I'd have to say that for all the different ways that the Clinton campaign has irked me over the course of this campaign, for the most part Hillary Clinton has avoided putting out specious policy proposals that might compromise the progressive agenda. While there have been a couple of exceptions -- I think her proposed mortgage rate freeze, for instance, is terrible economics -- in general I have agreed with the vast bulk of her domestic policy proposals. For the record, I also think she's in the right headspace on the issue of health care mandates, although if you get into the economic nitty-gritty, I think there are decent arguments that implementing mandates without overhauling privatized medical insurance might not have the desired effects in terms of passing savings along to consumers.
That's why I've been particularly disappointed by one of Clinton's most recent policy proposals. Actually -- it wasn't a Clinton policy proposal, but it began as a John McCain policy proposal: a summerlong moratorium on the gas tax (I refuse to use the Luntzian euphemism 'holiday'). Clinton has decided to piggyback on McCain's proposal, and is running commercials in Indiana to that effect:
There are few issues on which you'll find a broader consensus of economists, environmentalists and policy-makers: the gas tax is a good idea. Lowering or suspending the gas tax would be a bad idea. In fact, the gas tax should almost certainly be raised. If you want to get some sense for the broadness of the consensus on this issue, take a look at where the McCain proposal is receiving criticism from. Texas Senator John Cornyn, who is not only one of the most conservative members of the Senate but who also comes from one of the largest oil-producing states, has repudiated the proposal. So has Kit Bond. And the Wall Street Journal has been firmly advocating for a gas tax increase for several years.
I should pause here to note that, as Cornyn and Bond have noticed, funds received from gas tax receipts are earmarked specifically for bridge and highway construction, and mass transit programs. Suspending the gas tax for the summer would mean the loss of approximately $7.1 billion in Federal Highway Funds, and an additional $1.8 billion in mass transit funds, an amount that would almost entirely offset Clinton's proposed $10 billion increase in infrastructure reinvestments. The construction industry (admittedly, a self-interested party) also estimates that it could lead to the loss of tens of thousands of jobs. And I shouldn't need to remind you that there are few better ways to stimulate an economy on the brink of recession than large public works programs.
But few analysts have argued more persuasively against the idea of a gas tax moratorium than Paul Krugman. This issue is right in Krugman's wheelhouse: it's bad economics, bad policy, and bad politics.
Of course, Krugman hasn't had the druthers to come out against the policy now, when the junior senator from New York has begun to advocate for it. But he sure came out against the policy in 2000, when George W. Bush advanced a similar proposal on the campaign trail almost exactly eight years ago. Let me reprint some of the more persuasive sections in Krugman's 3/15/00 editorial in the New York Times.
Teachers of economics cherish bad policies. For example, if New York ever ends rent control, we will lose a prime example of what happens when you try to defy the law of supply and demand. And so we should always be thankful when an important politician makes a really bad policy proposal.
Last week George W. Bush graciously obliged, by advocating a reduction in gasoline taxes to offset the current spike in prices. This proposal is a perfect illustration of why we need economic analysis to figure out the true "incidence" of taxes: the people who really pay for a tax increase, or benefit from a tax cut, are often not those who literally fork over the cash. In this case, cutting gasoline taxes would do little if anything to reduce the price motorists pay at the pump. It would, however, provide a windfall both to U.S. oil refiners and to the Organization of Petroleum Exporting Countries.
So the gas tax means little relief for consumers -- and lots of relief for OPEC. Keep in mind that demand for gas is relatively inelastic: consumers think they need to purchase a certain amount of gas, whereas there is an inherently limited supply. The confluence of these two facts means that the oil companies will tend to charge consumers what they can get away with (hence, their record profits), and so if taxes are lowered, that just gives them more of a margin to capture those high prices as profits.
This gets into Krugman's next argument. Never mind its downside -- a short-term gas tax moratorium wouldn't even accomplish what it's intended to accomplish:
Let's start with why the oil cartel should love this proposal. Put yourself in the position of an OPEC minister: What sets the limits to how high you want to push oil prices? The answer is that you are afraid that too high a price will lead people to use less gasoline, heating oil and so on, cutting into your exports. Suppose, however, that you can count on the U.S. government to reduce gasoline taxes whenever the price of crude oil rises. Then Americans are less likely to reduce their oil consumption if you conspire to drive prices up -- which makes such a conspiracy a considerably more attractive proposition.
Anyway, in the short run -- and what we have right now is a short-run gasoline shortage -- cutting gas taxes probably won't even temporarily reduce prices at the pump. The quantity of oil available for U.S. consumption over the near future is pretty much a fixed number: the inventories on hand plus the supplies already en route from the Middle East. Even if OPEC increases its output next month, supplies are likely to be limited for a couple more months. The rising price of gasoline to consumers is in effect the market's way of rationing that limited supply of oil.
Krugman concludes by accusing Bush of knee-jerk conservatism -- which, while not such a remarkable thing when the candidate is George W. Bush, would be a remarkable thing to say about Senator Clinton. But Clinton's proposal is nearly identical to Bush's.
