California Tries to Tax Out-of-State Internet Merchants

(HT Drudge Report) By a 1992 Supreme Court decision, Internet merchants do not have to collect sales taxes in states if they do not have a physical presence in that state.  Legally, consumers are still required to pay the tax but collection is problematic.  The California legislature passed and Governor Brown signed a bill that attempts to circumvent the decision by taxing out-of-state merchants through affiliates that have a physical presence in California.  Most affiliates are related to out-of-state merchants through click through advertising.  Internet merchants located outside of California hate the legislation and instate merchants love it.

I will not offer an opinion about the merit of the legislation.  I do wish to comment on the difficulty of taxing highly mobile businesses and households.  Amazon and Overstock.com announced that they were immediately cutting ties to all California affiliates.  California expected to collect $200 million annually.  With the largest Internet marketer pulling out, that total will be smaller. 

The affiliates are also responding.  There are 25,000 affiliates in California and they pay $152 million in state income taxes last year.  Many have already announced that they will leave California and the state will lose their tax revenues.  Consumers will pay a higher price because at least part of the tax will be passed on to them.  There is a difference between the incidence of the tax, who writes the check to the government, and the burden of the tax.  Economic literature suggests that consumers will pay part of the burden through higher prices as part or all of the tax is passed on to consumers. 

Instate merchants view the tax as a fairness issue because they believe that they pay the sales tax that out-of-state merchants avoid but there is now question that they will gain sales as the price of products on out-of-state Internet merchants rise relative to their prices.

States that place high taxes on high income households or corporation will see these entities exit for states with lower taxes.  Countries that place high taxes on high income households or corporations will see these entities exit for countries with lower taxes.  Low income households and small corporations have less ability to “vote with their feet.”  Many complain that this phenomenon will create a raise to the bottom in which government will be deprived of necessary resources.  Certainly pressure will increase to make government smaller, but it will also increase to make government more efficient and that is good.

For more information information see, “California tells online retailers to start collecting sales taxes from customers,” “New Internet Tax Grab Will Burden Companies and Your Portfolio,” “Web retailers say they'll fight new California sales tax,” and “Sales Tax on the Internet.”
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Victor Fuchs, “Three ‘Inconvenient Truths’ about Health Care”

Without comment, I have quoted Victor Fuchs’ “Three ‘Inconvenient Truths’ about Health Care” which was published in the New England Journal of Medicine.  Each truth that Fuchs states is supported by argumentation.  As always, the entire article is worth reading.

1. Over the past 30 years, U.S. health care expenditures have grown 2.8% per annum faster, on average, than the rest of the economy. If this differential continues for another 30 years, health care expenditures will absorb 30% of the gross domestic product— a proportion that exceeds that of current government spending for all purposes combined.

2. Advances in medicine are the main reason why health care spending has grown 2.8% per annum faster than the rest of the economy.

3. Universal coverage requires subsidies for the poor and those too sick to afford insurance at an actuarially appropriate premium; it also requires compulsion for those who don't want to help pay for the subsidies or who want a “free ride,” expecting that they will get care if they need it.

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Rewrite of Political Chicken and the Debt Ceiling

This post is a rewrite and combination of two recent posts that evaluate the debt ceiling impasse as a game of political chicken.  This first (here) was incomplete and the second (here) completed the game but required readers to view two posts.

Congress is engaged in a game of political chicken over raising the debt ceiling.  Instead of two cars racing toward each other in a single lane, Republicans and Democrats are screaming at each other across the aisle about conditions that they will require to raise the ceiling.  If left unresolved, this political crisis will precipitate an economic crisis.  Leaders in both parties acknowledge that the ceiling must be raised or the government will not be able to use debt to meet its financial obligations, and both sides know that the government could not simply cut more than a trillion dollars from this year’s budget to remove the need to borrow.  In short, if a political solution is not found the government will default on its obligations.

This is where the game of chicken begins.  Both parties are attempting to use the current crisis as a fulcrum to leverage future budget negotiations over a bigger looming economic crisis caused by unfunded entitlement programs, the big three being Social Security, Medicare and Medicaid.  To greatly simplify arguments, the Republicans prefer to cut spending and reduce the federal government’s size and scope through reform of entitlement programs[1].  Democrats want the federal government to retain its size and scope and would rather close deficits with increased taxes[2]; their reforms to entitlements would attempt to cut expenditures through government reform.  It is beyond the scope of this post to comment on the merit of their agendas. 

