News anchors in re Hillary's gas tax plan: "The economists don't like it, but there are no easy answers".
Yes, yes there are. There are easy answers. The easy answer is "Don't do stupid things of no possible value to the electorate." Just observe how easy this is. I look at the plan to have a gas tax holiday. I note that it is a stupid thing of no possible value to the electorate. Then I do not support the plan to have a gas tax holiday.
To be sure, having blogged for years, I have some experience in these matters. But I do not want you to think that this can only be done by a few lucky souls whom nature has prepared through extraordinary natural talent, fortunate circumstances, and herculean training. Anyone who is not severely cognitively disabled, functionally illiterate, or named Lou Dobbs, can perform this feat in the privacy of their own living room. You do not even need expensive, specialized equipment. In fact, I will let you in on the secret right now.
1. Go to the Department of Energy's Energy Information Administration page. Look at the refinery utilization statistics. And the world oil production figures. And, of course, the figures on gasoline consumption. They have all been cleverly marked on the page for just this purpose.
2. Take one (1) frosty beer from the refrigerator. Those who do not have beer in the refrigerator may substitute a soft drink, a glass of white wine, or a hard cider. Do not attempt to replace the beer with Zima or wine coolers, however. These are known to cause your IQ to drop by 30 points.
3. Sit down in a comfortable chair with your beverage of choice.
4. Think for two minutes.
You too will be blessed, as if by heaven, with the easy answer: do not fool around with the stupid gas tax. No, I swear. It works every time.
To be sure, there is a worry: all the economists think that fooling with the gas tax is a ridiculous idea. And of course, when you are considering a policy, the last thing you want to do is consult people who study this sort of question for a living. Those are just the kind of ivory tower know-it-alls who will try to get you to go to the hospital to have your appendix removed just because you are spiking a fever and displaying Rovsing's sign. Myself, I don't throw in with all those out-of-touch surgeons; I put my faith in a good, old fashioned cup of tea.
But we also need to recognize that not every single thing eminent economists say is wrong. For example, I once asked Austan Goolsbee, one of Obama's economic advisors, what time it was. He said it was 3:00. He was absolutely correct--it was 3:00, which I know because he read it off the clock on the wall in the room where we were both standing.
Must we abandon common sense merely because economists occasionally speak it? No, I say, a thousand times no, no more than we would abandon children and dogs merely because Hitler was fond of them.
If you think for two minutes, you will realize that you have stumbled upon one of those extraordinary cases where people who have spent their whole lives studying a subject actually understand it as well as, or even better than, people who have spent their whole lives scheming to get their hands on as much political power as possible. Perhaps you thought that you, like most people, would go your whole life without encountering such an unlikely situation, but now it is upon you. I say, trust your heart. Throw your lot in with the economists, and stick to your guns even when they start talking about regression coefficients. No matter how frightening your fellow travellers, finding the right course is easy--so easy that even a politician could do it. If only they would.
On the one hand we have a minor item like the gasoline tax, and on the other hand we have a rather larger issue like free trade. I don't think Clinton is the candidate who doesn't care what the economists think.
Personally, I don't see why putting the gasoline tax back into the hands of consumers isn't at least as good a plan as income tax rebates. Plus it has an equity component: middle-class Americans have been blindsided by an increase in the cost of a very inelastic item, so a temporary reduction to ease the transition to a new consumption pattern seems at least as appropriate as, say, trade adjustment assistance.
I find that by substituting a snifter of cognac, I can get my time down to 102 seconds.
The only negative side effect I have detected is that some unpleasant individuals occasionally mutter things about "cheese-loving surrender monkey."
Dear Fellow Americans,
Our Great-grand Nation, the United States of America
is and will face very critical and substantial "Challenges" in coming,
months, years, and decades to come.
It is very essential that we pick out our next President on following criteria in mind.
1. A candidate with "Vision and Mission".
2. A candidate with " Stable Character and Integrity" .
3. A candidate with "Presidential Temperament" and
"stable Judgment".
4. A candidate with "little "Washington" exposure" and
"real connectedness with New Voters".
5. A candidate who "Inspires us up" rather than
"Tears us down".
