Wednesday, January 24, 2007

Pigou Club and Government Policy

Russell Roberts makes a very good point:

Greg Mankiw tries to expand the Pigou Club:

Some of my libertarian friends aren't members of the Pigou Club because they view gasoline taxes as a case of excessively intrusive government. But if this tangle of regulation is the alternative, isn't it time for them to reconsider?

But that's a different club. As I understand it, members of the Pigou Club support an increase in the federal gasoline tax on various externality grounds—pollution, global warming and international security issues. I'd be happy to replace all or even most attempts to reduce gasoline consumption via command-and-control and replace them with a higher tax rate. But that Club is a quixotic club—Archer Daniels Midland and others who benefit from ethanol regulation along with whoever it is that benefits from CAFE standards (regulators and politicians who get lobbied to see it tweaked or delayed?) will make sure that Club's mission is never achieved. But the Pigou Club's goal very well may be achieved and will add a higher gasoline tax to the existing tangle of regulations.

The federal tax on gasoline has been increased many times since its inception in 1932. Have any of those increases been accompanied by regulatory simplification?

It seems to me that most of the time economists offer policy advice and evaluation without thinking very much about whether it is practical or not. They also often offer advice without giving much thought to how the political process is likely to play out, even if the advice is taken. In the case at hand, I tell the students in all of my classes that the economic policy approach to pollution is a corrective, or Pigovian tax. The idea is, of course, to replace all the inefficient current policy approaches with a Pigovian tax. But, this simply doesn't look like politics would ever accomplish this substitution. Instead, as Russell Roberts suggests, what we most likely would get if the economists advice was followed was a corrective tax piled on top of all the inefficient policies and regulations already in place.

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