Tuesday, May 06, 2008

Gas Taxes, Politicians & Economists

Robert Reich claims to be appalled that Hillary Clinton has said that she won't listen to economists on the issue of her proposed gas tax holiday, and calls it "politics as usual".

But if Reich hadn't been an Obama supporter, he would have recognized her comment as being anything but "politics as usual", as it is instead a case of unusual honesty. Politicians generally ignore the advice of economists when they consider it politically beneficial. That certainly includes Obama and during his time as Labor secretary, Reich himself. So, the only difference between Hillary Clinton on the one hand and Obama and Reich on the other hand is that at least Hillary is honest about ignoring economics.

Reich's reasoning on the issue of gas taxes certainly doesn't qualify him as an economist one should listen to. For example, he argues that it would increase demand for gas and cause prices to rise". But why would demand increase if prices rise? A necessary condition in order for the gas tax cut to cause an increase in demand is that it will first lower the price. Now someone might object that perhaps Reich is referring to the price excluding taxes. In that case his economic reasoning is correct but his presentation dishonest as the focus of the debate is prices including taxes. Reich's post is thus ironically itself a case of "politics as usual", as he is either economically ignorant or dishonest.

Regarding the issue, the temporary gas tax cut that Hillary and McCain proposes is certainly not the best solution to reduce gas prices in either the short term or long term. The best short term solutions would be to reduce or at least stop increasing the Strategic Petroleum Reserve and to stop the Fed's inflationary policies. In the long term, permanently abolishing the tax and even more importantly, stopping the environmentalist obstacles to extracting more oil are the best solutions.

Still, as Bryan Caplan points out, given the current political situation the gas tax holiday might be if not a good thing, then at least the lesser evil of the politically realistic alternatives.


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