John McCain and
Hillary Clinton don't understand the basic concept of supply and demand. It is that when supply cannot be adjusted quickly, demand controls price. We don't have the ability to produce more gasoline in the next three months, because our refineries are operating at full capacity, 24 hours a day, producing gasoline. So what is controlling gas prices is not supply, but demand.
When the price of gas continues to rise, we know that there is more demand for gasoline than there is supply. Gasoline is not $3.50 a gallon instead of $2.50 a gallon because it costs markedly more for Exxon to pump oil and refine it; it is $3.50 a gallon instead of $2.50 a gallon because Exxon can sell all the gasoline that it produces for $3.50 a gallon. If the market will pay $3.50 a gallon, it does not matter to Exxon's pricing decision whether 18.4 cents of that price goes to federal taxes or to additional profit.
So if we cut the gasoline tax by 18.4 cents a gallon, what we are doing is giving Exxon 18.4 cents a gallon in additional profit. If Exxon chooses to reduce its price $3.32 a gallon to reflect the lower taxes, it can. But it won't have to, because consumers are already willing to pay $3.50 a gallon. So the economists that I have seen interviewed are unanimous in saying that the 18 cent tax savings will almost certainly NOT be seen by the driving public. It will give 18 cents more to Exxon. Now, that's good news for Exxon shareholders, but it is horrible news for the taxpayers, because the tax cut would cost the federal government billions of dollars to increase the profit of Exxon.
Suppose I am wrong. Suppose that the oil companies actually do reduce their prices, at least to start. When price goes down, demand goes up -- it's Economics 101. But we already know that supply can't be increased, at least in the short run. So when demand goes up, the price rises again. Every economist I have heard or seen interviewed as said, "If the gas tax is cut, demand for gasoline will rise and the price will rise back close to where it was before." Most estimates suggest that any temporary reduction in the price of gasoline will be on the order of a penny a gallon.
You can hear Gwen Ifill's story on The News Hour with Jim Lehrer, including an interview with economist Leonard Berman, Director of the Tax Policy Center and a senior fellow at the nonpartisan Urban Institute. Mr. Berman had been a Treasury Department official in both the Clinton and the Reagan administrations. If you go to the Real Audio version, or the MP3 version , the discussion with Mr. Berman begins at about 3:40 into the interview. Mr. Berman concludes that the gas tax holiday makes no sense; "only a tiny fraction" of any tax decrease would be passed on to consumers.
Or listen to Greg Mankiw, a Bush economist:
"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush's Council of Economic Advisers. "In light of the side effects associated with driving ... gasoline taxes should be higher than they are, not lower."
http://news.yahoo.com/s/nm/200...
Or look to an economist from a more liberal source:
Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.
"You are just going to push up the price of gas by almost the size of the tax cut," said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.
Many economists implicitly agreed with
Obama that the
McCain-
Clinton gas tax plan sent the wrong signal on energy efficiency, and would lead to increased, not decreased, carbon emissions.
"I think it is a very bad idea," said Gilbert Metcalf, a economics professor at Tufts University currently working with the National Bureau of Economic Research.
"If we want people to invest in energy-saving cars, we need some assurance that the higher price paid for these cars is going to pay off through fuel savings," he said. "It is a very short-sighted, counterproductive proposal."
It's also a lousy way to get money into the hands of struggling households.
As Mankiw said,
If you want to provide households tax relief, a direct rebate ... is more effective. Not all of the tax relief from a gas tax holiday will be passed on to consumers. Some will likely be kept by refiners.
New York Times op-ed columnist Paul Krugman, a professional economist, didn't like it at all:
John McCain has a really bad idea on gasoline, Hillary Clinton is emulating him (but with a twist that makes her plan pointless rather than evil), and Barack Obama, to his credit, says no.
Why doesn't cutting the gas tax this summer make sense? It's Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.
http://krugman.blogs.nytimes.c...
Across the political and economic spectrum, it is unanimous -- the McCain-Clinton gas tax holiday is lousy economics.
I haven’t done anything productive all day long. What have I done? I’ve enjoyed a little bit of Virginia Beach sun and I went to the mall with my parents (yes, I am still 14 years old), but for the most part, I spent all day on Facebook. My friend Sarah brings up a very good point:
