I Soften My Disagreement with an Increased Pigou Carbon Tax

In an earlier post, I criticized Harvard economist Dr. Greg Mankiw for his support of what is known as a Pigou tax on carbon emission producing products. After careful consideration and much research on the issue, I have softened my argument against Dr. Mankiw's proposal.

The tax would increase the tax on gasoline thereby raising price and reducing the quantity demanded. This would lower greenhouse emissions and presumably be good for the environment. My initial argument was based on the fact that taxes are almost always bad. Although I still believe that in most cases, this particular issue could be an exception. Let me go ahead and state that I am still not sold on the idea, but as I am about to explain, it may be the lesser of evils. Judging by the current political climate, there will almost certainly be future legislation passed to curb environmentally harmful activities. The solution, if left up to politicians, will almost certainly be a poor one. This increased sales tax on gasoline is at least fair and predictable. No one would be forced to pay it, and individuals would be taxed based on their contribution to pollution.

What has me rethinking my position on this issue is that Dr. Mankiw has proposed increasing this tax while lowering the income tax. That is exciting. By lowering the income tax, the government is keeping more capital in the hands of the most productive members of society. This is good for everyone since capital is the fuel of economic growth.

Now let me explain why I am still not completely sold on this plan. By increasing the gas tax, the government is encouraging the use of frustrating public transportation, car pooling, or simply not traveling at all. These make us less mobile. I believe mobility is a key behind productivity, since it not only makes us more time-efficient travelers but also keeps us happier since we are autonomous and don't have to deal with the headaches of group travel. Also, I am sure there are unintended consequences that have yet to be conjured.

Alas, if Congress feels it must do something, I support experimenting with raising the gas tax and lowering the income tax. The economic benefit may actually be positive since adding this tax may actually make our tax system more fair and more efficiently allocate resources within our economy.

One of Those Things Every 0-40 Yr. Old Should Know

So, the US Comptroller General says Medicare is going to bankrupt the country. Duh. Isn't that what we have been saying for a couple of decades now? Want to know the reason it is going to bankrupt us? Because the government is involved in the market. Do you actually believe the pharmaceuticals, hospitals, and other health-related companies have any incentive to keep prices low when their payments come from a third party that has a gargantuan tax base? Not when the big, bad government is disrupting and distorting the market. I would like to take this opportunity to thank the current legislators for forever putting this obvious and onerous burden onto me and my lineage.

Maybe the New Democrats Are Not Different

I have previously stated that I think the change of control in Congress is not a bad thing, but in some ways actually good. This is because many of the new Dems appeared throughout the campaign to be as conservative, and sometimes more so, than their Republican opponents. I must hope Senator-Elect Jim Webb's Wall Street Journal op-ed today does not reflect the consensus opinion of the newbies.

His ideas for wealth redistribution are flawed and will have the ultimate effect of strangling the economy through tax increases and economic protectionism and isolationism. These are proven and obvious to restrict economic growth. Let's all hope the rest of the new guys aren't as nearsighted and economically ignorant.

A Resounding Conservative Loss? I Don't Think So.

The recent Democratic victory may cause many conservatives to question the power and momentum of the conservative movement. I would like to tell my fellow right-wing ideologues to just calm down for a minute and analyze the situation from a longer term point of view. If you just look at the election as Republicans versus Democrats then you will find reason to worry since it was a strong win by the Democrats. However, looking at the election in the way that matters, in an ideological sense, then you see conservatives are still in an excellent position. The Dems that won Congressional seats are not your LBJ Democrats. They are fiscal and social moderates, some even conservative. They were able to win votes as Dems from a voter backlash against the President and the GOP, and many were excellent candidates that gained the votes of many right-of-center voters. This is part of a larger mainstream movement toward the ideological right. These new Congressmen tend to be pro-life, anti-gun control, and pro-economic growth. I do not believe they will allow taxes to be raised, nor do I believe they will become economic isolationist and protectionists. They will do what is right. I believe they will cut back on federal spending and may even find a way to cut out the pork barrel spending that has plagued the GOP the last half decade. The positive aspect of this is many of the Republicans they replaced had not done many of these things with a one party controlled government. This is democracy at its best. The incumbents do not get the job done, the constituents are given someone who they believe will, and he gets elected.

