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.
Is it just me, or does that quote sound positively Stalin-esque? (independent of the context, independent of what "it" happens to be).
Like universal health care.
It's the type of thing that almost makes one want to become a conservative.
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.
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.
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.
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.
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.
What a great economic system we have.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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..."
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.
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.
Instead of cutting the gas tax, why doesn't Senator Clinton teach us all how to make a small fortune trading cattle futures?
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...
You would also do well to note that McCain came up with this stupidity first.
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.
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.