6. A candidate not based on sexism, racism, and ageism.
In my professional and personal opinion, the only candidate who has the above qualities and characteristics and is also cool, calm, and collected is Senator Obama.
As an independent registered voter since 1980. I voted
for Carter, voted for Reagan, voted for First Bush,
and second Bush in 2000 and In the process last interest in Washington politics as usual and I stopped voting.Not a good idea under any circumstance particularly at present.
This time we can not afford to stay on side lines and
let Washington stay the same.We can not afford our Greatgreat Nation to become less than what we are and can be.
We need to send clear and candid message to the world
and some 24 hour partisan hateful media. These media
outlets are trying to deprive, dupe, and derail us
from getting it right this time.
They are trying there best to deny us better rather
than bitter future. { Our Greatgrand Nations people
are persistently and constantly subjected to Psychological terrorism" without their knowledge thru these hateful partisan media outlets.
We Americans are should not and would not to allow them
psychologically terrorized, traumatized and silence us this time.
I am sure that we will get it right this
time and elect Senator Obama our next President. let
us not get dragged down into racism, sexism and ageism.
Let us remember that our Greatgrand is constituted of
family, friends,fellowships, faith, funds,foundation, fun, and future with fairness and freedom and without fear or favor.
We can not afford to lose any of above. Let us stand
up, be counted, save, build our Greatgrand Nation for
centuries to come and regain our world economic, and power status back.
God Bless our Great grand Nation and its diverse people.
Our Greatgrand nation needs present and future stability, security, safety,sustained progress and restoration of our due status in this perilous Global World at the all levels.
Yours sincerely,
COL.[retd] A.M.Khajawall
Forensic Psychiatrist.
Disables American Veteran.
Las Vegas Nevada.
This is quite an amusing post from Megan. I haven't found much on her blog to agree with lately, but this I certainly do agree with: the gas tax holiday is a bad idea.
Nevertheless, I don't think it will be especially damaging. As Paul Krugman points out, the furor the McCain/Clinton proposal has caused is all out of proportion to any harm it might do.
The demand for gasoline is not very elastic in the short run. Thus, the environmental damage done by temporarily suspending the gas tax will be minimal (since gas consumption will increase but slightly in response to the tax cut). And since it is temporary its long run economic effects will be minimal as well.
So yes, the gas tax holiday is bit of demagoguery, not sensible economic policy, but it is really quite innocuous demagoguery. There are more important issues to worry about--like farm subsidies, health care costs, entitlement reform, etc...
It's not often that I agree with Krugman, but he's right that the reaction to this proposal borders on "hysteria."
"Hard cider?" Oh, sure, and if you're out of those, get yourself a Shirley Temple, there, High-Speed.
rwe, I would tentatively say that to the set of people who are reacting to it, it feels like a signal that McCain and Clinton's economic policies will be just as illiterate as those of Bush have been. It's not so much the gravity of this proposal as what it implies about the seriousness of the candidates. For Krugman, though, and rightly I think, the fact that McCain's platform involves 3 trillion dollars in tax cuts to be paid for with 30 billion dollars in savings is a lot more serious an indicator of his tongue-lolling fiscal innumeracy.
I'm an avid reader, but I almost never comment. I have to delurk to say... wow. Just wow. This post is epic. I smell an instalanche coming. *long, slow clap*.
Brooksfoe, Obama is proposing a "windfall profits tax" on oil companies, which is about the stupidest proposal I've heard this year. Talk about economic illitaracy. Somehow Obama hopes that discouraging oil production will bring prices down?
Look, I agree with you that McCain's numbers don't add up. Neither do Clinton's or Obama's. But that is really of secondary importance. The crucial questions are these:
1)Do you want a larger government or a smaller one?
2)Which candidate is most likely to increase the size of government?
Obviously Obama wants a bigger government, with a greater emphasis on "equity" and redistribution. And McCain wants a smaller government, with a greater emphasis on economic freedom and the incentives that drive growth.
Given Krugman's preferences and yours, it makes perfect sense that the two of you would support the Democrat. It also makes perfect sense that I would support the Republican, given my own preferences (Megan McArdle's support for Obama is much harder to understand, and even she seems not to be able to explain it, but that's an issue for another thread).
