From the Inquisitive Mind: The New Peak Oil: Peak Demand. An important reminder that the Marshallian scissors have two components - supply and demand. And no, oil is not "different" because we all use it. There are lots of things we all use... like springs. Anyhow, a few points:

In the emerging economies of India and China, the cost of oil subsidies is becoming a significant economic issue. There is a limit to which the governments can subsidize petroleum products and like the developed economies higher fuel prices are likely to result in demand destruction or at least much slower growth than what may be priced in.

In China subsidies given out to oil companies for imported oil were at $45B and accounted for 5% of the government’s total revenue; they were as high as $87B if domestic production was also accounted for. The government of China is reluctant to pass on the increase to keep a lid on inflation. They also want to ensure that the summer Olympics do not suffer from any Energy shortages. But once the show is over, expect the Chinese government to start taking measures to increase the elasticity in the demand of oil by passing on the price increases.

H/t: Facebook friend Felix Salmon.

I was beginning to typecast myself as a dour curmudgeonly old-before-his-time economist with my recent rants about the Coase theorem. So I was delighted this morning to see this:

There is no shortage of opinion on when we will run out of oil. Some say because of rapidly rising demand that it’s closer than we think, perhaps only 30 years. Others are more optimistic saying that we have at least 75 years or more because of the advances in our ability to find and pump it from the ground. Others go even further. Wherever you fall into this spectrum from Nostradamus to Pollyanna, you’ll probably agree with our contention that we should do our best to conserve now.

With the "further" being a link to my We Will Never Run Out of Oil.

If I have to choose between being a 16th century French poet-prognosticator that never predicted anything correctly and being someone with infectious optimism I will gladly take the latter.

Eclectecon takes the bait:

The Coase Theorem holds ONLY if transaction costs are low or zero. They clearly are not in the case of air pollution.

Exactly. So on the topic of air pollution, lets never hear of Coase's theorem again - as we did here, here, here, here, here, here, here, etc. etc.

According to Janet Yellen, president of the San Francisco Federal Reserve Bank:

"The 1970s were a horrible period. If there's one thing that has to be very high priority, we don't want to go back to a period that is anything like that," she said, critiquing presentations on the economy at a symposium for college students in Tacoma, Washington...

"During the 1970s the Fed failed to keep inflation low in the face of supply shocks (which) became incorporated into inflation expectations," Yellen said.

H/t: William J. Polley.

This is an issue I have discussed a few times - see here. If there is one economic issue I am worried about, it isn't rising oil prices and peak oil. It isn't rising food prices. It isn't this housing mess or problems with financial firms. It is that we did not learn our lessons the first time and U.S. monetary policy will bring on another period of stagflation. it certainly isn't the end of the world if it does happen - it'd be more like a bad rash to the economy rather than a gunshot wound. That being said, I really hope my fears are unfounded.

Felix Salmon - How Unleaded Gasoline Slashed the Violent Crime Rate:

...The main result of the paper is that changes in childhood lead exposure are responsible for a 56% drop in violent crime in the 1990s.

What are those "changes in childhood lead exposure"? Primarily the move to unleaded gasoline, which happened in the US between 1975 and 1985.

That is a pretty striking result. I am not sure if I entirely believe the 56% number, but I cannot see anything wrong with the methodology.

Even if the true figure is half of that finding, it is a remarkable result. Two questions for the Coase-lovers out there?

1. Is it not possible that air pollution imposes serious externalities on some people, such as those with asthma?



2. If air pollution can and does impose serious externalities on some people, should the Coase theorem not have taken care of this problem? Why was government intervention necessary here?

There are good arguments on why using Pigovian taxes to combat air pollution may be ineffective - my facebook friend Garth Brazelton has given several. But any economist who points to the tautological and ridiculous Coase Theorem as a way of dealing with wide-scale pollution problems needs to spend a little more time in the real world. It did me a world of good.

I tend to think of the deadweight loss associated with high tax rates being due to substitution effects. However, if you ask an MBA student about why taxes hurt business and the economy, in my experience they will, without fail, give you a story about income effects - if you take money out of the (metaphorical) pockets of business, they will have less resources to invest (and therefore invest less).

Having founded and worked in a small business for 3+ years, I am starting to think that the MBA's are correct to emphasis income effects.

In How Do High Small Business Corporate Tax Rates Hurt The Economy? I explain why.

From the Wall Street Journal:

Some clarity comes from the U.S. Energy Information Administration (EIA), an independent federal agency that tried to quantify government spending on energy production in 2007. The agency reports that the total taxpayer bill was $16.6 billion in direct subsidies, tax breaks, loan guarantees and the like. That's double in real dollars from eight years earlier, as you'd expect given all the money Congress is throwing at "renewables." Even more subsidies are set to pass this year.

An even better way to tell the story is by how much taxpayer money is dispensed per unit of energy, so the costs are standardized. For electricity generation, the EIA concludes that solar energy is subsidized to the tune of $24.34 per megawatt hour, wind $23.37 and "clean coal" $29.81. By contrast, normal coal receives 44 cents, natural gas a mere quarter, hydroelectric about 67 cents and nuclear power $1.59.

Detractors of gas taxes and the Pigou Club like to frame the debate as being between a laissez-faire status quo and a group of people who want more government intervention in the economy. See here for an example.

So we are left to believe that financing government spending through relatively economically benign externality taxes is interventionist but having one of the highest corporate income tax rates in the world then giving that tax money back to corporations in the form of subsidies is the antithesis of government intrusion.

But I beat my goal, so $100 will not be going to the sources of your choice. Results under the cut:

Read more...

I just finished teaching a 3-day all-day "boot camp" macroeconomics course to 60 MBA students. One topic that came up a few times was what would happen if NAFTA were to be repealed and tariffs were increased in North America. The article: Economic Effect of Tariffs examines the economic impact of trade restrictions.

This might be the least compelling argument against carbon taxes, but it is one that gets repeated ad nauseam. From Will Wilkinson:

So in order to estimate the optimal pigouvian tax, we not only need a solid estimate of the net harm of warming, but we also need a good estimate of how much of that is the external effect of human activity. I don’t think there exists a good estimate, which I think gives us good reason to worry about proposed carbon taxes. Any tax, unless we are very lucky, will either be too low or too high. If it is too low, we’ll get too much carbon emission. But if it’s too high, we’ll get too little and I think that’s likely the more worrying scenario, especially if it slows growth for poor countries.

I have address that argument in detail here. But put more simply: Does anyone anywhere ask what the optimal corporate income tax rate is? Ask what the optimal income tax rate is? Payroll tax rate? Sales tax rate? Given that government spending shows no signs of slowing down (particularly in the U.S.) and given that countries are making the sensible decision to reduce corporate tax rates (since corporate taxes are about the most economically destructive taxes ever created) and given that you cannot run massive deficits forever - why on earth are we worried about raising about the only tax that might lead to more economic efficiency at higher-than-current-rates?

I have said it before and I'll say it again - there are good reasons to increase gas tax rates (and other sales tax rates) rather than raising income taxes - even if there were zero environmental benefits from doing so.