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.

MORE:

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.

MORE & MORE:

Attila Girl:

No blood for oil. No sweat and tears, either.

And cartoonist Michael Ramirez in Investor's Business Daily:


source: IBD