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Friday, January 2, 2009

Lose, Lose, Lose, Lose, Lose ...

Last updated: January 3, 2009

Thomas Friedman is upset with how the low gas price is bringing back the excesses of the previous years.

How many times do we have to see this play before we admit that it always ends the same way?

. . .

So I could only cringe when reading this article from on Dec. 22: “After nearly a year of flagging sales, low gas prices and fat incentives are reigniting America’s taste for big vehicles. Trucks and S.U.V.’s will outsell cars in December ... something that hasn’t happened since February. Meanwhile, the forecast finds that sales of hybrid vehicles are expected to be way down.

Have a nice day. It’s morning again — in Saudi Arabia.

Well. How many times? The answer to the question is very simple. Indefinitely. Warren Buffet once noticed that the history of economic crises teaches us one thing about the human animal and it's that the beast just never learns. And it's just this. Though I should admit that I was also amazed by this data. We should probably admit that even to define the current crisis in the US a cultural event is to miss the point. This is no longer about greed, whether it's Wall Street or the regular American consumers, never mind that America has never stopped from being a very materialistic and consumerist society. There seems to have been produced a cultural breakdown almost at the level of brain circuitry. This one is affecting the most basic human faculty - the ability to resist urge to instant gratification.

There is no cure to the present situation except one - fuel taxes. Unless of course we get some technology that will be competitive against oil even at $10 per barrel. So...

That is why I believe the second biggest decision Barack Obama has to make — the first is deciding the size of the stimulus — is whether to increase the federal gasoline tax or impose an economy-wide carbon tax. Best I can tell, the Obama team has no intention of doing either at this time. I understand why. Raising taxes in a recession is a no-no. But I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal — i.e., a tax — and there are no effective ones. (Toughening energy-effiency regulations alone won’t do it.) Without a higher gas tax or carbon tax, Obama will lack the leverage to drive critical pieces of his foreign and domestic agendas.

. . .

The two most important rules about energy innovation are: 1) Price matters — when prices go up people change their habits. 2) You need a systemic approach. It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers.

. . .

Today’s financial crisis is Obama’s 9/11. The public is ready to be mobilized. Obama is coming in with enormous popularity. This is his best window of opportunity to impose a gas tax. And he could make it painless: offset the gas tax by lowering payroll taxes, or phase it in over two years at 10 cents a month.

Of course TF would not have argued for the tax, if all this pain were not worth it. Clearly such a tax would be basically working to defund US enemies, achieve energy independence for the US and reduce carbon emissions at the same time. If the US allows ethanol imports from Latin America, then this tax would also stabilize the continent and reduce the scale of Latino immigration.

A gasoline tax “is not just win-win; it’s win, win, win, win, win,” says the Johns Hopkins author and foreign policy specialist Michael Mandelbaum. “A gasoline tax would do more for American prosperity and strength than any other measure Obama could propose.”

I know it’s hard, but we have got to stop “taking off the table” the tool that would add leverage to everything we want to do at home and abroad. We’ve done that for three decades, and we know with absolute certainty how the play ends — with an America that is less innovative, less wealthy, less respected and less powerful.


Now I have a great respect for Thomas Friedman, I really do, but I will have to correct him here. First, fuel tax offset by lowering payroll taxes is not painful, it's a blessing for any taxpayer as long as this taxpayer has some brains left in his head (which basically means any taxpayer as long as he is not an American one). People can't really avoid paying payroll taxes unless they engage in tax evasion or something. Restructuring the taxation system and introducing fuel taxes leaves the taxpayer with the same amount of taxes, but a smart taxpayer then buys a hybrid or starts driving less and he ends paying less taxes. The whole purpose of such a tax is to encourage the taxpayer to avoid it. This is no payroll tax. This is basically an evasion tax.

Smart people will now say: wait, wait a minute. Lets say the oil is now $50 per barrel. And we add a tax equivalent of another $50 per barrel and so gasoline is now $100 per barrel. And we fully compensate our taxpayer by cutting in VAT, income tax and other stuff. But what we do if our man then goes and buys a flex engine car? Say we removed ethanol subsidies and the US corn based ethanol is equivalent to $60-70 per barrel. Brazilian ethanol is even cheaper, it's just $40-50 per barrel. So our taxpayer basically stops paying the fuel tax while pocketing the differential between the prices of gas and ethanol. Now the government needs to introduce new taxes, because the gas tax leaves huge loopholes in the system that allows our taxpayer to escape.

Well. For starters the tax will allow the US to cut its defense and foreign policy budgets. The tax may also increase the taxation base in case the US will use locally produced flex engine cars and ethanol instead of subsidizing Arab birth rates in the Middle East. The tax will also free the US government from the need to subsidize research and development of alternative energies, the private sector will do it all. Finally the current crisis has a strong deflationary aspect and so printing some money can actually help.