At any rate, let's not pretend that the details of campaign documents that are unlikely ever to be actual policy are the crucial issue.
And I thought I was tedious and unfunny.
Until a candidate exists who is willing to say that it is harmful to operate our government as if the most important thing to do is to transfer wealth from poorer, younger people, to richer old people, there isn't one worth listening to. Blah. Blah. Blah.
I guess I'm willing to trust economists...but I'm not sure I should be listening to someone who couldn't figure out how to look at a clock in the room to find out what time it is. ;-)
I just cannot believe with the infrastructure as bad as it is, that they would want to drop one of the few things that funds upkeep on the roads.
How about we declare a day where no defense contracts are paid and instead the money is used to build mass transit and make it easier to use in places it exists?
This takes an extraordinarily blinkered view of the problem. What the anchors meant, I'd venture to guess, was that there's no easy answer to the suffering caused by high gas prices. And it's true--there's not! There are some things we should be doing (investing more in mass transit, encouraging density, etc.), but there's no silver bullets and in the short run higher oil and gas prices will make people's lives harder. Merely "not messing with the gas tax" will do very little to solve that.
Very well said Megan. This is not a minor point. As pointed out above, it is excellent evidence of the deceitful, expedient, unprincipled streak running though McCain and Clinton: either that or their incompetence, combined with their stubbornness, take your pick. It certainly indicates the withering contempt with which these elite politicians hold ordinary Americans.
Our attitude to energy and hydrocarbons is crucial to the futures of our children and we have reached the end of cheap oil. This is not a topic that should be treated with the kind of cynicism we are seeing from Clinton and McCain.
If elected, one of the McCain-Clinton Administration's first proposals will be to subsidize carbon emissions. For an encore they'll find yet another country to invade, maybe Pakistan since it's in the neighborhood and allows them to ratchet up the stakes by attacking a nuclear state. For a finale they'll compromise: dump NAFTA but open the borders so that we can accommodate all the newly unemployed Mexican workers.
Are you perhaps familiar with the UK Budget in 1981, and the 364 distinguished economists who wrote to The Times as follows:
Statement drafted on March 13, 1981:
“We, who are all present or retired members of the economics staffs of British universities, are convinced that:
(a) there is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment;
(b) present politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability;
(c) there are alternative policies; and
(d) the time has come to reject monetarist policies and consider urgently which alternative offers the best hope of sustained recovery.”
The current governor of the Bank of England was one of the signatories. So yeah, although I don't support Clinton's nonsense, my opinions are not dicated by whatever the majority of academic economists happen to think.
I don't know which disturbs me most, the idea that (1) the candidates understand the true ramifications of their policies but advocate them anyway in a ruthless pursuit of power or that (2) they actually believe what they say.
I think (1) the better option. In a democracy, a knowledgeable but ruthless politician will probably make more good choices than one that is principled but clueless. Obama's "windfall profits" tax bothers me more than Clinton/McCain's pandering.
If you think for two minutes, you will realize that you have stumbled upon one of those extraordinary cases where people who have spent their whole lives studying a subject actually understand it as well as, or even better than, people who have spent their whole lives scheming to get their hands on as much political power as possible.
The same analysis applies if you apply it the other way around. People who have spent their whole lives scheming to get as much political power as possible are experts in getting political power. When Hillary proposes that the gas tax be suspended and a windfall tax imposed to pay for it, she knows exactly what she's doing. She gets to be the one who expanded the bureaucracy, gets votes from people who are ill informed, and gets campaign contributions from other unpopular industries looking to protect their interest in not paying windfall taxes.
Economics is (relatively) easy; the answers are printed in books, taught at universities, understood by thousands of intelligent people, etc. Gaining political power is hard; not many people do it successfully, there are few books with lessons and the one book that every educated person knows is almost 500 years old. Assuming that because a policy is a bad idea when analyzed with the tools of economics means that the proposer is ignorant of this is not a good assumption.
The idea of any holiday is a fanciful bourgeous idea. Following the lead of comrade Stalin we should add workdays to the week so that we can meet our glorious 5 year targets. Heehaw or any equivalent TV program needs to be canceled and in its stead uplifting reruns of Don Giovvani need to be shown every evening.
