Friday, May 21, 2004

Price Controls?

In a Washington Post oped Charles Krauthammer has proposed that the fix to getting Americans thinking properly about fuel economy is for the government to fix the price at $3 a gallon.

The idea is for the government -- through a tax -- to establish a new floor for gasoline, say $3 a gallon. If the world price were to rise above $3, the tax would be zero. What we need is anything that will act as a brake on consumption. Since America consumes 45 percent of the world's gasoline, a significant reduction here would bring down the world price.

But the key is to then keep the tax. Indeed, let it increase to capture all of a price reduction. Consumers still pay $3, but the Saudis keep getting lower and lower world prices. The U.S. economy keeps the rest in the form of taxes -- which should immediately be cycled back to consumers by a corresponding cut in, say, payroll or income taxes.

That's an interesting idea but I must ask where have price controls ever done good? Cuba? Soviet Union? California?

Price controls are inherently flawed as they stop the functioning of a dynamic free market. Right now while as annoying as the constant fluctuations in prices are the fact is that the oil companies have a very strong incentive to try and keep their prices lower than the other guy. They are constantly looking for more efficient ways of getting the gas to pumps so they can be a few cents cheaper than the station across the street. Set gas at $3 a gallon regardless and you have removed any incentive for them to improve their ways. A price control would have the opposite effect of creating an incentive to stop spending money on trying to make fuel cheaper and just let that R&D money go back to the bottom line. Then if you give everyone a kickback on their taxes from the money generated then you are also kicking money back to the folks driving the gas guzzerlers and to a degree you end up subsidizing them. Sure they are paying more in gas but they know they'll be getting a chuck of it back. You have removed incentive for oil companies to be more efficient and created a very week incentive to stop driving the guzzlers.

If you want to uses taxes to do social engineering then fine but you must careful not make the situation worse in the process or add to government with little or no gain.

First you never set a price control. Add a flat 50 cents a gallon tax. It would create billions in money to use as incentives but still allows market pressure to keep the price as low as possible at the pumps. Then you give the gas guzzler tax real teeth. Starting at $2,000 for vehicles getting a combined average 19mpg and sliding up $200 for each mpg lower. So a monster getting 11mpg has to pay $3,600 in taxes. All of the money from these two taxes goes into the Fuel Efficiency Incentive Fund (FEIF).

Now that you have billions in the FEIF you need of offer positive incentives for people to purchase more fuel efficient cars. But you must not do what the US is doing now with an incentive at the purchase of the car. That also is a form of price control. Toyota knows they can sell the Prius for $25k. Now you offer a $4k instant rebate from the government and the consumer pays $21k, right? Wrong. Now the car costs $29k and that $4k kick back goes to Japan in the form of a much higher profit margin. There must not be any incentives at the point of purchase. Market forces must be free to work and keep the cost of the cars low. So what you do with those billions is provide a yearly kickback on income taxes for those who purchase efficient cars. Starting at $1,000 for a car that gets a combined average of 31mpg and moving up $100 for each extra mpg gain until you hit a ceiling of say $4,000 and they get it every year for 3 years after purchase. The numbers I have made up might not work exactly but you get the idea.

Yes people that can't afford a new car are hurt because they are paying an extra 50 cents a gallon at the pump but will never see a penny back. However they still have market forces keeping gas down, the knowledge that their money is staying here instead of leaving with foreign car makers in the form of higher profits and the good feeling that we are might finally get off the oil addiction.

Market forces must stay free to ensure that oil and car companies can't get away with hidden gouging. There must be real negative incentives on purchasing, "irresponsible" cars. There must be real positive incentives for purchasing "good" cars. All money that goes into the FEIF needs to go back to the people and not end up lost in congressional pork. Soviet style price controls are not the answer.

As for Mr. Krauthammer's statement on ANWAR and the Gulf? Drill, drill, drill.

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