Debating Myself

Update: Just found out that Obama supported gas tax holidays too, although it was during his time in the Illinois state senate. Thanks to Buck Naked Politics for the info!

Just as Hillary Clinton is beginning to rise in the national polls thanks to a surge of momentum from her win in Pennsylvania she manages, like so many times before this campaign season, to shoot herself in the foot.

People may not be outraged about it, and it may not stir emotions like Obama’s current problems with Rev. Jeremiah Wright, but her recent proposal for a gas-tax holiday this summer (also proposed by John McCain–you might know him) has stirred up more than a little controversy. Top Democrats, like the Majority Leader in the House, have even lined up against the idea. Obama is enjoying telling voters that Hillary’s proposal will cost the government millions and save taxpayers only about $30 each.

Hillary’s side of the story seems to make sense at first, and I’m sure her campaign thought reasoning like what Buck Naked Politics’ D. Cupples summarizes here, would be very persuasive to middle class voters pinched by gas prices right now.

There’s just one problem: it won’t work.

Paul Krugman, the New York Times columnist, takes Hillary’s proposal to task in a recent article. The Washington Post’s Fact Checker has a great in-depth analysis of the economics behind the issue. If you take my word for it, here it is short and sweet: lower price = more demand and more demand will lead right back to higher prices because supply cannot be expanded. There simply isn’t enough oil.

The Machiavellian argument that Hillary knows it won’t be that effective, but it will win her more votes is okay with me, I support her and would like to see her win. But, that argument appears to fail as well. Fact Checker tell us that when a similar policy was tried in Illinois:

A poll by the Chicago Tribune showed that only 28 percent of motorists believed that they were actually paying less for gas as a result of the temporary suspension of the tax.

Not a significant enough part of the electorate to make a difference.

Across the Aisle features a great article by Brian Vogt discussing Hillary’s proposal and then suggesting some more sensible ways to deal with the gas price problems facing America. Essentially, inflate your tires properly (which will improve fuel efficiency by up to 10%) and let the government and private industry develop some long-term technological solutions that will reduce our dependency.

I agree, but I would argue that fixing the dollar crunch and managing the economy better to preserve consumers’ purchasing power would also go a long way to fixing this problem as well. A large rise in oil prices can be directly attributed to the falling dollar.

There is one aspect of Hillary’s proposal that people aren’t discussing that troubled me greatly (and Obama agrees with Hillary here). Again, from Buck Naked Politics:

That’s why I have called for making Exxon and other oil companies with record profits pay the federal gas tax this summer… I believe we should impose a windfall profits tax on big oil companies and use that money to suspend the gas tax and give families relief at the pump.

Now maybe it is just me, but windfall profits taxes always make me nervous. Sure, Exxon alone made over $40 billion in profits last year, but the market determines the price of gasoline, not Exxon. Exxon is simply the beneficiary of rising oil prices and the success of the OPEC cartel.

Here are some arguments against a windfall tax. My favorite:

The Tax Foundation’s Jonathon Williams and Scott Hodge remind us of more very unintended consequences:

… according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.

So here’s to Hillary proposing two policies that in all likelihood will sacrifice meager short-term relief ($30 over 3 months) in exchange for:

• A high likelihood of rising prices later
• Decreased oil production
• Weakened support for alternative technologies (in the short and middle term)
• Further dependence on OPEC oil
• No additional political support

I’ll keep my $30 Hillary (maybe even donate it to your campaign so you can hire a new economic adviser). Let’s try to find a more creative solution. I know you can, and have, done much better. As Paul Krugman writes:

I don’t regard this as a major issue. It’s a one-time thing, not a matter of principle, especially because everyone knows the gas-tax holiday isn’t actually going to happen. Health care reform, on the other hand, could happen, and is very much a long-term issue — so poisoning the well by in effect running against universality, as Obama has, is a much more serious breach.

Tags: gas prices, Hillary Clinton, windfall tax

This entry was posted on Monday, May 5th, 2008 at 8:42 am and is filed under Election '08, Political Economy, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.