Topic: Tax and Budget Policy

The Sound of No ‘Peak’ Story Popping

Last week, in a Capitol Hill press conference featuring congressmen Roscoe Bartlett (R-Md.) and Tom Udall (D-N.M.),  the Government Accountability Office unveiled a new report on the looming catastrophe the United States faces from “peak oil.” With gas prices up and environmental stories popping in the press, Bartlett, Udall, and the GAO had to be thinking they’d have a hit on their hands.

So, if a GAO report falls on Capitol Hill and the media ignores it, does it count as news?

I can find no coverage of the press conference or the report in either the New York Times or the Washington Post. The only mention of it on either of those papers’ websites is in a transcript of an online chat session with Post politics reporter Lois Romano, wherein a reader asks if the Bartlett-Udall press conference will generate buzz.  Romano’s response (in essence): What press conference?

In fairness, the report did get a bit of play: the AP moved a short story on it and the WSJ briefed it. But no one is interviewed in either story, and the two pieces have the whiff of being quickly typed up from a press release. In other words, the media decided the report didn’t merit any real attention.

Peak oil, if you’ve never heard the term, is the theory that oil, as a finite resource, will grow increasingly difficult and expensive to extract over time. At some point, the global extraction rate will peak and then decline because of the increasing cost and difficulty.

The GAO report investigates the theory and comes up with three scintillating conclusions (I’m paraphrasing):

(1)  The world will indeed reach an oil peak — in the next few years, or the next 15 years, or the next 35 years, or the next 70 years, or sometime in the 22nd century.

(2)  It’s currently unclear how the United States will adjust to declining production rates when they do occur.

(3)  We’re all doomed, doomed I tellz ya’!

OK, (3) is hyperbolic — but just a tiny bit.

The notion of peak oil gained currency back in the early 1970s, a little more than a decade after geophysicist Marion King Hubbert correctly predicted that (Lower-48) U.S.-produced oil would peak around 1970. (Peak oil theory is often referred to as “Hubbert’s peak.”)

But Hubbert wasn’t the first person to come up with the concept. The notion dates at least to 1875 (yes, 1875) when John Strong Newberry claimed the oil peak was imminent. From then on, there’ve been many versions of the same refrain: The End (of oil) is nigh.

In respect to Newberry, Hubbert, Bartlett, Udall, and all the other “end is nigh” guys, there is validity to their theory. At some point in the future, the rate of global oil production will max out and then begin to decline. And it’s quite possible that we may not have cheap and easy substitutes for oil when that occurs, so there’ll be some significant changes for the world. But it’s also quite possible that we’ll develop substitutes for oil long before the cost of extraction, by itself, produces an oil peak; instead, the peak would result from our preferring — and thus shifting to — the substitutes. After all, that’s what has produced many previous natural resource shifts.

But let’s assume the former scenario plays out. Does that mean we are, indeed, doomed? And should we thus adopt the GAO report’s two policy recommendations that the U.S. government (1) carry out a massive global information-gathering effort to determine when the oil peak will occur, and (2) orchestrate a bold, unified national program to prepare for the peak oil transition to substitutes?

Let’s consider the policy recommendations first. Given the U.S. government’s track record on determining Iraq’s supply of weapons of mass destruction, how wise would it be to rely on the government to estimate the future supply of known and unknown sources of oil in Iraq, Iran, Saudi, Nigeria, Russia, Kuwait, Syria, Venezuela, China, Cuba, under the world’s oceans, etc.? How reliable would be government projections of the future technological developments that will increase human abilities to access that oil? Moreover, given that the U.S. government’s only great success in developing and broadly implementing an alternative energy program is nuclear power, do we really want it to be orchestrating a national program for a major transition to new energy sources? (I won’t mention the risk that the government, in carrying out these policies, would “fix” its findings and efforts around various politicians’ agendas.) If we are solely dependent on government to save us from the ruination of peak oil, then we probably are doomed.

So, does this mean that we should do nothing? Quite the opposite, quite the opposite — we should, and already are, acting boldly on energy. There are countless scientists, engineers, business executives, economists, and others, both in the United States and abroad, exploring and developing all sorts of transition strategies and technologies to substitute for oil. And there are countless scientists, engineers, business executives, and others, both in the United States and elsewhere, who are exploring and developing strategies and technologies to extend the life of the oil we have yet to extract. And we consumers have the best (and only necessary) incentive to utilize those developments when it makes sense to do so — we have to pay for the oil and alternative energies that we use. Those dynamics are far broader, more powerful, and more effective than any government Great (Energy) Leap Forward would be.

