Sunday, July 15, 2007

The T-word and the Pigou Club

There are few words in the English language that can engender equal rancor with that of the term “taxes,” and that, the T-word, has long been considered the equivalent of the “third rail of politics.” After all, colonial Americans initiated a political revolution based in part on resentment over British taxation without representation. Yet, therein lies the problem; representation requires politicians, and few politicians have the courage to suggest tax increases since it is a surer path to election or re-election to cut, not implement taxes.

Of course, most individuals (including myself) don’t mind taxes imposed on others. “When it comes to taxes” said Russell Long, the legendary Louisiana politician who was Chairman of the Senate Finance Committee as he described the difficulty in passing tax reform legislation: “Don’t tax me, don’t tax thee, tax the man behind the tree.” The only taxes the public might tolerate are those that are considered “sin” taxes (as long you are not the sinner). That applies to cigarettes, alcohol, gambling, prostitution, etc.

Then too, much depends on who is defining what sin is worthy of a tax. Some states seem to have wacky ideas that nevertheless provide much needed revenue. For example:

Tennessee and North Carolina instituted a tax for possession of illegal drugs. You must report the purchase and pay for a stamp that you paste on the illicit substance. Obviously, there are few takers, yet substantial revenue is derived from those caught with an illegal substance who are then forced to pay a sizeable tax. Utah applies a tax on businesses where “nude or partially nude individuals perform any service” — in essence a sex tax. Now that might be worthwhile. Most states with a professional sports team levy a tax on income earned by athletes, and entertainers. This is known as a “jock tax.” In other states there are taxes on playing cards, furs, fountain soda drinks, and amusement taxes on stadium seats prevail.

Is Gasoline Sinful?

Until recently, gasoline is one product on which everyone pays taxes, but this has not often been thought of as a sinful item. In fact, federal gasoline taxes are primarily paid into the Highway Trust Fund and the Mass Transit Account. Thus it is not a sin tax but it is essentially a “use” tax. The more recent view however, that gasoline is indeed a sinful commodity, is fast gaining momentum. After all, it would undoubtedly benefit the country if less gasoline and other fossil fuels were consumed. This is where a long forgotten economics professor has been resurrected and once again becomes relevant.

What’s a Pigou?

With an unlikely name, Arthur Cecil Pigou was a brilliant economist who taught at Cambridge University in England from 1908 to 1943. It was Pigou who essentially rationalized and defined the concept of the “sin tax.” He and the more famous John Maynard Keynes frequently clashed and criticized each other’s theories. Pigou believed economic analysis could be justified only if it brought social welfare into its scope. He is responsible for the concept that governments can, via a mixture of taxes and subsidies, correct failures that occurred in the market place — these failures were termed “negative externalities.”

He warned that prices determined by competitive markets might not reflect the full cost of making goods if some of those costs were not borne by producers. A typical example of this theory is the pricing of cigarettes. No one could argue the fact that the price of cigarettes does not reflect the true societal costs associated with smoking. A recent study found that when added to the cost of cigarettes at the retail level (including taxes), the excess cost of health, life and property insurance; medical costs, drug, hospital and rehabilitation costs; and lost earnings, increase the true cost of a pack of cigarettes to an astounding $39.88. Ironically, the true cost would be even higher except for the fact that because smokers tend to die at a younger age, they don’t benefit from Social Security or Medicare. Obviously, taxes that are now levied on cigarettes are nowhere near high enough to compensate for the detrimental economic and social effects.

Unfortunately, the same argument can be made for the price of gasoline. In a study titled, “The Hidden Costs of Oil,” as reported to the Senate Foreign Relations Committee, the external or “hidden costs” of oil imports were calculated. The results clearly indicate that regardless of the pump price of gasoline, that price is only a fraction of the real cost to the domestic economy.

The True Cost of Gasoline

Here again the numbers are more than troubling. The Senate Committee was told that the total “import premium” or “hidden cost” for oil in 2006 was $825 billion. That adds $5.04 to the real price of a gallon of gas. For Persian Gulf imports, the premium would be $8.35. As mentioned above, since current federal gasoline taxes are by law required to go directly into the Federal Highway Trust Fund, used to build and maintain the federal highway system, there has been no effort (yet) to apply what is termed a Pigouvian Tax to correct this significant shortfall. Amazingly, the current federal gas tax is a measly 18.4 cents a gallon, and the last time it was increased was 14 years ago. Even when local and state taxes are added, the average tax is only some 50 cents a gallon. Remember too, this degree of taxation was applied when gas prices were in the one dollar a gallon range. Not so incidentally, gasoline taxes in the largest of the European countries are all in the four dollar range — that’s why the vast majority of Europeans drive small, fuel efficient vehicles — cause and effect? You betcha!

