I am Speechless!!

If you read Mankiw, you would have heard of the "Pigou Club". Now, the National Post (yes, it is the National Post in Canada) have this, and the Editor of the Financial Post (part of the National Post publication), Terence Corcoran, started this and this.

Here is the text of the column, "Nopigou Club".....and personally, I do not buy Corcoran's arguments.

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Join The Nopigou Club

Terence Corcoran, Financial Post

Published: Thursday, October 12, 2006

We don't know much about the Conservative government's national green plan, except that it seems to involve a lot of blustery emissions from ministers on the need to "replace rhetoric with results," as Prime Minister Harper put it yesterday. A new clean air act to be unveiled next week, he said, will "get things done" via "strict enforcement" of clear national standards.

Many puzzling signals have been sent out by the government, including the idea -- repeated again by the Prime Minister yesterday -- that greenhouse gasses and pollution are one and the same. The government plans a "holistic approach " that "doesn't treat the related issues of pollutants and greenhouse gas emissions in isolation." If you didn't know about the pollution-greenhouse isolation problem, you're not alone. But the government promises to fix it.

Whatever the plan, so far the Harper government appears to have resisted the great siren call sweeping some parts of the murky world of economics: Pigovian taxes. A New York Times column on Sunday by Daniel Gross, "Raise the Gasoline Tax? Funny, It Doesn't Sound Republican," listed all the big-name economists, many of them Republican, who have lined up behind the idea of higher gasoline taxes -- really higher gasoline taxes -- to solve a number of alleged U.S. economic and environmental problems.

The Times column makes a big fuss about Alan Greenspan's recent endorsement of the idea of higher gasoline taxes, even though Mr. Greenspan has backed the idea often in the past. At a recent conference, however, Mr. Greenspan said he would support an increase in the U.S. federal gas tax. "That's the way to get consumption down. It's a national security issue," he said.

With that, Mr. Greenspan appears to be jumping aboard a campaign by Harvard economist N. Gregory Mankiw to enlist support for higher gas taxes. His blog promotes membership in The Pigou Club, named after Arthur C. Pigou, an early 20th century welfare economist who promoted the idea of using taxes to fix social and other problems allegedly created by a free market economy. Among the backers of Pigovian taxes, especially on gasoline, are economists often associated with Republican governments, including Martin Feldstein and Mr. Mankiw himself. Other not-so-Republican members include Al Gore and Paul Krugman.

Canadians, of course, will recognize the idea as a core element in Liberal leadership candidate Michael Ignatieff's environmental program. A new carbon tax, to be paid at the pump, would reduce demand for gasoline and also provide government with revenue to shift around to subsidize other fuels, ethanol and bio-fuels, and transfer money perhaps to other levels of government.

The Pigovian idea is that you can use the tax system to correct market failures and clear up what economists call "negative externalities." By driving your car around, you leave behind a number of problems you don't pay for: smog, for example, or greenhouse gasses. An added issue in the United States is the high volume of oil imported from largely unstable areas. By raising taxes on gasoline, perhaps to European levels, consumption would fall, improving the environment and relieving the United States of dependence on foreign oil. How that would work is far from clear.

With Mr. Greenspan enlisted in Mr. Mankiw's Pigou Club, and with the Times column circulating, the idea of a gasoline tax is likely to sweep the econosphere. Whether it will sell politically is another matter. In the meantime, it is time to start up a little opposition to Mr. Mankiw's operation. If nobody in the United States does it, let me offer up the services of the National Post. The NoPigou Club starts here. To join, e-mail nopigou club@nationalpost.com.

The Pigovian tax concept is based on the same old, same old economic theories that supported the idea that a government can plan and run the economy better than the market. Arthur Pigou was a great interventionist, his premise being that markets fail and in the end we need socialism to put things right. Among his policy prescriptions: deficit spending, public works projects, nationalized industries and major taxes and redistribution.

The chart above is a classic economic portrait of how a new tax works in theory. But these are merely superficial presentations of a logical scheme that cannot possibly apply to any reality.

The problem with a Pigovian gasoline tax is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in gasoline consumption? And what's the price to be set at? How high will the tax have to go before it changes behaviour enough to reduce demand? Will the government just wing it and see what happens? Will the alternative behaviour be any better or create new externalities and unintended consequences? What does government do with the money collected -- except launch a program of subsidies and spending to run alternative economic initiatives?

There is no end to the planning mayhem that could be generated once Pigovian taxes become the economic norm. Taxes on cigarettes have risen hundreds of per cent over the years, in part to offset the alleged externality of rising costs of treating cancer and other diseases caused by smoking. Still people smoke. Anything that can be politically whipped up into an unwanted development -- taxes on food to reduce obesity, taxes on alcohol to reduce alcoholism, taxes on babies to reduce population growth -- or subsidies on babies to boost population.

There's nothing new in Pigou, no matter how he's dressed up by Prof. Mankiw.

© National Post 2006