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 pageok [Eugene Volokh, May 5, 2008 at 6:41pm] Trackbacks "Not Going To Put My Lot in With Economists": From ABC News This Week on Sunday, an exchange about Sen. Hillary Clinton's gas tax suspension plans:[George Stephanopoulos:] But economists say that's not going to happen. They say this is going to go straight into the profits of the oil companies, they're not going to actually lower their prices. And the top two leaders in the House are against it. Nearly every editorial board and economists in the country has come out against it. Even a supporter of yours, Paul Krugaman of 'The New York Times" calls it pointless and disappointing. Can name one economist, a credible economist who supports this suspension? [Clinton:] Well, you know, George, I think we've been, for the last seven years, seeing a tremendous amount of government power and elite opinion basically behind policies that haven't worked well for the middle class and hard-working Americans. From the moment I started this campaign, I've said that I am absolutely determined that we are going to reverse the trends that have been going on in our government and in our political system. Because what I have seen is that the rich have gotten richer. A vast majority, I think something like 90% of the wealth gains over the last seven years have gone to the top 10% of wage earners. [Stephanopoulos:] But can you name an economist who thinks this makes sense? [Clinton:] Well, I'll tell you what, I'm not going to put my lot in with economists. Because I know if we did it right, if we actually did it right, if we had a president who used all the tools of the presidency, we would design it in such a way that it would be implemented effectively.... Thanks to Wall Street Journal's Best of the Web for the pointer. (link) Joe Kowalski (mail): So, for all of Hillary's experience, she's learned more about economics and sound economic policy than people who've made an academic &practical study of it for decades? I smell a Democratic version of George Bush. 5.5.2008 8:05pm (link) tdsj: If there is any justice in the world, she will lose votes over this gas tax nonsense. 5.5.2008 8:21pm (link) lurker-999 (mail): " ... if we did it right, if we actually did it right, if we had a president who used all the tools of the presidency, we would design it in such a way that it would be implemented effectively...." Is it just me, or does that quote sound positively Stalin-esque? (independent of the context, independent of what "it" happens to be). 5.5.2008 8:22pm (link) The Cabbage (mail): Hey, she knows that some elite opinions of what's best for America turn out to harm the middle-class. Like universal health care. 5.5.2008 8:29pm (link) EH (mail): She's looking for a wedge issue for the little guy. Can't blame her even if her choice in salients is lacking. She probably figures that if inconsequential handouts work with Bush's $3/600 checks she might have a chance with it. 5.5.2008 8:32pm (link) Dilan Esper (mail) (www): It doesn't say much for the state of American liberalism that we have gone from (correctly) bashing on Spiro Agnew's anti-intellectualism to having one of our 2 remaining presidential candidates telling us that she doesn't care what economists think about economic policies. It's the type of thing that almost makes one want to become a conservative. 5.5.2008 8:33pm (link) Ak: She's the new "decider". Mission soon to be accomplished! 5.5.2008 8:35pm (link) rarango (mail): Neither HRC nor John McCain have covered themselves in glory with this sorry excuse for policy on the gas tax thing. Obama's overall tax policy is equally bad. I do fear for the republic because we are going to be stuck with one of these three turkeys as President. 5.5.2008 8:39pm (link) Bruce Hayden (mail) (www): But economists say that's not going to happen. They say this is going to go straight into the profits of the oil companies, they're not going to actually lower their prices. And the top two leaders in the House are against it. Nearly every editorial board and economists in the country has come out against it. Even a supporter of yours, Paul Krugaman of 'The New York Times" calls it pointless and disappointing. Can name one economist, a credible economist who supports this suspension?I like the way this starts off, with "economists say". Not all of them, or how many of them, but that "economists say". I would suspect that I could find economists who would say that the earth was flat, or that communism works. That this guy was press secretary for her husband does not say a lot for said husband's ability to pick talent. Presumably, he is talking about suspending the gas tax. And precisely how is that going to go directly to the oil company profits? Are they going to raise their wholesale prices accordingly? That much collaboration would seem to impact the antitrust laws, if nothing else. And maybe even the laws of economics. Oh, I forgot that "economists say" this. The most important fact he gave, of course, was that the two top (Democratic) leaders in the House were opposed. But of course, they also oppose any other tax cuts too, unless compensated by a bigger offsetting tax increase. After all, how can they expect to increase government spending with tax cuts (oh, wait, maybe because tax revenues increase...) And, I can't remember the last time former Enron adviser Krugaman was last considered an economic expert. Note that I am not supporting Hillary!'s proposal, but rather commenting on Stephanopoulos' argument. 