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Will Mitt Romney Join the Pigou Club?

3 min readBy: Jonathan Williams

Governor Mitt Romney appears to be one of the early frontrunners for the GOP presidential nomination in 2008. Although it’s still early in the race, Governor Romney has begun to bring key advisors onto his team for an expected White House bid. Recently, Romney added some major economic muscle to his team. From the Washington Post:

“He hasn’t even formed his presidential exploratory committee, but Massachusetts Gov. Mitt Romney (R) has already signed up an economic brain trust to advise him, led by two former chairmen of President Bush’s Council of Economic Advisers.

R. Glenn Hubbard, dean of the Columbia University Graduate School of Business, and N. Gregory Mankiw, a scholar at the American Enterprise Institute, have agreed to join Romney’s political action committee, committee spokesman Jared Young said yesterday. Hubbard and Mankiw will play key roles in the governor’s presidential campaign if he decides to run — a decision that is widely presumed.” [Full Story]

Both Dr. Hubbard and Dr. Mankiw are widely acknowledged as giants in the field of modern economics and Governor Romney should receive superb advice on economic policy issues.

However, there is one noteworthy exception.

Dr. Mankiw recently authored a piece for the Wall Street Journal outlining his reasons for imposing a “Pigouvian” gasoline taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on American motorists – increasing the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. by $1.00 per gallon. Professor Mankiw is the founder of the Pigou Club, which is named after Arthur C. Pigou, a renowned English economist from the early 20th century. Pigouvian taxA Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes. es are designed to correct what economists call “market failures” or “negative externalities” that impose spillover costs on society.

My rebuttal to Mankiw’s plan was published in Tax Analysts’ Special Energy Tax Supplement:

“In theory, using Pigouvian taxes is efficient and straightforward, but in practice, the Pigouvian solution is anything but simple. One important problem often ignored by advocates of Pigouvian taxes is what is typically referred to as the “knowledge problem.” That is, if gas taxes should be raised purely to offset the social costs of gasoline consumption, how high are those social costs, how would policymakers attempt to quantify them on an ongoing basis, and how high of a tax would be necessary to compensate for them?

Clearly, the practical difficulty of compiling data and estimating social costs is not trivial. Pigouvian taxes place enormously high information burdens on policymakers. Policymakers looking for social cost estimates in the economic literature will find results that vary widely. For example, there is a wide range of external cost estimates for gas, oil and other methods of power generation. These figures are compiled from various studies throughout the 1980s and 1990s, and estimates range from very large external costs to trivially small effects.

Additionally, what level of total social welfare loss would Americans experience if policymakers overestimate the costs of externalities and implement an excessive Pigouvian tax? Those hit hardest would be the lower-income Americans who are already disproportionately harmed by the regressive nature of gasoline taxes. On the other hand, what convinces proponents of Pigouvian taxes that $1 per gallon would be enough to solve the plethora of harms that “under-priced” gasoline is said to create?” [Full Article]

It’s discouraging to see thoughtful economists like Mankiw support the central planning that Pigouvian taxes promote. Prominent free-market economists F.A. Hayek (Nobel Prize winner – 1974) and Frank Knight (co-founder of the “Chicago School” of Economics) spent years debunking the ideology behind Pigouvian taxes. Ronald Coase (Nobel Prize winner – 1991) spent his lifetime pointing out the numerous flaws with Pigouvian ideas.

It is indeed very disappointing that some otherwise marking-leaning economists are turning their backs on the very intellectual framework that Hayek, Coase, Knight and so many others built. Let’s hope Governor Romney will have the wisdom to reject any invitation to join the Pigou Club.