Incumbents in both parties are wooing voters through political theater and both parties will gain or lose support depending on the actions of the other party and the economic outcome of those actions.  The following political outcomes are pure conjecture, and are only meant to illustrate the game.  If both parties stay the course causing a financial meltdown, incumbents in both parties will lose votes, say 10 million nationally.  If Democrats stay the course and Republicans capitulate, Democrats will gain 2 million votes and Republicans will lose 2 million votes.  If Republicans stay the course and Democrats swerve, the opposite outcome occurs (Democrats lose 2 million votes and Republicans gain 2 million).  If the parties compromise neither party gains or loses votes.Voters are affected by the economic outcomes of political actions.  The best outcome depends on the economic effectiveness and political sustainability of each party’s solution and the compromise solution.  Voters are members of a party because they believe that it offers the best economic solutions.  Their beliefs may or may not be correct but the implications of this assertion on the political game of chicken are clear.  The best outcome for a Democratic voter would be for Congressional Republicans to swerve and Congressional Democrats to stay the course.  The best outcome for a Republican voter would be the reverse.  Voters from both parties benefit from a compromise but less so than if their party holds the course and the other swerves.  The worst outcome for voters is for both parties to hold their course and fail to raise the debt ceiling because the impasse would trigger a financial crisis.     

I believe that tying the increase in the national debt ceiling to spending cuts and market oriented institutional reforms to entitlements is the best economic solution.  On this issue, I hew closer to Republicans.  I believe that it would cause the greatest level of economic growth and that growth would be balanced.  I would hope that the subsequent prosperity would be sufficient to make a more limited government politically sustainable.  I fear that my preferred solution or any political solution offered by one party is not politically sustainable or even attainable.  Our country is politically divided.  Republicans hold the House and the Democrats, the Senate and the executive branch.  A compromise solution that acknowledges this fact and takes the best elements of each party’s offerings represents the least political risk and offers a reasonable economic outcome.   

[1] A small group of Republicans insist that they will not support an increase in the debt ceiling under any circumstance.  I am not sure if this is a negotiating stance or a statement on their future vote.  I do not know if an economist that supports this position or believes that not raising the debt ceiling will have anything less than major costs to the economy.

[2] A small group of Democrats that they will not support an increase in the debt ceiling that reduces entitlement benefits or increases taxes on anybody but the wealthy.  The wealthy do not earn enough to make projected levels of entitlement programs financially sustainable.
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McAuliff on the Restarting American Offshore Leasing Now Act

Michael McAuliff, a writer for the Huffington Post, seems to oppose the Restarting American Offshore Leasing Now Act, which would expedite drilling in Alaska and the Gulf, largely because he finds arguments offered by supporters as specious (“More U.S. Oil Drilling Won't Lower Gas Prices, Experts Say”). 

The Bill was sold as a plan to bring lower oil prices, move the country towards energy independence and create jobs.  McAuliff hits an easy target; politicians always oversell the benefits of their activities.  He uses Mike Lynch, an oil analyst for Strategic Energy and Economic Research, Inc. who identifies himself as a moderate Republican and Phyllis Martin, an analyst with the U.S. Energy Information Administration to evaluate the oversold benefits.Lynch and Martin argue that implementation of the legislation would not reduce oil prices now and would have little impact in the future.  Lynch believes potential production increases in the U.S. are too small to have much impact on world prices.  They also argue that increased production would not make us energy independent.  The analysts agree that new drilling in Alaska would create jobs, increase tax revenue, and earn a lot of people a lot of money.

I believe that the analysts are largely correct, but a little depends on your interpretation of key words.  Assuming that drilling in Alaska increases world production by one percent, that gas prices are $4.00 per gallon and elasticity of demand ranges between 2 and 3, prices would fall between 8 and 12 cents a gallon.  I would call that a significant project.  Drilling in other locations and increased use of hydraulic fracturing and other new technologies would further increase production and, holding other things constant, decrease prices.  I agree with the analysts that the U.S. is unlikely to achieve energy independence through increased drilling even if it would reduce the amount of oil we import.  McAuliff seems to have a problem with oil companies profiting from their activities.  I do not.  If big oil can create jobs, increase profits and reduce the price of gas and other oil-based products, I am all for it.

McAuliff seems to have an unstated argument--drilling increases pollution.  It is an argument that I respect.  There is a tradeoff of pollution and wealth.  Wealth enhancing economic projects increase pollution even when cost benefit analysis justifies a pollution causing project.  Some people value a more pristine environment than a little more wealth and for them, marginal costs would exceed marginal benefits.
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The IMF and S&P on Playing Chicken

In “Political Chicken and the Debt Ceiling” I compared the current impasse between Democrats and Republicans were playing a game of chicken.  Incumbent politicians, the drivers and voters, the bystanders are affected.  The outcomes for voters differ from those of politicians and depend more on the economic outcome of the political game.  Incumbent politicians gain or lose votes depending on the outcome of the game and voters gain or lose from the nation’s change in financial stability which is again an outcome of the game.  Both parties are using the debt ceiling crisis to leverage a solution to the larger and looming sovereign debt crisis. 