5.5.2008 8:41pm (link) Bruce Hayden (mail) (www): [Clinton:] Well, I'll tell you what, I'm not going to put my lot in with economists. Because I know if we did it right, if we actually did it right, if we had a president who used all the tools of the presidency, we would design it in such a way that it would be implemented effectively....OK, on the other side. This is the classic liberal excuse for any government policy failures. If we just let the right people run the country, all these great government programs would work just fine. Sorry. 5.5.2008 8:47pm (link) frankcross (mail): Bruce, you might be wrong. Greg Mankiw said he was alone on Newshour's discussion, because they could not find an economist to support the gas tax suspension. And however much you dislike Krugman, he is still considered an economic expert across the board, including by prominent conservative Republican economists. I'd encourage a little more knowledge and a little less ideological bias. 5.5.2008 8:47pm (link) Clayton E. Cramer (mail) (www): Bruce Hayden writes: Presumably, he is talking about suspending the gas tax. And precisely how is that going to go directly to the oil company profits? Are they going to raise their wholesale prices accordingly? Retail prices are set by retailers at whatever level clears the market. If demand drops, retailers drop prices--and their profit margin declines. If demand rises, retailers raise prices. The cost of a product only affects the retail price to the extent that if cost and retail price meet, and there's no profit, the retailer stops making sales. Repealing the federal gasoline tax would allow retailers who are having trouble moving inventory to sell it at a lower price. But the evidence that this isn't a problem is quite clear at your nearest gas station that the market will bear the current outrageous prices, because Americans aren't hurting enough to stop buying gasoline at current prices. I don't want to believe that Sen. Clinton is this dumb. I think she's just playing cynical political games trying to look like a hero. 5.5.2008 9:00pm (link) hattio1: For me, the "all the tools of the presidency" is a hell of a lot scarier than "not going to put my lot in with the economists." If any of the three would come out publicly and say that Bush tried to grab too much power for the presidency, that the unitary executive is BS and that they will allow Congress to have the power it should have, that person would have my vote, even if it was McCain (yes, I'm a liberal). 5.5.2008 9:08pm (link) mrshl (www): Woah. I think I agree with Clayton E. Cramer. Seriously, this gas tax backlash has gained more traction than I thought it would. That coupled with Obama's mini-comeback from "bitter-gate" and the Wright episode makes me think people are starting to ignore much of the content-free noise that always seems to invade these national campaigns. Here's hoping it carries over to the general election. Because I think there's general open-mindedness amongst the broad part of the electorate that isn't nakedly ideological. Count me as one of them. I have no idea whether I'm voting democrat or republican in the presidential race. Kind of refreshing. 5.5.2008 9:16pm (link) Bruce Hayden (mail) (www): And however much you dislike Krugman, he is still considered an economic expert across the board, including by prominent conservative Republican economists. I'd encourage a little more knowledge and a little less ideological bias.I consider the question to have a significant amount of ideological bias (and that was what I was trying to point out), and, sorry about the language, Krugman to be a whore. He may be well respected in his narrow field (trade theory), but my impression is that he has also developed a reputation for being rather fast and foot loose with statistics. His reputation would probably be stronger now if he were not such a fierce partisan (esp. with his blaming everything wrong with the world on GWB). On the other hand, he does have a reputation as having been a fierce Clinonista, going so far as to gain the ire of many of Obama's adherents. 5.5.2008 9:19pm (link) A. Zarkov (mail): I'm surprised that no one has suggested that we bring back the U.S. Crude Oil Entitlements Program enacted in 1975 retroactive to November 1974. 5.5.2008 9:21pm (link) Chris Bell (mail) (www): That quote sounds like something straight out of Colbert's roast of Bush a few years ago. 5.5.2008 9:33pm (link) Chris Bell (mail) (www): That's where the truth lies, right down here in the gut. Do you know you have more nerve endings in your gut than you have in your head? You can look it up. Now, I know some of you are going to say, "I did look it up, and that's not true." That's 'cause you looked it up in a book. Next time, look it up in your gut. I did. 5.5.2008 9:36pm (link) Lior: Just in case I'm not getting it, is Hillary arguing that you have to be an economist to realize that taxing the gas at the pump or the producer oil company at the source amounts to the same thing and (to first order) will not have any effect on prices? 