"This is not a minor point... Our attitude to energy and hydrocarbons is crucial to the futures of our children and we have reached the end of cheap oil."-Chris Dornan
I'm not sure how well Chris understands elasticity. A reasonable estimate for the short run elasticity of gasoline is -.26. That means that a 10% reduction in price will increase the quantity of gasoline demanded by about 2.6%.
Now, the federal tax on gasoline is 18.4 cents per gallon and the average gasoline price is about $3.51, so the gas tax holiday could reduce the price by, at most, 5.2%. This means that the quantity of gas demanded would increase by about 1.4%.
And, of course, that increase would only be temporary. Moreover, that is very likely to be an overestimate, since, as many economists have been pointing out, the supply of gas is quite inelastic in the short run as well, so that the price of gasoline is unlikely to fall by anywhere near 18.4 cents per gallon in response to the gas tax cut.
So the true increse in quantity of gasoline demanded might be .7% or less, and only for a brief time. So again, this gas tax holiday just isn't very important. It's a silly idea, but one that will have only a very small impact.
*Note: I tried to post links, but was forbidden by the ever irritating spam filters. I'll point anyone who is interested to my sources.
Great post.
This is just the kind of snark this topic deserves.
I only wish that it was turned on Obama's horrible policy proposals as often as they deserve.
If you think for two minutes, you will realize that you have stumbled upon one of those extraordinary cases where people who have spent their whole lives studying a subject actually understand it as well as, or even better than, people who have spent their whole lives scheming to get their hands on as much political power as possible. Perhaps you thought that you, like most people, would go your whole life without encountering such an unlikely situation, but now it is upon you.
This is classic. I think Steve Johnson is on the mark about Clinton's reasons - which is all the more reason for snark. Great post.
I wonder how much of Cindy McCain's money rwe is getting each week to keep posting such laughably blatant falsehoods as "McCain wants a smaller government, with a greater emphasis on economic freedom and the incentives that drive growth"?
I wondered who this "Just Dropping By" was. Now I realize he (or she or it) is one of Ron Paul's nutty supporters. You know, the ones who bombarded this website several times with economically illiterate posts about gold, fascism and the apocalypse. While proclaiming their belief in liberty and free thought, they sounded most like a religious cult, or maybe the Borg.
At any rate, as Thorley Winston has explained more than once, McCain--while far from perfect--is much better than Obama for those of us who believe in liberty. He supports free trade, has never voted for a tax increase, and has been much better than most of his colleagues on spending. QED.
But you left out the most important point... (I thought of this even without a drink in hand.) IT WILL NEVER HAPPEN ANYWAY. There's no way it will come up for a vote, be voted on, and get signed by Bush in time for a "holiday" this summer (or probably for any future summers). So it's a COMPLETE FANTASY!!! We've had days of discussion about a MAKE BELIEVE event. It's like the Clinton folks saying they're going to pass out wings so people can fly like birds instead of drive, and the media cocks it collective empty head and asks,"but is it pandering to pass out wings?" or "will wings help the long term problem?" or "is this tapping into the real concerns of the working class?"
As a Greatgrand American, I just want to second everything said by COL.[retd]A.M.Khajawall
I agree with Megan that the proposed “gas tax holiday” is a gimmick – much like all tax “holidays” and “tax rebates” – and no candidate should support it. I am curious though if Megan thinks that this is a worse policy than say, ethanol subsidies or a “windfall profits” tax?
In which case, I’m curious why we aren’t seeing economists signing petitions saying that in their expert opinion ethanol subsidies and/or a “windfall profits” tax are bad policy? It seems to me that either of those policies is more likely to have an impact on energy and the economy than a gimmick that if enacted is likely to only have at most a short-term effect. In which case, I can’t say that I’m all that impressed (and I’m already on board with their position) with an expert who spends so much effort denouncing a proposal that would barely be a blip instead of weighing in on the ones where their expertise might do some real good.
As Homer Simpson says of beer, "Expand my brain, learning juice!"
Cheers!
Do not attempt to replace the beer with Zima or wine coolers, however. These are known to cause your IQ to drop by 30 points.
