Month: May 2006

Forget about how much you like either oil companies or taxes.  Let’s boil down the comparison to either taxing profits or taxing gasoline prices.

Taxing profits will reduce the incentive to increase future supply, even if you think oil companies form a cartel.  Fewer profits means less exploration and less incentive to develop new extraction technologies.

The weakening of supply responses is desirable only if you think we are approaching the "end of oil" — and indeed all feasible substitutes — and that we don’t want to discover more oil right now.  Perhaps it would be better to run out our string of doom more slowly.  You also presumably would believe that more conservation, as would be induced by higher prices, won’t much help.  These views, taken together, are possible but I find them doubtful.

Alternatively, you might believe that our government can tax short-run profits that arise from supply kinks or slow-to-adjust refineries.  Yet we will magically remove those taxes within a few months, so they do not discourage long-run elasticity of supply.  That again strains the imagination.

Taxing gas prices puts an immediate burden on motorists, although the profits tax may bring higher prices in the longer run.  But the gas tax encourages conservation and maintains the incentive for new supply.  Surely that is the superior approach. 

Addendum: Jane Galt and her readers have relevant thoughts.

Sure, as John Kenneth Galbraith argued, advertising can encourage people to buy things that may not make them happy.  The solution to the advertising problem, however, is not less advertising but more.  A society with a lot of advertising is a society in which advertising is not very powerful. In any case, the competitive cacophony of the market place where the very
desperateness of the advertisers is itself an advert for their
impotence is no real danger. 

The real danger is not from Madison Avenue.  At the very worst, when Madison Avenue tells us how white our shirts can be, we end up with lighter pockets but whiter shirts.  It’s political advertising, which often creates social images that fuel the politics of hatred, where the real danger lies.  Even in the best of democracies, political advertising is nowhere near as competitive as in the market for deodorant and the product being sold is much more dangerous.    

Around the world, reserves of US dollars and Treasury securities have more than doubled over the past 5 years.  It’s nice for us when we get to buy goods and pay in paper but what will happen when we face reserve reverse?  And why, asks Eduardo Porter, do poor countries continue to fund our consumption?

The amount that poor countries are giving up by holding low yield Treasuries is not inconsiderable.  Larry Summers calculates that India has reserves in excess of those required for prudent insurance in the realm of 100 billion dollars – if invested in higher paying assets those reserves could raise Indian GDP by 1-1.5%, more than double the amount that India spends on health care.