The worst outcome is for both parties to hold their course and fail to raise the debt ceiling.  Incumbent politicians in both parties lose votes.  Voters lose as well because the impasse would trigger a financial crisis.  The best outcome for a party is for the other party to swerve or capitulate, accepting the other party’s solution.  Voters gain or lose depending on which party’s plan best solves the sovereign debt crisis.  A compromise does not affect incumbents but is better for voters than a political impasse and has the potential to be better or worse than one party capitulating to the other.  Hopefully, a compromise might include the best ideas of both parties but could include the worst, or more likely still, something between the best and worst of each plan.

I prefer tying the increase in the debt limit to cutting the budget deficit.  The remainder of the post quotes to articles, one I believe that supports my position and another that does not.  In “IMF cuts U.S. growth forecast, warns of crisis,” Luciana Lopez writesblockquote>SAO PAULO (Reuters) - The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are "playing with fire" unless they take immediate steps to reduce their budget deficits. Yet that relatively benign global outlook could quickly fall apart if politicians in the United States and Europe do not start showing more leadership in addressing their countries' debt problems, the fund warned...

"You cannot afford to have a world economy where these important decisions are postponed, because you're really playing with fire," said Jose Vinals, director of the IMF's monetary and capital markets department.

"We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis," he said in an interview in Sao Paulo, where the updates to the IMF's World Economic Outlook and Global Financial Stability Report were published.In “S&P restates political threat to U.S. AAA rating,” William James and Emelia Sithole-Matarise write

The risks of the U.S. losing its prized triple-A rating over the medium term have increased as the country faces a political impasse and nears its debt ceiling, Standard and Poor's said on Tuesday.


While the ability to adapt both fiscal and monetary policy was a positive for the United States, the risk of a credit rating downgrade had increased due to a lack of political consensus on how to employ that flexibility, Moritz Kraemer, head of sovereign credit ratings for Europe at Standard & Poor's, said on Tuesday.


"The problem is this flexibility needs to be employed and for that you need political consensus. That's not very visible right now," he said.

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The Social Cost of Illegal Immigration

Bloggers and economics teachers face a paradox.  We want to convince students and readers that economic ideas are valuable and the best way to grab attention is to use those ideas to analyze the economics of current events.  The best way to lose them is to use economic ideas to come to a conclusion that contradict their prior beliefs.  The intersection of economic analysis and prior beliefs is small; if it were large, there would be no reason to teach economics.

The current debate about illegal immigration illustrates the gulf that often separates the views of economists and everybody else.  The popular debate posits high domestic net costs to illegal immigration and the economic literature finds empirical evidence of net benefits or small net costs.

Arizona, Georgia, Indiana, Oklahoma, Texas and Utah have passed or are considering legislation aimed at reversing the tide of illegal immigration.  The severity of these laws hints at the large costs that backers believe illegal immigration imposes on society.  The new Alabama law, heralded or decried as the toughest yet to be enacted would require public schools to determine the citizenship status of students, force police to detain someone they have stopped for any reason if they believe that person may be an illegal alien and if the person cannot produce documentation.  It would make it a crime to transport or harbor someone who is in the country illegally, and allows government to suspend or revoke the business licenses of a business that knowingly hires an illegal alien.  It also requires businesses to use the E-Verify database to confirm the immigration status of new employees. 

In my last post, “Political Chicken and the Debt Ceiling,” I sided with the Republican position on the debt ceiling negotiations.  In this post, I will take a shot at them.  Republicans claim to support smaller government, a lighter regulatory burden, and constitutional rights.  The anti immigration law is more strongly supported by Republicans than Democrats.  It is increases the size and scope of government, increases regulatory burden of schools and businesses, and limits my first amendment right of freedom of assembly, the right to collectively gather to promote, pursue and defend common interests.  The impact of these laws is the opposite of the claimed position of the Republican party.

A petition to President Bush and the Congress that was signed by 523 economists presents what I believe is the majority opinion.  In part, it reads

Overall, immigration has been a net gain for American citizens, though a modest one in proportion to the size of our 13 trillion-dollar economy. 


Immigrants do not   take American jobs. The American economy can create as many jobs as there are workers willing to work so long as labor markets remain free, flexible and open to all workers on an equal basis.