But after all this, the smart people are right of course. Fuel tax is NOT about the government collecting more taxes!!! Fuel tax is about the government collecting LESS taxes!!! Fuel tax is equivalent to cutting taxes and so it can only be implemented as such!!! All dumbwits over there, get this into your stupid heads!!! (This one is not addressed to TF, but to all those free market idiots I meet in forums)

Actually, TF has some ideas about how the government can sweeten the "bitter" pill. In order to soften the non existent pain, TF proposes to gradually phase in the tax by raising it bit by bit over the course of two years. The truth is that it would be enough just to decide to phase it in at all. Even five years would be good enough since the power of the tax comes not from immediately making gasoline consumption painful, but from shaping the market's anticipations. If businesses and consumers know that the gas tax will be gradually introduced over the next five years and they know how big the regulators want it to be in the end of the process, then they will start planning their investment, lifestyles and spending accordingly. Businesses will pour not billions, but trillions into developing hybrids, laying down new railways, biofuels research, solar panels. Municipalities will come up with plans for developing public transport. Corporate car fleets will be switched to flex engines by order. In short, it's the anticipations that count, not the tax itself. Just as anticipations can lift the oil market to the skies and then put it back on the floor, so the anticipations created by the tax will be responsible for a lion's share of its impact long before this tax becomes sizable enough to affect anybody.

So here we have a wonder tax. This tax is capable of pursuing all US global and domestic objectives at the same time. This tax is neither painful, not should actually exist to do its work. In fact implementing such a tax is basically equivalent to cutting taxes. Does it mean we can have it tomorrow? My intuition tells me that we can't. It's true that here we have a tax that's all win, win, win, win, win. But on the other side here we have a nation that's no longer capable of coming up with a coherent program for addressing its own and world's problems. A nation that's all lose, lose, lose, lose, lose.

I was amazed to read TF saying "Raising taxes in a recession is a no-no" and "I know it's hard to do..." and then failing to explain that this tax is basically about cutting taxes. There should be no mistake - I respect TF as the best US columnist for his clear thinking and common sense, but here he provides us by his own pen with such a devastating example of a nationwide collapse of common sense and economic thinking that can make one only despair of the US. And with that semi messianic figure looming in the background and about to put his bottom into the presidential seat, what chances are there that the US will save itself while in the process ridding the world of this monster called the Middle East?

Well. The US looks quite hopeless at this point, but our chances are not that bad at all. But this is for the next post.

January 3, 2009

Some friends emailed me after reading this post saying that it's too disparaging of the US. They also said that they don't see what's so wrong with Thomas Friedman. Yes, he did not articulate properly the fact that such a tax swap is practically cutting taxes, but he did say that the gas tax can be revenue neutral.

First of all, I am not sure that I am so wrong about the US but to balance out my post, here is a link to one editorial/opinion among several exchanged recently between the Washington Post, New York Times and other leading US media outlets: An Emissions Plan Conservatives Could Warm To. I want to draw the attention of the readers to these lines in the link:

. . . As long as national security risks aren’t factored into the cost of gasoline and as long as carbon dioxide can be emitted without penalty, oil will continue to have an advantage over emerging fuels in the marketplace, and we’ll continue our ruinous addiction to it.

. . .

A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

I have a more expanded explanation of this point in Making Sense.

So what was wrong with "Win, Win, Win, Win, Win ...". As I said a fuel tax offset by lower payroll taxes is tantamount to cutting taxes and can be only implemented as such. This is basically a system of institutionalized tax evasion. Such a tax swap cannot be introduced as if it's a regular tax since it will stop being revenue neutral in a matter of months, and in matter of a few years it will become massively revenue negative. Basically any state daring to implement such a tax swap should be ready to find itself getting defunded at an accelerating pace.

Regular tax cuts are predictable to a certain degree, but this sort of cuts is under nobody's control since it leaves to the market to decide how much and how fast it wants to stop paying the tax. Given that for such a tax to have an impact on the market it should be sizable enough, the government should shift a significant portion of the taxation to carbon fuels. Next there's going to be a massive destruction of the taxation base on which the fuel tax rests. So the regulators will quickly see this part of the taxation base disappearing into thin air. Given the rapid development of alternative energies this tax swap may end in an out of control collapse of tax revenues transfered to the state by taxpayers. This point is not obvious only to the herds of economic illiterates posing this day as conservatives who are opposing carbon tax.

The hapless and incompetent Bush administration missed the opportunity to implement such a tax swap when it introduced its useless tax cuts earlier. Instead of cutting taxes the administration had to go on a tax swap. Now Obama seems to be planning his own tax cuts. It's important that before it happens, the tax swap is brought to the attention of public and politicians. This may be the last opportunity to quickly implement a sizable tax swap. Otherwise it can be only phased in gradually.

That's why I did not like the apologies by TF such as "I know it's hard". Not only he is making his point in self defeating terms, but he is also failing to explain a very important practical aspect of the tax. Given the sorry state of the US finances it well may be now or never. The gas tax would be much more difficult to implement if Obama goes forward with his cuts, because for all practical purposes fuel tax amounts to another massive tax cut.

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