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.
READER COMMENTS
Andrew_FL
Jun 22 2022 at 11:28am
Urals Crude is at a $35/barrel discount to Brent. The normal 1:1 relation between what Americans pay for oil and Russia receives for oil doesn’t strictly apply.
Scott Sumner
Jun 22 2022 at 12:04pm
Russia is earning more today from energy exports than it did before the war. It’s not 1 for 1, as you correctly point out, but the direction of the impact is clear.
Komori
Jun 22 2022 at 11:43am
“Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.”
— Groucho Marx
Devin Lavelle
Jun 22 2022 at 1:03pm
While the direction of those impacts is probably right, it seems like the magnitude would be pretty minimal, except perhaps for #4. And, of course, #4 depends on the magnitude of #’s 1-2 being small. (Since we’re assuming supply is inelastic, they only make additional profit to the extent they don’t pass along the savings. Demand induced 1-2 only occur to the extent they do pass along the savings.)
Beyond that, if it helps maintain the political will to continue supporting Ukraine and taking steps to address Global Warming, that might have more potential impact on 1 & 2 … and potentially #3 if checks to drivers gets on the table as an alternative relief strategy.
As it is, #3 would add about 0.015% to the debt if the tax were suspended for a full year. So not nothing, but pretty minimal.
Scott H
Jun 22 2022 at 10:41pm
I don’t think the policy flows from worry about the political will to keep supporting Ukraine as much as it flows from worry about the political will to keep supporting the Biden Admin.
Scott Sumner
Jun 23 2022 at 12:39am
“Beyond that, if it helps maintain the political will to continue supporting Ukraine”
It seems to me that we are doing more to support Russia than Ukraine. How much extra revenue is Russia getting due to our botched sanctions programs. (I’m including Europe here.)
And once voters find out that the lost revenue goes to the refiners, how will they react?
Thomas Lee Hutcheson
Jun 22 2022 at 11:17pm
Of course if it worked POLITICALLY, guaranteeing Democrats win the midterms an President Harris takes office in 20025 those would make Putin more likely to loose, lower emission of CO2. and reducing the deficit. Enriching refiners would be a small price to pay for that.
IF.
A better political stunt, though with zero effect on gasoline prices would be to revoke all the new restriction on investment in production and transportation of petroleum.
A non-stunt would be to call off the spat with Iran.
Christophe Biocca
Jun 23 2022 at 11:16am
If the reasoning is strong enough to oppose lowering the gas tax, isn’t also strong enough to support raising it? What’s the limiting factor here?
Scott Sumner
Jun 23 2022 at 11:49am
I support a carbon tax, which would raise the price of gasoline.
Spencer Bradley Hall
Jun 23 2022 at 11:31am
Wonderful post. Makes you wonder about the Biden’s family ties to Ukraine. Biden’s spent more money in Ukraine than his gas tax holiday would cost: “A gas tax holiday would cost a reported $20 billion, according to the Committee for a Responsible Federal Budget”
“The U.S. government has allocated over $55 billion aiding Ukraine in the Russia-Ukraine war since February, more than President Joe Biden has budgeted for securing the southern border in his two executive budget plans combined.”
This communist containment policy, like North Korea, Viet Nam, which severed the gold’s tie to the $, will dethrone the U.S. $. As soon as inflation subsides, and interest rates fall, the U.S. $ will plummet and gold will rise.
Scott Sumner
Jun 23 2022 at 11:50am
This has nothing to do with our communist containment policy—it’s closer to our effort to contain Hitler.
aaron
Jun 24 2022 at 9:46am
If we were properly focused on energy security, greenhouse gas emissions would be a moot point. And nothing would do more to reduce inflation & pressure Russia to end war in Ukraine than an #AntiFragileEnergy policy. #HighlyFlexibleNaturalGas #FissionFuture #GreenNuclearDeal https://mobile.twitter.com/aaronshem/status/1539602253073506305
https://mobile.twitter.com/aaronshem/status/1539602253073506305
aaron
Jun 24 2022 at 10:25am
This 2011 Facebook post and 2001 Paul Krugman essay are relevant:
Whenever people start talking about OPEC, like to point out this Paul Krugman paper from 2001, http://web.mit.edu/krugman/www/opec.html. When people say that the US cannot affect the price of oil, I like to point out several things: 1.) That’s a good thing because every bit we produce goes to our GDP. 2.) That’s a good thing because every bit we don’t import adds to our GDP. 3.) That’s a good thing because every bit we don’t import reduces our trade deficit. 4.) That’s a good thing because it means lots of tax revenue (see and 2). 5.) Don’t be so sure about that, a little competition could spur production in lots of other places.
Many producers produce inefficiently (and messily) because they believe price rises will keep them wealthy. E.g. Venezuela, Russia in the 1990s… They don’t keep their equipment maintained and they waste/spill a lot. US hoarding sends a signal to oil producing nations with two implications: 1). Alternative Energy is nowhere near ready, otherwise the US would be extracting its oil before prices fall; the US likely doesn’t expect alternatives to ever be better than fossil fuels. 2). Current producers can make money by keeping production low.
If the US told the world it believes alternative energy R&D would pay off within the next 50 it would mean nothing, unless they back it up with extraction for the medium term. I believe that if the US said that there was no future in oil, and backed it up by pumping full- tilt to take advantage of the current high prices, we’d see both alternative research take off as well as exploration, extraction, and productivity throughout the world.
Reagan wasn’t the Great Communicator because of how he talked. Actions speak far louder than words.
Todd Kreider
Jun 25 2022 at 1:43pm
Suspending the federal gas tax has no impact on the war in Ukraine or on climate change, a tiny impact on the budget deficit – a 1% loss, all things equal – and a very small impact on oil companies’ revenues.
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