Friday, April 28, 2006

The oil price stabilization tax - US version

Amadeo has pointed out in a comment entry in this weblog that some US legislators are also pushing for their version of the oil price stabilization tax. The issue has been picked up by US econobloggers. Manuel Lora of is rendered speechless by the plan, which combines a $100 rebate plus stronger anti-price-gouging measures.

James Hamilton has a thoughtful post on the Chief Executive's policies towards the oil price hikes. He says:

There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts..

Indeed. Even the fact that OPEC countries control 40% of oil exports is no slam dunk case for international "price gouging". OPEC has been around for about thirty years; did they all just get their act together all of a sudden, just when China and US ratcheted up their oil demand? Does not compute.


I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful.

This is exactly how the average grandstanding politician would act. When something this big is going on, one must give the appearance of activity, inasmuch as passivity is the ultimate political crime. Hippocrates was right: a physician confronted with a baffling ailment is tempted to apply all sorts of mysterious nostrums. So he said: First do no harm!

Greg Mankiw also gives advice on how not to deal with higher gas prices. One interesting point: the US deficit is on a unsustainable path, so a tax rebate would be most unhelpful in moving towards fiscal sustainability.

What is a "sustainable deficit", anyway? There are several definitions, but two are most easy to remember: first is the "no Ponzi game" definition. In a Ponzi game, interest payments on debt can only be financed by borrowing. The analogy to pyramid schemes is perfect: in a that scheme/scam, the scammer's promise of high returns can only be met by new investors also chasing high returns. Insidiously, government may be playing a kind of pyramid scam with its deficit management. Second is that the public debt-to-GDP ratio must be constant or decreasing. The idea is that the GDP is the base from which to extract revenue, and therefore service the debt. The debt itself must not grow out of proportion of this tax base. Both these definitions are long run definitions; in the short run some violation of these rules is possible, but these violations cannot be pursued indefinitely. The creditors will eventually wise up, the way scammed pyramid investors do, and the whole thing comes tumbling down. The government becomes insolvent. Or it pays its debt by printing paper - fueling hyperinflation.

This time the message is: between taxes and excessive public borrowing, which one does less harm?


JasonSpalding said...

Have you ever looked at a map of gas prices in the United Stated based on county? Have you compared it to the results shown on a map showing the winning presidential candidate by county?

Econblogger said...

Hi Jason.

Sorry, your link to gas prices by county doesn't work. Winning candidate by county was interesting though - Bush handily won the rural vote. Were you trying to show that lower gas prices favor the incumbent?

Amadeo said...

The correlation between the counties who voted for Bush and the relatively cheaper prices in those counties may be explained this way.

Gas taxes range from 62 cents down to 26 cents. NY, California, and Hawaii lead the pack with over 60 cents per gallon, while Alaska is pegged at 26 cents.

And of course, the three named states with the highest taxes are Democratic bailiwicks. Their situation translates to higher pump prices, comparatively speaking.

Now, what is the political claim of one party against the other?

That the Democrats like higher taxes.

Might not this then be used to explain why pump prices are lower in red areas where gas taxes are also lower?

Here’s a detailed listing of the gas taxes from each state: