Caplan's New York Times article on this issue is The 18-Cent Solution. Caplan points out why most economist are opposed to the Clinton-McCain plan
Why are economists so opposed? In the short run, the supply of gasoline is basically fixed; it takes a while to build a new refinery. The demand for gasoline, in contrast, is more responsive to price; we’re already seeing greater use of public transportation and brisk sales of fuel-efficient cars. When you combine fixed supply with flexible demand, it’s suppliers, not demanders, who pocket the tax cut. That’s Econ 101.Caplan goes on to present two arguments in favour of the plan
The first is that the tax holiday is a relatively cheap symbolic gesture that makes truly bad policies less likely. The main causes of high gas prices are probably factors beyond our control, like rapid growth in China and India and low real interest rates. But voters don’t want to hear this; they want politicians to “do something!”and
Second, even a “giveaway” to the oil industry [i.e. oil companies pocket most of the tax cut] sets a positive course for the future. During the last crisis, the industry was a scapegoat for scarcity. Politicians scrambled to stop oil companies from profiting from the crisis, even though temporarily high profits end shortages by giving businesses an incentive to figure out how to increase output.(HT: Bayesian Heresy and Greg Mankiw)
Update: Bryan Caplan talks with Bloomberg's Tom Keene about the proposals by Clinton and McCain to suspend the federal tax on gasoline, the outlook for the presidential election and impact of the dollar's decline on oil prices.
1 comment:
I disagree with Bryan here. If the supply curve is short term vertical, and suppliers consequently get most of the surplus from the tax cut, what does he think voter response will be? If voters aren't quite screaming for politicians to do something now, what will they say once the gas tax cut leads to no appreciable change in gas prices?
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