Forget ethanol, raise the gas tax

Chris Farrell

TEXT OF INTERVIEW

SCOTT JAGOW: In the State of the Union, President Bush said he wanted to mandate the use of certain gasoline alternatives like ethanol and force higher fuel economy standards for cars. I called up our economics correspondent Chris Farrell to get his thoughts on the Bush energy plan. In a nutshell, good intentions but the wrong approach.

CHRIS FARRELL: Do you really think that the government is in the best position to determine that ethanol is the right alternative fuel? What I would much rather see, what I would have really liked to have seen, now it would have been a moment, but if the President had said, 'you know what, I'm going to join the Pigou Club. . .'

JAGOW: Come again? The Pigou Club?

FARRELL: The Pigou Club. Now this was started by Greg Mankiw and he was the former head of the Council of Economic Advisors under President Bush. He's an economist at Harvard University. Pigouvian taxes are taxes that you impose when there's a market failure. So the classic example are sin taxes, a tax on cigarettes as a way of discouraging people from smoking. Well he started the Pigou Club. A lot of economists have joined it. And all it says is 'look, let's just raise the gas tax and then let the market decide.' If Scott wants to drive a fuel-efficient car and you raise the gas tax, there's gonna be a lot of fuel-efficient cars out there. If Chris wants to drive a gas-guzzler, hey guess what, there'll be gas-guzzlers available, I'm just gonna have to pay for it.

JAGOW: Wait, so Chris you're telling me mandating certain things like ethanol use is a bad thing, but imposing a gas tax is a good thing? What's the difference?

FARRELL: Only thing the government's doing is saying, 'there are some really bad effects from our lack of energy independence and our dependence on foreign oil.' If you impose a broad-based tax, so you raise the cost, and then you unleash the wisdom of the market. You unleash the entrepreneurs in Silicon Valley. You know, they're finding all kinds of new technologies. We don't know if it's ethanol, biomass, let's just raise the price. It's really, what's the best way to encourage innovation. That's really the issue.

JAGOW: OK let's say you're right and that a gas tax is the way to go . . .

FARRELL: A little skepticism there but OK, I'll take it.

JAGOW: Just a healthy skepticism. Now just saying the word "tax," if you're running for President or if you are President or I mean who's gonna buy this?

FARRELL: You're absolutely right. What I would argue, if you package a gas tax, not only as part of energy security but part of attacking global warming and leading toward a more sustainable environment, there are ways that you can manipulate this situation so that the word "tax" doesn't quite have the negative connotations which you have rightly raised. And it's more like environmentally-conscious, attacking global warming . . .

JAGOW: OK Chris, thanks for sharing your thoughts.

FARRELL: Thanks a lot Scott.

JAGOW: Chris Farrell is the Marketplace economics correspondent.

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