Saturday, June 07, 2008

Tax Increases Distort

UPDATE: below

I've long been a fan of conservative columnist Charles Krauthammer as both thinker and writer. His piece in Friday's Washington Post is well written--but illogical and inconsistent.

The topic is energy. With "light sweet crude" closing Friday near $139 per barrel (a new record), petroleum palaver properly is preeminent. Yet, as I've detailed, the preferred policy response remains unchanged:
If oil production falls, prices rise, which both cuts consumption and stimulates investigation and production of alternatives, as Tim Haab explains:
High gas prices are NOT an economic or political problem. They are the result of the natural workings of markets. There is nothing wrong with the market--and no reason, other than self-preservation and the false appearance of being able to do something, for politicians to intervene. Supplies are decreasing--both temporarily through unexpected refinery shut-downs and permanently through stock depletion. Demand is increasing--both in the U.S. and worldwide. Both of these will cause gas prices to rise and that's good. If gas prices don't rise, we will consume gas even faster and run out sooner. Higher gas prices encourage conservation and encourage investment in alternatives.
We'll never "run out" of oil; instead, we gradually will shift to whatever substitutes are cheaper at the time. In other words, Adam Smith solved the energy crisis in 1776--the free market responds automatically and without . . . subsidy or bureaucracy.
Krauthammer gets it and starts spot-on:
So now we know: The price point is $4.

At $3 a gallon, Americans just grin and bear it, suck it up and, while complaining profusely, keep driving like crazy. At $4, it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down 4 percent. (Any U.S. decline is something close to a miracle.) Hybrids and compacts are flying off the lots. SUV sales are in free fall.

The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that "love affair" with SUVs? Love, it seems, has its price too.

America's sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company's fleet have to meet by precisely what date.

It was one out-of-a-hat number (35 mpg) compounded by another (by 2020). It involved, as always, dozens of regulations, loopholes and throws at a dartboard. And we already knew from past history what the fleet average number does. When oil is cheap and everybody wants a gas guzzler, fuel efficiency standards force manufacturers to make cars that nobody wants to buy. When gas prices go through the roof, this agent of inefficiency becomes an utter redundancy.

At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.)
This is clearly correct. So why does Krauthammer abandon his entire analysis in the next para by proposing to intervene in the energy market via a tax increase?:
Some things, like renal physiology, are difficult. Some things, like Arab-Israeli peace, are impossible. And some things are preternaturally simple. You want more fuel-efficient cars? Don't regulate. Don't mandate. Don't scold. Don't appeal to the better angels of our nature. Do one thing: Hike the cost of gas until you find the price point. . . The point [is] to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123. . .

Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.

Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand -- and bring down world crude oil prices -- the American consumer and the American economy reap all of the benefit.
Huh? Having established "the scarcity safeguards implicit in market supply and demand," Krauthammer implicitly presumes market failure. He warns against regulation and mandates, then proposes a massive Federal mandate to regulate oil consumption. In the service of honesty and openness, he would disconnect price from cost--orphaning efficiency the engine of market economies. We don't need higher taxes to promote energy conservation--Econ 101 already has.

I know Euro-loving liberals love this--after all, it's a tax hike. Yes, I understand the theory that higher gas-tax receipts permit payroll tax reductions. But, especially with a Democratic Congress and a tax-and-spend liberal likely moving to Pennsylvania Avenue, counting on tax relief is crazy. And too much of present gas-tax revenues are diverted to pork; higher returns would further tempt representatives seeking re-election.

What makes a smart and logical writer like Krauthammer turn away from reason? And why do some on [edited June 9th: In comments, Rick says he doesn't support a gas tax increase] the right agree, including solid conservative economists?

Conclusion: Government has a role in the energy arena. As Jerry Taylor explained in the June 2 New York Post, we need to encourage additional energy exploration and drilling, including Alaska and off-shore--using abundant domestic energy. And end the informal slowdown on nuclear plant construction approvals (which Obama may support). Put differently, for the most part, the Feds should stay out of the way. And Krauthammer should read Iowahawk.


Good debate in the comments. Newt Gingrich sponsors an on-line petition "to lower gasoline prices (and diesel and other fuel prices) by authorizing the exploration of proven energy reserves." And see Victor Davis Hanson at The Corner:
[W]hy are Republicans, who voted in overwhelming numbers for off-shore drilling, ANWR, nuclear, shale, tar sands, liquid coal, etc—and were opposed by Democrats on grounds of wanting to enrich energy companies—not appealing to the country to develop domestic supplies on the basis of fairness (the poor have the least access to energy efficient homes and hybrid, fuel efficient new cars), the environment (the US can extract oil, in a fungible market, far more cleanly than Russia or the Middle East), and national security (most of OPEC, Russia, Venezuela are belligerents and becoming more dangerous the more trillions of dollars the West, China, and Japan transfer to them in their hard-won national wealth)?

