Yet Another Hair-Brained Idea From Folks That Should Know Better

Originally Posted: May 6th, 2008

Talk about bad policy. I maintain that this idea is as bad as all of those "Lower Gas Prices" groups on Facebook. Misguided, wasteful, and nothing more than pandering to the masses.

Ugh. Gas tax-holiday? Seriously?

I'm pretty sure the conversation about whether or not to use this idea as a campaign tool, in both the McCain and Clinton campaigns went something like this:

Candidate: "Well okay, so a gas tax holiday won't actually work... But wouldn't it still be a good idea to float to make voters seem like we're sympathetic to their needs?"

Advisor: "Well yeah, the voters are too dumb to know that it won't actually work. If there's any opposition we'll just tell them that it's elitist to think that it won't, and that our projections show they'll save like, 70 bucks because of it. Besides, it'll never pass into law anyway, so we'll never actually find out that it indeed won't save anyone anything."

At least, I HOPE it went that way. Otherwise these people are just complete idiots. I'm not sure which scenario I'm less comfortable with. I believe Hilary Clinton's exact words were, ""I'm not going to put my lot in with economists", basically indicating either:

1) That she is not an economist, and she doesn't care what they think, or:
2) That she thinks that the economists are all wrong, or:
3) That she knows she's wrong, but still supporting a bullshit policy because it suits her political needs, or:
4) All or some of all or some configuration of, all of the above.

Whatever the case might be (I certainly am not going to profess to know the inner secrets of this sordid tale, but I'm guessing it's option number four), I'll say this: I AM an economist, and the idea is absolutely absurd.

Now I must admit, that yes, sometimes experts can appear to be elitist. (Like right now for example, when CNN runs a story about rats infesting O'Hare International Airport, and brings in 2 "experts with more than 15 years of extermination experience" to identify whether or not the furry little long-tailed long-eared critters captured on their undercover cameras are indeed rats, lol. Seriously? I need an expert to tell me what a rat looks like?) This however is not such a case.

If you've ever taken Econ 101, you know this is a bad idea. Quoting Greg Mankiw from the Washington Post on May 1st: "What you learn in Economics 101 is that if producers can't produce much more, when you cut the tax on that good the tax is kept... by the suppliers and is not passed on to consumers." I'm quoting the good man because he's spot on.

Assuming the supply of gas is inelastic relative to demand (i.e. it is difficult for producers to increase the quantity of gas supplied to the market), then when there is a tax, producers bear the burden. In simpler terms, when producers have little control over the quantity they can bring to market, it is harder for them to shift the cost of the tax to the consumer. Remove this tax, and the majority of the revenue that previously went to the government now goes to the producer.

That's the scenario that every economist subscribes to, and any student of economics should subscribe to, without exception. It is entirely unreasonable to believe that removing the tax would benefit consumers more than it would benefit producers. The estimates the Clinton campaign have come up with are wildly optimistic at best - $20 to $30 in savings per consumer is a far more neutral estimate, though I personally would go as low as $10.

Even worse however for the McCain and Clinton camps, is the idea that the supply inelasticity of gas may be perfect. Perfect inelasticity would be the case if producers had NO ability to increase the quantity of gas supplied to the market. Considering that refineries are producing to capacity as we approach the summer (somewhat daunting, since prices usually don't skyrocket quite this early), it is fairly unreasonable to assume that there will be any increase in supply over the time frame that this gas tax-holiday would be in effect. If this is the case, then relief to the consumer falls to ZERO. Yes, zero.

Even IF refineries are not producing to capacity, what's to stop producers from freezing the supply of gas where it is while the tax holiday is in effect, and hoarding the total tax relief revenue for themselves?? Absolutely nothing.

This talk of a gas tax-holiday is mindless babble. It's a ploy to get voters to think that their needs are being seen to compassionately.

Again, it's insulting. To think that voters are too dumb to consider expert opinion is insulting. To think that voters will ignore the media coverage saying as much is doubly insulting.

Worse than the insult to our collective intelligence however, is that it's simply BAD POLICY. Did I say bad? I meant ATROCIOUS. You have one candidate who has already confessed he knows nothing about economics, and another, who has now professed that she will not listen to economists.

It's a bad policy not only because it doesn't achieve what it sets out to (lowering the cost of gas for consumers), but also because it does exactly the OPPOSITE. It provides an incentive to producers to increase the supply of gas more slowly than demand is increasing through 1) their opportunity to hold on to what they no longer have to pay to the federal government, and 2) their expectation that if they squeeze the consumer enough, the government may drop the tax again in the future, having set the precedent earlier.

If you really want to relieve consumers from high gas prices in the short term, take all the money being spent on fuel for shipments to and for fuel for military actions in Iraq, and use it to a) set up a short term government funded fuel subsidy in the form of a debit card that can be used for fuel purchases, and b) start an advertising campaign showing people how they can minimize their fuel consumption.

Tax-holiday? Really? Bloody rubbish. I expect these kind of shenanigans from the likes of Rove and Company, but shame on you Hilary Clinton. I used to think you wouldn't actually say absolutely anything to get elected, but this changes my mind. It's about as great an idea as all of these hair brained calls to boycott gas from a particular company, or to not drive for a day. Oil is now $122 a barrel. The only way to reduce the cost of it is to USE LESS OF IT. If I hear anyone else expounding such filth again, I'll smack them with a trout.