want rather than the results produced by the market.

Monday, January 22, 2007

"Why I can't join Pigou Club"

The No Pigou Club welcomes Russell Roberts! After a podcast interview with Greg Mankiw, Russell concludes that while he likes the theory of Pigou taxes on gasoline, the practice will turn into a political mess. He's on the right track, just not far enough down to realize how off-base the Pigovians are. Greg Mankiw's claim that sometime you have to put up with bad politics to get to good economic policy misses at least part of the main point. If it involves a political move, it likely is bad economic policy.

Did oil price "tip" demand?

Front page of Wall Street Journal on Friday floated the idea that high oil prices hit a 'tipping point' in 2006 that prompted a fall in consumption within OECD nations. It was a big reach, but the Journal managed to turn it into a possible justification for Bush to present Pigovian arguments in favor of energy taxes in State of Union. We shall see. For the No Pigou take on this, visit the Club for a fresh posting.