Monthly Archives: January 2007

Not so fast…

Menzie Chinn (of Econbrowser) and his co-authors find:

We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables.

GDP Growth reports:

The economy snapped out of a sluggish spell and grew at a faster-than- expected 3.5 percent pace in the final quarter of last year as consumers ratcheted up spending despite a painful housing slump.
The fresh snapshot of business activity, released by the Commerce Department Wednesday, underscored the resilience of the economy; it has managed to keep on moving despite the ill effects of the residential real-estate bust.

The economy’s performance in the October-to-December quarter, which followed two quarters of rather listless activity, exceeded analysts’ forecasts for a 3 percent growth rate.

The economy opened 2006 on a strong note, growing at a 5.6 percent pace, the fastest spurt in 2 1/2 years. But it lost steam during the spring and late summer. It grew at a 2.6 percent pace in the second quarter and then a weaker 2 percent pace in the third quarter. The fourth-quarter’s rebound ended the year on a positive note.

For all of 2006, the gross domestic product (GDP) increased by 3.4 percent, an improvement from a 3.2 percent showing in 2005.

Quote of the Day

“Some people might describe my view of politics as ‘cynical.’ I reject the charge. I describe my view of politics as realistic.”

Don Boudreaux

Enough is Enough, part 2

In my previous post on Pigouvian taxes, I made the claim that the tax penalizes individuals who live in the furthest proximity to their job. I have received quite a bit of hate mail exclaiming that I am stating the obvious. Therefore, I would like to explain myself further.

The proximity of one’s dwelling to their place of employment is the result of many factors. Individuals choose the location of their home not only on the distance to their place of employment, but also to that of their spouse. In addition, many people choose to live in the same metropolitan area as their relatives (if possible). Further, neighborhoods are also chosen based on safety and the public school district.

Surely there are other factors that play a role as well. Essentially, the point that I am making is that individuals make decisions about where to live based on a variety of factors.

Most of those who work here in Detroit, do not live within the city limits. In fact, people have been fleeing Detroit at an rather quick rate. The reasons are quite clear. The neighborhoods in suburban Detroit are safer and the schools are better. Others have further personal reasons for choosing the suburbs — and specific suburbs for that matter.

Pigouvians claim that if the gas tax is raised, individuals will reduce gasoline consumption by using alternative methods of transportation, purchasing new vehicles, and moving closer to work. In reality, this is not the case. An increase in gas prices in not likely to cause anyone in suburban Detroit to migrate within the city limits. Doing so would require individuals to live in neighborhoods that are less safe, send their children to poorly performing schools, and pay unusually high property taxes. This is hardly a worthy trade-off.


More hate mail has arrived criticizing me of opposing this idea for ideological reasons. Sure I have ideological reasons for stating my case. Allow me to explain.

Choosing a car is similar to choosing the proximity of housing to one’s workplace. There are a variety of decisions involved. Different families and individuals have different tastes and necessities. Cars are chosen based on family size, the desired use of the vehicle, the vehicle’s style, and a variety of other factors. Gas mileage is just one of those factors.

Thus, changing to more fuel efficient vehicles is also not without a major trade-off. (I wonder how the Toyota Prius managed in the three plus inches of snow that graced the Motor City this morning?) For years, individuals have chosen to purchase trucks and SUVs voluntarily. Therefore, it must be the case that the cars provide something that individuals want. Perhaps it is the four-wheel-drive or the safety and security or even the ability to seat six. For whatever reason, Americans have by and large chosen to drive the vehicle that best fits their needs.

In essence, the Pigouvian tax on gasoline says to Americans that they are unable to make decisions on their own and seeks to forcibly change their behavior through government coercion.

The Pigouvian Subsidy

Those who have purchased a hybrid in the past year are eligible for a tax credit. This subsidy was created to encourage individuals to purchase a more fuel efficient vehicle. Further, it leaves the decision up to each individual without doing so forcibly. In my opinion, this is a much better way to encourage individuals to purchase more fuel efficient vehicles than the Pigouvian tax.

Critics argue that the subsidy results in deficit spending. Further, with the coming fiscal crisis of Social Security and Medicare, the United States can ill afford this type of spending. However, this is a red herring. If the problem is with Social Security and Medicare, not the subsidy.

Further, if the government is so focused trying to change behavior, why shouldn’t they spend money to try and solve the problem rather than soaking individuals with a regressive tax on gasoline?

Something can be done to help the environment. I remain unconvinced that the Pigouvian tax on gasoline is the way to do so.

Becker on Health Care Reform

Gary Becker has written an excellent post on health care reform:

Health care reform in the United States is receiving lots of attention recently from politicians and the media, and major changes in federal as well as state health law are likely. In thinking about reforms it is crucial to recognize that the American system has many strong features that should be preserved, such as the predominant role of private physicians, private hospitals, and private HMO’s that compete against each other for patients and health care dollars.

Pepper . . . and Salt

The Battle Has Begun

The Pigou Club dismisses my argument by falsely assuming that their are no transaction or transition costs. My short rebuttal is in the comments.