Gas Taxes, Meet Econ 101

McCain and Clinton want a summer cessation of the gas tax. Obama says that it is political pandering and won't help people who are hurting at the pump.

Obama is right.

When the short-term demand for a good is inelastic (meaning: short-term demand is relatively unresponsive to variations in price), as the demand for gasoline is, then a reduction in taxes will lead immediately to increased consumption until the price of gas once again reaches the market-clear price. In other words, if the gas tax is suspended the price will fall. When the price falls, people will buy more gas. Because of the increase in the quantity of gas demanded, the price will go right back up to its pre-tax-suspension level.

However, the quantity of gasoline demanded will increase if the tax is suspended. So such a policy would essentially be a hand-out from taxpayers to oil companies, with the added cost of environmental degradation and an increase in carbon emissions. 

In short, it's a remarkably stupid policy proposal. Obama should be commended for refusing to pander when given such an easy opportunity. He is losing ground in the polls for the sake of intellectual honesty, while Clinton and McCain are gaining cheap points by preying on peoples' ignorance. So good for him, and bad on them.

(P.S. This economic intuition is a fundamental assumption for members of the Pigou Club. If you share their goals and ethical assumptions, then it's easy to share their conclusion that gas taxes should be significantly higher; not lower.)

UPDATE:

Bryan Caplan likes the idea. But not for the same reasons as Clinton. His support is of a more cynical nature: he thinks that lowered taxes will preclude price controls, which he views as a greater evil, and in any case he thinks that eliminating the taxes won't have any strong negative effect. The second part is almost certainly true, and the first part is likely but not assured (and it is likely true because of American political tradition and our aversion to price controls; not because of the "irrationality" of the citizenry). If the profits of oil companies increase while gasoline prices continue upwards (as seems likely), then it seems likely that populist policies -- including price controls or other ill-minded ideas -- would become more likely, not less. I could draft the speech now: "Oil companies are getting rich on the backs of hard-working Americans. We tried to lower the burden by cutting out the taxes, but the greedy oil executives just grabbed more of the surplus. And so we should act punitively to re-direct money from these robber-barons back to the American people." And so price controls begin.

I know that Caplan knows more about game theory than I do, so maybe I'm missing something. But it seems to me as if he's acting as if this were a one-shot game, when it clearly isn't. 

Ugh

The new Farm Bill is even worse than its predecessors.

The Death Knell for Chavez?

In response to Chavez's seizure of oil company assets when he nationalized Venezuela's oil industry, the British government has frozen $12bn of Venezuela's assets. In protest, Chavez has once again threatened to stop selling oil to the U.S., saying that Venezuela would join an "economic war," and that they would not be the only country to do so. Daniel Drezner makes the obvious point:

If Chavez were to attempt an embargo, there's no doubt that the United States would feel a twinge of pain.

On the other hand, whatever twinge the U.S. felt would be mild compared to the massive spasms that would rip through Venezuela's economy from such a move -- especially since the only refineries that can handle Venezuelan oil are based in the United States.

This is one of those situations where, if economic warfare breaks out, the U.S. holds most of the cards.

I strongly suspect that Chavez's self-preservation motive will force him to back down -- but it would be kind of amusing if he believed his own bluster.

Drezner goes on to link to this NY Times article, describing how Chavez is losing his grip on Venezuela because of his economic mis-management:

These should be the best of times for Venezuela, blessed with the largest conventional oil reserves outside the Middle East and oil prices near record highs. But this country’s economic and social problems have become so acute lately that President Hugo Chávez is facing an unusual onslaught of criticism, even from his own supporters, about his management of the country.

In a rare turnabout, it is Mr. Chávez’s opponents who appear to have the political winds at their backs as they reverse policies of abstention and prepare dozens of candidates for pivotal regional elections. Mr. Chávez, for perhaps the first time since a recall vote in 2004, is increasingly on the defensive as his efforts to advance Venezuela toward socialism are seen as failing to address a growing list of worries like violent crime and shortages of basic foods.

While Mr. Chávez remains Venezuela’s most powerful political figure, his once unquestionable authority is showing signs of erosion. Unthinkable a few months ago, graffiti began appearing here in the capital in January reading, “Diosdado Presidente,” a show of support for a possible presidential bid by Diosdado Cabello, a Chávez supporter and governor of the populous Miranda State.

Outbreaks of dengue fever and Chagas disease have alarmed families living in the heart of this city. Fears of a devaluation of the new currency, called the “strong bolívar,” are fueling capital flight. While the economy may grow 6 percent this year, lifted by high oil prices, production in oil fields controlled by the national oil company, Petróleos de Venezuela, has declined. Inflation soared by 3 percent in January, its highest monthly level in a decade.

Bastiat Spins

EU candlemakers want protection. No, really.

If you're confused, see here.

Bad Headline

Here's the headline: "Inflation jumps in 2007".

Here's the beginning of the article: "Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas."

Yes, that's right. The first sentence contradicts the headline. You have to make it to the end of the article to get the appropriate context:

Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006.

The Federal Reserve is closely watching to see whether the jump in food and energy becomes more widespread and starts pushing core inflation higher.

Analysts said that with core prices generally remaining well-behaved, it will give the central bank the leeway to cut interest rates further to battle a serious economic slowdown triggered by a steep slump in housing and a spreading credit crisis. ...

Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.

The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005.

The Fed looks at core inflation independent of food and energy costs because food and energy costs are much more volatile than the rest of the economy for reasons which have nothing to do with economic stability. A hurricane in the Gulf of Mexico, for example, might cause oil and food prices to rise but everything else in the economy to stay relatively the same. The Fed shouldn't be looking at weather forecasts when setting monetary policy.

Additionally, energy prices are highly sensitive to oil prices which are set globally, not nationally. Also, some rise in energy and food prices will affect core inflation, since energy and food are inputs to other goods, and can replace other types of consumption and investment spending.

All in all, I look at this and see good news: core inflation was lower in 2007 than it was in 2006. This should give the Fed some flexibility in combating the financial meltdown which is still deepening.

WaPo Does Something Right

A nice, brief article explaining why the notion of "energy independence" is such a canard. These are mostly economic arguments, but there's a healthy dose of pragmatism as well.

I wish that the GOP presidential would pick up on this, and stop citing "energy independence" as a major goal. Even if it were possible, these claims ring hollow because of the nature of the Republican party, its historical ties to oil-exporting nations (e.g. the Bush family's relationship with the Saudi royals), the meddling of the U.S. into affairs of oil-exporting nations in the last three GOP presidents (Reagan in Iran/Lebanon, H.W. Bush in Iraq/Kuwait, W. Bush in Iraq/etc.).

But it won't happen, because "energy independence" has become a useful tool for Republican politicians to instill fear into their constituents. That theme is practically a constant now, as most major GOP politicians fear-monger over immigration, the inability of many voters to differentiate between Muslims (e.g. Sunni/Shiite, Islamists/modernists, democrats/dictators, etc.), gays, etc.

The history of this stuff in the GOP has a long and deep history (especially since the end of WWII) from McCarthyism to AIDS scares to the "bomb all the brown people back into the Stone Age" attitude of many GOP constituents after 9/11.

The fact is that we are deeply and irrevocably tied to the rest of the world, and the sooner we acknowledge that fact and try to make the most of it, the better we'll be. I don't know if the GOP is capable of leading the country in this area anymore.

Well, maybe McCain can. Maybe.