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. 

I Didn't Know That About Myself

Learn something new every day:

“The problem is not that economists are unreasonable people, it’s that they’re evil people.”

And that from a psychologist.

Good thing I'm not going for that Econ Ph.D.

(ht: Greg Mankiw)

Cowen, Rodrik, and Harford on Trade and Ethics

More reaction to Landsberg's article on why we shouldn't compensate "losers" from trade.

First, Harford:

...people lose their jobs all the time for reasons that have nothing to do with foreign trade. I'd argue that they deserve some help. Why are jobs lost to foreign competition so privileged?

Bingo. I would further this by saying that we already have many protections in place for all displaced workers -- such as unemployment benefits, subsidized education, etc. -- that extends to those workers displaced by trade. Why should those who lose their jobs to trade, as opposed to any other source, get more than that? The most likely answer seems to be: political nationalism. But that seems to be an inappropriate response to the question.

Then Rodrik:

The question of how we should respond to a trade-induced change in income distribution is not one on which economists can offer any expertise. This is a question about ethics, values, and norms, none of which is part of an economist's training. Landsburg's take on this is as good as mine--which is as good as that of any person on the street.

Cowen reacts fairly strongly in the negative to this view:

Every now and then I feel a deep responsibility to rebut an argument. In my view anyone doing policy economics has an obligation to learn more about ethics -- much more -- than the guy in the street would know. Would someone doing experimental economics feel free of the obligation to learn some empirical psychology? Would someone doing trade feel free of the obligation to learn some trade law, some history, and some political science? No. What's the difference? Economists like to separate the "positive" and "normative" aspects of what they do, but this distinction has not much impressed the moral philosophers who have looked at it nor has it impressed Amartya Sen. The very decision to use economic tools emphasizes some considerations and excludes others. The final policy analysis is not just pure prediction but rather it is also an implicit presentation and weighting of both different kinds of information and different values. So if you are doing policy economics, it is imperative that you think about ethics at a very deep level, and read widely in ethics. You are doing ethics whether you like it or not! Furthermore I don't doubt that Dani already has a deeper understanding of ethics than the (often very crude) man in the street.

That said, I don't agree with the ethics Dani does discuss, noting that he must have felt he had some good reason to put forward the concerns he did and not others. (As a rule of thumb I'll note that those who profess the impassability of ethical terrain have just in fact traversed it.) I don't worry much about the procedural fairness if a poor country trades at better prices by paying its labor less or by polluting. Low wages are precisely the wages we want to see bid up, and if there is a concern for the losers I would not call the issue a procedural one but rather one of outcomes. And pollution can be a moral crime but attacking trade is not usually a good way to go after it. Tax the pollution, not the trade.

Right. I have had many arguments with professors on this topic. Many economists like to believe that their studies are value-free; that they are scientists, and not philosophers. To an extent that is true, but the assumptions underlying all economic study requires an ethical underpinning. Economists often talk about "best" and "second-best" policies, or "perfect-world" scenarios; but what are these if not ethical judgments? The entire study of economics, as we are taught on day one of Econ 101, is the study of how people and nations make choices given the inherent scarcity of resources. In other words, how we choose between different options. For policy-makers, especially on the macro level, this is truly an ethical concern.

The hottest economic topics these days -- bailouts for defaulting homeowners, tax cuts/redistribution, income inequality, international trade -- are all ethical topics first and foremost. Economists would rather not face this fact, because to do would require more work on their part. Justifying their models and assumptions in an ethical framework is no simple matter, so economists just assume those ethical concerns away. This is not right, it is not proper, and it is detrimental to the causes that economists seek to further, since those who share different ethical beliefs may simply reject the conclusions of economists on ethical grounds (esp. on trade, where environmental, cultural, and labor standards are given so much weight). Since economists generally refuse to argue on those terms, the argument is lost to them before it even begins.

This shouldn't happen. Economists should have much to say on the topic; it's just a shame that they generally refuse to join the argument.