I always secretly liked Zima. This explains a lot.
OK, I'm sold, it's a gimmick. Just add $40 to my tax rebate and I'll be happy.
rwe,
A reasonable estimate for the short run elasticity of gasoline is -.26.
I'm finding numbers more like .10. It appears that the lower elasticity #'s seem to all be generated by newer studies. Usually using post-2000 data to calculate it. In fact, I find a considerably lower number through a pdf from the CBO of .06 for the short -run.
http://www.cbo.gov/ftpdocs/88xx/doc8893/01-14-GasolinePrices.pdf:
The research suggests that a 10 percent increase in the retail price of gasoline would reduce consumption by about 0.6 percent in the short run. [short run elasticity=0.06] .... Estimates of the longrun elasticity of demand for gasoline indicate that a sustained increase of 10 percent in price eventually would reduce gasoline consumption by about 4 percent. That effect is as much as seven times larger than the estimated short-run response, but it would not be fully realized unless prices remained high long enough for the entire stock of passenger vehicles to be replaced by new vehicles purchased under the effect of higher gasoline prices—or about 15 years.
In fact, the only .26 numbers I found seem to come from a 2003 "meta-study" by some Brits and by another "meta-study" done in 1996 by an American, Molly Espey. The studies seemed to all carry the caveat that the standard deviation for the number is .15!!!
Perhaps .15 would also be the standard deviation for the CBO study (I didn't see that noted, but it would make sense that it's about the same). Given these varying #'s and the large standard deviation implicated, I'm not sure that your "reasonable estimate" (reasonable as it may be under the circumstances) is all that useful for predicting percentage decreases/increases.
Such that these statements are almost certain to be wrong one direction or the other and must be seriously grained with salt:
That means that a 10% reduction in price will increase the quantity of gasoline demanded by about 2.6%.
This means that the quantity of gas demanded would increase by about 1.4%.
So the true increase in quantity of gasoline demanded might be .7% or less, and only for a brief time.
Not that I don't take your point about how silly the idea is. However, saying it is silly down to .7 of a percentage point seems, well, silly.
rwe,
Wait a minute, I just realized your # and the CBO # are basically the same.
So I'm now thinking, maybe your estimate is reasonable after all and I'm the unreasonable one here?
OTOH, we are talking about the CBO.
OTOH, if the CBO and the RWE are against me, then I think it's time to retire from this thread for the remainder of my Thursday!
Thorley, I think the reason that this gets to be an important point is that Obama has been rather at sea lately and to get him on dry land and find that he is correct is important, don't you know.
Keatssycamore, the true short run elasticity might be lower. I took the -.26 number from the Epsey meta-study you mentioned above but Pindyck put it at -.11. That would mean that a gas tax holiday would increase demand by only .57%, even if the the price fell by the whole amount of the gas tax.
But, of course, the price of gas won't fall by that much (18.4 cents per gallon). Most economists seem to believe that the short run supply is even less elastic than the short run demand, implying that the gas price will fall by less than 9.2 cents per gallon. That would be 2.6% drop in in price, implying an increase in quantity of gas demanded of less than .3%.
All of these numbers are based on estimated elasticities, so they are necessarily approximations, but the underlying point remains: the gas tax holiday matters very little. Its effect will be miniscule.
PS: Keep posting Keatssycamore. Your comments are very interesting.
I don't get it. A gas tax holiday and a windfall oil profits tax? Does this mean Hillary was for reduced gas prices before she proposed action to raise them?
This takes an economist to figure out? You lower taxes on gas (the motor fuel tax) while at the same time you raises taxes on gas (the windfall profits tax on oil companies). Don't those taxes cancel out?
"This takes an economist to figure out? You lower taxes on gas (the motor fuel tax) while at the same time you raises taxes on gas (the windfall profits tax on oil companies). Don't those taxes cancel out?'
You might be able to balance them cash-flow wise. The problem is in the effects. You're not saving people any money. You're encouraging increased consumption and discouraging exploration. Admittedly, you're doing both to a small degree. That reduces the selling point of the gas tax holiday to: It accomplishes nothing, but does little harm in doing so.