Americans are very upset about the price of gasoline, and for good reason. Every fill-up gives a sticker shock to consumers, and fuel prices are directly and indirectly driving up overall inflation, as $ 5 per gallon of gas increases the cost of transporting almost everything.
- But the tide of frustration is creating some inconsistent economic policy thinking in Washington, DC and the capitals of many states.
Why this is important: The central problem is the high demand for fuel and too little supply. But many policy ideas floating to address high gas prices do not wrestle with radical disconnection and can be hostile.
Run to news: The Biden administration today called for a three-month suspension of 18 gallons of federal gas tax this morning and encouraged states to consider suspending their own gas taxes.
Condition of the game: Americans are on the road. Refinery capacity is down 5.4% from 2019.
- This compatibility is the problem. The refineries are almost at full capacity, which means it will be difficult to produce more gasoline in the short term.
- High prices are basically a means of rationing limited supplies. The alternative is artificially low prices, combined with scarcity.
So get it The underlying problem is that a policy needs to reduce demand or increase supply. Many of the methods in the discussion do not.
What they are saying: President Biden’s proposed gas tax holiday will have limited benefits, analysts across the theoretical spectrum believe. “The substantive case of policy is weaker than ever,” Tobin Marcus, a technician at Evercore ISI, said in a research note.
- “It is unfavorable to subsidize demand in a supply crisis. The size of the tax cut is insignificant compared to pump prices, and the use of an upgraded refinery will seize more profits from the consumer than from the manufacturer.”
- Marcus, as it turned out, was a policy consultant when Biden was vice president.
There are similar problems Along with other policy ideas. California Governor Gavin Newsom is advocating a $ 400 gas tax rebate per vehicle to help take the sting out of higher prices – but that would mean higher demand, not less.
On the supply side, Some congressional Democrats have advocated a “windfall profits tax” for energy companies. But if this kind of policy is implemented, companies may hesitate to invest in more energy exploration.
What could work better? On the supply side, Employee America has proposed to the Treasury to use the “Exchange Stabilization Fund” to encourage energy producers to increase production if it is a creative, legally dubious one.
- On the demand side, subsidizing mass transit – or other, more fuel-efficient ways – can help reduce gasoline demand.
Bottom line: In weighing down policies aimed at lowering gas prices, go back to Economics 101 and think about how exactly they can help balance the supply and demand – or damage.