There are however a couple of troublesome areas that the Republicans will have to guard against. The first is the new Congressional leadership. They are as liberal as they come. They would love nothing more than to move toward socialism by boosting entitlements, raising taxes, and increasing the size of government(with the exception of Defense and Homeland Security, of course). What we conservatives have to hope for is the new blue dog Dems will stand by their principles and constituents and not follow the Nancy Pelosis, Harry Reids, and Charlie Rangels down that road. I do not believe these liberal leaders realize just how hard a task it will be to get their leftist agendas through Congress with this large number of moderates and conservatives in the Houses. In the long run, this will hurt those at the far left and help those of us on the right. Another strong concern has to be toward national defense. These newly elected Congressmen ran on a change of course in the War on Terror. If they do in fact insist on a change once they get to Washington, I hope it is not one of retreat and forfeiture. I hope their national pride and sensibility tells them we must stay and finish what we have started. I hope they realize running away will do nothing more than empower terrorists and reinforce Anti-Americanism around the globe. We need to stay and prove to the world that when we make our mind up on something, we follow through and make sure the end result is to our liking. Another disappointment in the Dem victory is that it looks as if entitlement reform is off the table for awhile. My generation will continue to pay into the entitlement system what we will surely not get out. Maybe there are some of those blue dog Dems who have the backbone to take it up, but I am not holding my breath.

While Tuesday November 7, 2006 has proven to have been a red letter day for Democrats, I urge you, fellow conservatives, to not get upset and do not become angry at the gloating of your liberal peers. For conservatism has prevailed in this election and that is what really matters.

Why is New York Losing Business?

For the past few years New York City has been losing market share in the global financial market. Many simply blame regulatory burden caused by Sarbannes-Oxley and other government actions and move on. I agree Sarbannes-Oxley, especially Section 404, needs to be revisited as does most legislation Congress passes, but I will not concede that law is solely responsible. There are many other factors that I feel are playing a much larger role in companies taking their financial needs out of the United States.

The first and most obvious explanation deals with globalization. Reductions in trade barriers, advances in technology, and the liberalization of free markets around the world throughout the past twenty-five years has created a global economy where wealth and knowledge reside in non-Western countries. There are now pools of capital available in every corner of the world. All else equal, companies will prefer to do business closer to home than in some far away place. There is a sense of regional pride and comfort created by doing business with people that understand not only your business but also your culture.

The next reason may have to do with the relative newness of the markets. These newly formed markets do not have the number of listings or investors as is seen in the US markets. With less companies to invest in, the participants in that market will invest more money into the available companies. This could artificially keep stock prices higher than what they should be, and assign a greater market value to the companies. This may go against efficient market theories, but with globalization comes much more aggregate information. I predict US-listed companies get much more attention than those listed on newly formed exchanges. Therefore the market for ideas and knowledge among the investors is smaller and less efficient causing less efficient asset markets and possibly faulty valuation in these smaller markets. This would attract companies who would wish to avoid getting lost in the mix in larger markets.

Ultimately, I believe New York is losing ground in the finance industry because of the banking fees it charges. New York City based bankers and firms have long been the cream of the crop and charged the fees to prove it. I still believe we have the smartest people in the world working on Wall Street, but others around the world have found an opportunity to take market share. Simple as it may sound, they have lowered the price they charge and undercut Wall Street. These companies that need financial services may not get the best advice outside of traditional sources, but if they can get sufficient service at lower cost it makes good simple economic sense to take advantage. The ego of Wall Street is costing them market share. They are most likely blinded by the enormous amount of money they are still making, but in terms of market share they are, and have been, losing. As competition increases, price competition will become more fierce and Wall Street will continue to lose unless they decide to become more price competitve. When strong competition enters an industry everyone is out for one thing; market share. It is the way to outlast competition and sustain.

In conclusion, for the good of the American financial system and especially New York City, I hope the Wall Street geniouses that man the trading floors and corner offices figure it out before they are forced to play the costly and tireless game of catch up.

Gas Tax Hikes a Good Idea?

