Re: Krugman on gas tax

[Peter Dorman <dormanp@xxxxxxxxxxxxx>]

I've been thinking about the continent-wide backlash against the green
tax on petroleum in the wake of the price spike.  Being green myself
(it's not easy, etc.), I am inclined to support the tax in a knee-jerk
fashion.  But I believe that the strategy of taxing our way to
sustainability is profoundly flawed, for reasons that should interest
Post Keynesians.

The tax strategy is based on a standard microeconomic model of smooth,
continuous adjustment.  There are winners and losers in such an
adjustment, of course, but, so long as the tax does not overstate the
social costs of burning petroleum, there is no net social cost.  This
means that there is at least the potential for a successful political
coalition based on such a tax.  Surely this is what Blair et al. are
appealing to when they stand firm against the truckers.

There are two interrelated errors in this reasoning.  First, the smooth
adjustment model overlooks the interaction effects (interactive
nonconvexities) that exist between different technological "clusters".
Location patterns for residence and industry, mass transit networks, the

centralized or decentralized provision of various services -- all of
these have to be taken into account.  To load the entire burden of
transition onto a single price means effectively to drive it to a much
higher level than would be sustainable if the entire edifice were to be
shifted simultaneously.

Moreover, the tax approach fails to consider the Keynesian dimension.
In the microeconomic argument, the tax alters only the relative price;
it has no effect on incomes in the aggregate.  But if the tax is
attached to a fundamental good, and certainly one that plays a
substantial role in many budgets, then it affects real incomes, and its
net effect may indeed be negative on that ground.  What the price spike
has done is to accentuate that effect; it clearly needs to be offset
somehow inasmuch as the European economies still have too much slack.

The two errors compound one another.  Because the viability of a
non-petroleum economy depends on the existence of a massive
infrastructural change that has not yet occurred, there are few options
for cushioning the price blow through substitution.  But in a world of
forward contracting, the price effect can also be ramified through
defaults and credit constraints.  And truckers who might be out of a job

will not find alternative jobs waiting for them because of the
macroeconomic consequences.

Taxing the population into ecological submission is the wrong approach.
Green-minded people should support programs that build a sustainable
infrastructure directly.  As the alternatives become available to
people, taxes can be used to speed the transition, with careful
consideration to their real income effects.  The political support for
this sort of policy is potentially greater, because the public is not
being asked to shoulder open-ended hardship.

Peter