Wednesday, April 30, 2008


18 cents a gallon?

John McCain and Hillary Clinton want to suspend the federal excise tax on gasoline sales for the summer, in a misguided attempt to “give consumers a break” to the tune of 18 cents a gallon or so. Barack Obama doesn’t agree, and Senator Clinton is telling people that Senator Obama is against giving the consumer a break.

No, Senator Obama is against a butt-stupid idea that won’t accomplish what some would like to think it would.

First, it’s a bad idea for the government to be the one to try to give back 18 cents per gallon, when oil companies continue to report huge profits, setting new profit records each year. We could deal with the idea of increased gas prices if the oil companies needed those increases to make ends meet. They don’t. If the federal government thinks it should do anything, it should be addressing that issue.

Second, it’s a bad idea to eliminate billions of dollars from the federal tax revenue at a time when we have a record deficit. Mrs Clinton says we’ll make it up elsewhere, but the problem is that there’s no place to take the money from instead — we don’t have extra lying about. A windfall profits tax on the oil companies? We’ve tried that, and it was a disaster. If Congress looks to the oil companies, that’s not the way to do it.

Third, while 18 cents a gallon sounds like a nice rollback, it’s not really very much, and won’t make much real difference as prices continue to rise. At $4/gallon, 18 cents is only 4.5%.

Fourth, it won’t really amount to an 18-cent rollback anyway. The artificial price cut will almost certainly push demand up at a time when demand is already at its highest. The supply side won’t be able to keep up, and the prices will likely rise more than it would have otherwise. In other words, the 18-cent cut will probably cause an extra price rise that will counteract part of the 18-cent cut.

So maybe it will hold prices down by, say, 2%. It’s not worth implementing a bad idea for a benefit to the consumer so small that most consumers won’t notice it.

Fifth, we don’t really want to do things that will encourage more gasoline usage. Soaring fuel prices are nasty, for the most part, but to the extent that they discourage fuel consumption — and the consequent environmental effects — they’re not.

But like any proposal for a “tax cut”, there’s political appeal to the claim of “giving money back to the people.” It’s never that simple, and we shouldn’t fall into that pit here.


lidija said...

Hail, Barry, the economist! But as it's an election year with many difficult problems, they're all finding straws to hold onto. I think smarter people have no solution either and it will all play out in the general melee of the fed-up consumers, the booming Asian economy and the sinking US one, the companies that make even more money and the politicians who listen to their voters... oh wait, no, listen to their donors, I mean (yes, Clinton and Obama alike). Never mind, I can always dream a consumer has a fighting chance.

Barry Leiba said...

«Hail, Barry, the economist!»

Yeah, I'm a Barry of all trades. I guess I should stick to the day job, but I'm too opinionated.