The Wrong Energy Policy

Commenting today on President Bush’s proposed energy program, Charles Krauthammer, who I usually like, just gets it completely wrong:

First, tax gas. The president ostentatiously rolled out his 20-in-10 plan: reducing gasoline consumption by 20 percent in 10 years. This with Rube Goldberg regulation — fuel-efficiency standards, artificially mandated levels of “renewable and alternative fuels in 2017″ and various bribes (er, incentives) for government-favored technologies — of the kind we have been trying for three decades.

Good grief. I can give you 20-in-2: Tax gas to $4 a gallon. With oil prices having fallen to $55 a barrel, now is the time. The effect of a gas-tax hike will be seen in less than two years, and you don’t even have to go back to the 1970s and the subsequent radical reduction in consumption to see how. Just look at last summer. Gas prices spike to $3 — with the premium going to Vladimir Putin, Hugo Chávez and assorted sheiks rather than the U.S. Treasury — and, presto, SUV sales plunge, the Prius is cool and car ads once again begin featuring miles-per-gallon ratings.

No regulator, no fuel-efficiency standards, no presidential exhortations, no grand experiments with switch grass. Raise the price, and people change their habits. It’s the essence of capitalism.

It’s unclear that Krauthammer is correct in his assumption that raising the price of gasoline will have a significant impact on demand. During the recent run-up in the price of gasoline, when prices in some parts of the country exceeded $ 3.50 per gallon, there was no apprecable impact on demand for gasoline. This isn’t to say that gasoline is immune to the laws of supply and demand, though, because it’s likely that people were simply making the choice to swallow the increased price (because they need the gasoline to power their cars) and cut back spending in other areas.

What higher gas prices will do, though, is harm the economy as a whole. Forced to pay more for the gasoline they need for their cars, people will cut back in other areas. We saw signs that this was happening last year.

Furthermore, raising taxes will increase the price, but it will be an artificial increase unrelated to real market conditions. It will divert investment toward the oil and gas industry and way from other industries. And it will take money out of the pockets of consumers.

Krauthammer goes on to advocate drilling for oil in ANWAR and reducing the regulations that prevent the construction of new nuclear power plants. Both of these are good ideas. But his first suggestion, raising the gas tax, is completely wrong headed.

  • http://unrepentantindividual.com/ Brad Warbiany

    Alright, allow me the counterpoint. If taxes were reduced in other areas to account for the new revenue of the gas tax, would you still think it’s so bad? Particularly if the taxes were reduced from personal income taxes or payroll taxes, which are things that would give the money back to the specific people who were paying more for gas…

    Economically, raising gas taxes significantly will reduce demand for gas in the long term. Obviously it takes a while for the market to work, but when you raise the cost of something, it does affect demand for it. I don’t know that it would meet his “20-in-2″ claim, but with enough gas taxes, it could certainly reduce gasoline usage over the long term.

    That doesn’t mean I advocate doing so, as it’s a blunt-force government solution that will have significant unintended consequences. I’m further ideologically against trying to influence behavior by cutting things into and out of the tax code.

    But I think to assume that because a one-season spike in gas taxes didn’t make a huge difference means that gas demand is immune to price increases is far from clear.

    And one more thing:

    Furthermore, raising taxes will increase the price, but it will be an artificial increase unrelated to real market conditions. It will divert investment toward the oil and gas industry and way from other industries.

    I don’t see why it would divert investment towards oil and gas. Unless that increase in price translates to increased profit for the oil companies (which isn’t suggested, since it’s actually taxes that go to the government), it shouldn’t really make a huge difference to investment. When a state increases gas taxes, I don’t think we see a corresponding increase in investment to the tobacco industry, do we?

  • http://www.atlasblogged.com Wulf

    Economically, raising gas taxes significantly will reduce demand for gas in the long term.

    This would be less dangerous and more “successful” if done gradually – annual increases over the course of several years. The point of Krauthammer’s proposal is to change our habits (so Leftist!), and a gradual change would be more likely to do this as it would allow consumers to change their commute or purchase a new car without having to cut back in other areas.

    After all, how often does the average consumer buy a new car or house, or switch career? I would oppose this tax in any form, but some forms would be more harmful and wrong-headed than others.

  • http://www.quincysblog.com/ Quincy

    “Alright, allow me the counterpoint. If taxes were reduced in other areas to account for the new revenue of the gas tax, would you still think it’s so bad?”

    Brad –

    Interesting counterpoint, but yes, I do think it would be that bad. The fact of the matter is that Krauthammer’s proposal is the functional equivalent of a price control. It sets the price that government wants gas to be and taxes it until it gets there. To that end, it would have the same effect as every other price control, polluting the information contained in the price. The collective intelligence of thousands of people looking out for their own best interests would be balanced out by the intelligence of one man looking out for the common good. This is a recipe for economic damage, not matter what the exact mechanism is.

  • http://www.thelibertypages.org/ Adam Selene

    However Quincy, changing our tax mechanism from income to consumption of gasoline is a minor improvement in freedom. You can choose how much tax to pay by the amount of gasoline you consume.

    It’s a total fantasy, of course.

  • http://www.quincysblog.com/ Quincy

    Adam –

    That argument would be defensible for something like a national sales tax, which impacts every type of product equally, but just plain doesn’t work when a straight-forward limit on freedom, the income tax, is replaced with government manipulation of the price of gasoline, which in effect denies the ability to make the best choice through misinformation.

  • http://www.thelibertypages.org/ Adam Selene

    I’d still argue that a tax on gas consumption is less restrictive of freedom than income tax is.