In recent decades, immigration of low-skilled workers may have lowered the wages of domestic low-skilled workers, but the effect is likely to have been small, with estimates of wage reductions for high-school dropouts ranging from eight percent to as little as zero percent.


While a small percentage of native-born Americans may be harmed by immigration, vastly more Americans benefit from the contributions that immigrants make to our economy, including lower consumer prices. As with trade in goods and services, the gains from immigration outweigh the losses. The effect of all immigration on low-skilled workers is very likely positive as many immigrants bring skills, capital and entrepreneurship to the American economy. 


Legitimate concerns about the impact of immigration on the poorest Americans should not be addressed by penalizing even poorer immigrants. Instead, we should promote policies, such as improving our education system, that enable Americans to be more productive with high-wage skills.

To my knowledge, there is not a competing anti-illegal immigration petition (see David Hedengren, Daniel B. Klein, and Carrie Milton.  “Economist Petitions: Ideology Revealed,” Econ Journal Watch, Volume 7, Number 3, September 2010, pp 288-319).
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Political Chicken and the Debt Ceiling

Congress is engaged in a game of political chicken.  Instead of two cars racing toward each other in a single lane, our two parties are screaming at each other across the aisle about conditions that they will require to raise the federal debt ceiling.  Democrats and Republicans alike acknowledge that the ceiling must be raised or the government will not be able to use debt to meet its financial obligations and both sides know that the government could not simply cut more than a trillion dollars from this year’s budget.  

This is where the game of chicken begins.  Both parties are attempting to use the current crisis as a fulcrum to leverage future budget negotiations over a bigger looming crisis caused by unfunded entitlement programs, the big three being Social Security, Medicare and Medicaid.  To greatly simplify arguments, the Republicans want to cut spending and reduce the federal government’s size and scope through reform of entitlement programs.  Democrats want the federal government to retain its size and scope and would rather close deficits with increased taxes; their reforms to entitlements would attempt to cut expenditures through government reform.  It is beyond the scope of this blog post to comment on the merit of their agendas.  

Incumbents in both parties are wooing voters through political theater and both parties will gain are lose support depending on the actions of the other party.  If both parties stay the course causing a financial meltdown, incumbents in both parties will lose support (say 10 million national).  If Democrats stay the course and Republicans capitulate, Democrats will gain votes and Republicans will lose votes (say Democrats gain 2 million and Republicans lose 2 million).  If Republicans stay the course and Democrats swerve, the opposite outcome occurs (Democrats lose 2 million votes and Republicans gain 2 million).  If the parties compromise neither party gains or loses votes. 

Pick one side or the other.  I would like to see smaller government so on this issue I tend to support the Republicans.  I want Democrats to swerve.  Federal Reserve Chairman Ben Bernanke wants Republicans to swerve.  Yesterday, he urged Republicans to not block legislation tying deeper cuts in spending to passage of legislation raising the debt ceiling (“Bernanke urges GOP to support raising debt ceiling”).  On this issue, he prefers the Democrat’s position.  I believe that we would both prefer a quick compromise.  Let’s just be honest and admit that both Republicans and Democrats are playing chicken and that the stakes are high.Replace this text with...
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Gene Autry and DDT

I watched another Gene Autry movie with good economics underlying the plot.  In Riders of the Whistling Pines, produced in 1949 and written by jack Townly, 60,000 acres of forest is infested with moth larva that will destroy the timber.  The forest land is a common resource sheltering land, timber, water and wildlife that is shared by all in the community.

The forest is patrolled by the forest rangers, and under contract, a logging company has an exclusive permit to harvest flagged timber, but the company would be more efficient if it could harvest more timber.  The infestation provides a profit enhancing scenario.  All dead timber is flagged for harvest.  The logging company and the forest rangers simultaneously discover the infestation.  A logger first attempts to suppress knowledge of the infestation by shooting the ranger, but fail as Gene Autry, a second forest ranger, discovers the infestation.

At Autry’s suggestion, his superiors decide that a DDT solution mixed in a proper proportion will save the timber and not harm wildlife or domesticated livestock.  This was certainly the best “scientific” response to the problem at the time, a response that Department of Agriculture would have approved.  Continued study of DDT demonstrated that it produces a negative externality.  It does affect more than just the moth larva, but how great is the negative externality?

The writer notes the controversy the use of DDT divides the community.  One group supports the forest rangers.  Another group fears that DDT would affect all local wildlife including livestock; the loggers attempt to incite this group to violent action.  A final group is composed of environmentalists concerned with the impact of DDT on both livestock and wildlife.  A conversation at 22:30 into the movie illustrates the divisions.

