Monday, May 05, 2008

Finally, a Disagreement with Caplan

I'm a big fan of Bryan Caplan, but I finally found something about which we can disagree (inspired by an online conversation on the subject today). He put up a somewhat tongue-in-cheek argument for why Hillary Clinton's proposed gas tax holiday is a good idea. Economists have overwhelmingly denounced it as a policy that would do nothing--that is, it's really just pandering.

Responding to his points one at a time:

1) The policy won't do much harm, and might mollify ignorant voters who otherwise might push for an even worse policy, like price controls.

Response: This is the best of Bryan's three arguments. It might be right; it's hard to know. Let's assume that gasoline prices stay high through the next year, and that Hillary Clinton is elected. Suppose she pushes through her gas tax holiday in February. When the summer driving season hits, gasoline taxes are going to rise again. The fact that an almost entirely ineffective policy was already enacted will not, I think, deter voters from pushing for additional stupid policies.

2) Even if the tax break is entirely enjoyed by the producers of gasoline, rather than the consumers, this is good because other populist measures are likely to harm the oil companies. The two effects balance out.

Response: I think Bryan is forgetting that Hillary Clinton has proposed a windfall profits tax to go along with the tax holiday. If oil companies are hoping for something to counterbalance future painful policies, they won't find it in Hillary Clinton's proposal.

3) The tax cut would only be expected to have zero effect on prices if there were a global gas tax. The fact that the tax cut would apply to the U.S. only would lure oil into the country, resulting in a lower gasoline price.

Response: This would be true if the U.S. refineries were not operating at capacity. Unfortunately, however, there is very little, if any, excess capacity available (to make matters worse at the moment, refineries are switching over to summer blend gasoline, removing some capacity from production). Extra oil coming into the U.S. cannot, in the short run, be translated into extra gasoline. I therefore would not expect gasoline prices to fall. Furthermore, let us suppose that the gasoline tax holiday would reduce gasoline prices. there are many economists who believe that we should be encouraging consumers to do more to reduce gasoline use (for reasons of greenhouse gas emissions, particulate emissions, and congestion externalities). If we can't get Congress to impose a higher gasoline tax, we should at least encourage them not to take policy action to push prices lower.