None of those statements should come as news to the readers of The Freeman. Such precepts underpin most of what is written in these pages. What is remarkable is that they come in a book on global warming by a well-known climatologist with no training in economics.

Dr. Roy Spencer is the principal research scientist at the University of Alabama at Huntsville. He has a Ph.D. in meteorology and was a senior climate scientist at NASA. Along with his colleague Dr. John Christy, he developed the original method for precise monitoring of global temperatures from earth-orbiting satellites. But unlike many scientists whose work impinges on public-policy debates, Spencer understands the importance of economic analysis in answering the fundamental question: “What should be done?” He recognizes that just because science may indicate a causal connection between human activity and some negative consequence—either for the environment or for other human beings—it doesn’t follow that policies should be implemented to curtail those activities. That is, the answer to the “should” question cannot come from the sciences.

That is why, in the middle of his book about global warming, Spencer includes a cogent and well-schooled chapter on both basic economics and the relationship between freedom and prosperity. The title, “It’s the Economics, Stupid,” conveys the importance he places on economic analysis not only for formulating policies toward global warming but also in determining whether there should be any such policies at all.

Some might interpret Spencer’s excursion into economics as a form of disciplinary imperialism—pontificating in an area where he has no expertise. That would be wrong. In fact, it is an act of disciplinary humility.

In writing this book on climate policy, Spencer realized that his own disciplines—meteorology and climatology—could not provide the answers to the policy questions. He understood that he needed to learn some economics. He did his homework well.

Ultimately though, the book is mostly about science and scientists. Indeed, it’s as much about the latter as the former. Chapters 3 and 4 are especially important. In the former, “How Weather Works,” Spencer addresses basic issues concerning weather, the climate, how the two are different, and how the former determines the latter. This is the background typically ignored in discussions about anthropogenic global warming. In Chapter 4 Spencer’s skeptical stance on global warming is conveyed in the title, “How Global Warming (Allegedly) Works.” Those chapters give the reader a solid, plain-language discussion of the science that almost anyone can understand.

As noted, much of the book is about scientists—their attitudes and the incentives they face. Spencer sets the tone with a cartoon showing three scientists standing in front of a battery of telescopes. The scientist in the middle is introducing a younger colleague to an older, more experienced researcher. The caption reads, “This is Doctor Bagshaw, discoverer of the infinitely expanding research grant.” Spencer spends many pages dragging scientists down off their pedestals. He shows that what they research and what they conclude, particularly in an area like global warming, is as much a function of financial incentives, ideological and religious beliefs, and peer pressure as it is a function of the scientific method.

The past decade has produced a battery of books written on global warming from a skeptical perspective. I have read many of them. What makes Spencer’s book stand out, in addition to its integration of sound economics with sound science, is its readability and sense of humor. It simplifies complex issues in climatology to a point where any reasonably intelligent person can understand them and keeps the reader continuously engaged.

Policies currently being enacted and proposed in the name of fighting global warming represent the biggest challenge to liberty of the last half-century. Those of us who cherish liberty need to come to grips with this issue and be able to discuss its ramifications intelligently. Spencer’s book is a great place to start.

Related posts:

1. Global Warming and the Layman
2. Global Warming Revisited
3. Higher CO2, More Global Warming, and Less Extinction?

Neither the government nor anyone else can spend future dollars. In reality all current spending must come from current revenues and can use only existing resources. Every dollar the government spends, even if borrowed, has to come out of some existing person’s pocket and therefore preempts the use of that dollar somewhere else in the economy—not in the future, but here and now.

The government can obtain its borrowed money by selling Treasury bonds to either American citizens or foreigners. If it borrows from domestic sources, it is getting money that Americans would have either invested somewhere in the economy or spent on goods and services. Government borrowing simply diverts the cash from other uses, just as if its spending were financed by taxation. Economists call this the “crowding out effect.” 

A typical response is that most of the government borrowing will be from foreigners and that the Obama deficit won’t crowd out economic activity in the United States. Thus we are said to be mortgaging our children’s future to people in other countries. The first thing to notice is that we can’t know who the bondholders will be in the future when the loans come due. Treasuries are sold and resold many times over. This is also true of debt originally issued to Americans. 