Logger: I hate to think what will happen when they lose it [DDT] from those airplanes.


Rancher 1: They claim it won’t do any harm.


Logger: If it kills the bugs in the trees, it will kill everything else won’t it?


Rancher 1: They say not.


Rancher 2: I heard of a fella that sprayed DDT on his dog to kill fleas.  It killed the fleas alright, but it killed the dog too. 


Loie:  What is going to happen to the fish in the streams?


Rancher 3: Oh, you talk foolish Loie, besides the timber is more important than the fish.


Loie:  Not to the fish it ain’t.

One may laugh at the naive scientific view that spraying DDT would not harm the ecosystem but it may be no more naive than the view that followed.  In 1962, Rachel Carson published Silent Spring, a book noting that DDT did not biodegrade quickly and that it harmed all creatures, including people.  The book caused led to a worldwide ban on the use of DDT, but the ban had a negative externality of its own.  DDT was used to kill malaria carrying mosquitoes in Africa and it has no close substitutes.  Millions of Africans died from malaria that might have been controlled by spraying DDT.  In 2006 a better balance was reached; the World Health Organization (WHO) recommended the use of DDT to control malaria and governments around the world including the Bush administration.  Some environmental groups including Sierra Club and Environmental Defense support a limited use of DDT to control for malaria (“WHO Backs Use of DDT Against Malaria”). 
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Are Kids Normal or Inferior Goods?

Justin Wolfers asks the following question in post in Freakonomics.

Are you likely to have more kids if you are rich or poor?  Or to put this in econo-jargon: Are kids normal or inferior goods?  (Reminder: When you get rich you buy more of a “normal good,” and less of an “inferior good.” And yes, the language of economics can be a bit cold.)

Read the post “The Rich vs Poor Debate: Are Kids Normal or Inferior Goods?” to get the answer.

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Adam Smith and Jane Austen

In “Economics: A Moral Inquiry with Religious Origins,” Benjamin Friedman persuasively argues that Adam Smith, a man not noted for religious observance, was highly influenced by religious thought that was pervasive in 18th-Century Scotland.  Jane Austen was a near contemporary of Smith, and a near opposite in upbringing being raised in a religious home as the daughter of Anglican Reverend George Austen and having little formal education[1].  As Smith’s writings reflected the religious thought of his time, Austen’s writing reflected Smith’s contributions to the Scottish Enlightenment.  Characters in Jane Austen’s “Pride and Prejudice” exhibit sentiments described in Adam Smith’s “The Theory of Moral Sentiments.” Austen concludes that bad behavior by one person can lead to good outcomes for another and Adam Smith more completely describes the conditions under which self-interest, described as vice by others, results in social good. 

I begin with a situation described by Smith in “The Theory of Moral Sentiments” and follow up with a parallel situation experienced by Austen’s characters from “Pride and Prejudice.” Smith writes

We sometimes feel for another, a passion of which he himself seems to be altogether incapable; because, when we put ourselves in his case, that passion arises in our breast from the imagination, though it does not in his from the reality.  We blush for the impudence and rudeness of another, though he himself appears to have no sense of the impropriety of his own behaviour; because we cannot help felling with what confusion we ourselves should be covered, had we behaved in so absurd a manner.

In the scene from “Pride and Prejudice” I quote, Lydia Bennet and her new husband, Wickham, return home after a scandalous affair and mercenary marriage in which Wickham is paid to marry Lydia.  The newlyweds show no sign of embarrassment.

Their sister’s wedding day arrived; and Jane and Elizabeth felt for her probably more than she felt for herself.  The carriage was sent to meet them at___, and they were to return in it, by dinner time.  Their arrival was dreaded by the elder Miss Bennets; and Jane more especially, who gave Lydia the feeling which would have attended herself, had she been the culprit, was wretched in the thought of what her sister much endure….

Wickham was not at all more distressed than herself, but his manners were always so pleasing, that had his character and his marriage been exactly what they ought, his smiles and his easy address, while he claimed their relationship, would have delighted them all.  Elizabeth had not before believed him quite equal to such assurance; but she sat down, resolving within herself, to draw no limits in the future to the impudence of an impudent man.  She blushed, and Jane blushed; but the checks of the two who caused their confusion, suffered no variation of colour.