But anyway, the gasoline tax is dedicated revenue, used for maintaining and improving the nation's highways. This is one case in which a tax cut would lead directly to cutbacks in a necessary and popular government service.
You could say that I am making too much of a mere political gambit. Gasoline prices have increased more than 50 cents per gallon over the past year; Mr. Bush only proposes rolling back 1993's 4.3-cent tax increase.
But the gas tax proposal is nonetheless revealing. Mr. Bush numbers some of the world's leading experts on tax incidence among his advisers. I cannot believe that they think cutting gasoline taxes is a good economic policy in the face of an OPEC power play. So this suggests a certain degree of cynical political opportunism. (I'm shocked, shocked!) And it also illustrates the candidate's attachment to a sort of knee-jerk conservatism, according to which tax cuts are the answer to every problem.
The long and short of a gas tax moratorium is that it will take money away from bridge, highway, and mass transit construction funds and give it to the oil companies. It's hard to think of a single policy that makes less sense in a slumping, oil-sick economy, or that does less to advance the progressive agenda.
And that's not even to mention the environmental externalities that result from encouraging the use of gas, which in the long run is the most important consequence. I have been worried for a long time that Clinton does not treat the environment as a serious priority, and will be quick to sell it out if it buys her political capital elsewhere. I would remind you that under her husband's administration (for all of Al Gore's good intentions) there were virtually zero serious environmental regulations passed, and that we lost eight critical years in the fight against the climate crisis.
Even if you just look at the specific issue at hand, at some point over the course of the next administration, we are going to want to devote attention to raising the gas tax as a way to discourage the consumption of fossil fuels. What sort of moral standing would a President Clinton have to advocate for such an increase now? The henchmen of the oil and gas industry would merely need to remind the country that Clinton had thought that lowering the gas tax was a good way to placate the decent, hard-workin' folk in Indiana, and she would be fighting an unwinnable public relations battle. As with her saber-rattling on Iran, Clinton has now begun to put forth proposals that are not only bad policy on their face, but which will also have tangible consequences for what she would be able to accomplish under her Presidency.
I would encourage you to e-mail Mr. Krugman, and motivate him to give his readers a refresher course on just what a terrible idea the gas tax moratorium is. And I would encourage you to talk to those friends you have that are still considering supporting Senator Clinton in the primary, and give them some sense for where her priorities lie when it comes to scoring political points, versus reducing our dependence on imported fossil fuels and reinvesting in our nation's infrastructure.
UPDATE: Just after I finished posting this, I noticed that Kurgman's Monday editorial has just come across the wires. And he addresses the issue of the gas tax moratorium! Only, he addresses it entirely in the context of Senator McCain - and neglects to note that Clinton has put forward the exact same proposal. Here are his words:
If truth be told, the McCain tax plan doesn’t seem to embody any coherent policy agenda. Instead, it looks like a giant exercise in pandering — an attempt to mollify the G.O.P.’s right wing, and never mind if it makes any sense.
The impression that Mr. McCain’s tax talk is all about pandering is reinforced by his proposal for a summer gas tax holiday — a measure that would, in fact, do little to help consumers, although it would boost oil industry profits.
More and more, Mr. McCain sounds like a man who will say anything to become president.
One could plug in "Mrs. Clinton" wherever we see "Mr. McCain" in the concluding couple of sentences, and the argument would have the same moral force. But Mr. Krugman does not seem much interested in intellectual honesty these days.
UPDATE #2: Let me preempt/disclose one additional point here, which is that in 2000, Obama voted in favor of a similar proposal in the Illinois State Senate, which temporarily reduced the state's gas tax from 6.25% to 1.25% percent. The policy passed the State Senate 50-0, with 6 present votes. There is a good backgrounder on this point here.
While from my standpoint, almost any policy that encourages fossil fuel consumption is bad thing, there is a very important economic distinction between the Illinois gas tax and the federal gas tax. Namely, the Illinois gas tax is assessed on a percentage basis, whereas the federal tax is assessed on a flat, per-gallon basis.
What that means is that when gas prices go up, Illinois will be making more revenue from its gas tax. In 2000, gas prices spiked in Illinois by about 50%, and so the state was bringing in far more revenue from the gas tax than it has anticipated. Thus, it might have been "fair" to give consumers a break; they had already paid about nine months' worth of the state's usual gas tax receipts in the first six months of the year.
However, this is not true of the federal gas tax. In fact, the federal government will bring in less revenue from the gas tax when prices go up, because the price increases will somewhat curb demand (it's also worth noting that the federal gas tax has not been re-indexed to inflation in about a dozen years, when the last increase was signed into law by Bill Clinton). So, at the very least, there was not the issue in Illinois about a budget shortfall resulting from the gas tax suspension, whereas that very much would be a problem at the federal level.
UPDATE #3: If you're feeling particularly wonky, this MIT paper studied the effect of gas-tax suspensions in Illinois (the one Mr. Obama voted for) and Indiana that went into effect in the summer of 2000. The authors found that, while the tax was cut by 5% in both states, retail prices only decreased by 2.7%. So only about half of the tax decrease was actually passed through to consumers, with the rest contributing to profits in the petroleum industry. For most other commodities, pass-through rates often approach or even exceed 100%.
