Killing 4 birds with one stone
Suppose that you wish to achieve the following 4 objectives:
1. Helping Vladimir Putin win the war in Ukraine.
2. Worsening global warming.
3. Worsening the budget deficit.
4. Enriching oil refiners at a time when supply is constrained and they are already earning extraordinary profits.
What is the most effective way of doing all four? On option would be to temporarily end the federal gas tax.
I don’t actually believe that these are the reasons why President Biden recently floated this idea. I think we underrate the extent that public policies reflect ignorance of basic economic theory. Whether the ignorance lies with the voters, the policymakers, or both is another question. But people who analyze politics from a “who gains” perspective are often missing the fact that the world is complicated, and not all public policies help the intended beneficiaries.
PS. If you have trouble seeing all of the connections, imagine a simple model where short run supply is highly inelastic due to refinery closures. Suppose the gas tax holiday shifts the gasoline demand curve (net of tax) to the right by 5%, and the equilibrium quantity increases by 1%. In that case US consumption rises, worsening global warning. The net global price of oil rises, helping to finance Putin’s war. Most of the tax cut goes to suppliers in the short run, helping refiners. And tax revenues fall, boosting the budget deficit. Part of this revenue shortfall will be made up later with taxes that are less efficient than gasoline taxes. (The real world effects would clearly be smaller, but this example illustrates the basic concept.)
If you decide to kill 4 birds with one stone, make sure that the 4 birds are not prized specimens in the local zoo.