Wednesday, May 07, 2008

Gas Tax Holiday

Hillary Clinton, among a few others, has been proposing the idea of a "gas tax holiday" for the summer due to the high price of gasoline. I will add my voice to the chorus that believes that this is a gimmick at best and a bad idea at worst.

First of all, it won't meaningfully lower the price of gas; the amount of tax on a gasoline is less than the amount prices have been varying of their own accord in the matter of weeks.

More fundamentally, it is a gimmick because the entire premise of the proposal is that governments are responsible for the price of gas and that the price of gas is somehow broken.

While it is of course true that in many countries government has a strong hand in the price of gas, that is only minimally true here. The gas tax is pretty low, and prices are largely determined by the markets. (Verifying that these markets are functioning properly is of course a valid responsibility of the government, but inevitably investigations into manipulation of these markets fails to find anything askew.)

And I'd argue that there is nothing inappropriate about the price of gas. I don't like it, but that doesn't mean that it's inappropriate. It's a commodity with finite supplies, diminishing new finds, and exponentially growing demand. So why should any rational person expect the long term trend on these prices to be anything but up? The price of a barrel of oil is up more than fourfold over the past few years, yet gas is only up 2-3x; that suggests to me that the price of gas is actually pretty reasonable.

I'm thinking that oil is above its "intrinsic" price right now because of speculation, fears of supply disruption, and (of course) the falling dollar; I'm not a sophisticated enough investor to know what the "right" price should be, but it's not $20 a barrel any more, and it will trend upward over time. But markets are far more efficient at finding the right price than any government attempts to guide it.

The market adjusts for the high price of gas in other ways as well: SUV sales are plummeting, hybrid sales are soaring, and alternative energy investments that do not make sense when oil is at $60 a barrel make a lot of sense at $90, $100, or higher. So the economy will almost certainly do exactly what it did during the energy crisis of the 1970s: it will get a heckuva lot more efficient, and the amount of energy required per unit of GDP produced will fall. And this helps keep us competitive and insulates us from the inevitable subsequent increases down the road.

Even if we were to ignore all of this and take for granted that high gas prices are a problem to solve, I also suspect that this "gas tax holiday" would actually exacerbate prices. After all, if it actually were to achieve its stated goal of lowering prices in a meaningful way, the law of supply and demand implies that consumption would go up. If consumption goes up, the price - especially given continued tight supplies and refining bottlenecks - will go right back up. So to be effective, the tax holiday must not lower prices by a meaningful amount. Which means that the tax holiday can only be meaningful if it fails to be meaningful. Brilliant.

So we have a solution proposed that would actually fail to solve our problem, but it turns out that the problem is not actually a problem. "Bad solutions to problems that don't exist" is probably the most distinctive hallmark of bad ideas.

As a postscript, I think it's particularly amusing that Hillary is using the term "elite" as a dismissive insult in reference to the fact that economists are nearly unanimous that the gas tax holiday idea is silly. I understand that politics is politics, but I'd at least hope politicians wouldn't be so naked about their political positioning.

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