Harvard Economist Gregory Mankiw opines in today's Wall Street Journal the possible benefits of substantially increasing the tax on gasoline. I am almost exclusively opposed to tax increases of any kind, but there is at least some sound logic in Mr. Mankiw's proposal. Those of us who believe in free markets and capitalism know that the high gas prices of late are not necesarily a bad thing and are determined by the market supply and demand. The benefit of high prices is an increased incentive to innovate and produce alternative products. When supply of a good or service is low and demand is high, there is opportunity for others to enter the industry and take some of the profit. This works out well for the consumer since there is now increased supply of the product, in this case gasoline or a substitute, the price decreases accordingly. Mr. Makiw proposes that a $1 increase in the gas tax would help the environment and road congestion since people would drive less, as well as the budget deficit since the government would see a windfall in tax revenues. This seems a little counterintuitive to me. If people drive less wouldn't there be less tax revenue to collect? Mr. Mankiw seems to believe there is not a direct correlation between price and demand, or rather that demand for gasoline is inelastic. I would disagree. Although inelasticity was prevalent in the recent run up in gas prices, I do not believe it is sustainable. The consumer was able to pay for the more expensive gas with the proceeds gained from the large appreciation of his home. The economy and stock market were doing well, not only providing the consumer with real money but also giving him a psychological boost that entices spending over saving. These trends are not sustainable in the long run. With high gas prices the consumer will eventually change his habits. This is why tax increases may in fact decrease emissions and road congestion, but it would also decrease government tax revenues. This tax increase/tax revenue increase policy goes against supply side economic principles that say tax increases limit economic growth and limit the tax base. This takes capital out of the hands of productive, entrepreneurial, wealth-creating individuals and businesses and puts into the less productive and inefficient government. I also discount Mr. Mankiw's claim that the "windfall" from the tax would materially help pay for the baby boomer's entitlements as wishful thinking at best. The only way to fix the looming entitlement crises is reform. I do agree with Mr. Mankiw's claim that the less oil we consume, the less money we send to the hostile regimes supplying it, and that is a good thing.

Tax increases are almost always a bad idea, even if there may be ethical reasons behind them. There are unforeseen consequences to everything and generally the market, made up of consumers, makes better decisions than government. These kind of policies tend to have the effect of disrupting efficient markets (even this one that OPEC tries to control but apparently cannot). This tax increase would be another way for the government to get into the pocket of Americans, and I think I speak for all when I say the people have had enough of intrusive government.

Wal-Mart and Capitalism

The constant attacks on global retail giant Wal-Mart throughout the past couple of years have caused many to begin to believe the non-sense rhetoric being spread by those who object to way the company runs its business. The arguments and complaints most often seen and heard concern worker treatment, impact on the community and local economy, and mistreatment of entities it engages in business. I will address those individually, but I also want to highlight the oft-forgotten aggregate domestic and international impact of the company.

The biggest problem it seems has to do with the way Wal-Mart treats its employees. The talking point is that the company is wrong to minimize worker wages and benefits and this is inherently harming poor and middle class America. I have heard no legitimate arguments from Wal-Mart workers concerning their wage and benefits package. Sure every worker in every industry would prefer wage and benefit increases, but somehow Wal-Mart is able to retain workers. These workers could go elsewhere to find work, probably at pay competitive to Wal-Mart's, but they tend to stay. This is because Wal-Mart offers entry level jobs with the real opportunity to move up the corporate ladder. Where else can a high school grad find employment working for $8-10 per hour with the opportunity to move into a management position of a Fortune 500 company within a few years? A domestic unemployment rate close to its natural level shows that there have not been, and are currently not, a lack of jobs.

After Wal-Mart haters get done with that, they move on to explain how stores harm the local economy. They argue they shut down 'mom and pop stores' that are vital to the community, and the high demand for their products causes traffic flow problems around the stores. When I see this many people apply for this many jobs, I think the people of the community feel the store opening in their neighborhood may be a good thing. Second, the company comes into a town buys a large piece of land, usually away from much else, and makes a huge investments in the building of the store. This store expands the community's tax base considerably since they can now get large yearly property tax receipts from the appreciation of the land the store sits on, as well as the windfall of the sales tax receipts the company accumulates throughout the year. The stores also have proven to bring in other stores nearby due to increased traffic. This creates a commerce area of new development that didn't exist previously.