As indicated earlier, nobody likes taxes, and for politicians the subject is radioactive. This is especially true of Republican politicians who have never met a tax cut they didn’t like, so any tax to them is anathema. That’s why traditional Republican orthodoxy has been upset by a large group of highly respected economists, many of them staunch Republicans, who have strongly endorsed the implementation of a Pigouvian tax on gasoline.

Republicans For a Gas Tax — Remarkable

The group leader, and self-appointed president of what he calls the “Pigou Club,” is none other than George W. Bush’s former head of the Council of Economic Advisors, N. Gregory Mankiw, professor of economics at Harvard University. Professor Mankiw’s prescience relating to the subject can be established by the fact that seven years ago, in an article in Fortune magazine, he strongly urged the imposition of a gasoline tax to lessen consumption, force the manufacture of more fuel efficient vehicles, lower carbon dioxide emissions and help the country limit the importation of foreign oil. That article went unnoticed and largely forgotten — until…

Last October, in an article on the editorial page of The Wall Street Journal, he repeated that same recommendation under the title. “Raise the Gas Tax,” but this time other economists (including many fellow Republicans, as well as Democrats) joined the cause. He suggested increasing the gasoline tax by $1 a gallon over a ten-year period. This would eventually provide over $100 billion dollars in tax revenues that will help offset what he terms is “a federal budget that is on an unsustainable course.”

Most interesting (and impressive) are the reputations and credentials of those who are considered members of Professor Mankiw’s Pigou Club, all as advocates of a gasoline tax. The most famous is Alan Greenspan, the recently retired head of the Federal Reserve. However, the most influential (amongst those in the know) is Martin Feldstein, currently, a Harvard professor who is considered the intellectual godfather of a generation of Republican economists. He has also laid out a plan for reduced usage of gasoline in a Wall Street Journal editorial.

Other famed economist members include, Lawrence Summers, former Secretary of the Treasury; Paul Volcker, Alan Greenspan’s predecessor at the Federal Reserve; two Nobel Prize Laureates, Gary Becker and Joseph Stiglitz; Kenneth Rogoff, former chief economist at the International Monetary Fund, currently at Harvard as a professor; Robert Frank, professor at Cornell; plus many other university professors including Hal Varian, Paul Krugman, Nouriel Roubini, Robert Stavins, and William Nordhaus.

In addition however, there are other luminaries who agree that a gas tax is desirable including George Schultz, former Secretary of State; Al Gore (you remember him); and several well known journalists including Thomas Friedman, Greg Easterbrook, Joe Klein, Charles Krauthammer and others from such conservative publications such as Forbes, The Wall Street Journal, The Financial Times, and Business Week.

Andrew Samwick, former chief economist on the Council of Economic Advisors and currently a professor at Dartmouth has said, “If you are concerned about the external consequences of imported oil, then you should raise the cost of it,” a position that more and more free market economists are embracing. It is recognized that a gasoline tax is regressive and would unfairly impact low-income workers. Writing in the New York Times, Professor Frank (mentioned above) suggested an additional $2 a gallon tax, with “all revenue going into a common pool, which would be returned on an approximately equal per capita basis by reducing payroll taxes.” He provided solutions to shortcomings in that plan related to compensating retirees, businesses and automakers. He also cites a recent New York Times/CBS News poll showing 55 percent of Americans would be willing to support a higher gasoline tax if it reduced dependence on foreign oil.

That poll raises questions about the trepidation of politicians relating to the imposition of a tax (no matter how sensible). Professor Mankiw writes in his Wall Street Journal editorial, “Is it conceivable that the policy wonks will ever win the battle with the campaign consultants? I think it is. Even after a $1 hike, the U.S. gas tax would still be less than half the level in, say, Great Britain, which last I checked is still a democracy. [Gas prices in Britain are approaching $7.00 a gallon.] But don’t expect those vying for office to come around until the American people recognize that while higher gas taxes are unattractive, the alternatives are worse.” Now, how can we get our politicians to come around to that view?

Johnny Still Can’t Read — The New York Times Agrees

The Sunday Times magazine section of April 27 th featured an article on the testing standards implemented by the states for the No Child Left Behind (N.C.L.B.) program. The article claims, “So one of the most glaring legacies of [that program] is surprising; it has made a muddle of meaningful assessment. Testing has never been more important; inadequate annual progress toward ‘proficiency’ triggers sanctions on schools. Yet testing has never been more suspect either. The very zeal for accountability is confusing the quest for consistent academic expectations across the country.”

The article then points out the huge discrepancies between the N.C.L.B. test scores reported by the states as compared to the federally financed test called the National Assessment of Educational Progress. It reports that “While the states’ tests typically show rising math and reading scores, with roughly 70 percent of students rated proficient or better, the National Assessment reports only about half that proportion scoring so well.”

