In the midst of the recent debate over a “gas-tax holiday” over the summer, the Huffington Post tried to find a single economist who thought the idea had merit. There were none. Last weekend, George Stephanopoulos asked Hillary Clinton to name an economist who supports her proposal and she responded by saying she doesn’t trust economists.
So I was delighted to see Bryan Caplan, an associate professor of economics at George Mason University, step up to the plate in a New York Times op-ed today to argue in support of the McCain-Clinton idea. Well, that’s sort of what Caplan did.
At the outset, Caplan concedes that economists and the Obama campaign are entirely right about the facts.
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.
So far, I pretty much agree with the consensus. Economists might overstate the rigidity of supply — it’s possible that eliminating the tax could spur producers to find a way to squeeze out a little more gas — but they’re probably right that the Clinton-McCain proposal will not shrink the price at the pump.
Remember, this is a defense of the idea.
OK, so if the “gas-tax holiday” won’t save consumers any money, and will boost oil company profits, why does Caplan approve? He has two reasons.
First, Caplan figures one stupid proposal is preferable to a series of even stupider proposals that might come up.
During our last big energy crisis, in the 1970s, “something” turned out to be a salad of populist nonsense: price controls, rationing, windfall profits taxes, arcane loopholes and lots of lawsuits. That political response turned an inconvenience into a disaster.
We can do better this time. Since in an election year Congress will feel compelled to show the voters that it feels their pain, let’s do something that at least keeps energy markets in good working order. The tax holiday fits the bill. Markets will adjust to it, no problem. And it won’t cost much — the estimated $9 billion in lost revenue is about $30 per person. That’s not a bad price to pay for a little insurance against a rerun of misguided ’70s measures.
Second, Caplan argues that the oil industry will get a whole lot of new money, on top of its already enormous profit margin, but we should take solace in the notion that oil companies will probably put all of this new profit to good use.
[T]hat oil companies might pocket most of the tax cut could easily be a good thing. It helps cancel out the negative legacy of the last energy crisis: public hysteria will occasionally work in your favor. This makes the energy companies less likely to hunker down on their profits and more likely to do what they didn’t do enough of in the 1970s: search for ways to increase production.
So there you have it, an economist’s defense of the McCain-Clinton gas-tax idea. It’s a sop to oil companies that won’t help consumers, but that’s not really a bad thing. Persuaded yet?
As for the politics of all of this, Paul Krugman concluded yesterday, “I’m on record as saying that Hillary Clinton’s advocacy of a gas-tax holiday, while it wasn’t good policy, didn’t rise to the level of a crime. Judging from last night’s results, however, it was worse than a crime: it was a mistake.”