Caplan Nails It

Via Cafe Hayek, I came across this excellent piece in support of the gas-tax holiday from Brian Caplan. Caplan is someone I've been meaning to read for some time. His book is a staple of Cafe Hayek recommendations, in fact. Now that I've seen his writing skills in action, maybe I'll give him a more thorough read.

The point of the article is that Hillary Clinton's (and John McCain's) proposed gas-tax holiday is actually a blessing in disguise, though almost certainly not for the reasons that Clinton (or McCain) would state in public. The basic idea is this: in reality, (temporarily) repealing the federal gas tax will actually benefit the oil companies more than consumers. This is simple economics. The supply of oil is fixed, so there's actually very little (in the short term) that oil companies can do to increase output. Demand, however, is flexible: when prices go up dramatically, people find ways to consume less. So - by giving consumers an $0.18 break, all the government does is stimulate demand, meaning that the oil companies peddle more of their product and pocket the excess for themselves. The tax holiday benefits them, not us. Put differently - oil companies' profit margin on the oil they sell remains the same (since it long ago ceased being affected by the tax), but the tax cut lowers the at-the-pump price - meaning people will buy more gas. So oil companies take the same percentage of a larger market. Bully for them.

Increased profits for oil companies are good for two reasons. First, when the market becomes more lucrative, they have greater incentive to invest in production refinements, making the industry more efficient. In fact, the added profits would probably go to fund just such a thing. Second, taking an action that actualy benefits oil companies has the dual benefit of assuaging the public's demands for "action!" while not doing any actual harm to the supply of oil. In the 70s, of course, Nixon (and Carter, to a lesser extent) did exactly the wrong thing and regulated supply and pricing, with the effect that there was a Soviet-style shortage of gas right here in these very United States. I think Caplan takes the right tack here in assuming that politicians are just dumb actors who are motivated by desire for job security to do what the public wants. It's nice for us in the blogoshpere to carp about "spineless" politicians, but any rational agent, threated with being sacked, will do what it takes to keep his job. If the public wants "action!," politicians are bound to supply it. Nixon supplied it in spectacular fasion, with an equally spectacular disaster to show for it. The nice thing about the gas tax holiday is that it lets Clinton (and McCain) pretend to be doing something without doing the actual damage that Nixon's price controls wrought.

But I think Caplan missed at least one other side benefit to this particular politico-goodie. Once repealed, the tax is going to be hard to reinstate, and that's a Very Good Thing. We don't want government profit tied to a politically volatile commodity. That is, I personally don't want the government having a stake in continued oil production, which it currently does (to the tune of $9billion or so). If we're to ween ourselves off of oil, the sooner various interest groups turn their attention elsewhere, the better. Once consumers get used to oil prices that are - let's be realistic and say $0.06 - lower, no one is going to like a politician who suddenly adds at least that much back onto their prices overnight (the inevitable result, from a consumer's point of view, of repealing a tax holiday). So going down this road means that government abdicates, to some non-trivial degree, its ability to regulate the oil market. I'm all for it.

Granted, there are proposals for "windfall taxes" in the works. This would, at best, cancel out the effects of the gas tax holiday. But that's a good thing in its way simply as a function of the publicity that the tax holiday is getting. Any failure to deliver on lowering prices at the pump will end up in the proposing politician's lap, possibly with the added goodie that the public isn't so easy to fool next time 'round (having learned its lesson - at least a little bit - that taxing things leads to higher prices).

All that said, I don't much care what happens with the federal gas tax. Oil prices aren't going down any time soon absent some serious breakthroughs in the extraction and refinement processes, and that means possibly not ever. I'm optimistic enough to believe that government has learned from its mistakes on price regulation. Which is to say, enough voters remember the pain of the 1970s that we won't be that stupid this time around. $0.18/gallon isn't going to make or break anyone in the long run, so what we really have here is a neat demonstration of just how powerless government actually is to regulate these things. It's a nice schooling on the follies of Socialism. You can (a) regulate prices and thereby ensure that there will be shortaages, or (b) let the market alone and guarantee that there will be oil to consume, though possibly not at the prices you would fantasize. To the extent that we, as a society, collectively choose option (b), it is an encouraging sign that we've grown up since Nixon's time.