November 11, 2005

AH, THE THIRD WAY (via Gene Brown):

Pump Some Seriousness Into Energy Policy (Charles Krauthammer, November 11, 2005, Washingtoin Post)

Just yesterday we were paying $3.50 a gallon at the pump and were ready to pay $4 or $5 if necessary. No blessing has ever come more disguised. Now that we have lived with $3.50 gasoline, $3 seems far less outrageous than, say, a year ago. We have a unique but fleeting opportunity to permanently depress demand by locking in higher gasoline prices. Put a floor at $3. Every penny that the price goes under $3 should be recaptured in a federal gas tax so that Americans pay $3 at the pump no matter how low the world price goes.

Why is this a good idea? It is the simplest way to induce conservation. People will alter their buying habits. It was the higher fuel prices of the 1970s and early '80s that led to more energy-efficient cars and appliances -- which induced such restraint on demand that the world price of oil ultimately fell through the floor. By 1986 oil was $11 a barrel. Then we got profligate and resumed our old habits, and oil is now around $60. Surprise.

The worst part is that much of this $60 goes overseas to foreigners who wish us no good: Wahhabi Saudi princes who subsidize terrorists; Hugo Chavez, the mini-Mussolini of the Southern Hemisphere; and (through the fungibility of oil) the nuclear-hungry, death-to-America Iranian mullahs. This is insanity. It makes infinitely more sense to reduce consumption, drive the world price down and let the premium we force ourselves to pay at the pump (which begins the conservation cycle) go to the U.S. Treasury. If the price drops to $2, plow that $1 tax right back into the American economy by immediately reducing, say, Social Security or income taxes.

The beauty of a tax that keeps gasoline at $3 is that it obviates the waste and folly of an army of bureaucrats telling auto companies what cars in which fleets need to meet what arbitrary standards of fuel efficiency. Abolish all the regulations and let the market decide. Consumers are not stupid. Within weeks of Hurricane Katrina, SUV sales were already in decline and hybrids were flying off the lots.


The price here is already within pennies of $2 and oil prices are dropping with no natural floor.

Posted by Orrin Judd at November 11, 2005 12:10 PM
Comments

The beauty of a tax that keeps gasoline at $3 is that it obviates the waste and folly of an army of bureaucrats telling auto companies what cars in which fleets need to meet what arbitrary standards of fuel efficiency. Abolish all the regulations and let the market decide.

I thought you wanted regulations AND high taxes, Orrin?

Have YOU now gone Third Way on this issue as well? If so, it's a welcome development! ;)

Posted by: kevin whited at November 11, 2005 12:28 PM

Kevin:

If you raise the gas tax you don't need regulations, you've forced private enterprise to effect what the regulations would have. That's the essence of the Third Way. But people support higher CAFE standards and don't support higher taxes.

Posted by: oj at November 11, 2005 12:33 PM

OJ:

Yes, but that's because people are economic illiterates, not because CAFE is a good idea.

Posted by: Mike Earl at November 11, 2005 1:35 PM

Let the market decide. Amen!

Posted by: tefta at November 11, 2005 1:40 PM

Mike:

They're also ineducable. You work with what you're given.

Posted by: oj at November 11, 2005 1:49 PM

People are outstanding at telling pollsters they will pay to support some outcome.

Their opinion quickly changes when reality sets in.

CAFE regulations impose stupidly what the market will intelligently. Their apparent success so far is due solely to their fortuitous appearance at the leading wave of the IT revolution.

There just isn't much more to be had at that well.

Posted by: Jeff Guinn at November 11, 2005 1:56 PM

BTW -- setting a floor value for gas doesn't, on the face of it, seem a bad idea.

Deciding on that floor, though, will be much harder.

Posted by: Jeff Guinn at November 11, 2005 1:57 PM

Why?

Posted by: oj at November 11, 2005 2:01 PM

Markets have to be told what end to produce before they determine the means.

Posted by: oj at November 11, 2005 2:02 PM

No. Markets are what happen when people decide their own ends for themselves.

Posted by: joe shropshire at November 11, 2005 2:36 PM

Markets don't exist where freedom reins, only where law and order establishes them. Ask a Mogadishan.

Posted by: oj at November 11, 2005 2:44 PM

Of course markets require the law. But they also require the law to be humble. Then clever people like you start telling themselves they can dictate ends and let the market decide the means.

Posted by: joe shropshire at November 11, 2005 4:19 PM

All laws dictate ends. Note that the Declaration and Constitution start by stating ends.

Posted by: oj at November 11, 2005 4:41 PM

No natural floor? Be careful, or that floor will smack you in the head on it's way up again. The floor is demand, and demand is growing, growing faster than production.

Posted by: Robert Duquette at November 11, 2005 4:55 PM

No market in Mogadishu? wrong

But the real end result would be that if as you suggest the US via taxation maintains a floor on the price of gas, then of course the US will consume less.

At that point the world-wide price of oil will decline to a lower equilibrium price. Hence the net effect would be that American workers/consumer (all drivers) would be subsidizing cheap oil for China.

Posted by: h-man at November 11, 2005 4:58 PM

Demand can't grow in the midst of technological innovation, demographic implosion, and economic decline in the developed world.