Bartlett, Udall, and the GAO are correct to be thinking about peak oil. But realizing that oil will peak one day is only the beginning of a thoughtful policy discussion, not the clinching demonstration that immediate government action is necessary. The only necessary (and sufficient) government energy policy is to allow consumers, innovators and entrepreneurs the degrees of freedom to make their own energy choices and to experience the costs and benefits of those choices.

Government is not the sole enlightened, rational actor on the planet. (Some might say the word “sole” should be removed from the previous sentence.) Somehow, we need to get the politicians to discover that.

High-Tech Welfare for High-Tech Billionaires

Voters in a New Mexico county appear to have approved a tax increase to build the nation’s first commercial spaceport. Two other counties will also hold tax referendums before the project can proceed. British billionaire Richard Branson and his company Virgin Galactic have signed a long-term lease to use the spaceport.

But why should the taxpayers of rural New Mexico be paying for facilities for billionaire space entrepreneurs? If the spaceport is going to be profitable, then businesses could pay for it. And even if it weren’t profitable, the space business has attracted the attention of a lot of people with a sense of adventure and billions of dollars, from Branson to Microsoft cofounder Paul Allen, the seventh richest man in America.

The argument to spend tax dollars on the spaceport is very similar to the argument for tax-funded stadiums and convention centers. Proponents say it will bring jobs and tax revenues to the three rural counties. But apparently it isn’t a sure enough thing for businesses to invest their own money.

Cato scholars have argued for years against corporate welfare. The spaceport is a classic example of corporate welfare, though in this case it might better be called billionaire welfare. It will transfer money from middle-class and working people to subsidize businesses and billionaires who won’t have to invest their own money — just like the typical stadium deal, paid for by average taxpayers to benefit millionaire players and billionaire owners.

At least in this case the voters get to decide, which rarely happens with stadium subsidies. The vote pitted “political, business and education leaders” against retirees and groups representing the poor.

“I’m not opposed to the spaceport, but I think it’s a terrible idea to tax poor people to pay for something that will be used by the rich,” said Oscar Vasquez Butler, a county commissioner who represents many of the unincorporated rural colonias where the poorest New Mexicans live, often without proper roads and water and sewage systems. “They tell us the spaceport will bring jobs to our people, but it all sounds very risky. The only thing we know for sure is that people will pay more taxes.”

Using Markets to Solve Water Shortages

South Florida is suffering a water shortage, but the shortage only exists because politicians are unwilling to allow market-based pricing. There is no shortage in the markets for air conditioners, automobiles, and haircuts, but that is because prices are allowed to rise and fall to reflect market conditions.

An article posted at TCSDaily.com offers a first-hand account of living with government-imposed price restrictions and draws an appropriate analogy to the price controls that caused gasoline shortages in the 1970s:

So here we are, in the spring of 2007, with rain below average, with a low lake level, little else in the way of reservoirs, and a water shortage. What is the response? Well, a rational response might be to price a scarce commodity such that people will use it only as they need it, and not frivolously. …Instead, we get the response of the local commissars. So, not allowing the market to work, and not allowing prices to provide signals to the participants, they have decided to run our lives for us.

…I live at an odd numbered address. That means that if I want to water my lawn, I can only do it on Monday, Wednesday and Saturday mornings, from four to eight AM. I can water my plants with a hose on the same days, but only between five and seven PM. My neighbors across the street, and behind my house on the next block, get Sunday, Tuesday and Thursday.

…Over thirty years ago, in the first OPEC oil embargo, the government, rather than allowing prices to rise to account for the reduced supply, told people when they could purchase gas based on the parity of their license plate — even one day, odd the next. My recollection was that this did nothing to alleviate the shortage — the lines remained. The problem was only solved when Nixon-era price controls on oil were lifted, the market was allowed to work, and oil prices eventually (and it didn’t take all that long) fell to historical lows.

…[H]ere’s a radical concept. How about pricing the commodity to the market? Maybe, if people had to pay more for water to water their lawn, they’d use less of it? Yes, I know that it’s hard to believe, but there really are some people out there who buy less of something if the price is higher.