5.5.2008 9:39pm (link) Sid Finkel (mail): Let's see, if you lower taxes as paid by the oil companies and raise taxes on the oil companies by the same amount the retail price of gasoline will go down? What a great economic system we have. 5.5.2008 10:17pm (link) Bruce Hayden (mail) (www): Clayton, While I agree at one level with what you are saying, keep in mind that the average profit margin at the retail level is pennies on the gallon. For the amount of money involved, the gas stations would probably do better by putting their money into CDs. Most of them sell gasoline because of the amount of other business they bring in, esp. to their convenience stores, where their margins are far, far, higher. In short, any more, at the retail level, it is a loss leader. Why is that important? Because the reality is that the retail gas market is fairly cut throat, with gas stations having to meet their competitors' prices (often right across the street). There are just too many retail outlets, and they are too independent, to be able to artificially maintain prices. And that is why their prices tend to follow (but lag due to stocking issues) the wholesale prices they pay fairly closely. But that doesn't end the debate, since the proposition was that the oil companies were going to capture the tax reduction. Not the retail outlets, but those further up the supply chain - presumably the wholesalers, the refiners, and maybe even the producers. Any of these would require some sort of collusion. 5.5.2008 10:20pm (link) Bruce Hayden (mail) (www): I think it fairly obvious that if you increase the tax on the oil companies, that the price for gasoline, to the extent that they can pass that along. And if offset by a reduction in gas taxes at the pump, then all you pretty much have is musical chairs. That is to the extent that the market is symmetric. But it isn't, really. Much of those "obscene" profits are likely coming from the sale of crude oil, which is driven by the global price of oil. The problem is that the oil companies that might be subject to this tax increase are a minor part of the global market any more. So, they are unlikely to be able to pass through all their cost increases due to world competition. BUT that also means that they won't have the money needed for future exploration, exploitation, etc. After all, their long run profits are not that great, despite occasional bursts of "obscene profits". So, in the long run, money will flow out of the oil industry and into industries with a better rate of return. 5.5.2008 10:29pm (link) byomtov (mail): the proposition was that the oil companies were going to capture the tax reduction. Not the retail outlets, but those further up the supply chain - presumably the wholesalers, the refiners, and maybe even the producers. Any of these would require some sort of collusion. No. It would not require collusion. all it would require is that the oil companies have no reason to lower prices in response to the tax cut. Why would they ever lower them? To increase sales to a degree that would more than make up for the lower price. But if they are operating at capacity, as they do, more or less during the summer, they can't sell more, because they can't produce more. So there is no reason to lower prices. The McCain/Clinton proposals are ridiculous. 5.5.2008 10:31pm (link) Bruce Hayden (mail) (www): My view is that the real criticism of suspending the federal gas tax at the pump is that it is more symbolic than useful. I do think that it would tend to bring down the price of gas at the pump, but for most of us, that decrease won't be enough to really notice. I don't drive a lot, and so it might put a dollar or two a week in my pocket. BFD.$120 a barrel oil is the issue, and not $0.18 federal tax per gallon. 5.5.2008 10:34pm (link) Bruce Hayden (mail) (www): No. It would not require collusion. all it would require is that the oil companies have no reason to lower prices in response to the tax cut.You seem to be missing the point that the wholesalers, refiners, etc. are not the ones seeing the tax cuts. Rather, it is the retailers, who make pennies on a gallon. For a great extent, they are not the oil companies. And why would they pass on the tax cut? Likely because the station across the street has cut his prices by that much. Why would they ever lower them? To increase sales to a degree that would more than make up for the lower price. But if they are operating at capacity, as they do, more or less during the summer, they can't sell more, because they can't produce more. So there is no reason to lower prices."They" is pretty nebulous here. Are you talking the oil producers? The refiners? The wholesalers? Or the retailers? Only the latter will actually see the tax cut at the pump. And it is at the pump where the competition is the fiercest. Everyone else would have to push up their prices to try to capture the tax cut at the pump. 5.5.2008 10:40pm (link) Dan Weber (www): If there is any justice in the world, she will lose votes over this gas tax nonsense. Down here in North Carolina, she's been blasting the ever-living fuck out of the airwaves with "I'm trying to save you on taxes by taking it from the oil companies!" commercials. We'll find out tomorrow how well this worked out for her. 5.5.2008 10:49pm (link) common sense (www): What I've always found funny is the desire to make gas cheap while at the same time railing against greenhouse gasses. If our carbon footprints are a problem, then increase the cost of gas so that people use less. 5.5.2008 11:15pm (link) Raghav (mail) (www): You seem to be missing the point that the wholesalers, refiners, etc. are not the ones seeing the tax cuts. Rather, it is the retailers, who make pennies on a gallon. For a great extent, they are not the oil companies. And why would they pass on the tax cut? Likely because the station across the street has cut his prices by that much. Look, it's a basic problem in tax incidence. It doesn't matter where along the supply chain you impose the tax, or whether you impose it on consumers. All that matters are the relative elasticities of supply and demand. That has nothing to do with how competitive the market is. 5.5.2008 11:15pm (link) Raghav (mail) (www): As for which economists say so, there's a list. 5.5.2008 11:31pm (link) ClosetLibertarian (mail): Krugman may be a good economist but he is also a left wing hack. My favorite part, " I am absolutely determined that we are going to reverse the trends that have been going on in our government and in our political system. Because what I have seen is that the rich have gotten richer.." That goes for the poor too. No more prosperity for you either. 5.5.2008 11:51pm (link) Connie: I do not see the conservative pundits, who condemned this same waive-the-gas-tax idea when proposed by Gore (or was it Kerry?), rushing to defend Obama and criticize McCain. 5.5.2008 11:52pm (link) JB: Common Sense, Stop living up to your name! Seriously, bring on the$5 gas. In a couple years I'll be buying a new car and I want there to be sufficient demand so someone will have built a cheap, powerful electric by then. 5.6.2008 12:45am (link) MnZ: All that matters are the relative elasticities of supply and demand. If demand is highly inelastic (i.e., gasoline), then a tax on the seller tends to be borne by the buyer rather than the seller. That has nothing to do with how competitive the market is. You are incorrect. A monopolist will capture some of the gain from lower marginal costs (due to the reduction in tax) for himself, but perfectly competitive firms will pass all of the marginal cost reduction onto the buyer. The petition signed by the economists is a bit weasely in its language regarding this matter: First, research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers. While the layman might read this and think, "Economists don't think that gas tax reductions will be passed to consumers." However, this statement really means, "Individual consumers will derive only small benefits from the gas tax holiday relative to individual oil companies." Don't get me wrong. I think the federal gas tax should be more like $1.84 rather than$0.184. However, any economist or politician who argues that lower gas taxes won't impact prices to consumers is playing politics. 5.6.2008 12:51am (link) Consenting: HRC: "My favorite part, " I am absolutely determined that we are going to reverse the trends that have been going on in our government and in our political system. Because what I have seen is that the rich have gotten richer.." Ms Clinton then went on to say, "For example, I used to be worth only a few million dollars, and now I'm worth over $100 million. So clearly I know more about this than these academic economists, who haven't made out nearly as well..." 5.6.2008 1:01am (link) Richard A. (mail): "I know if we did it right, if we actually did it right, if we had a president who used all the tools of the presidency, we would design it in such a way that it would be implemented effectively...." Implement what effectively? A gas-tax cut for this summer driving season? Even if she wins, she wouldn't be president until next year. Clinton doesn't even believe her own b.s. 5.6.2008 1:44am (link) Tony Tutins (mail): Of all the people for ABC to pick to grill Hillary, why pick Bill's former campaign and first term strategy advisor? The guy's probably still shellshocked: In his 1999 memoir, Stephanopoulos spoke of his depression and how his face broke out into hives due to the pressures of conveying the Clinton White House message. I'm guessing Hillary hit him with a hairbrush when he disappointed her. I didn't watch it, but did he flinch or cringe when she gestured? 