Adam Smith demonstrated conditions under which self-interest causes social good in “The Wealth of Nations.” A quote illustrates this marvelous insight.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

Jane Austen seems to struggle more with the idea that individual vice (self-interest) can lead to good outcomes but note that it is only an individual’s vice leading to a good outcome for that individual that concerns her.  In the book, Elizabeth Bennet and Mr. Darcy discuss the events that lead to their engagement.  Two were particularly important.  Lydia revealed to Elizabeth that Mr. Darcy had attended her wedding.  Anxious for details, she improperly solicited information from her aunt who also attended the wedding and would have known of the arrangements made to induce Wickham to marry.  In another scene, Mr. Darcy’s officious aunt attempts to convince Elizabeth not to marry Mr. Darcy.  Even though Elizabeth had no understanding with Dr. Darcy, she refused to promise that she would spurn a proposal.

I wonder when you would have spoken [proposed], if I had not asked you [about Lydia]! My resolution of thanking you for your kindness to Lydia had certainly great effect. Too much, I am afraid; for what becomes of the moral, if our comfort springs from a breach of promise, for I ought not to have mentioned the subject? This will never do.


You need not distress yourself. The moral will be perfectly fair. Lady Catherine’s unjustifiable endeavors to separate us, were the means of removing all my doubts. I am not indebted for my present happiness to your eager desire of expressing your gratitude. I was not in a humour to wait for any opening of your’s. My aunt’s intelligence had given me hope, and I was determined at once to know every thing.


Lady Catherine has been of infinite use, which ought to make her happy, for she loves to be of use.

A reader might conclude that Austen was a student of Smith, but a more probable explanation is that both were products of the same culture, and with keen powers of observation, interpreted the outcomes caused by the interactions of people in much the same way.

[1] Biographical information on Jane Austen was found at Jane Austen.org.
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Initial Claims for Jobless Benefits

The level of unemployment can be viewed as a combination of stock and flow variables.  The level of unemployment at any given time is a stock variable and is affected by recent layoffs, recent hires, and changes in the labor force, each of which is a flow variable.  Holding the labor force constant, the level of unemployment increases when recent layoffs exceed recent hires. 

Initial claims for state jobless benefits is a statistic produced by the BLS that is often used as a proxy for recent layoffs.  For the week ending May 28 was 427,000, an increase of 1,000 from the previous week.  The four week moving average of initial claims, which is viewed as a more stable statistic of changes in unemployment, fell 2,750 to 424,000.  Most economists believe that initial claims will have to fall below 400,000 per week for the employment market to improve. 

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Akerson on Gas Tax and CAFE Standards

In an EconTalk podcast of Milton Friedman hosted by Russ Roberts, Friedman explains that businesses leaders do not usually support policy that strengthens markets.  They do what is best for them.

[I]t's always been true that business is not a friend of a free market...It's in the self-interest of the business community to get government on its side. It's in the self-interest of a particular business...But the real puzzle—puzzle isn't quite the right word—the real problem here is where do you find the support for free markets? If free markets weren't so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that's wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there…

With Friedman’s admonition in mind, I read the following interview of GM’s CEO, Dan Akerson (David Shepardson and Christina Rogers, “GM's Akerson pushing for higher gas taxes,” The Detroit News).

Detroit — General Motors Co. CEO Dan Akerson wants the federal gas tax boosted as much as $1 a gallon to nudge consumers toward more fuel-efficient cars…Akerson would like to see it (the federal government) step up to the challenge of setting a higher gas tax, as part of a comprehensive energy policy.

A government-imposed tax hike, Akerson believes, will prompt more people to buy small cars and do more good for the environment than forcing automakers to comply with higher gas-mileage (CAFE) standards.

If you believe that Americans should consume less oil, Akerson’s statement holds up pretty well.  GM does sell an electric car, the Volt that is highly subsidized by the government and the cost of driving the Volt would be much less sensitive to gas prices than a car that is only powered by gas.  They also make a number of fuel efficient cars that might do well relative to competitors if the cost of fuel rises due to a $1.00 per gallon tax.  Consumers would face a tradeoff.  They would substitute new car purchases toward more fuel efficient cars but the increase in gas prices is the same as a decrease in income.  The income effect would lower the overall sales of new cars.CAFE standards have several disadvantages relative to increasing the gas tax.  They increase the cost of making a vehicle, but lower the marginal cost of driving by increasing fuel efficiency. We will drive more because we will spend less at the pump, but not as much as we would have driven in absence of the increase in the CAFE standards.

Increased CAFE standards only result in increased fuel efficiency of new cars that meet higher standards. It does nothing to increase the efficiency of cars we already drive. Furthermore, to the extent that drivers resist buying efficient cars as they have in the past, the higher CAFE standards will result in an older U.S. fleet. Crandall (1992),[1] estimates that the full impact of the higher standards would not be realized for eight years after implementation.  Old cars also pollute more than new cars.

