Ever read something you wrote not all that long ago and pondered how you could have got it so epically wrong? Take this article I wrote last year about forcing the Middle East into a strategic decline. My prescription? Government action – tax breaks, subsidies, strategic state investment; a Keynesian smorgasbord. Ugh! Why did I not think this through more fully? Five years of sky-high oil prices will go an awful long way towards solving the problems mentioned in the article, courtesy of the market. No government meddling required. As it happens, I submitted the essay for a university assignment and received a pleasing mark. A bit regrettable that I felt sticking the bloody thing up around this rather more intellectually rigorous domain was a good idea.
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James,
I think it’s debateable as to whether tax breaks constitute government “meddling”. Reducing taxation means less government.
High oil prices cuts both ways. I’m sure President Mahmoud Armageddon in Iran is well aware that the escalating cost of oil is a happy (for him) side-effect of his nuclear sabre-rattling. It will also enable the Saudis to prop up their abysmal regime by keeping-up their pact with the Devil (the mullahs cut the elite some slack in terms of drinkin’, whorin’ and gamblin’ because they’re exporting Wahabism at an industrial rate).
In short, I rather liked your original article.
I also think you are a little hard on yourself… I did not entirely agree with the original article but as Nick points out, tax breaks are indicative of less intervention, not more (of course the best tax break is no tax at all…).
In a place like Iraq, where the ‘bad guys’ were the ones with guns and who were organised, just allowing anyone to ‘homestead’ assets formerly owned by the Ba’athists would probably have just handed them back en-mass to the Tikriti clan, so some sort of messy state handling was probably unavoidable, at least initially.
The mistake that was made was that this intervention was not aimed at putting in place the structures of ownership needed to preclude the need for ongoing state intervensions. I suppose asking creatures of the state to plan themselves out of a job for the greater good is too much to expect.
Thanks, Nick!
However, tax breaks certainly constitute government meddling by altering incentives in the market and influencing behaviour of commercial entities. Tax breaks corrupt market forces. Also, government requires a set amount of resources to function. So, since the money’s got to come from somewhere, a tax break here and there simply means someone else has to pick up the slack created.
You’re right about the Middle Eastern nasties that have become disproportionately influential due to their oil wealth and the trappings it buys, however this phase of high oil prices is transient in the great scheme of things. Those bastards running the Middle East better enjoy it while it lasts.
tax breaks are indicative of less intervention, not more
I’m afraid I have to disagree, in similar fashion to James. Tax breaks are very bad as they represent the state taking a step beyond simple harrassment of commerce to attempting to direct economic activity on the basis that the state is in the best position to pick winners. Tar sands and the like may work out fine, but maybe synthesising petroleum from coal would be better? Who knows, but the market will decide best and tax breaks will interfere in that process far more than simple taxation alone.
You’re picking nits. Any such tax breaks should of course be as broad based as possible, perhaps simply on any non-traditional oil recovery and/or domestic hydrocarbon supply technology.
Having been in the energy conservation business, I’d much rather there be statutory tax breaks, which don’t require budget approval every fiscal period, and thus make for a simple shift to another stable economic equilibrium, rather than subsidies (like DoE money to electric utilities for energy conservation rebates), which vary year to year based on congress’ mood, and can easily be cut off entirely (as they were by the GOP in 1994). Subsidies cause real disruptions in the market due to their chaotic nature creating risky markets for producers, and thus the higher risk reduces capital availability for new technology creation and introduction.
Unlike some free market proponents, I do acknowledge that the market, left alone, tends to take its sweet ass time responding to issues, and sometimes needs encouragement, or a means of amplifying market signals. If government is going to meddle (as seems its natural wont), I’d prefer it were done in a way that minimized risk and confusion in the markets.
tax breaks are indicative of less intervention, not more
I rather agree with James and Noel on this matter. Across the board tax reduction will be economically advantageous and industry neutral, but selective tax breaks will distort the market and in general should be avoided.
BUT –
What should we think when the aims are not primarily economic? What should we do when the aims are to do with Foreign Relations? Is it in our interests to finance the Saudi and Iranian regimes? Is it acceptable to adjust our resource usage via differential incentives in order to achieve a specific foreigh policy aim? Hell, should we even have a foreign policy?
Interesting original article and follow up. You are being way to hard on yourself Nick.
Intervention happens in the Oil market all the time, by governements, OPEC (Organization of Petroleum Exporting Countries – an overt cartel in my view), pester power, banks and many more.
Whilst there is a tiny amount of genuine free market force is at work in the oil markets, the market is by far the most controlled and rigged market of all the commodoties markets and so just occasionally intervention is very necessary.
I still think the most effective intervention stems from popular free market support or pressure e.g. the action of UK haulage companies in response to a government intervention on oil price (in an upward manner) – it caused a pretty rapid climb down at budget time.
Chris,
Yes, I’d thought of that. This is more a foreign affairs issue than an economic one. Perhaps the money could come from the foreign/defense budget.
I still say the market can cure this problem – and cure it far more effectively than any government intervention. High oil prices will supercharge the development of alternatives to ME oil in a way no government subsidy or tax break ever could.
Maybe Nick meant “tax reductions”. Anyone reading at the hapless USA liberal media will see tax reduction is always equated with “tax breaks for the rich”. I guess I should take some solace that according to the likes of the NYTimes, I’m actually *rich*. Now all I need do is not let those infernal bills take that feeling away……
Anyone reading at the hapless USA liberal media will see tax reduction is always equated with “tax breaks for the rich”.
[shrug]
Due to ‘progressive’ taxation, most of the taxes are paid by the rich, therefore a rate reduction based on % of income will benefit the rich more than the average joe.
It’s quite disingenious, and it’s is very depressing that most people aren’t smart enough to see how they are being misled.
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Due to ‘progressive’ taxation, most of the taxes are paid by the rich, therefore a rate reduction based on % of income will benefit the rich more than the average joe.
As it will, regardless of progressive taxation, while incomes are unequal, provided taxes are not actually regressive. Even under a flat tax or a consumption tax regime, a much higher proportion of taxation would still be paid by the rich.