View From a Height
Commentary from the Mile High City
Friday, May 21, 2004

More Oil 

Charles Krauthammer today shows why he's much better writing on foreign policy than on economics. He proposes a gas consumption tax to create a $3 at-the-pump floor, in order to spur consumption. To keep it revenue-neutral, any money collected would be refunded through payroll or income tax refunds. I've been thinking this over, and I can't see any way that this does anyone any good.

First of all, promising to refund the amount of this tax is like promising to put Social Security in a lockbox. What you're really doing is giving the government a chance to create some complicated refund formula that I guarantee will leave it holding more of my money.

But let's say the government tries to play fair. Think about who's going to do the most to conserve. It's going to be the middle class, in particular, the well-educated middle class who always responds better to these incentives, and who has the means to buy a new Prius even if they didn't really plan on it for another 5 years or so. The guys as the very top don't care. The guys at the bottom couldn't scrape together enough to replace that 1973 Malibu anyway, which is why they're still repairing it, and this tax isn't helping them to save the money to do it.

You can't link the savings to income tax. That wouldn't be fair since the wealthly would get all that money back and they don't drive any more than I do. Also, the guys at the bottom end would get slaughted by this thing, and they may not pay any income tax to begin with. You can't link it to payroll tax. If I'm upper-middle, or even middle-class, much of my income isn't covered by payroll tax, but I'm probably doing the most to conserve.

There's another problem with one of Krauthammer's assumptions. Suppose I'm a Saudi prince. Now, I'm Jewish, so I'm a Saudi prince who can't get a visa to visit him home country, but bear with me. Why on earth should I not restrict output to force the price up to $3 a gallon? Well, you say, that may not be the optimal supply-demand curve for you. No, it may not be, but while I'm producing at $2 a gallon, gas is being consumed at $3 a gallon. I'm not reducing consumption by raising the price, because the US Government has already done that for me. All I'm doing is making sure I don't leave anything on the table for it or the oil comapnies to take.

Which goes to Krauthammer's last point. The money won't be recycled through the American economy, anyway. Even if it were, why should we believe that the government can cycle it better than or more wisely than consumers can, in the long run?

In fact, the first couple of paragraphs provide the solution to the problem, and we've been there before:

In the mid-1970s, the twilight of America's oil innocence, the average new American car was a monster weighing 4,000 pounds. The oil shocks induced belated rationality into American oil habits. By 1981 the average car was down to 3,202 pounds.

By the mid-'80s, rational consumer reaction to high prices -- home insulation, fuel-efficient appliances and lighter cars -- had actually solved the energy crisis. We had OPEC on the run. In July 1986 oil plunged to $7 a barrel.

We've solved this problem before. Why not again?

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