The real problem has nothing to do with who holds the note at the time of repayment. A good economist asks what else these foreigners would be doing with their dollars. Because they are lending dollars, as opposed to euros or yen, this money would ultimately be either spent on American goods, thereby increasing exports, or invested in the U.S. economy. We reach the same conclusion regardless of who lends the government the money. The real costs of government spending, no matter how it is financed, are experienced here and now.

Government Spending Always Competes with Private Spending

Also, regardless of where the money comes from—taxation, borrowing, or printing press—government spending always preempts other spending in the economy. Those who get the borrowed money have purchasing power transferred to them that will increase the demand for the resources they use. That will increase the cost of those resources to other buyers. Government spending thus always competes with private-sector spending for scarce resources and preempts growth.

This is not to argue that deficit spending is the same as tax-financed spending. It is not. Deficit spending creates the occasion for coercive wealth transfers from future taxpayers to future government bondholders. When the bills come due, most of our children and grandchildren will have part of their incomes coercively transferred through higher taxes to those who hold the Treasury notes. Government debt makes our children less free.

Furthermore, deficit spending obfuscates the true cost of government, not only in lost liberty but also in lost productivity and wealth. Deficit spending is dishonest because it leads people to believe they are getting something for nothing while in reality their wealth is diminished just as if the spending were covered by taxation. But that cost is not seen in the tax bill. This is why politicians find deficit spending so appealing. It is a tool for pulling the wool over citizens’ eyes while rewarding special-interest groups and expanding the state’s control over the private sector.

Ultimately, the real choice is not between deficit-financed and tax-financed spending. The moral question is whether we should have more spending and bigger government with less liberty or less spending with a smaller government and more liberty. The hand-wringing on the left and right about passing the cost of “stimulating” our economy onto future generations is misplaced. No matter how it’s financed, Obama’s new spending has the potential to stimulate only one thing: the size, scope, and power of government.

Related posts:

1. The Politics of Deficit Spending
2. A Deficit of Understanding II
3. What Spending and Deficits Do

The study is important because it influences policy debates, especially in the states, and because the local news media like to focus on the ALA’s ranking of counties and states. In reality every aspect of the ALA report is methodologically flawed. Its reporting of ozone data and the extent of detrimental health effects is hyperbolic, and its grading system and rankings are meaningless.

First, the ALA report is based on data as much as four years old and says little or nothing about current or future trends. Despite its title, “The State of the Air: 2003”focuses on 1999–2001 and says nothing about the state of the air in 2003 or 2002.¹  Ground-level ozone is heavily dependent on the weather, particularly heat, sunlight, and humidity, and can vary dramatically from year to year. For example, from 1999 to 2001 the average number of ozone exceedence days per monitor in North Carolina fell by more than two-thirds, a fact not mentioned in the ALA’s discussion of air quality in the state. In spite of this flaw, the media typically report on the study as if the data were both current and an accurate reflection of past and current trends.

The ALA’s grading system and the comparisons based on this system convey little if any useful information. A county is given an F if there are more than three monitor readings greater than or equal to 85 parts per billion (ppb) of ambient air averaged over eight hours for the three-year period.² This raises several problems.

Imagine county Y and county Z. Y registers ten mild exceedence days of 85 ppb over the period with no other days registering above 70 ppb. Z registers 20 days measuring 80 ppb with no day below 75 ppb. The ALA grading system would give county Y a grade of F and county Z, with no exceedences, a grade of A. According to the Environmental Protection Agency’s Clean Air Scientific Advisory Committee (CASAC), these two grades would tell us nothing about the relative healthiness of the air in these two counties.³ CASAC concluded that when considering a range of 70 to 90 ppb “there is no ‘bright line’ which distinguishes any of the. . . standards . . . as being significantly more protective of public health.” In this case the difference between A and F, while appearing quite dramatic, would turn out to be, in terms of actual protection of public health, no difference at all.