An increase in the gasoline tax would decrease the impact on automakers and consumers compared with increasing CAFE standards. People would drive less, reducing the demand for new vehicles. Demand would shift from less fuel efficient vehicles to more efficient vehicles. More subtle market signals for increased efficiency would replace heavy handed mandates.

All drivers, including those with older vehicles, face incentives to drive less with an increase in the gasoline tax. Gone is the adverse impact of the CAFE standards which incentives people to drive more by reducing the marginal cost of driving. Less driving also lowers pollution and congestion.

Crandall concludes that

The existing empirical literature suggests that CAFE costs about 7 to 10 times as much as a petroleum tax that would induce comparable reductions in oil consumption, because CAFE fails to equate the marginal costs of reducing fuel consumption across all uses, including usage of older vehicles and nonvehicular consumption.


CAFE is an even less efficient mechanism to reduce greenhouse gases. To reduce CO2 emissions, a carbon tax is much more efficient than a petroleum tax, which in turn is decidedly more efficient than CAFE standards. The empirical evidence suggests that CAFE would cost the economy at least 8.5 times as a carbon tax with equivalent effects on carbon emissions.

[1] Crandall, Robert W. Journal of Economic Perspectives, "Policy Watch: Corporate Average Fuel Economy Standards," Vol. 6, Num. 2, Spring 1992.
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A B Western with a Great Economic Foundation

Feeling nostalgic for old cowboy movies I watched every Saturday morning when I was a lad, I downloaded a Gene Autry movie, “Cow Town” through Netflix.  In addition to a few songs, horse chases and shootouts, it had a very plausible economic foundation, a rare event in any movie let alone a B Western.

The story was written by Gerald Geraghty in 1950 and explains how barbed wire changed the West.  The movie opens with a documentary description of hardships faced by cattlemen raising their herds on the open range: lightning caused stampedes, hard winters, and rustling.  The description could have been improved by explaining how the common range was a “common resource” and was overgrazed, a problem that economists named the “tragedy of the commons.”The story pitted open range cattlemen against those who wished to control it by fencing property with barbed wire.  Closed range cattlemen believed that barbed wire fences would reduce operating costs and improve cattle genetics.  Cow hands, who were after all an operating cost, feared that the innovation would reduce employment opportunities, opposed closing the range.  Finally, two sheepherders attempted to fan the animosity between the three other groups into open warfare to push down land prices so they could make a killing on the market and turn cattle country into sheep country. 

Two scenes exemplified problems with ill defined property rights and resource allocation.  In one scene, open range cattlemen complain to the sheriff about fences blocking roads, the delivery of the mail and injuring cattle.  The sheriff asks for time to solve the problem stating that their is no law to covering their complaints.  These cattlemen were asking for enforcement of “range rights” or unwritten but respected rules governing behavior on the frontier.  Another scene anticipates the Coase theorem: if private parties can bargain without costs, they can solve problems with externalities (fences) and allocate resources efficiently.  In the scene, Autry confronts a neighbor who cut his fence. She said she had the right to use the road to get to town.  He replies that he would have built a gate had she asked.
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Enough Fossil Fuel for Now?

Michael Lind writes a very good column for Salon entitled “Everything you’ve heard about fossil fuels may be wrong.”  At least I think it is a great article because it eloquently states opinions I hold.  While I should beware of confirmation bias, I hope other readers will be exposed to new ideas. 

In short, the Lind writes that new technologies like hydraulic fracturing have dramatically increased reserves of natural gas and oil.  Governments are funding basic research into other methods of producing gas hydrates that could supply enough hydrocarbons to fuel civilization for centuries.  Countries with now exploitable natural gas and oil reserves are numerous, stable and friendly.  This implies that energy markets will be more competitive, dramatically weakening if not eliminating OPECs ability to set price.  Finally, he observes that most governments are treating CO2 emissions as a low priority because catastrophic outcomes of global warming are low probability outcomes.Lind makes a supporting argument that I believe deserves more attention.

All energy sources have potentially harmful side effects. The genuine problems caused by fracking and possible large-scale future drilling of methane hydrates should be carefully monitored and dealt with by government regulation. But the Green lobby’s alarm about the environmental side-effects of energy sources is highly selective. The environmental movement since the 1970s has been fixated religiously on a few "soft energy" panaceas -- wind, solar, and biofuels -- and can be counted on to exaggerate or invent problems caused by alternatives. Many of the same Greens who oppose fracking because it might contaminate some underground aquifers favor wind turbines and high-voltage power lines that slaughter eagles and other birds and support blanketing huge desert areas with solar panels, at the cost of exterminating much of the local wildlife and vegetation. Wilderness preservation, the original goal of environmentalism, has been sacrificed to the giant metallic idols of the sun and the wind.