Mauvaises Idées

The International Herald Tribune reports that Ségolène Royal, the Socialist Party candidate for the French presidency, wants to impose price controls on banking services. She also wants to distort the allocation of credit by having the government guarantee loans to young people.

These ideas do not make economic sense, but they are a sign of pogress. Thirty years ago, a Socialist in France would be arguing for nationalization of banks. At this rate, maybe the Socialists will be advocating free market ideas within 300 years:

In a French presidential campaign with recurrent anti-capitalist undertones, the Socialist Party candidate, Ségolène Royal, took aim at banks Tuesday, accusing them of penalizing the poor with low interest rates on savings and high overdraft fees.

…Banks should pay customers more interest on current accounts than the 0.5 percent to 3 percent common today, Royal said. They should also credit bank accounts on the day a transfer is made, and give every young person with a “project” a free €10,000 loan that would be guaranteed by the state.

The Tax Code Nightmare Continues

Money, a personal finance magazine, periodically used to conduct a test by sending a hypothetical family’s tax information to dozens of professional tax preparers, an exercise that generated a wide array of results because of the tax code’s complexity. Unfortunately, it seems Money no longer conducts this test. But USA Today has stepped up to the plate, albeit in a more limited way. It asked for a tax return from four preparers and got - gee, what a surprise - four different results:

In 1913, the CCH Standard Federal Tax Reporter, which spells out the U.S. tax code in all its riveting detail, was 400 pages long. In 2007, it contained 67,204 pages. As the tax code turns ever more unwieldy, deciphering it has become more art than science, tax experts say. With the April 17 deadline approaching, USA TODAY decided to test this theory by asking three veteran tax pros — two enrolled agents and one certified public accountant — to prepare a tax return for a hypothetical family, the Baileys. …All the preparers came up with varying results.

To its credit, USA Today draws the obvious conclusion and denounces the current tax code. Unfortunately, other than making some generic comments about the need for reform, the newspaper does not explain why fundamental reform like a flat tax is the only solution:

The fact that they couldn’t agree is testament to how impossibly complex the tax code has become. It also illustrates the utter contempt Congress has for the Baileys and their real-life contemporaries. This year, individuals and companies will spend about $300 billion, according to the non-partisan Tax Foundation, on tax preparation costs. To put that in perspective, that is a 20% levy on top of the $1.5 trillion they will actually pay in taxes. Some 60% of filers — including IRS Commissioner Mark Everson — will pay a professional to do their taxes for them.

New Estonian Government Plans to Lower Flat Tax Rate

The International Herald Tribune reports that the new government in Estonia plans to lower the rate on the flat tax from 22 percent to 18 percent. Estonia already ranks as one of the world’s most laissez-faire economies. Reducing the flat tax rate - which was originally imposed at a rate of 26 percent - will further enhance Estonian competitiveness and increase the power of tax competition in Europe:

Estonian lawmakers on Wednesday gave Prime Minister Andrus Ansip the go-ahead to form a new center-right government that is expected to cut the Baltic country’s flat income tax. …Ansip’s center-right Reform Party, the conservative IRL union and the centrist Social Democrats agreed earlier this week on a coalition platform. They plan to continue market-friendly policies in the country of 1.3 million, including reducing the flat tax from 22 percent to 18 percent by 2011. High-tech Estonia has one of the European Union’s fastest-growing economies, and some economists credit the flat tax, which means everyone pays the same tax rate as opposed to the progressive rate that most European countries use.

Czech Government Officially Proposes Flat Tax

Although its prognosis is unclear because of the ruling government’s lack of a firm majority in parliament, the Czech government has unveiled its flat tax. Combined with reductions in social welfare spending, the tax reform could dramatically boost Czech competitiveness and put more pressure on Western Europe’s welfare states. Tax-news.com reports:

The Czech government has announced a raft of major tax reform plans, which include a flat tax on personal income, a significant reduction in tax on corporate income, and changes to the value-added tax regime. Under the proposals announced by Finance Minister Miroslav Kalousek, if approved Czech taxpayers will pay a 15% flat tax on their personal income, while companies will see their income tax rate drop to 19% from the current 24% by 2010. At present personal income tax rates vary according to wages, and range from 12% to 32%. The lower rate of value-added tax will increase under these reforms to 9% from 5%, but the headline rate will remain unchanged at 19%. …with the tax cuts accompanied by some major cuts in welfare spending, such as unemployment benefits and healthcare, the government is sure to encounter opposition from the left.