There are also individual consumer benefits that follow Wal-Mart stores. Wal-Mart offers consumers products (ones they may have access to previously and some they may not) at prices lower than other business in the area. This increases the consumer's discretionary income since they are spending less and saving more. Increases in saving increases the capital in the community giving other entreprenuers access to funds to invest in ideas that further boost the economic conditions and lift standard of living of a community. Wal-Mart may in fact drive some competition out of business, but this what happens in free markets where corporate darwinism prevails. People will say it is wrong to drive that little company that has been in operation for 50 years out of business, but it is not in the hands of the community leaders to protect the profits of a few (the small business owners). Rather, they should look out for the interests of the whole community by allowing the more efficient, effective, and price competitive Wal-Mart to come into their area and offer consumer's what they want and at lower prices. The 'mom and pop stores' will not be forced to close if their products and prices are in line with what the local consumers desire. They will close when consumers go elsewhere (Wal-Mart) to receive more selection at better prices. I'll also remention here the local economic benefits of the large job creation the store brings to the community.

You may think there would not be much else the naysayers can complain about, but you would be underestimating their diligence. The environmentalist say Wal-Mart is bad because their fleet of big-rig delivery trucks is putting harmful emissions into the air, even though Wal-Mart has proven to be a leader in implementing environmental technology to all areas of its business. Other big trucking firms do nothing to improve environmental standards, yet they receive no criticism from the environmentalist. Some business advocates say Wal-Mart is bad because they force their vendors to bend over backward to keep prices low and improve efficiencies in the supply chain. Wal-Mart does this so it can charge the lowest possible price to you and I, the consumer. These efficiency (productivity) increases are the key to improving overall standard of living through economic growth. The more efficient (productive) the individual businesses in an economy are, the more non-inflationary economic growth its people will enjoy. Isolationists will say Wal-Mart buys many of its products overseas and is costing us jobs domestically. This goes against all the laws concerning the ecnonomic benefits of global free trade that say when people trade freely, each party will become better off in the end. Once again, Wal-Mart is minimizing its cost to minimize price to the consumer. It is benefitting the masses instead of protecting a few higher priced producers at home. Union advocates say Wal-Mart is treating the attempted formation of unions illegally or unethically. Another attempt to keep costs down to benefit the general public over a few. The company is doing all of this while continuously returning profits to shareholders as it has been one of the best performing stocks in the history of the American stock market.

What the critics often leave out of their propoganda and rants is the aggregate and global benefits of Wal-Mart. Wal-Mart's low cost pressure along with its supply chain efficiency are responsible to a certain degree of suppressing inflation pressures throughout the past 25 years. They force themselves as well as the companies they do business with to constantly innovate to find ways to lower costs while maintaining quality products. Wal-Mart employs 1.3 million people, second only to the government, providing jobs for many low skilled individuals who may have trouble finding work elsewhere when economic conditions turn unfavorable, and giving those people marketable skills and the possibility of upward mobility. Globally, as John Tierney points out on the Opinion page of October 17th's New York Times, Wal-Mart's low cost strategy causes factories to be built where the labor is cheapest, often the most poor of countries. The workers are paid dramatically more than they were in their old jobs, even if it dismal by our blessed standards. You must look at this relative to the previous local conditions. So, Wal-Mart is helping to reduce worldwide poverty in the areas where conditions are the worst. Wal-Mart is also expanding its operations worldwide which will allow more people access to the large array of products at affordable prices. This will result in a sharing of ideas across cultures that will benefit Americans and foreigners alike.

Critics love to hate Wal-Mart and everything they stand for, but the company is good for the common man. Wal-Mart has revolutionized the way businesses function for the better and I hope the Wal-Mart will ignore the naysayers and continue to innovate to increase customer satisfaction. With the right managerial mindset, Wal-Mart will continue to be a shining beacon of capitalism in America and worldwide.

UPDATE: Wal-Mart expands its $4 generic drug program to 14 more states bringing deep cost savings to the customers of 1,264 stores in the US.