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May 04, 2008
More fun with the gas tax
We've been tough on the "McCain-Clinton gas tax holiday". We economists, that is. Seems there's not one of us who thinks it's a good idea. It's just plain bad public policy. The actual effect will be small. A family that goes through two tanks of gas a week might see a difference of maybe a couple dollars a week under the best case scenario (full explanation here). If you want to give working families some relief there are certainly better ways to do so. A check for $50 for every family with less than $50,000 income would be better targeted, subject to less uncertainty, and would have a larger effect. Just about any economist would tell you this.
Ah, but what do they know.
“Well I’ll tell you what, I’m not going to put my lot in with economists,” -- Hillary Clinton
And...
“When the federal government, through the Fed and the Treasury gave $30 billion in a bailout to Bear Stearns I didn’t hear anybody jump up and say, ‘That’s not going according to the market, that’s rewarding irresponsible behavior.’ We’ve got to get out of this mindset, where somehow, elite opinion is always on the side of doing things that really disadvantage the vast majority of Americans.”
The market reference is strange. You see, I think many economists did have reservations about what happened with Bear Stearns, although many of us ultimately feel that it was necessary to prevent even further catastrophe--one which might have had a pretty sizable impact on "the vast majority of Americans." Rather than take that chance, the Fed decided to put its own credibility up as collateral--no small decision, that.
So suddenly Senator Clinton has all this concern for markets? Is she implying that her gas tax holiday should be supported by economists because it removes the tax that is somehow distorting the free market?
No, more likely it was just a convenient sound bite. But I do see one very troubling problem in this exchange and it's going to have me thinking for a while. These quotes by Senator Clinton show that economists have not done a very good job of explaining what we really know objectively and scientifically to be true. Though my previous post (as well as posts on other blogs) pointed out some caveats, the basic thrust of tax incidence theory is not in question. The questions deal with specific issues such as whether summer production quantities have been set and how costly it would be to change them. That's an objective scientific question. Once we know the answer to it, we know whether the market price of gas would go down by roughly half of the tax cut (as econometric research suggests) or not at all (if quantities are already set).
The level of economic literacy in this country is so low that few people know that this is a point of near 100% agreement among economists. But correct though it may be, it is a counterintuitive result. People expect that the tax cut would drop the price one-for-one. People will believe a politician who tells them that this tax cut will help them. In fact, other policies would help them more, but because this one is believable and strikes an emotional chord, they'll remember it at the ballot box.
To add insult to injury, the same politician can discredit the economists on this point of near 100% agreement and mountains of objective evidence by pointing to a more controversial and unsettled issue where our pronouncements seem to favor the "elites" for reasons that are hard to explain in a hundred words or less, hard to draw on a blackboard, and are based on more recent scholarship.
It's sort of like saying that the meteorologist who sees clouds, hears thunder, and predicts rain should not be believed because he's on the wrong side of the global warming issue for your tastes. That would be ridiculous and should be called out as such. The level of economic understanding necessary for good citizenship is a level that would enable a person to see that connection.
True economic literacy does require some understanding of the concept of elasticity.
Posted by William Polley at May 4, 2008 09:42 PM
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Comments
"Once we know the answer to it, we know whether the market price of gas would go down by roughly half of the tax cut (as econometric research suggests) or not at all (if quantities are already set)."
As someone in the industry, I'd lean far towards the latter rather than the former. Most refineries are running at full capacity and clamoring for anything that will allow them to extend their capacity.
I currently work for a pump manufacturer, and we've got record bookings and backlogs - we're even turning away business because our factories are too full. The oil industry from well to gas pump just doesn't have any way to increase capacity right now.
I like the blog, Dr. Polley - glad to see you on the interwebs.
Posted by: Jason Stokes at May 5, 2008 11:18 AM
Hi Jason,
Good to hear from you. (Yes, I do remember you in class.)
Your experience is consistent with what I have heard about their desire to increase capacity. The question is how much extra capacity they have.
That will be my next post.
Thanks for reading!
Posted by: William Polley at May 5, 2008 02:44 PM