It is a ready-made issue for them, and with skill can appeal to Americans of every persuasion who are starting to snicker when Obama soars in pie-in-the-sky sermons about wind, solar, and millions of new jobs in green energy. Maybe—but back on planet America until we get there the working class is going to be paying a day or two per week of their wages to fuel their second-hand cars, while the environmentalists will buy new Priuses and an on-demand water heater for their tasteful homes. One would have thought the President, who was on right side of these production issues, would give a national address calling for a bipartisan effort to produce energy to get us through these hard times, or Republican senators would now be reintroducing energy legislation almost daily.

But given the current conservative ineptness, $5 a gallon gas will be blamed on the war, or lack of federal subsidies to solar, or the oil companies, and not the elite agenda of utopians who were not willing to do what was necessary for the collective good to help us transition through to new fuels.

Attila Girl:
No blood for oil. No sweat and tears, either.
And cartoonist Michael Ramirez in Investor's Business Daily:

source: IBD


OBloodyHell said...

> And end the informal slowdown on nuclear plant construction approvals (which Obama may support)

Yeah, until his Green Liberal Idiot suport base gets wind of any seriousness "Yu Wuz Seeryus 'Bout Dat?", at which time it'll be backpedal like a circus-clown version of Lance Armstrong time and "I-Supported-it-until-I-rejected-it".

This gas problem is not a positive move. It may be a necessary move, but it's not a positive one.

a) The automobile is a basic expression of freedom. It represents the ability to go where you want when you want and in the manner you want.
b) Mass transit is a massive -- and I do mean MASSIVE -- waste of human time. In a mid-sized town such as the one I live in (major metro area ca. 250,000, rough diameter of metro area maybe 10-15 miles), It takes ca. 25 minutes to get anyhere in RUSH HOUR. 15-20 any other time. The buses, thanks to a very liberal population (We are the only county in within 120 miles which went for Gore and Kerry), are BETTER than those in most places this size (and are substantially supported by a large local college's student government). Despite this, do not plan on taking less than 30 minutes to get ANYWHERE... and if a transfer is involved (i.e., you are not headed along a spoke towards the college) then it will be not less than one HOUR to get from A to B. (so, for a round trip, allocate TWO HOURS for a 40 MINUTE car trip) You will also need to be at the bus stop not less than 10 minutes ahead of time (enjoy sweating in the summer sun, getting soaked in the rain, and freezing your butt in the winter).

Oh, and... multiple stops? BWAAAAhahahahahahhaaaaaa!!!!!

Packages? BWAAAAAAAAAAAhahahahahahahahahahaha!!!!

Out later than 10pm?

I'll keep my @#@%@%^ car at $10 a gallon.

*Thanks, but no thanks*. The number of man-years wasted riding on buses in the course of a single year, is this town alone, is staggering. Calculate it for yourself.

It may be necessary to reduce car usage. It's not DESIRABLE. It puts you to someone else's schedule. It's anathema to everything that makes this country WORK so well.

A proper alternative to a car would be a device with the same characteristics excepting the motive force would be something else. Hydrogen, a whole new type of battery, whatever.

Anything else is *crap*.

Assistant Village Idiot said...

OBH, the book "The Road More Traveled" suggests that mass transit becomes cost effective at densities of 5,000people per sq. mile. That seems about right. In very limited situations, it's fine. But when you remember that out of the city it is essentially an extra highway lane that moves fewer people per hour than an actual highway lane, its uselessness becomes clear.

Carl - and oil shale, oil sands. We really only need to hang on with big globs of oil for another 20-30 years, until nanotechnology makes solar electricity (or something better) feasible.

OBloodyHell said...

> Carl - and oil shale, oil sands. We really only need to hang on with big globs of oil for another 20-30 years, until nanotechnology makes solar electricity (or something better) feasible.

Solar is never going to be feasible. There are only two forms of solar energy which have any chance of ever being feasible -- Ocean Thermal and SPS.

The absolute maximum energy available at the earth's surface is roughly 1kW/sq-m. This means that, at 100% efficiency, you've got to cover not less than a full METER sq. with solar collection materials to drive 1kW of power (contrast with existing plants, which are in the multi GIGA-Watt range). "divide" that by the efficency of your cells and then multiply by some vaguely definable numbers to see what you will need in your area, with its typ. climate and sun and shade numbers.(Hint' I'll lay odds that it's not less than a 3x multiplier no matter where you live). Further, there are no decent storage mechanisms which don't add a lot of conversion-deconversion inefficiencies to that mix, too, which adds STILL ANOTHER multiplier to it. Now divide by the conversion factor for sq-m to acres, and you start to see the problem with solar cells, which are an inherently nasty tech, on top of all of that (they are basically computer chips, the production of which results in large quantities of toxic waste -- and you are now looking toward covering square KILOMETERS with the things...!)

Ocean Thermal overcomes these limitations by making the rather vast ocean surface into the solar collector for you.

But it's (horror of horrors!) an inherently centralized system, so it requires a Utility Company. This means that it's the illegitimate stepchild of Green Power Generation, and gets no funding. What that says about how much Green advocates really care about both the environment and about power generation I'll leave to you.