Posted by: oj at November 11, 2005 5:01 PM

h:

Simple economics lesson: if Mogadishan seller A has five gallons of gas and buyer B (who as $20) and buyer C (who has $25) both need it, how much will seller A get?

Posted by: oj at November 11, 2005 5:04 PM

OJ

Here is a link Telecoms thriving in Somalia

Now you can address my other point that the net effect of setting a floor price via taxation on gas, would be for the US Worker/consumer subsidizing lower oil price for China.

Posted by: h-man at November 11, 2005 8:23 PM

h:

You can't answer the question?

Posted by: oj at November 11, 2005 10:07 PM

Robert:

Sure, it could if population did, if Europe weren't declining, if China were stable, and if technology stood still.

Posted by: oj at November 11, 2005 10:09 PM

OJ

The same dynamics between the three market participants as would occur in any locale. However the predicted senarios are innumerable.

1. Let's presume your punch line is that (C) buys an AK-47 and two bullets for $25 dollars. Shoots (B) and takes his $20 dollars and proceeds to shoot (A) and takes the 5 gallons of gasoline. Capital expenditure of $25 for this transaction. For this one transaction (C) has capital goods (AK-47 without ammo, which is useless unless he has a source with a replenishable inventory of ammo) and investible capital of $20 and 5 gallons of gasoline which is sellable to the highest bidder. If (C) has a source for ammo, he can call himself the Mogadishu Trade Authority and repeat the process but instead of killing all market participants he decides that it is more lucrative to take only a portion of future tranactions between (new A) and (new B). This is the Judd progrom.

2.) Lets assume (A) has a source for replenishing his inventory of gasoline at the rate of $2 per gallon. Lets further assume that (B) and (C) will use the gasoline in productive activity which will transform material (for instance seed corn) of negligible value into products of greater value (cornbread). (A) will sell the gasoline at a varying price above his cost to (B) and (C). (B) and (C) will sell the resultant cornbread at price higher than their cost to all people in the locale including (A). Everyone is happy and gradually become richer. This is the H-man non-system.

I could come up with many other senarios, but basically the results would fluctuate from the hateful disgusting Judd Progrom to the blissful happy, joyful, idyllic, life affirming H-man non-system, with lots of giggling kids.

Now to the issue of coercively placing a burden on American citizens by means of gasoline/oil taxes, which would cause the world-wide price of oil to decline to a lower market clearing equilibrium. The Chinese would benefit at this new price only because of the destructive gouging of American workers/consumers. Please give me your thoughts.

Posted by: h-man at November 12, 2005 5:11 AM

So where perfect freedom exists there is no market, just force. In response to such a system people demand security at any cost, including all their freedom. Thus does freedom invite totalitarianism.

Posted by: oj at November 12, 2005 8:06 AM

OK, OK, you win on the side issue of Mogadishu. (not really but who cares)

The topic is the creation of an "artificially" higher price for gasoline/oil within the jurisdiction of the US, which has the effect of creating a surplus of oil world-wide thereby driving prices to lower market clearing price. This benefits other jurisdictions (China for example) and allows them to purchase oil cheaper than they would in a evenly rotating free economy. In other words yours and Krauthammers suggestion is in effect a subsidization of China at the direct expense of American worker/consumers. Any (rational) criticism of this proposition from you would be appreciated, but I know you are a busy man.

Posted by: h-man at November 12, 2005 8:58 AM

h:

If you could wish one thiong on an enemy it would be that they dramatically increase their reliance on an antiquated energy source, dependence on a product of unstable regions which we can easily interdict, reduce the price of the goods we import from them, etc. The damage done to China is only coincidental to the good done for us, but is devoutly to be wished.

Posted by: oj at November 12, 2005 9:06 AM

"antiquated energy source,"
This is just plain stupid statement

"dependence on a product of unstable regions "
The world has huge supplies outside of the said unstable regions, we just need higher market prices for the stuff to justify getting them

"reduce the price of the goods we import from them"
After we are econonically weakened enough by stupid things like energy taxes, they will decouple the rimbe from the dollar and the cheapness will evaporate like leftists aguments tend to do.

"damage done to China"
In your car fantasy dreams...

Posted by: Perry at November 12, 2005 10:46 AM

Perry:

We'll find new ones given the impetus.

Yes, by reducing market polices we thwart that.

Switching to consumption taxes from income taxes will strengthen the economy by boosting savings.

You don't dream of a democratic China?

Posted by: oj at November 12, 2005 10:56 AM

The moon is waxing these days.

In Europe, what has been the effect of higher fuel taxes on consumption? What has been the downside? Why has the policy been in place for so long? What is the condition of their highway infrastructure?

The Chinese question will be settled by their impact on the market, which ultimately will be larger than ours. It's a mistake to assume all conditions will remain static as we move into the future and try to judge the effect of a tax implemented in the USA today. The elegance of the tax proposal is that it will float according to the objectives realized and if necessary phased out as a motivator, as it has in the recent past. We already have a tax and it's always been too low to become an operator of any consequence in our infrastructure or our economy.

Why support the Immans and the likes of Chavez who use our dollars to undermine our systems? If we reduce our consumption we can freely choose the actors from whom we buy.

Posted by: Genecis at November 12, 2005 11:38 AM
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