Tag Archives: gas tax

Brokaw quizzing Obama on Pigovian gas taxes

Right around the 7 minute mark on this past weekend’s Meet the Press. (The video should start playing just as Brokaw asks him about it.)

Obama’s response pretty much jives with what I said last week about now not being the right time, but when Brokaw pushed him, he kind of waffled on the possibility of a gas tax hike in the future. Impossible to read into his response at all because it’d be detrimental politically to do so. (Though if he slipped it in at the beginning of his term, it might be forgotten at the end of four years.)

It’s right around the 7 minute mark, and the video should start playing right as Brokaw asks the question.

Now is not the time for a Pigovian gas tax

Wrote this a little while back. The macro policy bits in the second to last paragraph may or may not remain my opinion in the light of some of the data that Mankiw has posted here. Let’s just say my thinking is… fluid on the more Keynesian bits I’ve referenced. I’m going to have to read the whole paper (PDF) in the near future.

Several weekends ago, the Washington Post editorial board came out in favor of a Pigovian gas tax. A guest op-ed in the New York Times advocated essentially the same thing. For those unfamiliar with the concept, a Pigovian tax is a fee levied on a particular good or service designed to reduce consumption of that good or service to compensate for a negative externality. Even if the revenue raised from the tax is returned to the public in the form of an income subsidy, it has a real tendency to reduce consumption of that particular good or service, even though an individual has experienced no real drop in income. (They have not dropped to a lower indifference curve.)

In the case of gasoline, the tax has many reasons: pollution generated by the combustion of fossil fuels isn’t accounted for because clean air never enters a market system, therefore it has no market price so we treat it as free. (Obviously clean air has value even though we don’t buy or sell it.) Another externality is the US’s reliance on foreign oil, often provided by otherwise hostile nations who derive their economic power from US petrodollars. There are several other, more wonkish reasons for desiring a Pigovian gas tax as well.

In general, I consider myself a bandwagon fan of the Pigou club. I agree with their aims, and Pigovian taxes have demonstrated a remarkable ability to meaningfully compensate for externalities otherwise unaccounted for in a free market system. However, now is not the time to institute such a tax. At a time when the federal government is considering a large-scale stimulus package that certain Keynesians think needs to be in the neighborhood of US$600 billion to have any chance of working — a figure that jives with China’s US$585bn package — the tremendous drop in gas prices is equivalent to a US$318 billion stimulus package that Uncle Sam doesn’t have to ultimately borrow from China or sovereign wealth funds to put into play in the here and now.

This trumps any marginal environmental benefit that might be gained by instituting a Pigovian tax at this moment in time.

Recession economics suggest that when all normal tools of correction have been tried, the government should increase spending and/or cut taxes. Trying to close a budget deficit while in the middle of a recession will only exacerbate the economic turmoil, and you run a very real risk of pushing a recession into a depression. (Though a nation’s long-term stability obviously requires fiscal responsibility, which the US has been lacking in recent years.) Raising taxes takes money out of consumers’ pockets, and cutting government spending tends to lead lead to lost jobs. Obviously lost jobs and decreased consumer buying power are undesirable. Doing nothing can cause the recession to deepen, and doing too little is no better than doing nothing at all. The question isn’t whether we need a stimulus package, the question is how big it needs to be. Therefore we should take what the burst petroleum speculation bubble has given us, and let it ride until the current economic crisis has passed.

It would have been better for the WaPo and NYTimes to have published these pieces back in the spring and summer — not in the middle of a recession. During the Democratic primary, Senator Clinton suggested rolling back the federal gas tax, which was a pretty bad idea. Ironically, if we still had $4/gallon gas prices today, her ideas might make more sense, except that a temporary reprieve of the relatively small federal gas tax wouldn’t amount to very much. However given petroleum’s relatively low cost right now, rolling back the gas tax temporarily wouldn’t amount to much in the way of meaningful consumer relief. ($31.46 billion on the generous side — an amount in the same ballpark as the recent Citigroup bailout.) When the seas are calmer, then we should discuss nifty tricks like Pigovian taxes and other consumption taxation vehicles as part of a responsible long-term fiscal policy.

Now is not the time to balance the budget. While there will always be arguments over timing, it seems obvious to me that instituting a Pigovian gas tax today — or even this year — isn’t in the US’s, or the world’s best interest. Let’s revisit this idea sometime in 2010. Hopefully by then, we’ll have weathered the worst of this recession.

Hillary’s superficial plan to “fix” gas prices

It seems that Hillary Clinton wants to tax big oil, but only on their record profits. She would do this to make up the revenue lost while putting the federal gas tax on hold for a while. While I’m sure this is more of a ploy to pander to voters due to her faltering campaign, the whole thing is incredibly superficial for a couple of reasons.

The first is that taxing big oil is only going to shift the cost to consumers. While you might see a temporary drop in prices at the pump, businesses typically shift such burdens on to the consumers. Doing this only makes sense for their bottom line. Beyond this, it will cause an increase in demand, causing prices to rise naturally. But then, Hillary apparently doesn’t care what economists think.