5.6.2008 2:10am (link) Paul Allen: I have a fair bit of economics in my background, there is something very fishy going on here. Consider: gas costs$6-20 gallon in most countries outside of the US. Further, in Europe ($6-8 per gallon) the differential is entirely attributable to taxes. So the question you need to ask yourself is: Why aren't prices 6 dollars here? By those unnamed economists logic, the producers should be capturing all of that money. What gives? Well the effect could be nonlinear. The producers can push off the first X dollars onto consumers but experience diminishing pricing power. If this were to be true, it would be a consequence of our limited refinery capacity. Consider that if we're tapped out in our refineries, there is little to no price pressure in the market b.c. no one has the capacity to capture market-share from gouging. The trouble with this is prices should have gone up a long time ago, but they didn't it. The historic evidence just doesn't fit the facts. The truth is that margins are incredibly small at all layers EXCEPT crude-oil production. This suggests that so long as America takes rather than sets the "world" crude price, this sort of scamming is not possible. Prices at the pump are explainable purely as a function of crude oil + costs + return to capital. Demand is basically constant and crude oil is priced to demand + fear against supply--with no pricing power anywhere else in the system. 5.6.2008 2:59am (link) Perseus (mail): "For example, I used to be worth only a few million dollars, and now I'm worth over$100 million. So clearly I know more about this than these academic economists, who haven't made out nearly as well..." Instead of cutting the gas tax, why doesn't Senator Clinton teach us all how to make a small fortune trading cattle futures? 5.6.2008 4:43am (link) iowan (mail): Lost in this whole debate is the fact that Democrats for 30 years have wanted $5 gas. That how much they wanted the consumer to pay. The difference is the Democrats wanted$3.50 of that \$5 to go to the govt. Democrats dont care about the consumer. Other than taxing more of their income 5.6.2008 9:57am (link) Leland (mail): Lurker, you're not alone, and I think her plan is pretty smart, if you like a socialist government. I think HRC sees the current gas tax as problematic and inefficient. The customer sees the higher prices and sees the government as part of the problem. That needs to be rectified, so simply cut that part of the tax. That will get bi-partisan approval, because Republicans can brag about how they cut or maybe ended a tax. I think HRC could support a permenant cut, because the current gas tax is a set amount and not a rate. In addition, the government only gets income on this tax for money spent by Americans. Now create a new tax on the profits made by international oil companies. This can be a rate, so although it may go down, it may also go up as the price of oil rises. Further, government can adjust this rate without consumers every really noticing. How handy is that? Sure, the oil companies will pass along this cost to the consumer, who will see it as a raising price at the pumps. The beauty is now the consumer will blame the oil company and not government, because the consumer isn't directly paying the tax. What's not to love about that if you are a politician? Sadly, McCain is pushing the same agenda on this... 5.6.2008 10:22am (link) Mr. X (www): Economists run the gamut of opinion, and there's probably an economist that agrees with you, no matter what your politics. That she can't find a single one who is willing back the gas tax holiday speaks volumes about just how stupid this idea is. You would also do well to note that McCain came up with this stupidity first. 5.6.2008 10:50am (link) Duncan Frissell (mail): Well I'm sometimes an economist and I think that gas taxes (and taxes in general) are a bad idea and people should pay for goods and services directly. There's nothing anti-economical about that idea. It's a "policy choice" that is perfectly consistent with "economics" which does not command any particular mix of government and taxes. One has "economics" with or without taxes. When I was studying economics in the mainframe era, we were playing with a FORTRAN program (on punch cards) handling National Accounts modeling where you input different levels of taxation and spending and tried to get growth w/o inflation. I did a run with taxes and spending both set to zero. Growth and inflation were both high (the software was not monetarist) but we were all happier. 5.6.2008 11:00am (link) Raghav (mail) (www): If demand is highly inelastic (i.e., gasoline), then a tax on the seller tends to be borne by the buyer rather than the seller. No, only if demand is more inelastic than supply. Both are highly inelastic right now, but summer driving tends to be more discretionary. You are incorrect. A monopolist will capture some of the gain from lower marginal costs (due to the reduction in tax) for himself, but perfectly competitive firms will pass all of the marginal cost reduction onto the buyer. Um, obviously since the monopolist has no elasticity of supply, the relationship is more complicated—it depends on the concavity of the demand and average cost curves. But assuming linear demand and average cost curves, I'm correct: the change in price still depends on the relative elasticities of demand and "elasticities of cost." Work it out and you'll find that \frac{\partial p}{\partial t} = \frac{\epsilon_c}{2 (\epsilon_c-\epsilon_d)}. While the layman might read this and think, "Economists don't think that gas tax reductions will be passed to consumers." I don't see how a layman can read it that way, unless he ignores the word "significantly." I don't think anyone denies that prices won't fall at all. 5.6.2008 1:54pm (link) JBL: Well, I'll tell you what, I'm not going to put my lot in with politicians. 5.6.2008 5:31pm pageok pageok