Wednesday, March 14, 2012

Obama Doesn't Want Higher Gas Prices; More's the Pity

By Mike Dorf


Campaigning in Mississippi and Alabama, Newt Gingrich recently promised gasoline prices of $2.50/gallon, while all of the Republican candidates have criticized President Obama for supposedly adopting environmental policies that make it difficult for oil and gas companies to increase production.  Indeed, some Republicans have claimed that the Obama Administration actually wants higher gas prices as a means of limiting demand.  As the Washington Post noted yesterday, that claim is mostly untrue.  Indeed, the story to which I've just linked shows that the Administration has hardly been an environmentalist's dream.  What emerges pretty clearly--and has been evident in American politics for quite some time--is that virtually no politician will deliberately pursue a policy of higher energy prices.

There is, of course, a short-term policy rationale for that reluctance.  During our current, rather fragile, economic recovery, high energy prices will cut into other consumer spending and raise costs for business,  which will harm the economy.  Thus, one could make a decent case that for the short term at least, government should not take any measures that would exacerbate energy price inflation.

But what about the long term?  Wouldn't higher fossil fuel costs be good for the United States because they would lead to decreased dependence on foreign oil and reduced greenhouse gas emissions (as well as decreases in other pollution)?

It's still not hard to understand why most Americans would oppose, say, an additional $2/gallon tax on gasoline, if the government were simply going to keep the revenue.  But most plans for a Pigovian tax on fossil fuels involve rebating the extra revenue back to consumers (and businesses) through the tax code or otherwise, so that the typical American would not see a net tax increase.  People who drive a lot or otherwise use a lot of fuel--and who don't have the option of shifting their consumption patterns--would likely oppose such plans because they end up cross-subsidizing individuals and businesses with greater energy demand elasticity, but such high-volume energy users are undoubtedly a minority and some of them could probably be accommodated with special subsidies.

Thus, we are left with a puzzle: A lot of Americans -- a substantial majority, to judge by the timidity of politicians on this issue -- would oppose a gas tax, even if it didn't cost them anything but ended up producing net social benefits.  Why?  I don't have definitive answers but I'll float a few hypotheses.

1) Anti-tax sentiment is so strong in the U.S. that even a tax that nets out even is seen as evil;

2) Some people don't really believe that the government would rebate the proceeds of the tax, so they think that they would end up paying more;

3) Some people dislike Pigovian taxes precisely because such taxes aim to shape their behavior, regarding such regulatory taxes as improperly constraining their liberty.  They smack of "social engineering."

I'm sure there are additional explanations, but it is striking to me that each of the foregoing reasons rests on an economic libertarian view of the world.  And that would probably explain somewhere between a third to a half of Americans.  But the more than half of the rest of the country are not economic libertarians, or at least not across-the-board economic libertarians.  So, are there other explanations?  Or is the U.S. simply a much more economic libertarian country than I have been assuming?

3 comments:

BDG said...

Your intuition that people don't trust that there will be rebate seems right to me. Also, I think almost no one knows that there would be a rebate; how many even of your well-informed readers knew that the cap-and-trade bill that passed the house actually had a rebate provision?

Another possibility is that people think that the timing of the rebate will not match the timing of their consumption, which is a legitimate worry. The House Bill didn't really get all the way to fixing that problem, as I've argued at some length elsewhere.

heathu said...

Perhaps one way to make a gas tax more palatable is to gradually increase the tax, slowly, over years. This would give people time to initially cut out some extraneous driving, then three to five years later, when considering a new car, make fuel efficiency more of a concern. Then, seven to ten years later, give greater consideration to geography when moving or accepting a new job. We could also start now, without the concern that a sudden, sharp rise in fuel prices could have on our recovery.
The downside to this approach, of course, is that it would require a decade-long commitment to a consistent energy and tax policy that historically has been difficult to maintain.

Dewaite Houwad said...

Another possibility is that people think that the timing of the rebate will not match the timing of their consumption, which is a legitimate worry. The House Bill didn't really get all the way to fixing that problem, as I've argued at some length elsewhere.