If all this seems familiar, you may recall that this information was reported here in April. The Times article agrees with my blog article and although the information for that latter article originated in U.S. News & World Report, Bob’s Blog did scoop The New York Times by some six weeks, so remember, you read it here first.

Sunday, July 01, 2007

The Doomsday Book, An Environmental Nightmare — Part IV

Hallelujah! Hallelujah! Hallelujah! A miracle has transpired. Yes indeed! In a stunning reversal of a doctrinaire disregard for the findings of a vast majority of international climate scientists, our illustrious president has announced that “global warming” does indeed exist. This phrase was previously off-limits to federal government workers and barred from usage in governmental documents. That this president has finally admitted that scientific evidence should be a factor in his decision making process (after all he is self-admittedly “The Decider”), is a remarkable about-face.

Science Denier?

Remember, it is just two years ago that he endorsed efforts by Christian conservatives to give “intelligent design” equal standing with the theory of evolution; and that stance was consistent with his previously stated view as governor of Texas that students should be exposed to both “creationism” and evolution. His veto of a stem cell research bill is further evidence that his personal beliefs take precedent over scientific exploration. His views on abortion rights, same-sex marriage, and faith-based initiatives further confirm the fact that his religion drives government policy. Do you think the term “science denier” might apply? He certainly will not go down in the annals of presidential history as “the science president.”

Thus, whether this was a sudden epiphany on Bush’s part that gave true recognition to science or merely an act of political expediency is unknown. Also unknown is the degree to which any endeavor to manage damaging emissions will really be pursued by this administration. Unfortunately, it is not only greenhouse gas emissions that threaten civilization as we know it. This is explained at length, and quite compellingly in the 2006 published book Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble. I term it The Doomsday Book although the book’s main purpose is to provide solutions to avoid that type of scenario.

Who’s He?

For an individual selected as one of “50 Great Americans” by Marquis Who’s Who, and as “one of the world’s most influential thinkers,” by the Washington Post, Lester R. Brown, author or co-author of over 50 books in addition to Plan B 2.0, is virtually unknown to the public. As a MacArthur fellow and the recipient of countless prizes and awards for his works on the environment, he also was the founder of the Worldwatch Institute and is currently President of Earth Policy Institute, with a goal of providing “a vision for an environmentally sustainable economy and a roadmap of how to get from here to there.” As described in Part I of this series, Ted Turner was so impressed by Plan B 2.0’s content, he purchased over 3500 copies and sent them to heads of state and other influential policy makers.

The Doomsday Book

The book lays out a series of events that have occurred, are occurring, or are predicted to occur that could indeed create a “doomsday” effect unless world leaders and governments take action to disrupt its course. The subjects covered are so diverse, far-reaching, and surprising that the singular problem of greenhouse gas emission seems almost microscopic by comparison.

The book’s opening paragraphs provide the background for Brown’s hypothesis: “Our growing economy is outgrowing the capacity of the earth to support it, moving our early twenty first century civilization ever closer to decline and possible collapse. In our preoccupation with quarterly earnings reports and year-to-year economic growth, we have lost sight of how large the human enterprise has become relative to the earth’s resources. A century ago, annual growth in the world economy was measured in billions of dollars. Today it is measured in trillions.”

Brown continues, “As a result, we are consuming renewable resources faster than they can regenerate. Forests are shrinking, grasslands are deteriorating, water tables are falling, fisheries are collapsing, and soils are eroding. We are using up oil at a pace that leaves little time to plan beyond peak oil. And we are discharging greenhouse gases into the atmosphere faster than nature can absorb them, setting the stage for a rise in the earth’s temperature well above any since agriculture began.”

Brown elaborates further by pointing out that as we study the collapses of earlier civilizations, “the lead indicators of economic decline were environmental, not economic. The trees went first, then the soil, and finally the civilization.” He maintains that “Our situation today is far more challenging because in addition to shrinking forests and eroding soils, we must deal with falling water tables, more frequent crop withering heat waves, deteriorating range lands, dying coral reefs, melting glaciers, rising seas, more powerful storms, disappearing species, and soon, shrinking oil supplies.” He emphasizes that “Although these ecologically destructible trends have been evident for some time, and some have been reversed at the national level, not one has been reversed at the global level.”

The China Card

While the world’s political bodies have been wrestling with greenhouse gas emissions, Brown has here identified numerous other vulnerabilities that beset the world at large, not the least of which can be summed up in one word — China. Of the five basic commodities, grain and meat, oil and coal, and steel, “consumption in China has eclipsed that of the United States in all but oil.” Even in consumer goods China leads in the number of cell phones, television sets, and refrigerators. Okay, we still use more computers but probably not for very long, and even Chinese automobile consumption is increasing at a torrid pace.

