Gas Tax: Principles of Microeconomics

This diary will be a short (and I hope clear) exposition of why nearly every economist thinks that eliminating the gas tax for three months is more than just cheal pandering-it's also a bad idea. I'll also talk a little about what is wrong with health care mandates. But before I get started, I thought I would share some shocking new photos of Bill and Hillary Doing what they do best.

Let's start with a standard assumption of microeconomics: People respond to incentives.  Nothing I am going to say requires the view that people are strongly rational in the textbook microeconomics sense. Nor do I really have to rely on the stronger still view that people respond to very small incremental changes when they make their assumptions. In fact, I think they don't. I think people require some pretty big changes in information to make real changes in behavior. But the basic premise that people will (quality being equal) buy more of the cheap good and less of the expensive good is under most circumstances correct.

Now, markets are complex entities. But to simplify let's note that one very important signal for how we make decisions in markets is price (rules, conventions, norms, quality matter to and I'll try to address some of that below). As of right now, my view is that the price of gasoline-if I look at from the standpoint of efficiency-still does not reflect the true overall costs to society of producing and consuming it. When I say this,I am including all the social costs attached to consuming gasoline. Simply put, the overuse of carbon based fuels has costs beyond what it costs to produce a gallon of gasoline and even though gas has gone up, it still is not priced right.

OK-could I possibly say anything more elitist than we should pay more for gas? What should we/can we do for people earning less than some specified level of income.

The way to help out the people making less than $25,000 year, or less than $50,000 a year (or even higher salaries) would be to increase the proposed refund. If we can figure out how to pay for it, send every single American a check for twice what it would cost to suspend the gas tax.

Why would this work? Since gas prices would stay high (they will stay high anyway)the incentive of high prices causes people to buy less gas-even if you give them more money. It will benefit people on the lower end more (make people above a certain level of income exempt) and more directly. A cut in the gas tax helps everyone-including those who can afford to pay.

And still, we have to choose among many options: which is more important-short term tax relief (30 bucks over the summer) or highway construction? Where do we want to put money-towards making gas not really cheaper this summer or helping poor people pay utility bills this winter-which judging from what my natural gas company says they will charge are going to be horrific.

Now-what's my beef with mandatory health insurance? It requires people to buy a product that they may decide they don't want or can't afford. The best solution is to make it affordable. Well, really, the best solution IMO is Canada's-but that's not on the table. Since we can't (or actually won't) go down the Canadian road, forcing people to buy health insurance leaves them at the mercy of insurance companies. In addition, by instituting forced pay stub reductions it will make the program widely unpopular.

One economist I know well and respect has suggested that leaving people uninsured risks a situation where a person with a contagious disease avoides going to the hospital/doctor because they lack health insurance. While I agree this kind of anti-social behavior could occur forcing people to buy health insurance does nothing to guarantee this person actually goes to the doctor-and forcing people into the doctor again can only make people resent the intrusion. At present, we already have the power when people have infectious diseases to quarantine them and force them to get medical care.

James Galbraith (the founder of Economists for Edwards)** and even Gregg Mankiw, an economic advisor for the Bush administration are both against this idea. The disciplinary consensus on this is really stunning when you consider how strongly people like Galbraith and Mankiw disagree on many issue (the gas tax). On health insurance mandates there is a lot more disagreement and probably reasonable arguments on both sides. I know that some people in the Economists for Edwards group probably prefer Hillary's plan, though it's a safe guess most of them prefer single payer.

Personally, I'm more inclined to agree with economist Amartya Sen that government should help people get the bundles of goods they need to live well but that it shouldn't force people to what's good for them.

**Citizen Rat was a signatory to the Economists for Edwards statement. The views expressed in this diary are those of Citizen Rat and not of James Galbraith or any other member of Economists for Edwards.