More on bad economics that will cost YOU

In my last post on Greg Mankiw’s campaign to raise the gas tax, I only got started. Mankiw buys into Pigou’s idea of an optimal tax to solve some policy problems, hence raisign gas taxes will do many wonderful things. I respond that the government has a demonstrated inability to make optimal decisions. Let me expand on that. Ted’s earlier post pointed to a nice interview with Mankiw by Russell Roberts that gets at some of these questions. Indeed, as Roberts paraphrases:

Greg [says] that yes, there are going to be political complications, but if we let political complications stand in the way of good economic policy, we may as well fold up our tent and go home. There are always going to be political complications. So if economists want good policies, they should advocate good policies even if in practice, they may not always turn out ideally.

Wrong! Economic policy needs to take into account the real world. Economics biggest problem is creating theory in a world of perfect markets or optimal governments with no relevance to non-economists whatsoever. That is why public choice theory emerged–to take into account the realities of “political complications” in economic policy. I talked about that in my previous post. But there is another aspect to Mankiw’s wrongness. We also have a nice theory of non-market failure that parallels the theory of market failure that underpins Pigouvian thinking, and thus Mankiw’s gas tax proposal. Charles Wolf at RAND developed the theory best and it tells that just as sometimes there may be market failures and institutions need to emerge to deal with them, the same is true of government. There are structural forces driving government decisions away from theoretical optimality. So, back to the gas tax idea and dealing with “political complications.” Good economic policy must take into account those complications and recommend approaches that best deal with complications of both the market and government action. And an increase in the gas tax for general revenue is not good economic policy.