Saturday, April 26, 2008

Clinton Joins McCain in Failing Econ 101 (or at least Econ 365)

I thought Clinton had better economic advisers than this:
Clinton launched an ad calling for a suspension of the gasoline tax.

"Hillary Clinton knows it's time to act, take some of the windfall profits of big oil to pay to suspend the gas tax this summer, investigate the oil giants for price gouging and collusion," the ad said.
Obama appears to have better advisers (or at least he's listening too them on this issue):
Obama spoke out against halting a tax on gasoline during the summer months, a move supported by Clinton and presumptive Republican nominee John McCain, saying it may not bring down prices and would deplete a fund used for building highways.

"The only way we're going to lower gas prices over the long term is if we start using less oil," Obama said in Anderson.
Just so it's clear, a gas tax holiday won't lead to lower gas prices:

But economists and energy analysts say it would have little impact on mitigating the rise in gasoline prices. In fact, it could lead to the opposite result.

The federal gasoline tax represents a flat fee of 18.4 cents a gallon nationwide. With gasoline currently averaging $3.39 a gallon, the tax represents a mere 5 percent of today’s pump price. While that’s not trivial, consider that gasoline prices have more than doubled since 2004.

The problem is that lowering gasoline prices at the pump would encourage more consumption. So in the long run, it would push prices up.

The timing of the proposal matters. Senator McCain called on Congress to suspend the gas tax from Memorial Day until Labor Day. That’s typically the period of highest gasoline use in the country as Americans drive to their holiday destinations.

“You don’t want to stimulate consumption,” said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. “The signal you want to send is the opposite one. Politicians should say that conservation is where people’s mindset ought to be.”

To be more fair, if, in fact, the supply of gas is less than perfectly inelastic, then consumers will see some decrease in prices. Furthermore, if the demand for gas is significantly less elastic than the supply, then consumers will observe changes in gas prices (indeed if demand (not supply) is perfectly inelastic than consumers will receive the full benefit of the cuts). However, the "energy experts" argue that supply of gas in the US during the summer months is close to perfectly inelastic (refineries are operating at capacity, so higher prices don't lead to more supply). Indeed, this inelasticity is why gas prices rise significantly every summer as demand for gas increases. This is why the tax holiday is unlikely to lead to increases in consumer welfare.

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