Compounding this deception is the fact that the ALA study uses its conclusions to rank counties and metropolitan areas according to relative levels of ozone pollution. The problem is that different counties, cities, and states all have different numbers of monitors. The more monitors a jurisdiction has the more likely an exceedence will be registered on any given day. That biases the comparisons against areas with more monitors. While the ALA is clearly aware of this problem, it has never attempted to adjust its rankings for the numbers of monitors in each county.

In reporting data from a county, the ALA counts an ozone exceedence from any one monitor against the entire geographical area. Assume a county has four monitors each at a different location, if only one shows an exceedence for a given day, the entire county is reported as being out of compliance. Therefore, a county will always be reported as having considerably more ozone exceedence days in a given year than any location in the county actually experiences. For example, in the latest report, Wake County, North Carolina, was cited as averaging 16 high ozone days per year during 1999–2001. In reality the annual average for the four monitors in the county was only six exceedence days each. In 2001 they averaged only two each.

Exaggerates Risk

In adopting this misleading methodology the ALA exaggerates the number of people who are at risk. Whenever the study cites a county as having an ozone exceedence day, even if only registered on one monitor, the entire population of the county is reported at risk. For example, during 1998 in Wake County, a monitor in the small rural community of Fuquay Varina registered four exceedence days that were not registered on any other monitor. In spite of this, the ALA listed the entire “sensitive” population of the county as “at risk”—including the population of Raleigh, which showed no exceedences on those days.

Along these same lines, the ALA misleadingly reports the identical people as being at risk in several different categories. For example, in stating that “as many as 27.1 million children 13 and under, and over 1.9 million children with asthma are potentially exposed to unhealthful levels of ozone,” the ALA is actually referring to many of the same children twice.⁴ This occurs with several other categories of “at risk” populations. Technically double counting is avoided only because the ALA does not aggregate.

The annual “State of the Air” report is pure propaganda, and its primary purpose is political advocacy. This is clear from the ALA’s website and from the fact that it regularly joins coalitions with leftist environmental pressure groups such as Earth Justice, Environmental Defense, and the Natural Resource Defense Council.⁵ The media and everyone else should view its publications in that light.

Roy Cordato is vice president for research and resident scholar at the John Locke Foundation in Raleigh, N.C., a public-policy research institute that focuses on North Carolina.

1. Found at http://lungaction.org/reports/sota03_full.html. 
2. The 85 ppb, eight-hour threshold is central to the controversial EPA standard that was proposed in 1997. But the ALA standard is even more stringent than the EPA’s. For the ALA, if any one ozone monitor crosses the threshold during the day the entire county is in violation of the standard. As the ALA notes in the appendix of its report, “some counties will receive grades of F . . . while still meeting EPA’s 1997 ozone standard.”
3. “CASAC Closure on the Primary Standard Portion of the Staff Paper for Ozone,” Clean Air Scientific Advisory Committee, U.S. Environmental Protection Agency, EPA-SAB-CASAC-LTR-96-002, November 30, 1995.
4. “American Lung Association Fact Sheet Children and Ozone Air Pollution,” American Lung Association, September, 2002.
5. See “Environmental Groups Sue EPA for Weakening Clean Air Act,” February 28, 2003, www.lungusa.org/press/envir/air_022803.html.

Related posts:

1. Saving Sick Children From State Science
2. Socialist Propaganda
3. The Libertarian Movement and Its Propaganda

Friedman writes, “[O]ur federal bureaucrats are to capitalism what the New York Police and Fire Departments were to 9/11-the unsung guardians of America’s civic religion . . . that says if you work hard and play by the rules, you’ll get rewarded and you won’t get ripped off.” The analogy suggests that capitalism without a huge regulatory apparatus would be a disaster of 9/11 proportions. He explains his strange, but probably not untypical view by arguing that “fear and greed are built into capitalism. . . . [W]hat distinguishes America is our system’s ability to consistently expose, punish, regulate and ultimately reform those excesses.”

In one sense Friedman is right, the system does “expose, punish, regulate” and ultimately lead to reform. But he is confused when it comes to identifying the part of the system that gives rise to this process. It is not the bureaucracy, not the alphabet soup of regulatory agencies mentioned above, but the market itself that punishes bad behavior, rewards good behavior, and leads to change. The regulatory agencies he credits for the success of capitalism cannot improve on the market, but only make it worse.

Friedman’s view demonstrates almost no understanding of the nature of capitalism or government. This is reflected in several comments. As noted, he says “fear and greed are built into capitalism,” and therefore the importance of the heroic bureaucracies is that they keep “excesses” in check. Of course “greed,” that is, self-interested behavior, is part of capitalism. Indeed, it is part of human nature and therefore of all economic systems. What distinguishes capitalism is that it channels “greed” into activities that benefit society as a whole. The same cannot be said for the SEC, EPA, and the rest. In fact, as “public choice” analysis has demonstrated, most of what these bureaucracies do can be viewed as attempts to maximize their own power and budgets. His comment about fear is truly bizarre, considering that he praises the IRS, INS, EPA, and FBI. These agencies pursue much of their agenda by instilling fear.

A second comment suggests that Friedman really knows nothing about what goes into a capitalist system. He states that while “Mexico or Argentina, Russia or China . . . have . . . the hardware of capitalism . . . they don’t have all the software-namely, an uncorrupted bureaucracy.” The hardware of capitalism is its basic institutions. Foremost among these are defined and enforced property rights that include the right to exchange property on any mutually agreeable terms-in other words, an unencumbered and flexible price system. To suggest that those countries have institutional “hardware” anything like this, and that their main problem is corrupt bureaucracy, shows no understanding of either capitalism or the civil and economic institutions there.

This lack of understanding leads Friedman to his erroneous conclusion about the importance of regulatory agencies and presumably the laws they enforce. In a free market, businesses do not have the freedom to pursue greed wherever it takes them. Both the rules of the market and the market process itself put severe constraints on business behavior. Free-market activity demands respect for other people’s property. For example, under laissez-faire capitalism, where property rights are clearly defined and enforced, constraints on the polluting activities of industry would exist without a massive and intrusive EPA bureaucracy. If a firm’s pollution harmed others, it would be held responsible for all damages. Likewise fraud and misrepresentation would also be recognized as illegitimate conduct.

Bureaucracy Not Necessary

Prohibiting pollution and fraud is not an intrusion into the capitalist system but part of what it means for the system to exist. Ensuring that people abstain from those offenses does not require the large bureaucratic apparatus consisting of the SEC, FTC, EPA, and DOJ to regulate business activity. It requires an efficient civil-court system where contract disputes and claims of fraudulent advertising and cooked books can be adjudicated and, if proven, compensation awarded to victims.

Perhaps most egregious of all is Friedman’s failure to understand how the market process itself checks harmful behavior. Unlike the government agencies he praises, when businesses are abusive to their customers, or corporations deceive their stockholders, they are penalized. And if they do not reform they are driven out of business-just ask Enron, Arthur Andersen, or WorldCom. While the officers of those companies may eventually be punished for alleged wrongdoings, which may or may not have involved actual violations of other people’s rights, the market’s punishment has already occurred. It was swift and severe. One need only ask what the market consequences would be for any business that treated its customers the way the IRS treats taxpayers or that managed its books the way, for example, the Pentagon does. The company would be bankrupt in no time. The marketplace is much swifter and harsher in doling out justice than any political agency. Indeed, abuses by government agencies, even when exposed, often go unchanged indefinitely.

Friedman apparently has infinite faith in human beings as bureaucrats with power to impose arbitrary rules, confiscate property, and transfer wealth-and almost no trust in free individuals. This blind faith in government, held by more and more people since 9/11 and the recent corporate scandals, is not only naïve but also betrays the principles on which America was founded. Ultimately it is dangerous to a free society.

Related posts:

1. The Burden of Bureaucracy
2. Book Review: Bureaucracy: What Government Agencies Do And Why They Do It by James Q. Wilson
3. Stewardship Versus Bureaucracy

According to Timothy Noah, writing for Slate.com, “[I]n seeking to harm America, terrorists will probably end up making it more prosperous. They can make us die, and they can make us weep, but they can’t make us poor.”¹ And in the words of economist Larry Kudlow, “[W]e may lose money and wealth in one way but we gain it back many times over when the rebuilding is done.” Kudlow states that “in economics, it’s called the broken window effect.”² In fact, Kudlow is not only ignorant of economic theory, he is also ignorant of economic terminology. The “effect” that he describes is actually known as the “broken window fallacy”—from the destruction of wealth comes prosperity. It is the same ignorance of economics that leads some to conclude that wars are good for economies.