Secondly, there’s the temporary nature of the repeal. Reinstating the tax after it’s been rolled back for a while will be unpopular on an epic scale, but I suppose Hillary is mostly going for a short-term boost to get her through to the November elections. Naturally, I’ve heard nothing about rolling back the tax on big oil’s profits once the federal gas tax would go back into effect. That means that the consumer is going to be doubly hurt in the end anyway.

This leaves big oil’s profits right where they’re at now. Taxing big oil’s profits isn’t the answer — and neither is breaking up the oil monopolies. (Though the latter might not be a bad first step.)

The real problem is that demand has exceeded supply. This is a result of the American way of life. We depend on oil for literally everything: we are a spread out nation of roads where a child’s first thought of freedom = getting their drivers’ license, and whose development has, for generations, been driven by cheap oil. Every aspect of our lives is controlled by the road: everything from our food to our consumer goods arrives via truck. Auto companies have been complicit as well, and in some cases actively undermined attempts to create efficient mass transit systems that were a direct threat to their business model.

This isn’t a problem that can be fixed overnight, nor is it a problem that will be cheap or easy to fix. Comparisons to European nations and Japan with their comprehensive mass transit systems are inherently flawed because of the US’s relatively low population density and sheer size of our country. While effective, efficient mass transit is certainly the answer in urban and larger suburban areas, those systems do not scale well in more rural areas.

In that respect, we will always be a nation of cars — or other personal transport devices[1]. The mantra that we need freedom from foreign oil is trite, and it misses part of the point: we need freedom from petroleum in general, inasmuch as that is economically and techonologically possible. We will always be somewhat dependent on combustible fuels so long as the internal combustion engine is our primary mode of getting from Point A to Point B. (And really, aside from bicycles and our feet, there’s nothing out there that’s as efficient from top to bottom as a modern internal combustion engine.)

So in that respect, even if Hillary’s plan had a prayer of a chance of long-term success, and if she had any ability to get it passed — which she doesn’t because it’s an idea for this summer, not after January — it would be like prescribing a pain med instead of removing the thorn from one’s foot.

The proposal is just astonishingly dumb on every conceivable level.

I do have some related thoughts about the next ten years…

1) We’ll see a small resurgence of the railroad industry. Rail travel is more efficient than air travel, and solves some of the mass transport problems presented by our spread-out nation. This will resemble the current hub-and-spoke airline system in the short term. Business travelers won’t mind taking the train as much due to the ubiquity of wireless internet access and the fact that you can use cellphones while on a train. Trains don’t have to be slow, either. So while you won’t be taking the train from NYC to LA for a one-day affair, you might well take it from Boston to Washington DC for the same.

2) More effective car-pooling systems. Thanks to the Internet, it’s easier to more effectively carpool with folks headed in your direction. This could be supplemented by mass transit systems — buses in the beginning, and trains later on — where people gather at smaller, de-centralized staging areas for a trip into the city. Many suburban areas already have these systems, but there are many, many larger cities that don’t.

3) More and better research into biofuels as a replacement for traditional petroleum. This goes beyond corn-based ethanol which was a failure of epic proportions, as it resulted in increased food prices and is energy-intensive to produce. The graphic below (click for larger) demonstrates some of the more promising alternatives, particularly algae and switch grass.

biofuels comparison chart
(Preserved against link-rot from this article.)

I think America is getting to the point where they’re ready to think about letting go of their precious four-wheeled transportation. Drive by a used car dealership, and you’re likely to see quite a few gas guzzlers sitting on the lot. This alone is anecdotal evidence that the PED of gasoline isn’t zero. A more formal study finds that when the price of fuel goes up and stays up by 10%, the process of adjustment is dynamic and far reaching:

  • The volume of traffic will go down by roundly 1% within about a year, building up to a reduction of about 3% in the longer run (about five years or so).
  • The volume of fuel consumed will go down by about 2.5% within a year, building up to a reduction of over 6% in the longer run.

The reason why fuel consumed goes down by more than the volume of traffic, is probably because price increases trigger more efficient use of fuel (by a combination of technical improvements to vehicles, more fuel conserving driving styles, and driving in easier traffic conditions). So further consequences of the same price increase are:

  • Efficiency of use of fuel goes up by about 1.5% within a year, and around 4% in the longer run.
  • The total number of vehicles owned goes down by less than 1% in the short run, and 2.5% in the longer run.

Prices have certainly gone up by more than 10% in the last 12 months, and the snowballing effect of this phenomenon is that many people of my generation have gotten rid of their cars where and whenever possible, and instead opt for healthier, less expensive modes of transportation: walking or biking. When they need to travel a longer distance, they rent a Zipcar.

I certainly would if it were realistic.

[1] I could see motorbikes becoming more popular, as they are in the UK, as gasoline prices continue to rise. For Americans who have not been to the UK, it is not uncommon to see motorcycles and scooters out and about, even in the rain.