If the Chinese catch up to the United States in consumption per person, and its economy increases at the rate of 8 percent a year by 2031, its grain consumption would equal two thirds of the current world grain harvest; its use of paper would double existing world production — Brown writes “there go the world’s forests.” China would use 99 million barrels of oil a day by 2031. Current world production is only 84 billion barrels per day and it is unlikely that more than that can ever be produced. Imagine the chaos that will overtake the oil market (and prices) as major industrial countries fight (perhaps literally) for oil and oil supplies. And what about India whose population is projected to surpass China’s by 2031?

Peak Oil

I doubt if many American political leaders, much less the American populace have given much thought to the kind of problems that Lester Brown is postulating. He provides elaborately detailed and convincing evidence related to his concerns in the section of the book titled “A Civilization in Trouble.” The very first problem he confronts is headed “Beyond the Oil Peak.” You may recall the six part series devoted to that subject that ran in this column starting in December of 2005.

For those unfamiliar with the topic, Brown defines it as follows: “Peak Oil is described as the point where oil production stops rising and begins its unavoidable long term decline. In the face of fast growing demand, this means rising oil prices.” Some analysts believe we either have reached that point or are destined to do so within the next few years.

The results, according to Brown (as well as my articles) will be devastating. As oil supplies wither, how and where people live, travel, work and eat will be dramatically affected. For example, shopping malls and suburban living will disappear. Within this section, Brown also addresses alternative fuels such as ethanol, a subject covered here in November and December of last year. As in my articles, Mr. Brown derides corn-based ethanol as an inefficient and cost ineffective replacement for oil. He also refers to the increases in food prices resulting from accelerating corn prices as “the line between the fuel and fuel economies has suddenly blurred as service stations compete with supermarkets for the same commodities.”

His next topic, “Emerging Water Shortages” will be the subject of an article that will appear on my blog in the near future. However, here is the essence of Brown’s concerns: “The global water deficit is recent, the result of demand tripling over the last half-century. The drilling of millions of irrigation wells has pushed water withdrawals beyond the recharge of many aquifers. The failure to limit pumping the sustainable field of aquifers means that water tables are now failing in countries that contain more than half the world’s people.”

The next section does deal with greenhouse gas emissions under the heading, “Rising Temperatures, Rising Seas.” Brown cites the dramatic increase in melting glaciers on every continent and the resulting consequence of rising sea levels and on falling crop production. For Floridians, he refers to the fact that, “Rising seas are not the only threat that comes with elevated global temperatures. Higher surface water temperatures in the tropical oceans mean more energy radiating into the atmosphere to drive tropical storm systems, leading to more frequent and more destructive storms. The combination of rising seas, more powerful storms, and stronger storm surges can be devastating.”

The next segment, “National Systems Under Stress,” covers topics such as deforestation, as usage of firewood, paper and lumber is expanding. This results in less rainfall and declining crop yields. Soil erosion is also becoming a critical issue. Brown states that “Perhaps a third or more of all cropland is losing topsoil faster that new soil is forming, thereby reducing the lands’ inherent productivity.” He points out that as a result, “Today, the foundation of civilization is crumbling. The seeds of collapse of some early civilizations such as the Mayans, may have originated in soil erosion that undermined the food supply.”

Another developing problem is “ Advancing Deserts or Desertification” — “the process of converting productive land to wasteland through overuse and mismanagement. Anything that removes protective grass or trees leaves soil vulnerable to wind and water erosions.” Brown identifies areas throughout the world — several in Africa and South America, Iran, Afghanistan, China — where “overgrazing, over-plowing, and over-cutting intensified the desertification process.”

Another most serious issue is that of “Collapsing Fisheries.” As a result of advanced fishing technologies and the creation of huge refrigerated processing ships abetted by significantly increased demand, fisheries are collapsing all over the world. Brown cites an expert scientist who maintains that since 1950, with the onset of industrialized fisheries, we have rapidly reduced the resource base to less than 10 percent — “ not just in some areas, not just for some stocks, but also for entire communities of these large fish species from the tropics to the poles.” As a result, fish as a food staple will be in shorter and shorter supply.

Additional subjects covered are Population Growth, Universal Education, Poverty, Health, Failed States, and Plant and Animal Extinction. The multiple problems facing our planet and our way of life, as outlined by Lester Brown do indeed imply a doomsday scenario. However, these problems are associated with current conditions or Plan A. Under those conditions, allowing what is essentially a “business as usual” pattern to persist, a doomsday outlook is likely. Brown is not willing to accept a Plan A mentality. Thus, in the second half of the book he presents a series of recommendations for Plan B — a “how to” list of strategic initiatives to save civilization from destroying itself. This will be covered in next month’s column.

In the meantime, I strongly urge you to go to and read at least the opening chapter of the book. It is even available for a free download. I would be surprised if that did not hook you into buying the book, just $6.99 if used, and $11.99 if new, on Amazon.