The “broken window fallacy” stems from the observation that when wealth is destroyed, through war, natural disaster, or, as told by nineteenth-century French economist Frédéric Bastiat, a hoodlum throwing a brick through a shop window, it is usually replaced. As the story goes, in replacing this destroyed wealth, jobs are “created.” Money is spent on hiring construction workers, plumbers, electricians, glaziers (in Bastiat’s original story), and so on. In turn employment and economic activity are stimulated in all the industries those people do business with, and so on. This is why Kudlow concludes that from the ashes of the WTC we will gain back the lost wealth “many times over” and Noah concludes that we will actually end up being “more prosperous.” In the case of the WTC and Pentagon disasters, the impetus for all this economic growth will not only come from the private sector but from the government as well. According to Noah, “we live in a very wealthy nation that responds to horrible disasters by spending large sums of money. In this case, the spending will come from both the private insurers and from the federal government’s Federal Emergency Management Agency” (FEMA).³

The Fallacy

The problem with this argument is that it ignores what economists call opportunity costs. The entire analysis assumes that all the money and resources which must go into rebuilding the WTC and the Pentagon would, had the terrorists not been so kind as to destroy these buildings, have lain idle. Of course this is a ridiculous assumption. All the money and resources—the lumber, steel, oil, labor, human capital, and more—would have gone elsewhere in the economy.

Consider the massive sums that insurance companies must now pay in claims. Those funds would not have been left in a mattress somewhere. That money would have been invested in the insurance companies’ port-folios of stocks and bonds. This means that it would have been used in productive ways somewhere else: building new homes or financing new business expansion or new research into life-saving drugs. This investment and the resulting improvements in our lives are now lost as a result of the terrorist attacks.

The same is true with any money that is spent by FEMA or other government agencies. Taxpayers, if allowed to keep that money, would be spending it on themselves or their families, or saving and investing it. In either case, the money would be going toward other productive uses that would be stimulating growth in the economy. It is truly goofy economics to assume that if bureaucrats don’t use the money, the people from whom they must first take it would be doing nothing with it.

Indeed, that is the fallacy. It assumes that if people and resources weren’t employed in fixing the broken windows and the blown-up buildings, they would be unemployed. In reality, if the windows didn’t have to be fixed and the buildings rebuilt we could have more buildings, more windows, and more of all of the products that we desire and that make our lives better. The true absurdity of the “broken window fallacy” is that if it were true we could make the entire economy wealthy by constructing buildings, blowing them up, and then rebuilding them.

Discounting Human Productivity

In this particular situation, where many thousands of obviously productive and hard-working people have lost their lives, invoking the broken-window fallacy has implications that are somewhat different from the typical natural disaster. Even if the analysis of those who claim that the destruction of wealth brings more wealth had merit, at the very least it would depend on having the ability to replace what was lost. But what was lost in this terrorist attack was not just physical capital, like tall office buildings, but massive amounts of human capital. Kudlow and Noah, in their assessment of the situation completely discount the future productivity of those whose lives were lost. This is productivity that is gone forever. It is human capital that can never be rebuilt and that would have been productive for many years to come. To say that the economy will be better off because of the terrorist attack is equivalent to saying that the economy will be better off without these thousands of human minds and bodies and their productive output.

The destruction of wealth can never be good for the economy, whether the destruction occurs through natural disasters, terrorists, or hoodlums. And certainly war, which is clearly the most destructive force invoked by man, should never be considered a conduit for economic growth. Resources used to replace destroyed wealth are resources that cannot be used to create additional wealth. To invoke this broken-window fallacy is to ignore both economic and human reality.