I might add to his arguments that supporters of alternative energy often act as if the cost of switching from hydrocarbon based fuels to alternative energy sources is low but experience has taught that the opportunity cost is high.  If it were easy to switch to alternative energy sources, we would have done it already.
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A Gallup Poll on Attitudes Toward the Wealthy

A Gallup poll released today released a survey of American’s opinion on the distribution of earnings and wealth.  It is an ongoing survey conducted for more than a decade.  The three questions and response are provided below.

1. Do you feel that the distribution of money and wealth in this country today is fair, or do you feel that the money and wealth in this country should be more evenly distributed among a larger percentage of the people? (Distribution is fair, 35%; should be more evenly distributed, 51%; no opinion, 8%)
2. As far as you are concerned, do we have too many rich people in this country, too few, or about the right amount? (Too many, 31%; too few, 21%, right amount, 42%, no opinion 7%)
3. People feel differently about how far a government should go. Here is a phrase which some people believe in and some don’t. Do you think our government should or should not redistribute wealth by heavy taxes on the rich? (Yes, should, 47%; no, should not, 49%; no opinion, 4%)

The majority of respondents clearly answered the second question incorrectly.  There are obviously too few rich people.  The percentage of rich should approach 100%.

The results of the first and third questions are interesting in and of themselves, but I would like to see deeper results.  As follow up questions to the first, I would ask why and give the following options.

1. The economic system favors the wealthy.
2. The political system favors the wealthy.
3. I want the rich to pay for benefits I receive from the government.
4. I want to pay for the benefits of others so long as others in my socioeconomic class do as well.

To the third question, I would again ask why and give following options.

1. Taxing the rich more will help the economy grow.
2. Taxing the rich more will not affect the economy.
3. Taxing the rich more will harm economic performance, but I want to punish the rich.
4. Taxing the rich more will help economic performance, but it not fair to more heavily tax the rich.
5. Taxing the rich more will harm economic performance.

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Portraits on U.S. Currency

Politicians are over represented on our currency creating the false impression that service through elected office is our nation’s highest calling.  I suggest that the portraits of the following great Americans be added to those on our currency and that the portraits change periodically much as portraits the portraits on stamps.

1. William Gates (dollar Bill)
2. Amadeo Giannini
3. George Mellon
4. Susan B. Anthony and Sacagawea (put them on coins that people carry)
5. Emily Dickinson
6. John Steinbeck
7. Mark Twain
8. William Rittenhouse
9. Joseph Smith
10. Martin Luther King Jr.
11. Muhammad Ali
12. Babe Ruth
13. Adam Smith (technically not an U.S. citizen)
14. Milton Friedman
15. Luis Walter Alvarez
16. Thomas Edison
17. George Washington Carver
18. Barbara Streisand
19. Paul Simon and Art Garfunkel (two dollar bill)

Certainly, many other great Americans deserve the honor of appearing on our currency.

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More Oil or a Cleaner Environment

There is little that a president can do in the short-run to lower oil prices but policy does affect prices in the long-run.  The prices we pay today are in part the result of policy executed over the past forty years.  Those policies were aimed at restricting drilling or increasing regulatory standards to protect the environment, vilifying and harassing oil companies to drive up costs and replacing oil with an alternative energy source. 

The prices that we pay in the future are in part the result of policies that we enact today and those policies seem to be a continuation of past policy.  New hydraulic fracturing (fracking) techniques hold the potential to vastly expand oil and gas production but at a potential environmental cost to water quality.  Cheaper energy for degraded water quality is an important tradeoff, and no we cannot drill for oil or gas without environmental cost.  Given our very high quality of water standards and the strain to the economy by high energy prices, I favor moving the balance on the tradeoff toward more oil and gas.

The U.S. Fish and Wildlife Service may place the sand dune lizard that lives in an rich section of West Texas on the endangered species list creating a huge new hurdle oil producers must clear to bring oil based products to market (Jerry Patterson, “Patterson: Texas lizard represents the latest example of failed U.S. energy policy”).  This seems like harassment to me.  I wonder what it would cost to breed the lizards then place them back in their native environment.

The tradeoff between cheaper energy and a cleaner environment exists.  If we as voters wish to push that tradeoff towards a cleaner environment we must not complain when energy prices rise. 

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