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Wednesday, April 30, 2008

"What to Do About Gas Prices?"

Jonah Gelbach emails that he has signed on to post periodically at Economists for Obama:

What to Do About Gas Prices?, by Jonah Gelbach: As an economist, as a person who worries about climate change, and as someone who believes the Democratic Party's electoral success is very important, if only to spare us more of the damage that the GOP has done over the last quarter-century of its hammer lock on federal policy, I find political discussion of gas taxes to be extremely frustrating to watch.

Democratic politicians regularly use high gas prices as a club with which to beat Republicans. I understand that politicians use the issues they think will work. And the nexus between oil company profits and GOP officials whose policies have been awful for most people in the bottom four quintiles of the income distribution (and probably plenty in the top one) has got to be pretty tough for Democratic candidates and officials to resist.

But the fact of the matter is that gas prices should be high. They should be high for the very simple and now very obvious reason that the pressure on the world's climate needs to be reduced. Our country's foolish policy of keeping gas prices low while providing implicit (and sometimes explicit) subsidies to the vehicles that get the worst mileage should have ended many years ago. Demand-side pressure on gas prices is finally pushing gas prices into the range they should have been for many years.

But that last paragraph tells only part of the story. One effect of the low-gas price policies we've pursued for so long is that it's induced many people to buy very fuel-inefficient cars and trucks. These are the people who are getting nailed hardest in the wallets by today's high gas prices, and I don't blame them for being upset. If you drive a vehicle that gets 18 miles per gallon for 12,000 miles a year, then you use about 670 gallons of gas a year. Even a $1.00 per gallon increase in the price of gas over a period of one year alone therefore translates into more than the stimulus tax rebate that a single person with sufficient income will receive over the next month. A married couple each of whom drives such a car 12,000 miles a year will receive a smaller rebate than the one-year cost of a $1 per gallon gas price hike.

By any reasonable standard, the increase in gas prices translates into real money for a huge number of people in this country, especially under current economic conditions.

But since the reason this is true is that American consumers have been induced to buy inefficient gas guzzlers, with serious environmental consequences, policies that would reduce the price of gas should be the last thing we consider. (On this score, the gas tax holiday that Sens. McCain and Clinton have proposed at least has the virtue that it would likely do very little, leading to at most a very small change in the price of gas; McCain's proposal would add to the deficit by increasing windfall profits of oil companies, while Clinton at least has proposed a new windfall profits tax to undo her proposal's provision of windfall profits.)

So what to do?

I propose the following two-pronged policy:

  • Prong 1. No change in the gas tax until the economy improves. At that point, we would begin to increase the gas tax annually by some fixed amount that would be stated in advance, allowing people to make informed car-purchase decisions. Consumers would shift consumption toward more fuel-efficient vehicles, and automakers would see this coming, so they would shift R&D toward such vehicles. Over time, the efficiency of the U.S. auto fleet would improve, cutting emissions and making us less dependent on all that foreign oil over which everyone always frets.
  • Prong 2. Every person who owns a car and files a tax return would receive a Gas Price Rebate (GPR). The amount of the GPR could vary with income if means-testing is desired to keep the overall cost of this program lower than it would otherwise be. However, the GPR would not vary according to the type of car people own. It could be set at something like.

    (12,000/avg MPG of U.S. fleet) x (the 2002-2008 change in the per-gallon price of gas)

We could adjust any particular component of the GPR. The point isn't the exact formula, but rather the fact that the GPR does not vary with the type of car that a person drives but does provide relief to the millions of Americans who responded to the bad incentives created by the misguided/chicken*$@# representatives the people themselves elected. People who want to keep driving those H2 and Mustang monstrosities (Ok, I admit it -- I used to drive a Mustang) can do so if they want, but they'll have to pay for it.

Thus, the two prongs together move incentives in the right direction (prong 1) while helping alleviate the real suffering going on out there due to gas price increases (prong 2). What I hope makes such a policy politically viable is the combination of the two elements. Yes, opponents will slam prong 1, but prong 2 is there as a retort.

As for paying for prong 2, some headway can be made with the increase in gas taxes in prong 1. It's a truism of microeconomic theory, though, that a tax-induced price increase will reduce equilibrium quantity, so it's likely that any GPR big enough to make prong 1 politically feasible will require additional funding. To deal with this, I propose ... you guessed it, an increase in taxes on upper-income Americans. And while I think the best way to do this would be those who make even more than I do, if need be, I'd be happy to pay more in taxes to help make this plan a reality.

Update: Here's Obama talking about the McCain-Clinton proposal today.

    Posted by on Wednesday, April 30, 2008 at 12:24 AM in Economics, Environment, Oil, Policy, Taxes | Permalink  TrackBack (0)  Comments (45)


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