—Roy Cordato, John Locke Foundation

Notes

1. Timothy Noah, “Will Terrorism Resuscitate the U.S. Economy?” at http://slate.msn.com/code/Chatterbox/Chatterbox.asp?Show=9/12/2001&idMessage=8279.
2. As quoted in David Seifman and Lisa Marsh, “N.Y. Urges Bizmen: Stay!” nypost.com, September 17, at www.nypost.com/business/2229.
3. Noah.

Related posts:

1. The Economy Is Cyclical? ~ It Just Aint So!
2. Terrorism
3. International Terrorism: The Deadliest Plague

“The current net tax per gallon [of diesel fuel] is 13 percent of the price, while the environmental cost per gallon is 50 percent of price. The tax on this fuel could be raised substantially to promote its efficient use.” ¹

Typically economists oppose excise taxes on the grounds that they distort market prices and lead to a misallocation of resources. But to most economists, energy, particularly energy that is derived from fossil fuels (coal, oil, and natural gas), is seen as an exception. In fact, as evidenced in the statement above, to the extent that the generation of energy imposes unwanted negative effects on society, such as pollution, it is argued that taxes on the production of that energy are called for to enhance the efficient operations of the market. In the face of a new “energy crisis” and increasing levels of propaganda about environmental problems, real and imagined, it is possible, with an assist from “economic science,” that “soak the energy wasters” could replace “soak the rich” as the number one rallying cry for new tax initiatives.

Support for energy taxes by many economists centers on the economic concept of externalities. Because some energy production generates pollution, the full cost of generating that energy is not being borne by its producers and consumers: there are “external effects.” As a result the price of the energy source is said to be “too low” and the amount of it produced is said to be “too high”; the market “fails” to generate the “correct” output at the “correct” price. The standard solution is to tax the energy source to induce the producer to charge the “correct” price and produce the “correct” level of output. Such a tax would, according to the theory, improve economic performance of the economy overall. As one staunch supporter of energy and other externality taxes has argued: “The primary function of such taxes is to make the economy function more efficiently. Through their use we have the opportunity to employ the tax system, not only to raise revenues but also to enhance the operations of the economy.”²

There are serious flaws in this entire approach to both environmental and tax policy. Ultimately we must ask what is meant by market failure and implicitly, market success. If certain forms of energy are being sold at the wrong prices and are being produced in the wrong amounts, what would be the correct price and output? Obviously this would have to be known before a tax that would “enhance the operations of the economy” could be formulated and imposed. When all the fancy terminology, graphs, and equations are stripped away, the definition of market success that energy tax policymakers are supposed to mimic is so stylized and so contrived as to have no relevance for real-world policymaking.

Knowledge Problems and the Correct Price and Output

The “correct” price and output from this perspective is the one that would be generated under conditions of what is called “perfect competition.” This is a world where all market participants have perfect knowledge of all current and future information that relates to their market activities. Within product lines there are no differences between what competitors offer for sale. Markets can be entered and exited costlessly. Finally, there are so many buyers and sellers in any market that no one can have any effect on their selling or buying price. Furthermore, this world is static. Any unanticipated changes in people’s preferences, attitudes, technology, or the relative scarcity of resources are assumed away. The correct price and output is the one that will occur when all markets are operating under these conditions. So when an economist proclaims that “too much” gasoline is being consumed and implicitly, that the price of gasoline is too low, he means: relative to the amount that would be consumed and the price that would be paid in a world that looks like the perfectly competitive model. Clearly, by this totally unrealistic and unobtainable standard all markets fail all of the time.

Once this is recognized the absurdity of the market‑failure case for energy taxes becomes easily recognized. The information requirements that are necessary to impose the “efficiency enhancing” tax are so great as to render the policy impossible to implement. If the desired outcome is the one that will be obtained when all market participants have perfect information of all preferences, scarcities, and technologies, then any policymaker would have to have similarly perfect knowledge. In reality, then, the amount of the tax and the amount of the output reduction that it brings about would necessarily be arbitrary or politically motivated and unrelated to true efficiency considerations.