SPS requires a functioning space industry. I seem to notice that, despite how things appeared in the 70s, we don't have that yet, and seem to lack the national will to do so. So my suspicion is that it's going to be left to the next world superpowers (Chana/Japan, China/India, what-whoever) to initiate that.

But direct solar-power from cells? That will never be more than a nominal fraction of the power generation needs of this or any other major nation.

Rick said...

My blog detected the link from your website - so I checked it out. Can I assume you have some automated script doing the links? Respectfully I suggest you have misunderstood me when you write "some on the right agree" (with Krauthammer) and link that to my post. I agree with his analysis. Not necessarily with his solution. "It is a solution I would resist". But thanks for the link. :-)

Geoffrey Britain said...

The real problem is that neither 'side' will acknowledge the other 'sides' valid points.

That's why there's a logjam preventing resolution of this issue.

Conservatives are right that only established technologies can address the world's short- term needs.

Conservatives are also right that with the rise of Islamic terrorism, energy independence has become a national security issue.

Why won't liberals acknowledge the rights valid points?

Fear. Fear that if they did give in to demands to start drilling etc. the short-term profit motive would lead to two unacceptable outcomes: first, that business and government would cut corners and the enviroment would suffer greatly.

Many have drunk the kool-aid that Al Gore is offering. Those people really do believe that it's a race to save the planet.

Secondly, that funding and support by conservatives into alternative energy would be in the nature of lip-service only and that the false 'crises' we face today would in 20-50 yrs be a real crises.

What valid points by liberals won't conservatives acknowledge?

Liberals are right that only development of alternative technologies (including nuclear fusion) can address our long-term needs.

That is also a national security problem.

Ask anyone older than 50 how fast a half century can fly by and you'll realize how 'quickly' the distant future can become, a present with few options.

The perception that conservatives are not serious about the need for the attainment of practical alternative energy technologies is for the most part accurate.

Many conservatives have their heads buried-in-the-sand on this issue.

Scientifically unfounded fears of global warming aside, consider that on his own initiative, no national conservative politician nor commentator talks about the long-term implications of a rapidly growing modern world's dependence upon a critical but finite resource like oil.

Carl said...


No automated script--I surfed to your blog. Which I read as implying Krauthammer was convincing you to change your mind. Still, you are the authority on your views, so I'll note a correction in the text.


I agree solar seems like a dead end so far. Maybe it will work some day, but--for the reasons you say--we can't pick solar cells as a winner today.


I'm with you on sands and shale. When I was just a lad, my father (a chemical engineer) brought home some shale after a business trip to Calgary--he lit it, and it burned.

A 2005 Rand report estimated between 500 billion to 1.1 trillion barrels of oil resource reserves lie in just in 3 Western states (at 8-9). That report warned that extraction would be economically unviable unless the cost of crude oil exceeded $95/barrel (at 44). Well, guess what. . .

So why did Congress prohibit virtually all oil shale leasing only last year?


I agree that the Administration sometime acts as if bureaucrats should select future energy technology. But I don't see such short-sightedness in most conservatives. Rather, as you say, it's a perception problem: because righties believe free-market incentives transmitted via price signals, progressives smear the speediest solution as "inaction." And don't underestimate the short- and long-term benefits of nuclear power plant construction. Similarly, don't overstate the need for, or the feasibility of, energy independence (for national security or other reasons).

I'm not smart enough to know whether fusion is the answer. Neither is Obama. That's the free market's job--and what it does best. So let's get government out of the way.

Carl said...

From the June 6th Fortune:

"You'd think with gas prices topping $4 and consumers crying uncle, Congress would be moving fast to spur development of a domestic oil resource so vast - 800 billion barrels of recoverable oil shale in Colorado, Utah and Wyoming alone - it could eventually rival the oil fields of Saudi Arabia.

You'd think politicians would be tripping over themselves to arrange photo-ops with Harold Vinegar (whom I profiled in Fortune last November), the brilliant, Brooklyn-born chief scientist at Royal Dutch Shell whose research cracked the code on how to efficiently and cleanly convert oil shale - a rock-like fossil fuel known to geologists as kerogen - into light crude oil.

You'd think all of this, but you'd be wrong.

Last month, the U.S. Senate's Appropriations Committee voted 15-14 to kill a bill that would have ended a one-year moratorium on enacting rules for oil shale development on federal lands (which is where the best oil shale is located). Most maddening of all - at least to someone like myself not steeped in the wacky ways of Washington - the swing vote on the appropriations committee, U.S. Sen. Mary Landrieu, D-La., voted with the majority even though she actually opposes the moratorium."

Anonymous said...

To what extent are the high gas-at-the-pump prices caused by the need for Bush and his oil buddies to rake in as much as they can before he leaves office? I wonder.

Carl said...


Is this NOfP bait, or are you actually asserting the Administration invaded Iraq for the money?