Thursday, April 21, 2011
My friends don't know anything about economics!
I have heard many crazy things, said seriously, by my friends. Most recently and scarily was the suggestion that, to curb inflation's primary driver (oil), we add a tax to it. Allow me to explain why that is wrong on so many levels. Tax, but pay back The idea was that a tax would be imposed on fuel, but it would go towards compensating people for the higher price. That is like mugging someone at a gas station for 20$, but giving them a 19$ gas card (some gets lost to taxation and bureaucracy). It doesn't matter that the mugger gives most of it back: they still stole from you. But even assuming that there is no inefficiency (and this tax is not taxed by the sales tax), it makes no sense. It would be like charging someone 20$ for service, but handing the bill back as an instant rebate. If a charge is paid back by the charger, does it even exist? But because of inefficiency, it will exist; the charged will be the loser. The rising price is enough Just by the very fact that the price is going up, and the market trend is that it will continue to rise, is incentive enough. It does not take a genius to figure out that one of the largest pillars of the world (it is responsible for just about all the food on the market, as well as the delivery of just about every product) is a large market, ready for a cheaper solution. The open market is more likely to get it right It is a simple probability thing: if one person (in the legal sense) roles a ten-sided die, one in ten times she will get a ten. But if one million people each role a die, 100,000 will get a ten. It is simply better to let the open market determine the actual correct price, purely statistically speaking. Then, once someone has the right price, all others will be forced to meet or exceed this number. Those who get it or better get business; those who don't get none (assuming that all other factors are controlled for. This means that oil will cost more on Ellesmere island than it would, say, right next to the oil refinery in Alberta). On top of that, the people in the market have two things that the governors of the market will never have: boots on the ground, and immediate consequences. These people's jobs are to judge the optimal price, and they suffer the consequences when they get it wrong (less right than the competition). Bureaucrats have no hope of ever acquiring that knowledge, and, because they are not dependant on getting it right for their jobs and income, no incentive to perform. It's not our job It really isn't the job of government to be encouraging and discouraging various practices that do not infringe on the rights of other. As explained above, a bureaucrat has no chance against the open market, and his efforts will only further mess up the economy (see the abnormally high price of dairy products, courtesy of the dairy marketing board. Also see the ethanol boondoggle in the US; even Al Gore admits he backed it to support his buddies in the farming business). Because of this, it just doesn't make sense to go around managing economies, and so it shouldn't be a role of government (the same way heavy-machinery operators don't work in chemistry labs: they could, and might even have the occasional success, but it would just be better to leave that job for chemists). I hope that I have provided a good case against increasing taxes on oil. The idea of a tax who's proceeds go to those who pay it to pay the tax is absurd an inefficient. The rising price is incentive enough to spur innovation, and, left on its own, the open market will get the right price better than a meddling bureaucrat. Because of this, it would be best to leave the free market to do its thing, and rectify the situation if it needs correcting, and determine that on its own. Remember, even if there is no demand, people will always fiddle and explore: gasoline was originally discarded because no-one could find anything to do with it, and then along came the internal combustion engine (an oversimplification, I know).