Bryan Caplan  

The Cynical Case for the Gas Tax Holiday: From EconLog to the NYT

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Name Your Price: When Will Gas... Tradition of Liberty: Advanced...

I've finally made the Gray Lady: Today's New York Times features my op-ed inspired by Sunday's post, "I'll Shill for Hillary." I hope critics don't misrepresent me as an economic apostate; I'm not dissenting from the standard analysis, just taking a broader view:

Why are economists so opposed? ... When you combine fixed supply with flexible demand, it’s suppliers, not demanders, who pocket the tax cut. That’s Econ 101.

So far, I pretty much agree with the consensus. Economists might overstate the rigidity of supply — it’s possible that eliminating the tax could spur producers to find a way to squeeze out a little more gas — but they’re probably right that the Clinton-McCain proposal will not shrink the price at the pump. Nevertheless, I think it’s an idea worth supporting. In fact, I’ve got two arguments in favor of it, though I doubt that either candidate will want to repeat them in public.

If I am angrily misinterpreted, I'll make a special effort to practice what I preach and look on the bright side: I'm in the New York Times. Sweet!

P.S. I may be on CNBC some time today to talk about the piece; look here for updates.

P.P.S. Now it looks like I'll be on Neil Cavuto's 6 PM Fox Business show instead.

P.P.P.S. Here's the Cavuto clip.


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COMMENTS (30 to date)
Snark writes:

Congrats! But I wouldn't get too excited. The old Gray Lady just ain't what she used to be. It's possible, however, you might get honorable mention by Letterman or Leno.

Read all about it!

Pablo Escobar writes:

Cutting tax is always good, even if it's temporary. That's why Ron Paul was in favour of this particular gas tax freeze. The only problem is that Hilary proposes to pay for it by instating a less transparent tax on the big bad oil companies instead. This second part is not good policy.

Bill Stepp writes:

$9 billion "lost" to the government ($30/person) is not a cost to the government, because the money that was collected was stolen from buyers of gasoline.
Just like the mugger who dropped a C-note on the ground when he held me up didn't suffer a cost of $100. On the contrary, he cost me $100 (the five $20s he got away with), plus some time and aggravation.

Don writes:

Congrats on getting into the Paper of Record, Bryan, even though hardly anybody reads it anymore. But I'm not sure that I agree with the consensus view of the incidence of this thing. The short run demand elasticity for gas is low, I think; folks aren't going to temporarily buy a gas-guzzler just for the summer or move further away from work. Meanwhile, while the global elasticity of supply is low, the US is not the globe, and it's fairly easy to sell gas in other places instead of in the US. So perhaps the US elasticity of supply is higher than the elasticity of demand. If that's the case, then consumers bear the short-run burden of the tax and will receive most of the benefit of a cut.

liberty writes:

Don,

Elasticity isn't that high true, as people won't move or buy new cars, but people do make marginal decisions: on vacation and pleasure trips (it will be summer), extra shopping trips or day trips on weekends, and even car-pooling choices (we'll each take a car).

liberty writes:

Brilliant: "In a perfect world, policymakers would respond to energy crises with benign neglect. "

Ethnic Austrian writes:

Your entire argument relies on the assumption that oil companies could increase production in the first place.

Wasn't the USA still an oil exporting nation in the 70s? Today, these profits from tax cuts would go to places like Saudi Arabia, Mexico, Iran, Venezuala, all of which are not able to develop oil production in the arctic (if that is even possible) for geopolitical reasons. Russia would be the only exception. But Russia's oil companies aren't exactly free to do what they want.

Brad Hutchings writes:

Wow Bryan! History could remember you as the guy who stuck a fork in Hillary Clinton.

Jim writes:

What's this crap about inelastic supply? Refineries are operating at only 85% of capacity and demand is down. It seems like the price of gas is controlled by the price of oil, not supply and demand.

John Thacker writes:

Refineries are operating at only 85% of capacity and demand is down. It seems like the price of gas is controlled by the price of oil, not supply and demand.

Jim, huh? Your two sentences contradict each other. The price of gas has risen less than the price of oil, and this is absolutely correlated with refineries running at less capacity and demand being down. The margins for refiners are down right now, since the spread between oil and gas is narrower. They're supplying less because demand is lower at the higher price.

