Elections, Hot Air, and Gas

Election season is probably the best time for bad economic policies to garner support — and one of the roles of academic economists is to call the candidates out on terrible policy.

From yesterday’s New York Times, we learn that:

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.


Greg Mankiw
‘s commentary
is spot on:

I don’t know any prominent economist who favors this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea “ludicrous.”

I’m all for giving folks a helping hand, if that is the rationale. But why give a bigger helping hand to those who drive more, pollute more, and cause more car accidents? And why encourage even greater consumption of gasoline?

Let me go a step further, and pose a challenge:

If any reader can find a coherent economist not affiliated with any of the major campaigns who thinks this is a good idea, then please add a link in the comments.

My prediction:

Perhaps some hot air, but we won’t find any economist willing to support this nonsense. Not a right-wing economist, not a left-wing economist, and not even a two-handed economist.

Critics might note (fairly) that we economists are often wrong. But when opinion is unanimous that a proposal is terrible, it is probably time for the electorate to send a message to their wannabe leaders that they expect something a bit more responsible.


Alex

I think there is a strong economic argument for it. Assume gasoline has a short-run demand curve that is HIGHLY inelastic, but a long-run demand curve that is more or less elastic.

A temporary suspension of the gasoline tax would reduce revenues towards the government and gasoline, and thus leave revenues in people's pockets, without changing in the consumption of gasoline (since we assume a very inelastic demand curve).

Over the long run, however, people will still understand that the gasoline tax is a permanent tax, so they will continue to make long-run adjustments to their behavior (hence the long-run elastic demand curve). So really you could make the case that this is a relatively efficient form of "deficit spending", one that does not incentivize people towards alternative economic activities and also one that is regressive (and therefore the multiplier towards consumption/demand is higher).

Then again that's the Keynesian argument and I am a bit of a Chicago-school follower myself.

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Andy

What should governments do with the money they get from taxing negative externalities? If the main reason to do such a thing is to align incentives correctly, then what is the income for? Perhaps they should use to to encourage activities with positive externalities? What if the totals don't add up?

Travis

@#39 Joe hit it.

Reducing taxes on a behavior that produces significant negative externalities has no possible social benefit.

Perhaps it's a strange argument to take, but taxes should be enacted and removed for the good of society. Not so that big oil can make more money (which ultimately is what will happen with the gas tax holiday) at the expense of the taxpayers.

Not to get too onto the political side of things but at least in hillary's case it seems another example of her pandering to the neocon crowd.

Marie

Let's take the majority of these arguments to their logical conclusion. If the gas taxes reduce consumption, reduce pollution, make us thinner, and decrease demand, thereby actually lowering the price (!)

hey, why not charge 10 times as much tax? We'd live in utopia!

I think one of the best things "they" could do, actually, is to have free public transit and free parking at public transit depots. I know, nothing's really free. They could use their stupid gas tax for it.

AC

After a tough few months for Obama, it's a real pleasure for him to see him standing up on this issue. McCain and Clinton are pandering to the lowest common denominator on this issue.

For once, I would like to hear a candidate say the erosion of personal responsibility in the country CANNOT continue to steer our society toward an idiocracy.

Now if only we can get Obama to be more consistent on trade!

Electron

McCain and Clinton want the gas tax holiday. Obama and Bush are not for a gas tax holiday. Kinda odd to McCain and Clinton on one side of an issue, and Bush and Obama on the other.

The bottom line is the pinch at the pump is not coming from the 18.4c gas tax. It's the near $2/gallon increase in the last 2-3 years caused by big oil and gamblers in the oil speculation market. Those causes are out of the control of politicians to fix in the near term, so, while lame, the gas tax holiday is the only part of this problem the politicians can control.

John R

#14 GSAs anyone? What a wonderful boon to the financial services industry...a huge new tax abatement scheme to administer for a fee! Section 125 plans would seem tiny by comparison.

RZ

Rather than a gas tax holiday, how about a bus/train fare holiday? Maybe for one week, ask all transit systems in major metropolitan areas to run their services for free. With the increased gas prices, I bet there would be lots of takers who normally don't use public transit. Once they've tried it, many of those folks would come back. This could initially make gas prices go up even more, but once the suppliers realize that the demand has shrunk, they'd have to adapt by lowering prices.

Michael D

I agree that the tax suspension proposal is simply pandering. However Mr. Wolfer's bias is that gas consumption is a negative.

rpl

Nathan (#32), I'm not sure I agree that the Marketplace piece "debunked" the idea that refining capacity is to blame for (some of) the increase in gasoline capacity. Here's a telling quote from the industry expert they interviewed:

"Barbara Shook: We're expanding refining capacity in this country. We have probably more than half a million barrels of new refining capacity per day under construction right now and I wouldn't be surprised to see another 100,000 barrels per day of new capacity announced in the next six months to a year."