The market‑failure argument for energy taxes, and energy policy in general, is based on what Nobel laureate F. A. Hayek described as a “pretense of knowledge.”³ To implement a tax policy that would improve on market results, the government would have to pretend that it had information it could not possibly possess. For example, gasoline taxes are often argued for on market‑failure grounds. Because, it is assumed the cost of air pollution is not being borne by oil companies and automobile drivers and producers, it is argued that too much gasoline is consumed and the price of gasoline is too low.

What is typically left unstated is that it is too low relative to the amount of gasoline that would be produced and consumed in the idealized world of perfect competition. Simply to know whether this is the case, the government must know how much would be consumed in a world of perfect competition. The government has to have complete knowledge of all the purposes for which individuals in society are using gasoline and the relative importance that they place on those purposes. Furthermore it would have to possess accurate knowledge of the costs that the pollution generated by the gasoline usage imposes on all the individuals in the economy. Ultimately all of this information is subjectively determined and unknowable by outside observers, even economists.

The information requirement becomes even more intractable once the timeless feature of the perfectly competitive world is recognized. To impose the “correct” tax, individual preferences, scarcities—and therefore all costs and benefits—are assumed to be constant. If this were not the case the amount of the correct tax would always be changing as these variables change. But this is not the real world. As time passes, people’s preferences and scarcity conditions are continuously changing. Even if we (unrealistically) assume that one could gather the relevant information to impose the correct tax for a given moment, by the time the tax was actually imposed it would be completely out of date.

The argument against the possibility of efficient taxation is essentially the same argument made by Mises and Hayek against the possibility of efficient, centralized control of economies in general. ⁴Gerald O’Driscoll and Mario Rizzo refer to the implementation of such taxes as “socialism writ small.&rdquo ⁵; If a central authority could obtain the appropriate information for improving on market outcomes with regard to levying pollution and energy related taxes, then there is no reason why the same authority could not second‑guess the market in general. Because of the nature of the information requirements needed to mimic the perfectly competitive results, the central authority would need to know the pattern of these outcomes in all markets, both  for a particular moment and as time passes and information changes.

Insurmountable Problems

These kinds of information problems are insurmountable. In spite of this fact, highly respected economists continue to make bold proclamations concerning the appropriate size of such taxes and their effect on the efficient allocation of resources, as evidenced by the statement at the outset of this essay.

The fact is that energy taxes—like all other excise taxes—distort market efficiency, not enhance it. They drive a wedge between prices paid by consumers and those received by producers, with consumers paying more than they would in the absence of these taxes and producers receiving less. Since energy is an input into production processes throughout the economy, this means that everyone’s production costs are higher, and output and social welfare are lower.

In addition, such taxes, like all taxes, transfer resources from private to inherently less‑efficient public‑sector uses, further reducing output and productivity. That is rarely considered by those who claim that energy taxes enhance economic efficiency.

The packaging of energy taxes as good for the economy is a political ploy meant to give tax increases a free ride on the environmentalist bandwagon. We should never be more wary than when anyone, politician or economist, tells us that a tax is “for your own good.” Taxes have one overriding purpose: to transfer resources from the private to the public sector. This has never been and cannot be a formula for improving the economy.

Notes

1. W. K. Viscusi, “Pricing Environmental Risks,” Policy Study No. 112, Center for the Study of American Business, 1992, p. 2.
2. Wallace Oates, “A Pollution Tax Makes Sense,” in Herbert Stein, ed., Tax Policy in the Twenty‑First Century (New York: John Wiley and Sons, 1988), p. 254.
3. F. A. Hayek, “The Pretense of Knowledge,” in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 23–34.
4. See Ludwig von Mises, Socialism (Indianapolis, Ind.: Liberty Fund, 1981[1922]) and F. A. Hayek, “Socialist Calculation I,” “Socialist Calculation II,” and “Socialist Calculation III” in Individualism and Economic Order (Chicago, Ill.: University of Chicago Press, 1948).
5. Gerald O’Driscoll and Mario Rizzo, The Economics of Time and Ignorance (Oxford: Basil Blackwell, 1985), p. 141.

Related posts:

1. Book Review: The Use of Knowledge in Society by Friedrich A. Hayek
2. Wasting Energy on Energy Efficiency
3. The Division of Knowledge