If the price of gas were "controlled by the price of oil," as you claim, then this wouldn't be happening. (Also, the idea that there's elasticity in the supply contradicts the idea that the price of gasoline is "controlled by the price of oil" alone.) Empirically, it's not; the oil price obviously affects it an enormous amount, but it has not risen in lockstep. Even aside from that, the price of oil itself is affected by supply and demand.

Mark DeLucas writes:

[Comment removed pending confirmation of email address, for crude language, and for ad hominem remarks. Email the webmaster@econlib.org to request restoring this comment in edited form. A valid email address is required to post comments on EconLog.--Econlib Ed.]

You and your column got about a minute airtime on "Morninge Joe" on MSNBC this morning.

Blackadder writes:

Bryan,

Excellent argument. But it seems you're on the verge of a slippery slope here. For instance, if a gas tax holiday is good as a symbolic gesture because it crowds out more noxious alternatives, then wouldn't the same be true for, say, raising the minimum wage?

liberty writes:

Mark DeLucas,

The public "hysteria" or irrationality can be seen by watching the news, late night talk shows, reading op-eds, looking at all the bills proposed in congress, etc.

The symbolic value of passing a bill such as a tax holiday helps politicians (a) right now (the public will give it some time to do its magic) which is useful and (b) they can blame something else for the lack of price-drop, such as Big Oil, then they can scream and shout for a while but possibly not actually pass any really damaging bills and (c) if the price comes down for another reason - if they get lucky - then they won't even have to do (b).

A lot of stuff goes on in congress for reasons very much like this - politicians are notoriously pandering opportunists.

If you want further evidence about voter's views and a more in depth analysis of how democracy handles them, see Bryan's book the Myth of the Rational Voter. For an op-ed, it went into enough detail, I think.

liberty writes:

oh, and you ask "Is there in fact any reason to think that an average person cannot comprehend the role of demand in the driving up of gas prices?"

Yes, I believe there are several surveys that show that most people believe it is evil big oil, not supply and demand. I think Bryan has cited those somewhere before. Also, I don't know why you think that opposition to the tax holiday by the public would prove irrationality or hysteria.

Mark DeLucas writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment in edited form. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Steve Roth writes:

Pablo Escobar: "Cutting tax is always good"

Let's eradicate them entirely! The world would be such a great place if our founders had established *no government at all*!

aaron writes:

I'll throw you a another reason: High Gas Prices Are Destroying My Fuel Economy.

TGGP writes:

Steve Roth, Caplan is an anarchist, so he would agree with you if you weren't being sarcastic.

I would like to echo the question on the minimum wage. What it take for Caplan to support it?

aaron writes:

Could gas prices affect our speed. Maybe, even if people are rational.

Snark writes:

Or...how about economic stimulus packages as a harmless symbolic gesture?

John writes:

A short holiday on gas problems does nothing for our long term challenges. How about working on the real problem and move away from natural resources?

degustibus writes:

Gas tax holiday? A Summer War Holiday makes more sense to me.

Eli writes:

I posted video of Bryan on Cavuto here for those who missed it.

aaron writes:

Thanks, Eli.

Bill Stein writes:

Bryan,

I enjoyed your interview on Bloomberg radio today, plus I found your ideas refreshing (least harm done). However, maybe you should have also offered the solution of raising taxes on gasoline to reduce demand in order to break the US's dedendence on oil. Just like water is too cheap, so many people waste our critical natural resource. If oil truly represents a much smaller amount of one's diposable income today vs. the 70's, then drive up the price sooner so we can find alternative products that much sooner. Get it done with already instead of the nickel increase everyday that seems like torture to most people.

liberty writes:

Bill Stein,

But there are much higher taxes in Europe, and no real innovation there. People also need to feel like they can make profit in the new industry... maybe they are worried about high taxes on the new energy? Or maybe it just takes time.

Bryan: Did Neil Cavuto call you Steve at the end?

Ross Levatter writes:

Bryan,

Great job on Cavuto. However, when, at the end, he complimented you on being the only economist he's ever spoken with who made sense, it would have been nice if you'd returned the compliment and told him he was the only Fox News show talking head you've ever spoken with who made sense. :-)

Snark writes:

Is Bryan the only economist that Cavuto has ever spoken with?

aaron writes:

Higher gas prices seem to be pushing people away from driving as much, but making fuel economy worse.

Charts in this Kevin Drum post show that driving is down 5% while fuel production is down .7%.

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