Why would the industry be investing in more refining capacity if demand were weak and expected to stay that way? Also, note that the added capacity is "under construction," and thus presumably not ready yet. Therefore it in no way contradicts the claim that (current) capacity is stretched.

I think the most likely explanation of these observations is that stretched refining capacity has caused much of the recent increase in prices (with crude prices accounting for much of the rest), and demand has weakened a bit recently in response to high prices, but it is expected to rebound going forward, in keeping with the general trend over recent years.

-rpl

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Red

Obama shows integrity here, McCain and Clinton just sell out. The tax is there to pay for Highways and mass transit. Remove the tax and the money will just go to Big Oil. The more encouragement we give reducing demand, the more likely the price will come back down. If we want to help the poor and middle class, just increase the standard deduction, don't subsidize the Hummers and Escalades.

Joe

I think:

Nick (#6), you're incorrect. Joel (#26), not sure I get your logic. Tom (#28) has it right.

Michael (#34), you seem confused. Maybe this helps:

First off, taxes are (and should be) used for "social engineering." Governments have many purposes. One is to correct market failures, like negative externalities. For example, they may tax things which cause pollution (gas for one, but also sulfur emissions, etc.) to internalize the negative externalities for the businesses that produce them. So yes, taxes are used for "social engineering," in the sense that they align incentives so as to change behavior.

The reason progressive taxes exist is totally different. Another purpose of governments is to redistribute wealth. In that case, they use progressive taxes to move wealth from the rich to (ideally) those who need it, by having unequal contribution to the funding of the government. (In addition, the services it provides often disproportionately benefit the poor/needy as well, e.g. Medicaid, Medicare, welfare).

But progressive income taxes are totally different from the taxes on behaviors with negative externalities. They exist for different reasons; you shouldn't conflate the two.

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Dave Mendelin

I suggest free pie and ice cream for everyone from Memorial Day to Labor Day. Of course it will have to be very special pie and ice cream. Since we are all worrying about our weight, the pie and ice cream will need to actually help people reduce. I'm pretty sure we can roll this out in the next 4 weeks.

Nathan

There was a great segment on Marketplace yesterday where they discussed, and basically debunked, the idea that current gas prices have anything to do with classic supply and demand. In fact, demand is down, refineries have cut back production, and there's plenty of supply. I'm no economist, but I found this very interesting. The transcript is available here: http://marketplace.publicradio.org/display/web/2008/04/29/bush_moon_q/

Kevin P.

"Murphy's law of economic policy": Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.
- Alan S. Blinder

David

I'm no economist, but am I correct in assuming that cutting the gas tax would result in people using more gas, thereby raising demand and lowering supply, leading to even higher gas prices? To me, saving 2 bucks per fill up isn't worth that.

Michael Casp

@ #24 - Short term solutions for higher prices at the pump and in the grocery store: Work harder, get another job, spend less on other things. That's what I'm doing.

@ #26 - If taxes are and should be used for social engineering, then what is the explanation of the progressive tax? To discourage economic success? To encourage poverty? If taxes really do a good job of social engineering, then to end poverty we should tax the poor MORE than the rich to encourage them to make more money.

John

Most economists would agree that demand for gasoline is pretty inelastic in the short run. Any increase in the demand for gas caused by the suspension of the gas tax will be minimal especially considering how demand has not dropped much since we have had this recent run up in prices. Its real purpose seems to be to provide stimulus or relief to taxpayers generally, which might have been better accomplished with either more spending on infrastructure projects or through larger short term rebates, but it's not that terrible.

However, what bothers me about this post is that it is a less than subtle effort to promote Obama, which is silly. Obama has supported not only CAFE but the California ridiculous 42 MPG requirements. It is far more sensible to raise the gas tax and let the market it sort it out to curb demand, not to compel manufacturers to produce certain cars. I doubt you will see Obama promoting raising the gas tax as well...

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holt

As much as it pains me to say it, Obama is right. As I look across the street now, suspending the $0.18 tax will put gas @ $3.40 per gallon. Big whoop. Just a gimmick to make us think that our elected officials are doing something (which they apparently aren't).

Jennifer I

I'll agree with DJH that I'm surprised that Wolfers put it the way he did (i.e., Wolfers makes it sound like his objection to the proposal is because it would "give a bigger helping hand to those who drive more, pollute more, and cause more car accidents"). I'm sure that what Wolfers meant to say is that if the rationale is to give folks a helping hand, this policy will be completely ineffective. The claim that no economist would support this proposal might be more accurately phrased as "no economist would agree that this policy will be effective at reducing consumption or giving consumers any relief". Krugman has a slightly more econ-speak explanation on his blog that succinctly states why economists don't think this will work: (http://krugman.blogs.nytimes.com/2008/04/29/gas-tax-follies/)